2000 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

12-26-2000

EP Medsystems Inc v. Echocath Inc

Precedential or Non-Precedential:

Docket 98-6461

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Recommended Citation

"EP Medsystems Inc v. Echocath Inc" (2000). 2000 Decisions. Paper 259.

http://digitalcommons.law.villanova.edu/thirdcircuit_2000/259
Filed December 26, 2000 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

NO. 98-6461 

EP MEDSYSTEMS, INC., 

 Appellant 

v. 

ECHOCATH, INC. 

On Appeal from the United States District Court 

for the District of New Jersey 

(D.C. Civil No. 97-cv-04926) 

District Judge: Hon. Alfred J. Lechner, Jr. 

Argued December 6, 1999 

Before: SLOVITER, ROTH and COWEN, Cir cuit Judges 

(Filed: December 26, 2000) 

 John J. Murphy, III (Argued) 

 Stradley, Ronon, Stevens & Young, 

 LLP 

 Cherry Hill, New Jersey 08002 

 Attorney for Appellant 

 Richard G. Primoff (Argued) 

 Rubin Baum Levin Constant & 

 Friedman 

 New York, New York 10112 

 Attorney for Appellee 
OPINION OF THE COURT 

SLOVITER, Circuit Judge. 

EP MedSystems, Inc. appeals the dismissal with 

prejudice of its securities action against EchoCath, Inc. 

According to the complaint, the Chief Executive Officer of 

EchoCath enticed MedSystems into investing $1.4 million 

in EchoCath by assuring MedSystems that lengthy 

negotiations had already taken place with four prominent 

companies to market certain new EchoCath products and 

that contracts with these companies were "imminent." 

Relying on cautionary language contained in several public 

documents filed by EchoCath with the Securities Exchange 

Commission, the District Court held that these 

representations, as well as other r elated representations, 

were immaterial as a matter of law under the"bespeaks 

caution" doctrine and the general test for materiality. It also 

held that MedSystems failed to adequately plead scienter, 

reasonable reliance, and loss causation and could not do 

so. It accordingly dismissed the complaint without leave to 

amend. 

Our review of a decision granting a motion to dismiss is 

plenary. We must accept as true all the factual allegations 

in the complaint. See United States v. Gaubert , 499 U.S. 

315, 327 (1991). 

I. 

BACKGROUND 

The following facts are drawn largely fr om the amended 

complaint and the documents attached to the pleadings by 

the parties, including several EchoCath public filings with 

the Securities Exchange Commission (SEC). 

EchoCath is a small New Jersey research and 

development company engaged in developing, 

manufacturing, and marketing medical devices to enhance 

and expand the use of ultrasound technology for medical 

 2 
applications and procedures. Among the pr oducts that 

EchoCath has developed with the company's pr oprietary 

ultrasound technology are ColorMark, which highlights 

metallic objects such as needles and other interventional 

instruments in color to permit them to be seen on existing 

ultrasound imaging screens, and EchoMark, which 

electronically marks and displays the position of nonmetallic objects such as catheters within the body. The 

parties refer to these two products as the"women's health 

products." EchoCath describes its women's health products 

as enabling physicians to perform pr ocedures such as 

needle biopsies, catheterizations, and intravascular imaging 

more safely and efficiently. 

EchoCath consummated its initial public offering on

January 17, 1996 and issued a lengthy Prospectus that 

included details of the company's technologies, future 

plans, capitalization, collaborative agreements, and selected 

financial data. The Prospectus also included the caution 

that "[a]n investment in the securities of fered . . . is 

speculative in nature and involves a high degr ee of risk," 

App. at 81, and set forth several pages of risk factors. In 

particular, EchoCath cautioned investors that the company 

"intend[ed] to pursue licensing, joint development and other 

collaborative arrangements with other strategic partners 

. . . [but] [t]here can be no assurance . . . that the Company 

will be able to successfully reach agreements with any 

strategic partners, or that other strategic partners will ever 

devote sufficient resources to the Company's technologies." 

App. at 84. 

More than six months after the public of fering, 

MedSystems began consideration of a sizable investment in 

EchoCath. MedSystems is itself a small company involved 

in the development, marketing, and sales of car diac 

electrophysiology products used to diagnose and treat 

certain cardiac disorders. See Amended Complaint P 5. In 

August 1996, the chief executive officers of the two 

companies met at EchoCath's plant in Monmouth Junction, 

New Jersey, where MedSystems management tour ed 

EchoCath's facilities to evaluate the technology under 

development. See id. P 9. 

 3 
Frank DeBernardis, the Chief Executive Officer (CEO) of 

EchoCath, made a lengthy presentation during the August 

meeting to David Jenkins, MedSystems President and CEO, 

James Caruso, its Chief Financial Officer (CFO), and 

Anthony Varrichio, a Director.See id. PP 9, 10. DeBernardis 

represented that EchoCath had engaged in lengthy 

negotiations to license its products and was on the verge of 

signing contracts with a number of prominent medical 

companies, which he identified as including Ur oHealth, 

Johnson & Johnson, Medtronic, and C.R. Bar d, Inc., to 

develop and market EchoCath's women's health pr oducts. 

See id. 

Negotiations between MedSystems and EchoCath 

commenced "in earnest" in November 1996. See id. P 12. 

Throughout the negotiations and until the closing in 

February 1997, EchoCath's CEO continued to r epresent to 

MedSystems officials that EchoCath was actively moving 

forward with the line of women's health pr oducts described 

in the August meeting, see id., and that the contracts with 

UroHealth, Johnson & Johnson, Medtronic and C.R. Bard 

to develop these products were "imminent," see id. P 15. 

The complaint points to a specific telephone conversation 

between December 16 and December 20, 1996 during 

which EchoCath's CEO DeBernardis r eiterated these 

representations to the CFO of MedSystems. See id. P 12. 

On December 20, 1996, DeBernardis deliver ed a group of 

documents to MedSystems, which included the pr eviously 

issued 1996 EchoCath Prospectus and EchoCath'sfinancial 

projections and marketing plan for fiscal years 1997 and 

1998 entitled "EchoCath's Operating Model." See id. PP 13, 

14. The Operating Model "outline[d] the sales and 

marketing goals for the next two years (February 1996 - 

January 1998)." App. at 29. It projected sales from the 

women's health products of $852,000 in 1997 ($736,000 

for ColorMark and $116,000 for EchoMark) and $3,286,000 

in 1998 ($2.5 million for ColorMark and $786,000 for 

EchoMark) and represented that these sales projections 

were "conservative" estimates. App. at 19. The Operating 

Model contained the statements that the Model "is intended 

as a beginning guide, and it is expected that it will be 

revised," and it is "a simplified for m of accounting" but it 

 4 
"does reflect accurately cash and incomeflows." App. at 19, 

29. The Operating Model included the statement that"[t]his 

Model is driven by a number of assumptions." App. at 19. 

The Operating Model also stated that EchoCath expected 

other income in 1996 and 1997, including $450,000 in the 

form of license fees and Milestone payments fr om 

Medtronic, arising out of a licensing agr eement EchoCath 

had with Medtronic for the use of leads with permanent 

pacemakers and defibrillators, a grant of $560,000 from the 

National Institute of Health, and $500,000 fr om another 

company interested in using the EchoMark technology. 

App. at 19. In the same paragraph, it noted that 

"[n]egotiations for these contracts ar e in process." App. at 

19. 

In an additional communication to MedSystems on 

December 23, 1996, this one by Daniel Mulvena, the CoChairman of EchoCath's Board, EchoCath stated that it 

anticipated that other outside investment in the company 

would provide sufficient operating funds to allow EchoCath 

to actively develop the women's health products for at least 

18 to 24 months. See Amended Complaint P 26. 

On February 27, 1997, MedSystems entered into a 

subscription agreement with EchoCath to pur chase 

280,000 shares of preferred EchoCath stock for 

$1,400,000. See id. P 8. In the agr eement, MedSystems 

specified that it "ha[d] not relied upon any representation or 

other information (oral or written) other than as contained 

in documents or answers to questions so furnished to 

[MedSystems] by [EchoCath]," that it had "relied on the 

advice of, or has consulted with, only its own Advisors," 

and acknowledged that "an investment in the Shar es

involves a number of very significant risks and 

[MedSystems was] able to bear the loss of its entire 

investment." App. at 63. Nonetheless, MedSystems alleges 

in the complaint that it relied on the r epresentations from 

EchoCath's CEO of imminent contracts, the for ecasted 

sales, the expected fees and payments referr ed to in the 

Operating Model, and the assurance that EchoCath would 

have sufficient liquidity to continue operation for 18 to 24 

months. See Amended Complaint P 32. 

 5 
In the fifteen months after MedSystems made its 

investment, EchoCath failed to enter into a single contract 

or to receive any income in connection with the marketing 

and development of the women's health products. It also 

did not receive the expected payments fr om license fees. 

See id. P 25. In September 1997, EchoCath advised 

MedSystems that EchoCath would run out of operating

funds in 90 days if new investment in the company was not 

forthcoming. See id. P 27. 

MedSystems filed suit in the United States District Court 

for the District of New Jersey, alleging that EchoCath 

intentionally or recklessly made misrepr esentations to 

MedSystems in connection with the sale of securities in an 

effort to induce MedSystems to purchase its securities, in 

violation of Section 10 of the Securities Exchange Act of 

1934, 15 U.S.C. S 78j, and Rule 10b-5. See id. PP 30, 35. 

MedSystems also alleged a supplemental state law fraud 

claim. MedSystems alleged that EchoCath was not on the 

verge of signing contracts with any company to develop its 

line of women's health products in August of 1996, or any 

other time up to the closing on February 27, 1997. See id. 

P 17. MedSystems also alleged that EchoCath knew when it 

drew up the Operating Model that it was highly unlikely the 

company would meet the performance r equirements on

which the Milestone payments were contingent. See id. 

P 22. It further alleged that EchoCath made this misleading 

projection in an effort to conceal EchoCath's true financial 

condition and to induce MedSystems to invest in the

company. See id. P 23. 

EchoCath moved to dismiss the complaint under Rule 

12(b)(6) and Rule 9(b) of the Federal Rules of Civil 

Procedure. It attached to its motion: (1) the January 17, 

1996 Prospectus; (2) the February 27, 1997 Subscription 

Agreement between EchoCath and MedSystems for the 

purchase of the stock; (3) its annual 10-KSB r eport filed 

with the SEC on December 12, 1996 for the 1996 fiscal 

year ending August 31, 1996 ("Annual Report"), which 

reported, inter alia, that as of August 31, 1996, EchoCath's 

operations had not generated significant r evenues and 

which contained substantial cautionary language; 1 (4) 

_________________________________________________________________ 

1. Among the cautions contained in the Annual Report were statements 

that "[n]o assurance can be given that the Company will successfully 

 6 
EchoCath's quarterly update filed with the SEC on January 

21, 1997 for the three months ending on November 30, 

1996 ("Quarterly Report"), which reported that EchoCath 

had minimal sales in the quarter, and that EchoCath "will 

receive a series of payments totaling $950,000[from its 

agreement with Medtronic] after the completion of certain 

milestones," that its current cash r eserves, together with 

anticipated sales, should be sufficient to fund r esearch and 

development and other capital needs through December 

1997, that it anticipated additional cash resources that 

would be provided by the completion of unspecified 

licensing agreements and strategic alliances, but that there 

"can be no assurances that the Company will be able to 

complete the aforementioned license agr eements and

strategic alliances on acceptable terms." App. at 214-15. 

EchoCath took the position that these documents 

established that any alleged misrepresentations were 

immaterial under the "bespeaks caution" doctrine because 

they contained sufficient cautionary language. 

The District Court concluded as an initial matter that it 

was appropriate to examine these documents without 

transforming the motion to dismiss into a motion for 

summary judgment, as they were expressly or implicitly 

relied upon by MedSystems in its complaint. EP 

MedSystems, Inc. v. EchoCath, Inc., 30 F . Supp. 2d 726, 

741-42 (D.N.J. 1998). Although the complaint contains no 

direct reference to the Annual Report or the Quarterly 

Report, MedSystems does not contest that decision. There 

is no indication that MedSystems ever received a copy of 

these documents, but they were readily available to the 

public. 

The District Court then dismissed the complaint with 

prejudice. In an exhaustive and lengthy opinion, the court 

concluded that the representations wer e immaterial as a 

_________________________________________________________________ 

commercialize any of its products or achieve profitable operations," that 

the report contained "forward-looking statements" within the meaning of 

the Private Securities Litigation Reform Act of 1995, and that many 

known and unknown risks may cause the actual r esults to be materially 

different from the company's futur e predictions. App. at 157-58. 

 7 
matter of law under the "bespeaks caution" doctrine

because of the cautionary language accompanying these 

alleged misrepresentations. See id. at 745-51, 760-69. The 

court also stated that MedSystems had failed to plead 

scienter with sufficient particularity as r equired by Rule 

9(b) and 15 U.S.C. S 78u-4(b)(2). See id. at 751-56. Next, 

the court found that MedSystems could not have 

reasonably relied on EchoCath's optimisticfinancial

projections. See id. at 757-60. Finally, the court concluded 

that MedSystems failed to plead loss causation. See id. at 

769-71. Having dismissed the federal securities claim, the 

District Court declined to retain jurisdiction over the 

remaining state law fraud claim pursuant to 28 U.S.C. 

S 1367(c)(3). See id. at 771-72. 

The District Court had jurisdiction over the federal 

securities claim under 15 U.S.C. SS 77v and 78aa and the 

state fraud claim under 28 U.S.C. S 1367(a). W e have 

jurisdiction under 28 U.S.C. S 1291. W e exercise plenary 

review over the District Court's dismissal of MedSystems' 

complaint under Rule 12(b)(6). See Wheeler v. T owanda 

Area School Dist., 950 F.2d 128, 129 (3d Cir. 1991). 

II. 

DISCUSSION 

Section 10(b) of the Securities Exchange Act pr ovides 

that it is unlawful for any person to "use or employ, in 

connection with the purchase or sale of any security . . . , 

any manipulative or deceptive device or contrivance in 

contravention of such rules and regulations as the 

Commission may prescribe." 15 U.S.C. S 78j(b). Rule 10b-5 

makes it unlawful for a person 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 pur chase or sale 

of any security." 17 C.F.R. S 240.10b-5(b). Together, these 

provisions establish a private right of action for plaintiffs to 

recover for false or misleading statements or omissions of 

material fact. See In re Advanta Corp. Sec. Litig., 180 F.3d 

525, 535 (3d Cir. 1999). 

 8 
Under the legal principles governing actions alleging 

securities fraud, MedSystems must prove that EchoCath (1) 

made misstatements or omissions of material fact; (2) with 

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

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

MedSystems' reliance was the proximate cause of its injury. 

See Weiner v. Quaker Oats Co., 129 F .3d 310, 315 (3d Cir. 

1997). The District Court relied on these principles, and the 

precedents applying them, in dismissing MedSystems'

complaint as a matter of law. 

At the outset, it is important to recognize that there are 

important distinctions between this case and the usual 

securities actions for which these principles wer e

developed. Although EchoCath, like the companies sued in 

those cases, sought to sell its securities in the market by 

an offering accompanied by the January 1996 Pr ospectus, 

MedSystems does not base its claim on public 

misrepresentations or omissions that af fected the price of 

the stock it purchased. Instead, it contends that it was 

induced to make the substantial $1.4 million investment as 

a result of personal representations directly made to its 

executives by EchoCath's executives and that those 

representations were false and misleading. 

In one sense, this action is more akin to a contract action 

than a securities action, and that may be the claim

encompassed in its state law fraud count that the District 

Court did not consider. However, as MedSystems chose to 

base its initial claim on the securities law, we cannot fault 

the District Court for analyzing it as such. Nevertheless, the 

distinction between the fact pattern alleged here and that 

in the typical securities cases explains why it is difficult to 

apply the precedent from those cases to many of the issues. 

It is like the proverbial difficulty of fitting a square peg in 

a round hole. While the question whether EchoCath's

alleged misrepresentations are immaterial as a matter of 

law can be readily considered under the pr ecedent, it is far 

more difficult to do so with the subsequent issues, such as 

whether MedSystems pled scienter with sufficient 

particularity, failed to plead reasonable r eliance, and failed 

to plead loss causation. We consider each of these issues 

hereafter, keeping in mind throughout not only this

 9 
distinction but also that the District Court dismissed the 

complaint without leave to amend. 

A. 

General Principles of Materiality 

That materiality is a prerequisite to a viable securities 

action based on a misrepresentation is too well established 

to require citation. Nor can there be any disagreement as to 

the general definition of materiality under the securities 

laws. As the Supreme Court has defined it, a 

misrepresentation or omitted fact "is material if there is a 

substantial likelihood that a reasonable shar eholder would 

consider it important in deciding how to [act]." TSC 

Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). 

Although the TSC Industries case involved a proxy 

solicitation dispute, the TSC Industries standard of 

materiality was expressly applied by the Court to the S 10(b) 

and Rule 10b-5 context in Basic Inc. v. Levinson , 485 U.S. 

224, 232 (1988). According to the Court, for a 

misrepresentation or omission to be material " `there must 

be a substantial likelihood that the disclosur e of the 

omitted fact [or misrepresentation] would have been viewed 

by the reasonable investor as having significantly altered 

the `total mix' of information made available.' " Id. at 231-32 

(quoting TSC Industries, 426 U.S. at 449). 

Material representations must be contrasted with 

statements of subjective analysis or extrapolations, such as 

opinions, motives and intentions, or general statements of 

optimism, which " `constitute no mor e than `puffery' and are 

understood by reasonable investors as such.' " In re 

Advanta Corp. Sec. Litig., 180 F.3d at 538 (quoting In re 

Burlington Coat Factory Sec. Litig., 114 F .3d 1410, 1428 

n.14 (3d Cir. 1997)). In other words, some statements 

would not alter the total mix of relevant infor mation 

available to a reasonable investor. W e have recognized that 

"[a]lthough questions of materiality have traditionally been 

viewed as particularly appropriate for the trier of fact, 

complaints alleging securities fraud often contain claims of 

omissions or misstatements that are obviously so 

 10 
unimportant that courts can rule them immaterial as a 

matter of law at the pleading stage." In r e Burlington Coat 

Factory Sec. Litig., 114 F.3d at 1426. 

The materiality requirement has been further refined in 

recent years. In 1995, Congress enacted the Private

Securities Litigation Reform Act (the "Reform Act") because 

of significant evidence of abuse in private securities 

litigation, particularly the filing of frivolous suits alleging 

securities violations designed solely to coer ce companies to 

settle quickly and avoid the expense of litigation. See S. 

Rep. No. 104-98, at 4 (1990), reprinted in 1995 

U.S.C.C.A.N. 679, 683; H.R. Conf. Rep. No. 104-369, at 31 

(1990), reprinted in 1995 U.S.C.C.A.N. 730, 730. The 

Reform Act contains, inter alia, a statutory safe harbor for 

forward-looking written or oral statements. 2 Under that 

provision, an issuer is not liable for a forwar d-looking 

statement if it is "identified as a forwar d-looking statement, 

and is accompanied by meaningful cautionary statements 

identifying important factors that could cause actual 

_________________________________________________________________ 

2. The Act defines "forward-looking statement" to include: 

 (A) a statement containing a projection of r evenues, income 

 (including income loss), earnings (including earnings loss) per 

share, 

 capital expenditures, dividends, capital structure, or other 

financial 

 items; 

 (B) a statement of the plans and objectives of man agement for 

 future operations, including plans or objectives relating to the 

 products or services of the issuer; 

 (C) a statement of future economic per formance, including any such 

 statement contained in a discussion and analysis offinancial 

 condition by the management or in the results of operations 

 included pursuant to the rules and regulations of the Commission; 

 (D) any statement of the assumptions underlying or relating to any 

 statement described in subparagraph (A), (B), or (C); 

 (E) any report issued by an outside r eviewer retained by an 

issuer, 

 to the extent that the report assesses a forwar d-looking statement 

 made by the issuer; or 

 (F) a statement containing a projection or es timate of such other 

 items as may be specified by rule or regulation of the Commission. 

15 U.S.C.A. S 78u-5(i)(1) (West Supp. 2000). 
 11 
results to differ materially from those in the forward-looking 

statement." 15 U.S.C.A. S 78u-5(c)(1)(A)(i) (West Supp. 

2000). The safe harbor is also available for oral forwardlooking statements under certain conditions.3 

In this case, the District Court did not rely on, nor did 

EchoCath cite, the safe harbor provision as a basis for 

finding the representations at issue immaterial as a matter 

of law. This may be because the oral misrepr esentations on 

which MedSystems brought suit were not identified as 

forward-looking as required by the safe harbor provision. 

See supra note 3. Instead, the District Court found that the 

misrepresentations were immaterial under the "bespeaks 

caution" doctrine as adopted by this court in In re Donald 

J. Trump Casino Sec. Litig., 7 F.3d 357 (3d Cir. 1993). 

Under the "bespeaks caution" doctrine, "cautionary 

language, if sufficient, renders the alleged omissions or 

misrepresentations immaterial as a matter of law." Id. at 

371. In In re Trump Casino Sec. Litig., we held that a suit 

brought by a class of investors who pur chased bonds to 

provide funding for the acquisition and completion of the 

Taj Mahal, a lavish casino/hotel on the boar dwalk of 

Atlantic City, could not be maintained because the alleged 

misrepresentations and omissions in the pr ospectus were 

accompanied by warning signals in the text of the 

prospectus that conveyed to potential investors the extreme 

risks inherent in the venture and the variety of obstacles 

the venture would face. See id. at 364. We stated that 

"bespeaks caution" represents new nomenclature, but it "is 

essentially shorthand for the well-established principle that 

a statement or omission must be considered in context, so 

that accompanying statements may render it immaterial as 

a matter of law." Id. 

_________________________________________________________________ 

3. Under the Reform Act, an issuer is not liable for any oral forwardlooking statements if (1) the issuer informs the audience that the 

statement is forward-looking and that actual r esults may differ 

materially from the predictions; (2) the issuer orally directs the 

audience 

to other "readily available" written documents that contain the additional 

information about important factors relating to the forward-looking 

statement; and (3) the identified documents set forth satisfactory 

cautionary statements. See 15 U.S.C.A. S 78u-5(c)(2)(B) (West Supp. 

2000). 

 12 
Shortly thereafter, in Kline v. First Western Gov't Sec., 

Inc., 24 F.3d 480 (3d Cir. 1994), we considered application 

of the "bespeaks caution" doctrine to alleged 

misrepresentations and omissions in an opinion letter 

written by a law firm to its client. W e rejected the position 

that the disclaimers in the opinion letter entitled the law 

firm to summary judgment. As we stated,"[n]ot just any 

cautionary language will trigger application of the doctrine. 

Instead, disclaimers must relate directly to that on which 

investors claim to have relied." Id. at 489. Quoting In re 

Trump Casino Sec. Litig., we recognized that: 

 [A] vague or blanket (boilerplate) disclaimer which 

 merely warns the reader that the investment has 

 risks will ordinarily be inadequate to pr event 

 misinformation. To suffice, the cautionary statements 

 must be substantive and tailored to the specific future 

 projections, estimates or opinions in the pr ospectus 

 which the plaintiffs challenge. 7 F.3d at 371-72. 

Id. 

Later, in In re Westinghouse Sec. Litig., 90 F.3d 696 (3d 

Cir. 1996), we reversed the dismissal of a suit based on 

alleged misstatements in Westinghouse's 1991 Prospectus. 

The district court had held that the cautionary language in 

the prospectus rendered the alleged misstatements 

immaterial under the "bespeaks caution" doctrine. See id. 

at 707. We held that "notwithstanding the cautionary 

language" in the prospectus, the alleged misrepresentations 

about the adequacy of the loan loss reserves likely "would 

have assumed actual significance to a reasonable investor 

contemplating the purchase of securities." Id. at 710. 

By its terms, the "bespeaks caution" doctrine, like the 

safe harbor provision in the Reform Act, is directed only to 

forward-looking statements. When we first r ecognized the 

doctrine, we stated that "when an offering document's 

forecasts, opinions or projections are accompanied by 

meaningful cautionary statements, the forwar d-looking 

statements will not form the basis for a securities fraud 

claim . . . ." In re Trump Casino Sec. Litig., 7 F.3d at 371 

(emphasis added). In later cases, we confir med that the 

doctrine only applied to forward-looking statements. See, 

 13 
e.g., Semerenko v. Cendant Corp., 223 F.3d 165, 182 (3d 

Cir. 2000) (noting that the plaintiffs"maintain that the 

`bespeaks caution' doctrine is inapplicable, because the 

statements related to present and historical facts that were 

capable of verification and, as such, not forwar d-looking" 

whereas "[t]he defendants . . . characterize the statements 

. . . as forward-looking, and thus subject to the bespeaks 

caution doctrine."). 

The other courts of appeals have also held that the

"bespeaks caution" doctrine only applies to forward-looking 

statements. See Grossman v. Novell, Inc. , 120 F.3d 1112, 

1123 (10th Cir. 1997) (holding "bespeaks caution" doctrine 

inapplicable to alleged statements relating to the company's 

increased market share, pace of mer ger integration, and 

"smooth" merger); In re Stac Elec. Sec. Litig., 89 F.3d 1399, 

1408 (9th Cir. 1996) ("By definition, the bespeaks caution 

doctrine applies only to affirmative, forwar d-looking 

statements."); Shaw v. Digital Equip. Corp. , 82 F.3d 1194, 

1213 (1st Cir. 1996) (explaining that a statement may 

contain "both a forward-looking aspect and an aspect that 

encompasses a representation of pr esent fact," and "[t]o the 

extent that plaintiffs allege that the . . . statement 

encompasses the latter representation of present fact, and 

that such a representation was false or misleading when 

made, the surrounding cautionary language could not have 

rendered the statement immaterial as a matter of law.") 

(emphasis omitted); Harden v. Raffensperger, Hughes & Co., 

Inc., 65 F.3d 1392, 1405-06 (7th Cir . 1995) (refusing to 

apply "bespeaks caution" doctrine to statement of "hard 

fact" regarding the company's "plans to restore profitability 

to its day-to-day operations"); Rubinstein v. Collins, 20 F.3d 

160, 167 (5th Cir. 1994) (discussing the"bespeaks caution" 

doctrine's applicability to "predictive statements"). But cf. 

Harris v. Ivax Corp., 182 F.3d 799, 805-06 (11th Cir. 1999) 

(holding that statements made on the last day of a quarter 

concerning the results for the quarter ar e forward-looking). 

We have also recognized that for the"bespeaks caution" 

doctrine to apply, the cautionary language must be directly 

related to the alleged misrepresentations or omissions. See 

Kline, 24 F.3d at 489. Although we have never explicitly 

held that the cautionary language must actually 

 14 
accompany the alleged misrepresentation or omission, we 

have noted in many cases that the cautionary language did 

accompany the representation. For example, in In re Trump 

Casino Sec. Litig., we evaluated the plaintif fs' "assertion 

that the Partnership believed the Taj Mahal could meet the 

obligations of the bonds [set forth in the pr ospectus], [and] 

also other relevant statements contained in the 

prospectus." 7 F.3d at 369. W e noted that "an 

accompanying statement may neutralize the ef fect of a 

misleading statement." Id. at 372. 

In Kline, we pointed out that the opinion letters at issue 

contained cautionary language but ultimately concluded 

that the disclaimer did not directly relate to the statements 

by which plaintiffs claimed to have been misled, and thus 

we concluded the claim could be maintained. See 24 F.3d 

at 489-90. Similarly, in In re Westinghouse Sec. Litig., even 

though the cautionary language appeared in the 

prospectus, we held that it did not sufficiently negate some 

of the claims. See 90 F.3d at 709. 

EchoCath argues that the cautionary language need not 

accompany the alleged misrepresentation, citing to our 

decision in Weiner v. Quaker Oats Co., 129 F.3d 310 (3d 

Cir. 1997). One of the alleged misrepr esentations was the 

statement made by the CEO of Quaker Oats at a public 

meeting on August 4, 1994 that he was "confident of

achieving at least 7% real earnings gr owth" in fiscal year 

1995. Id. at 313. The district court dismissed this claim, 

ruling that the projections of earnings growth were per se 

reasonable and per se immaterial. Although we affirmed the 

dismissal of this claim, we did so only after finding that a 

subsequent statement in the 1994 Annual Report that the 

company is "committed to achieving a real earnings growth 

of at least 7 percent over time" neutralized the alleged oral 

misrepresentation. Id. at 321 (emphasis in original). The 

phrase "over time" inoculated Quaker Oats fr om any claims 

of fraud based on a decline in earnings gr owth. 

EchoCath seeks to draw from Weiner the general 

proposition that the "bespeaks caution" doctrine applies if 

the cautionary language in public filings addr esses the 

substance of the alleged misrepresentations and provokes 

uncertainty, even if the cautionary language does not 

 15 
accompany or directly negate the misrepr esentations. 

Weiner cannot stand for that proposition because we

specifically noted that the "bespeaks caution" doctrine was 

only applicable if the forecasts, opinions and projections 

were accompanied by a meaningful cautionary statement, 

and the August 4 statement "was accompanied by no such 

language." See id. at 320. Instead, we held that the 

earnings growth projection was immaterial as a matter of 

law under the general test for materiality because after 

issuance of the Annual Report with its "over time" 

language, "[n]o reasonably careful investor would find 

material a prediction of seven-percent gr owth followed by 

the qualifier `over time.' " Id. at 321. 

Notwithstanding our precedent suggesting that the 

"bespeaks caution" doctrine requir es the cautionary 

language to accompany the misrepresentation, we need not 

make such a holding today. Ultimately, this court may 

recognize such a requirement, but we choose to exercise 

restraint in that connection because we r ecognize that 

possible fact scenarios may arise that we cannot now 

envision. See Grossman, 120 F .3d at 1122 (rejecting notion 

that cautionary language must accompany the 

representation at issue). 

Nonetheless, the absence of accompanying cautionary

language is an important factor in determining the 

materiality of the misrepresentation. If the representation is 

so obviously unimportant to an investor that r easonable 

minds could not differ on the question of materiality, the 

representation or omission will be immaterial as a matter of 

law. See Weiner, 129 F.3d at 321. On the other hand, 

"[m]ateriality is a mixed question of law and fact, and the 

delicate assessments of the inferences a r easonable 

shareholder would draw from a given set of facts are 

peculiarly for the trier of fact." Shapir o v. UJB Financial 

Corp., 964 F.2d 272, 280 n. 11 (3d Cir . 1992). We turn to 

consideration of the misrepresentations alleged by 

MedSystems in light of these general principles to 

determine if dismissal at the pleading stage should be 

upheld. 

 16 
B. 

Alleged Misrepresentations 

1. "Imminent Contracts" 

The principal allegation of MedSystems is that EchoCath 

repeatedly misrepresented the existence of imminent

contracts for its women's health products. The complaint 

alleges that EchoCath's CEO represented that it "had 

engaged in lengthy negotiations with and was on the verge 

of signing contracts with a number of companies including 

UroHealth, Johnson & Johnson, Medtronic and C.R. Bard, 

Inc. to develop and market [EchoCath's] women's health 

products." Amended Complaint P 10; see also id. PP 12, 13, 

15, 17. MedSystems also alleges that "[t]hr oughout the 

negotiations and until the closing in February, 1997," 

EchoCath "continued to represent . . . that EchoCath was 

actively moving forward with the line of women's health 

products . . . ." Id. P 12. Allegedly, EchoCath's CEO 

repeated these assurances to MedSystems' CFO during a 

telephone conversation between December 16 and 

December 20, 1996 and again on December 20 when 

MedSystems was given the Operating Model. See id. PP 12- 

14. On or about January 30, 1997, EchoCath's CEO 

further assured MedSystems that "the deals he had 

promised with outside companies to develop these products 

were imminent." Id. P 15. 

The District Court, referring to this claim as the Possible 

Contracts Allegation, concluded that this repr esentation 

was immaterial as a matter of law under both the 

"bespeaks caution" doctrine and the general test of

materiality.4 Applying the "bespeaks caution" doctrine, the 

court assumed that the imminent contracts repr esentation 

was forward-looking but never explicitly deter mined that it 

was. In addition, the court found that the documents 

containing the cautionary language were "for the most 

part contemporaneous" with the imminent contracts 

_________________________________________________________________ 

4. We note that the District Court discussed the "bespeaks caution" 

doctrine under its section on reliance, see EP MedSystems, 30 F. Supp. 

2d at 760, though the doctrine actually concer ns materiality. 

 17 
representation. EP MedSystems, 30 F. Supp. 2d at 767. It 

later stated that cautionary language neutralized the 

alleged misrepresentation "[i]rr espective of the time of 

issuance of the [documents]." Id. at 769. 

As we noted earlier, the "bespeaks caution" doctrine 

applies only to forward-looking statements. On review, we 

cannot say as a matter of law that the repr esentation was 

not a present statement of fact. EchoCath's CEO had told 

MedSystems that lengthy negotiations with the four 

companies had already taken place and that the contracts 

were "imminent." See Amended Complaint P 15. An event is 

"imminent" if it is "ready to take place." WEBSTER'S THIRD NEW 

INTERNATIONAL DICTIONAR Y 1130 (1976). A statement by the 

CEO of EchoCath that contracts with four companies were 

"ready to take place" may reasonably be construed as a 

representation about the current state of negotiations 

between EchoCath and the four companies it had 

identified. As such, the representation could be reasonably 

construed by a trier of fact to be a statement of fact rather 

than a prediction of future events. 

This view is consistent with that of other cir cuits. See, 

e.g., Grossman, 120 F.3d at 1123 (concluding that the 

"bespeaks caution" doctrine would not apply because the 

statements at issue contained "then-present factual

conditions, or implied background factual assumptions a 

reasonable investor would regard the speaker as believing 

to be true."); Shaw, 82 F.3d at 1212-13 (finding a statement 

that the company's reserves were adequate to cover costs 

contained both "forward-looking" and"present-oriented" 

aspects and was therefore not subject to the "bespeaks 

caution" doctrine); Harden, 65 F .3d at 1405-06 

(determining that a statement regar ding the company's 

"plans" to restore profitability was "a present assertion of 

fact, i.e., `plans' exist or are being for mulated"). 

There is also a question whether the cautionary language 

cited by the District Court was sufficiently pr oximate to the 

imminent contracts representations to meet the relatedness 

test established by our precedent. The r epresentations were 

not accompanied by any cautionary language. The 

cautionary language referred to by the District Court to 

have put MedSystems on notice that the contracts might 

 18 
never be consummated was contained in the 1996 

Prospectus, published in January 1996 in connection with 

the initial public offering and given to MedSystems in 

December 1996. That Prospectus had numer ous cautionary 

warnings regarding the futur e of EchoCath.5 

However, the 1996 Prospectus was published seven 

months before the August 1996 meeting wher e EchoCath's 

CEO first made the representation that it was "on the verge 

of signing contracts" with the four companies. By the time 

EchoCath gave the Prospectus to MedSystems, over ten 

months had passed since its initial publication. W e cannot 

discount the possibility that MedSystems executives would 

have treated the cautionary language as applicable to the 

earlier date when the Prospectus was issued. Whatever the 

state of the negotiations between EchoCath and the four 

companies when the Prospectus was published in January 

1996, the MedSystems executives might have r easonably 

believed that significant progress in the negotiations had 

been made in the interim. This may be particularly so when 

EchoCath's CEO has personally and repeatedly given 

assurances that four contracts were "imminent." 

The District Court found the necessary relatedness 

because the Prospectus contained repr esentations similar 

to those made by EchoCath's CEO in the August 1996 

meeting. See EP MedSystems, 30 F. Supp. 2d at 747-48. 

However, the Prospectus contained general language of 

intentions to make arrangements and agreements with

_________________________________________________________________ 

5. For example, the Prospectus includes the following: 

 [EchoCath] has no binding commitments fr om any third parties to 

 provide funds to [EchoCath] . . . [and] there can be no assurance 

 that [EchoCath] will be able to obtain financing from any other 

 sources on acceptable terms. App. at 99. 

 [EchoCath] intends to pursue licensing, joint development and other 

 collaborative arrangements with other strategic partners. There can 

 be no assurance, however, that [EchoCath] will be able to 

 successfully reach agreements with any strategic partners, or that 

 other strategic partners will ever devote sufficient resources to 

 [EchoCath's] technologies. App. at 84. 

 No assurance can be given that [EchoCath] will ever be able to 

 establish commercial scale manufacturing operations. App. at 84. 

 19 
third parties. Nothing in the Prospectus specifically refers 

to the imminent contracts with the four companies 

EchoCath identified in August 1996. 

The District Court also cited to cautionary language 

contained in EchoCath's Annual Report for the fiscal year 

ending August 31, 1996 and the Quarterly Report for the 

quarter ending November 30, 1996, which both cautioned 

investors that there could be no assurance that EchoCath 

would ever successfully commercialize any of its products 

or complete any of the expected license agreements or 

strategic alliances on acceptable terms. The Annual Report 

was filed with the SEC on December 12, 1996 and pr ovided 

information as of August 31, 1996, and the Quarterly 

Report was filed on January 21, 1997 and pr ovided 

information as of November 30, 1996. Whether they were 

sufficient to neutralize the initial repr esentation of the four 

imminent contracts made in the August 1996 meeting is 

not so obvious as to be decided as a matter of law.

Moreover, MedSystems also alleged that EchoCath's CEO 

repeated his assurance that the four contracts were

imminent between November 1996, when the parties began 

negotiations for the subscription agreement, and February 

1997, when the subscription agreement was finally closed. 

See Amended Complaint P 12. Ther efore, we cannot agree 

with the District Court that the cautionary language 

contained in these documents rendered the imminent 

contracts representation immaterial under the "bespeaks 

caution" doctrine. 

Nor do we agree that dismissal of the complaint should 

be affirmed under the general test for materiality. The 

District Court justified dismissal of the imminent contracts 

claim because "[a]bsent a statement by EchoCath that the 

contracts would be consummated, such statements, taken 

in context, are not false and misleading," EP MedSystems, 

30 F. Supp. 2d at 748, and cited as support our decision in 

Weiner. The District Court also held that the 1996 

Prospectus put MedSystems on notice of the possibility that 

the four contracts might not be consummated. Ther efore, 

according to the court, no reasonable sophisticated investor 

would view such representations as altering the total mix of 

information. 

 20 
We find little support in Weiner where, as discussed 

above, the claim that was dismissed was based on a public 

statement of earnings growth projections that was followed 

by an equally public qualifier. Her e, MedSystems bases its 

claim on oral representations personally made by 

EchoCath's CEO to executives of MedSystems fr om August 

1996 until its subscription was finalized in February 1997, 

a qualitatively different situation. A r easonable investor 

could have viewed these representations as altering the 

total mix of information. 

EchoCath argues that even if MedSystems executives 

believed that the contracts were imminent in August of 

1996, they should have known by February 1997 when the 

contracts had not been consummated that they could not 

rely on the veracity of the representation. See Br. of 

Appellee at 4. On the other hand, MedSystems had r eceived 

no information from EchoCath during that period to 

suggest that the contracts would not be consummated. 

Thus, MedSystems could have reasonably consider ed that 

there was no change in the information on which the

representation was based, inasmuch as EchoCath, which 

was in a superior position than was MedSystems to 

ascertain the facts, failed to update its earlier 

representations. See Weiner, 129 F.3d at 318. 

It follows that we cannot agree with the District Court 

and EchoCath that the imminent contracts repr esentation 

is immaterial as a matter of law. 

2. Sales Projections 

The MedSystems complaint states that DeBernar dis, 

EchoCath's CEO, made representations to MedSystems 

concerning anticipated income from the"women's health 

products it had always represented it was committed to 

marketing and developing." Amended ComplaintP 14. 

These representations were contained in the Operating 

Model for the fiscal years 1997 and 1998, which EchoCath 

delivered to MedSystems in December 1996. Specifically, 

the Operating Model states: "ColorMark sales ar e projected 

to be $736,000 in the coming year and $2.5 million in the 

second year. The EchoMark SSG catheter sales are 

projected at $116,000 and $786,000 in the 1st and 2nd 

 21 
year, respectively. We believe these sales projections are 

conservative." App. at 19. 

The District Court discussed the sales projections along 

with the imminent contracts representation, apparently 

recognizing that the projections would necessarily be based 

on the consummation of the contracts for the women's 

health products. We agree with this approach. Ordinarily, 

sales projections such as these are characterized as 

forward-looking statements that may fall within the

"bespeaks caution" doctrine. See In r e Advanta Corp. Sec. 

Litig., 180 F.3d at 536. In fact, the pr ojections were 

accompanied by a number of warnings. The Operating 

Model stated at the outset that "[t]his Model is driven by a 

number of assumptions," and warned that"[t]his Model is 

a simplified form of accounting, but does r eflect accurately 

cash and income flows." App. at 19. It further stated that 

the sales and marketing goals outlined were"intended as a 

beginning guide, and it is expected that [they] will be 

revised." App. at 29. Such statements could be sufficient to 

neutralize the materiality of the sales projections in the 

same document. 

However, we do not understand MedSystems to be 

arguing that its claim can be maintained on the basis of the 

sales projections independent of the imminent contracts 

representation. At oral argument, its counsel stated that 

the sales projections and financial model wer e tied into the 

representation that these contracts wer e imminent. He 

further conceded that the sales projections tur n on the 

validity of that representation and that the imminent 

contracts representation is by far the most important 

misrepresentation in this case. Ther efore, we are not 

prepared to hold that the sales pr ojections are completely 

immaterial at this pleading stage of the proceeding, as they 

may reinforce the materiality of the imminent contracts 

representation.6 

_________________________________________________________________ 

6. Because the sales projections are not an independent basis for the 

action, we need not consider whether they would be actionable under 

our language in Weiner, where we declined to recognize a per se rule of 

immateriality for earnings growth projections. See 129 F.3d at 320 n.12. 

We noted that a per se rule would immunize companies from "the need 

 22 
3. Milestone Payment and Other Licensing Receipts 

MedSystems also alleged that EchoCath's Operating 

Model misrepresented the likelihood that it would receive 

$450,000 in "Milestone payments" under its r ecent contract 

with Medtronic, and $500,000 from a company that wished 

to use EchoMark technology for "guiding pr ostrate 

treatments." Amended Complaint PP 22, 24. Like the 

imminent contracts, none of the payments eventuated. 

However, unlike the imminent contracts r epresentation 

which was made by the CEO of EchoCath personally to

MedSystems executives on various occasions, the 

statements regarding the expected r eceipts cannot be 

viewed as statements of present fact but rather are forwardlooking. The Operating Model described the Milestone 

payment and other licensing fees as "[o]ther income over 

the coming two-year period." App. at 19 (emphasis added). 

The statement is thus akin to the "over time" statement in 

Weiner which neutralized an earnings growth projection. 

See 129 F.3d at 321. Indeed, the qualifying language 

accompanied the representation and we see no reason why 

the "bespeaks caution" doctrine would be inapplicable. The 

District Court did not err in holding these statements to be 

immaterial. 

4. Sufficiency of Funds 

The final misrepresentation alleged in the complaint 

concerns the statement made on December 23, 1996 by the 

Co-Chairman of EchoCath's Board to r epresentatives of 

MedSystems that the investment by MedSystems together 

with "other outside investments" would pr ovide EchoCath 

_________________________________________________________________ 

to speak truthfully about the future." Id.; see also Kline, 24 F.3d at 486 

(stating that opinions are actionable under federal securities law if made 

without a reasonable genuine belief or factual basis); Eisenberg v. 

Gagnon, 766 F.2d 770, 776 (3d Cir . 1985) ("opinion must not be made 

with reckless disregard for its truth or falsity") (quotation omitted). 

MedSystems did allege that EchoCath "did not genuinely believe and 

ha[s] no reasonable basis to support the projections set forth" in its 

Operating Model, an allegation that, if proven, will be equally relevant 

to 

the representation about the imminence of the contracts upon which 

this case is based. Amended Complaint P 18. 

 23 
with sufficient operating funds to allow it to actively develop 

and market the products for at least 18 to 24 months. 

Amended Complaint P 26. The District Court concluded 

that this statement was neither misleading nor material 

when examined in light of cautionary language surr ounding 

a similar statement in the January 1996 Prospectus. See 

EP MedSystems, 30 F. Supp. 2d at 751. But nearly a year 

had passed from issuance of the Prospectus until the 

representation at issue, which would likely have negated 

whatever effect might be attributable to the cautionary 

language in the Prospectus. MedSystems executives could 

have reasonably believed that new developments had 

occurred that prompted the Co-Chair man to make that oral 

representation. 

However, we agree with the District Court's conclusion 

that the representation is not material. As alleged, the 

representation was of "anticipated" investment in EchoCath 

-- not guaranteed. Amended Complaint P 26. Unlike the 

imminent contracts representation, the Co-Chairman's 

statements did not refer to specific companies (besides 

MedSystems itself). Nor was this representation repeated 

over a six-month period. MedSystems was well awar e that 

it was dealing with a start-up company and should have 

expected that cash flow would be an issue. No r easonable 

investor could find that one optimistic statement made by 

the company's board member affects the total mix of

information available to that investor . Therefore, the 

claimed misrepresentation relating to anticipated 

sufficiency of funds is immaterial. 

To summarize, in applying the materiality principle to the 

alleged misrepresentations, we conclude that the imminent 

contracts representation as well as the r elated sales 

projection do not fall within the "bespeaks caution" doctrine 

as the District Court held but that they may be viewed by 

a factfinder as statements of present fact. Therefore, they 

may not be dismissed as immaterial as a matter of law. On 

the other hand, the District Court did not err in dismissing 

the claims regarding the expected r eceipts from other 

contracts and the anticipated sufficiency of funds, although 

our analysis differs to some extent fr om the District 

Court's. 

 24 
C. 

Scienter 

EchoCath argues on appeal that the District Court 

correctly held that dismissal of the complaint was also 

warranted on the ground that MedSystems failed to meet 

the heightened pleading required for the scienter element in 

securities fraud cases. Rule 9(b) of the Federal Rules of 

Civil Procedure, which applies to all complaints filed in 

federal court, provides that "[i]n all averments of fraud or 

mistake, the circumstances constituting fraud or mistake 

shall be stated with particularity." Fed. R. Civ. P. 9(b). The 

1995 Reform Act requires, inter alia, that a "complaint 

shall, with respect to each act or omission alleged to violate 

[the Securities Exchange Act], state with particularity facts 

giving rise to a strong inference that the defendant acted 

with the required state of mind." 15 U.S.C.A. S 78u-4(b)(2) 

(West Supp. 2000). After considering these r equirements, 

we recently held that it "remains sufficient for plaintiffs [to] 

plead scienter by alleging 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.' " In r e Advanta Corp. Sec. Litig., 180 

F.3d at 534-35 (quoting Weiner, 129 F.3d at 318 n.8). 

The District Court read our decision in In re 

Westinghouse Sec. Litig., 90 F.3d 696, to hold that we must 

analyze the allegations of the complaint separately rather 

than in their totality. We need not decide how In re 

Westinghouse Sec. Litig. would apply her e. Our earlier 

conclusion that the representations as to expected receipts 

from other contracts and the representation as to the 

anticipated sufficiency of funds are immaterial obviates any 

need to consider whether these allegations meet the

standard for pleading scienter. It follows that we need only 

analyze the sufficiency of the pleading as to the 

representation of the imminence of the contracts with four 

identified companies and the related sales pr ojections. 

MedSystems' complaint alleges that "[c]ontrary to 

EchoCath's repeated representations to EP MedSystems, 

EchoCath was not on the verge of signing contracts with 

 25 
UroHealth, Johnson & Johnson, Medtronic, C.R. Bard, Inc. 

or any other company to market and develop a line of 

women's health products in September, 1996 or at any 

other time up to the closing of February 27, 1997."

Amended Complaint P 17. Moreover,"EchoCath knew at all 

times relevant hereto that it had no r easonable prospects of 

entering into the contracts it had identified to EP

MedSystems." Id. P 18. The complaint then notes that 

"EchoCath has failed to entered [sic] in to a single contract 

and has yet to receive any income fr om the sale of women's 

health products" since September 1996. Id. P 19 (emphasis 

in original). 

MedSystems argues that these allegations constitute

strong circumstantial evidence of conscious misbehavior or 

recklessness. The District Court, on the other hand, viewed 

the complaint as merely alleging fraud by hindsight. It is, of 

course, true that we generally require mor e than a showing 

that a predicted event did not occur in or der to sustain a 

claim of fraud. See In re Advanta Sec. Litig., 180 F.3d at 

536-37. And in In re Burlington Coat Factory Sec. Litig., 114 

F.3d at 1429, we stated that it is not enough for a plaintiff 

to state that defendants had no reasonable basis for 

making the representation. However , we believe that when 

multiple promised events fail to occur, there is a point 

where a strong inference of fraud can be made. As 

MedSystems notes, four contracts with independent 

companies, each characterized as imminent, failed to 

materialize within a year of the representations. While it is 

possible that all of these companies discover ed some 

characteristic of EchoCath or its products that explained 

why the putative contracts did not materialize, we cannot 

dismiss the possibility that EchoCath, in an ef fort to coax 

a substantial investment, did not fairly repr esent to 

MedSystems the status of its negotiations with these 

companies. 

As we noted earlier, this case presents a factual situation 

unlike that in our prior precedent and, indeed, unlike those 

that were the basis for the 1995 Reform Act. The legislative 

history of the Reform Act makes clear that it was primarily 

directed at the abuse and misuse of securities class action 

lawsuits where defendant companies "choose to settle 

 26 
rather than face the enormous expense of discovery and 

trial." S. Rep. No. 104-98, at 9 (1995), r eprinted in 1995 

U.S.C.C.A.N. 679, 688. As the Senate Report states:

 The fact that many of these lawsuits arefiled as 

 class actions has had an in terrorem ef fect on 

 Corporate America. A whole stable of "professional 

 plaintiffs," who own shares--or sometimes fractions of 

 shares--in many companies, stand ready to lend their 

 names to class action complaints. 

 * * * 

 The "victims" on whose behalf these lawsuits are 

 allegedly brought often receive only pennies on the 

 dollar in damages. Even worse, long-term investors 

 ultimately end up paying the costs associated with the 

 lawsuits. As the Council for Institutional Investors 

 advised: "We are * * * hurt if a system allows someone 

 to force us to spend huge sums of money in legal costs 

 by merely paying ten dollars and filing a meritless 

 cookie cutter complaint against a company or its 

 accountants when that plaintiff is disappointed in his 

 or her investment." 

Id. (footnotes omitted). 

MedSystems stands in contrast to the professional 

plaintiffs who were the focus of the statute. MedSystems 

invested the substantial sum of $1.4 million in EchoCath. 

It did so on the basis of personal repr esentations by 

EchoCath executives to MedSystems officers concer ning 

negotiations that had occurred and the imminent results 

expected of those negotiations. MedSystems' complaint is 

not a "cookie cutter complaint" or a class action brought by 

shareholders with an insignificant inter est in the company; 

it is an individual action, based on a transaction arising 

from direct negotiations between the parties to the action. 

It is difficult to see how MedSystems could have pled 

fraud or scienter with more specificity without having been 

given the opportunity to conduct any discovery. Her e, the 

necessary information as to the status of EchoCath's 

negotiations with the four companies lies in the defendant's 

hands. In cases prior to the Reform Act, we noted that the 

 27 
pleading standard required by Fed. R. Civ. P. 9(b) could be 

relaxed "when factual information is peculiarly within the 

defendant's knowledge or control." Craftmatic Sec. Litig. v. 

Kraftsow, 890 F.2d 628, 645 (3d Cir . 1990); see also 

Shapiro, 964 F.2d at 285 (r eversing the dismissal of the 

complaint and granting the plaintiff an opportunity to state 

in the complaint that the necessary information is held by 

the defendant). We acknowledge the Refor m Act's 

heightened pleading requirement for the defendant's state 

of mind, but we believe that MedSystems' allegations are 

sufficient under the particular facts of this case, which is 

not the typical class action that Congress intended to 

target. 

In analyzing the effect of the Reform Act on pleading 

scienter, the Second Circuit concluded that the Reform Act 

"effectively raised the nationwide pleading standard to that 

previously existing in this circuit and no higher (with the 

exception of the `with particularity' requir ement)." Novak v. 

Kasaks, 216 F.3d 300, 310 (2d Cir . 2000). In In re Advanta 

Corp. Sec. Litig., we noted that Congress essentially adopted 

the Second Circuit's interpretation. See 180 F.3d at 584. 

This court's earlier requirement for pleading scienter did 

not differ materially from that of the Second Circuit. See In 

re Burlington Coat Factory Sec. Litig., 114 F.3d at 1418. 

MedSystems has conceded that it does not have 

information as to the status of the EchoCath negotiations 

with the four companies, if indeed there wer e negotiations, 

as it has not had the opportunity to acquire such 

information. We conclude that will suffice under the Reform 

Act. 

The District Court also found that the cautionary 

language in the January 1996 Prospectus and EchoCath's 

Operating Model eviscerated any inference of the requisite 

intent to commit fraud. However, as we commented earlier, 

cautionary language in the publicly disseminated 

Prospectus in January 1996 hardly negates any possible 

inference of fraud as to personal statements made from 

August 1996 to February 1997. There is no suggestion that 

EchoCath ever cautioned MedSystems before it made its 

investment in February 1997 that there was a change in 

the status of its four "imminent" contracts. Under these 

 28 
circumstances, we believe that the scienter pleading 

requirement has been adequately met. 

D. 

Reliance 

It is undisputed that a plaintiff seeking r elief under Rule 

10b-5 must show reasonable reliance on a false statement 

or omission of material fact. See Kline, 24 F.3d at 487-88. 

MedSystems' complaint alleges that its executives believed 

the "representations concerning EchoCath's line of women's 

health products were true and would not have made its 

substantial investment in EchoCath if it had known these 

representations were false." Amended Complaint P 16. The 

District Court treated the imminent contracts 

representation as involving future pr edictions by EchoCath 

that contained no guarantee that the contracts would be 

consummated. The court repeated its position that the 

representation was contradicted by disclaimers and 

cautionary language in the 1996 Prospectus, the Annual 

Report, and the Quarterly Report filed with the SEC. See EP 

MedSystems, 30 F. Supp. 2d at 758. Thus, the court found 

that any reliance by MedSystems on the r epresentation was 

unreasonable as a matter of law. 

Our consideration of the District Court's analysis leads 

us to a conclusion similar to that we reached in our 

discussion on materiality where we concluded that none of 

the documents containing cautionary language sufficiently 

neutralized the materiality of the imminent contracts 

representation. It follows that reliance on the repeated oral 

representations by EchoCath's CEO was not unreasonable 

as a matter of law because of those documents. 

In Straub v. Vaisman & Co., Inc., 540 F.2d 591, 598 (3d 

Cir. 1976), we identified a variety of factors that should be 

considered in determining whether the plaintiff 's reliance 

was reasonable. These factors include the existence of a 

fiduciary relationship, plaintiff 's opportunity to detect the 

fraud, the sophistication of the plaintiff, the existence of 

long-standing business or personal relationships, and 

access to the relevant information. See id. EchoCath argues 

 29 
that MedSystems was a very sophisticated investor and 

that it should have taken more care to per form due

diligence before it signed the subscription agr eement. But, 

as we noted in Straub, "a sophisticated investor is not 

barred by reliance upon the honesty of those with whom he 

deals in the absence of knowledge that the trust is

misplaced. Integrity is still the mainstay of commer ce . . . ." 

Id. 

Nor did MedSystems have access to information that 

would have suggested that the imminent contracts 

representation was false. Whether MedSystems, after being 

told by EchoCath's CEO for the second time that contracts 

with four companies were imminent, should have 

approached one or more of the four companies and asked 

for a verification of the present state of negotiations is an 

issue for the trier of fact, not for a judge ruling on the 

sufficiency of the pleadings. We cannot say that 

MedSystems' reliance on the imminent contracts 

representation was unreasonable as a matter of law.

E. 

Loss Causation 

Finally, we turn to EchoCath's contention that dismissal 

was appropriate because the complaint fails to plead loss 

causation. The Reform Act provides that in a securities law 

action, "the plaintiff shall have the bur den of proving that 

the act or omission of the defendant . . . caused the loss for 

which the plaintiff seeks to recover damages." 15 U.S.C.A. 

S 78u-4(b)(4) (West Supp. 2000). Although this provision 

does not deal with pleading, the District Court, describing 

loss causation as the "causal link between the alleged 

misrepresentations and the harm incurred when a security 

is purchased and sold," EP MedSystems , 30 F. Supp. 2d at 

770 (quotation omitted), concluded that MedSystems failed 

to plead loss causation. The court stated that the plaintiff 

must show that the misrepresentations"caused the decline 

in value rather than merely inducing the transaction," id. 

(quotation omitted), and noted that MedSystems did not 

allege that the value of its investment has declined, but 

 30 
rather "that it has `sustained substantialfinancial losses' 

as a direct result of the fraudulent misr epresentations [by 

EchoCath]." Id. at 771 (quoting Amended Complaint P 34). 

Before our recent decision in Semer enko v. Cendant

Corp., 223 F.3d 165 (3d Cir. 2000), we generally stated that 

the "misrepresentation must touch upon the reasons for 

the investment's decline in value." In r e Phillips Petroleum 

Sec. Litig., 881 F.2d 1236, 1244 (3d Cir . 1989) (citing 

Huddleston v. Herman & MacLean, 640 F .2d 534, 549 (5th 

Cir. 1981)). In Semerenko, we equated loss causation with 

proximate cause, stating that there must be a "sufficient 

causal nexus between the loss and the alleged 

misrepresentation." 223 F.3d at 184. The plaintiff class in 

Semerenko, which is representative of the usual securities 

case, alleged that it purchased shares at a price that was 

inflated due to misrepresentations by several directors and 

officers and that when the truth was made known, the 

price dropped to its true value. See id. at 185. 

The complaint in Semerenko stated: 

 [T]he misrepresentations . . . dir ectly or proximately 

 caused, or were a substantial contributing cause of, 

 the damages sustained by plaintiff and the other 

 members of the Class. The misstatements . . . had the 

 effect of creating in the market an unr ealistically 

 positive assessment of Cendant, as well as of its 

 financial condition, causing ABI's common stock to be 

 overvalued and artificially inflated at all r elevant times. 

223 F.3d at 186. 

The defendants argued that the plaintif f class did not 

adequately plead loss causation, but we rejected that 

argument. Drawing all reasonable infer ences in a light most 

favorable to plaintiffs, we found that an allegation that the 

misrepresentations "directly or pr oximately caused, or were 

a substantial contributing cause of, the damages sustained 

by plaintiff " adequately pled loss causation. Id. Semerenko, 

which was issued after the District Court decided this case, 

adopted a practical approach, in effect applying general 

causation principles. 

Some of the other courts of appeals have also adopted a 

practical view of loss causation. For example, the Eighth 

 31 
Circuit has stated that "[p]laintif fs are not required to meet 

a strict test of direct causation under Rule 10b-5; they need 

only show some causal nexus between [the defendant's] 

improper conduct and plaintiff 's losses." In re Control Data 

Corp. Sec. Litig., 933 F.2d 616, 619 (8th Cir. 1991) 

(quotation omitted). The Second Circuit similarly held that 

loss causation "embodies notions of the common law tort 

concept of proximate causation." AUSA Life Ins. Co. v. Ernst 

and Young, 206 F.3d 202, 216 (2d Cir. 2000) (quotation 

omitted). In Ambassador Hotel Co., Ltd. v. W ei-Chuan 

Investment, 189 F.3d 1017, 1027 (9th Cir . 1999), the Ninth 

Circuit stated that "the loss causation r equirement limits 

the ability of plaintiffs to recover for losses sustained on the 

basis of factors unrelated to any misrepr esentation or 

fraud." As the Eleventh Circuit stated in Robbins v. Koger 

Properties, Inc., 116 F.3d 1441, 1447 (11th Cir. 1997), "the 

loss causation requirement must be applied on a case-bycase basis." 

In considering loss causation, it is important to r ecognize 

once again how this case differs from the usual securities 

action. In the usual securities action, plaintif fs complain 

because some announcement emanating from the 

company, whether regarding a tender of fer, see Semerenko, 

223 F.3d at 169, earnings, see In r e Burlington Coat Factory 

Sec. Litig., 114 F.3d at 1416, pr ojected earnings, see 

Weiner, 129 F.3d at 312, or the company's financial

condition, see In re Westinghouse Sec. Litig., 90 F.3d at 701, 

fraudulently represented the actual state of affairs. 

Plaintiffs claim that, as a result, they purchased the 

securities at a price that was artificially inflated, only to 

suffer a loss when the true situation was made known. See, 

e.g., Hayes v. Gross, 982 F .2d 104, 105 (3d Cir. 1992) 

(involving a claim that defendants knowingly or r ecklessly 

misrepresented the company's financial condition, thus 

artificially inflating the stock price). 

This case differs. In this case, MedSystems claims that as 

a result of fraudulent misrepresentations made in personal 

communications by EchoCath executives, it was induced to 

make an investment of $1.4 million which tur ned out to be 

worthless.7 None of the cases in this circuit is analogous, 

_________________________________________________________________ 

7. While the complaint may not have set forth that damage theory with 

specificity, MedSystems' counsel clarified its damage theory at the oral 

argument. 

 32 
and counsel have not referred us to a similar case in 

another circuit nor have we found one. It follows that 

although we take guidance from the language in other 

cases enunciating general principles, the holdings are to 

some extent inapplicable here. 

The causation issue becomes most critical at the pr oof 

stage. Whether the plaintiff has proven causation is usually 

reserved for the trier of fact. See, e.g. , Huddleston, 640 F.2d 

at 549-50 (reversing for failure to submit causation to the 

jury). MedSystems' complaint was dismissed at the pleading 

stage. Although, as noted above, the allegation that it 

"sustained substantial financial losses as a direct result of 

the aforementioned misrepresentations and omissions on 

the part of EchoCath" could have more specifically 

connected the misrepresentation to the alleged loss, i.e., 

investment in a company with little prospects, when we 

draw all reasonable inferences in plaintif f 's favor, we 

conclude that MedSystems has adequately alleged loss 

causation. 

III. 

CONCLUSION 

The District Court, in its scholarly opinion leading to its 

conclusion to dismiss MedSystems' complaint in its entirety 

as a matter of law, applied the law of the cir cuit as to some 

of the requirements of a securities action too restrictively. 

While Congress and some judicial decisions have tended to 

cabin the large securities class actions that may have been 

filed without adequate basis, some of the District Court's 

conclusions do not withstand our analysis. W e are informed 

by more recent precedent of this court that was not

available to the District Court. Moreover , the District Court 

failed to recognize that this complaint by MedSystems does 

not fall into the pattern of the usual securities action and 

that application of certain legal requir ements must be 

adjusted to fit the particular action. 

Specifically, we have concluded that MedSystems' central 

allegation, that EchoCath's CEO gave MedSystems 

executives assurances that, after lengthy negotiations, 

 33 
contracts with four identified companies wer e "imminent" 

and provided sales projections that wer e an integral part of 

these assurances, should not have been dismissed. This 

was a statement of fact in the context in which pr esented 

by MedSystems' complaint that could be found to meet the 

requirement of materiality. The allegation that EchoCath 

knew or had reason to know that this was not the case 

adequately met the requirement of pleading scienter. A trier 

of fact could find that reliance was r easonable and that 

there was the requisite causal connection between the 

assurances and MedSystems' loss, i.e., its investment. 

On the other hand, we have concluded that the District 

Court did not err in dismissing the allegations as to certain 

other expected income and anticipated sufficiency of funds 

because there was qualifying language that should have 

put a reasonable investor on notice of the risk. It follows 

that we will reverse the dismissal of the complaint, and also 

direct reinstatement of the state fraud count. 

In remanding to the District Court we do not suggest that 

it is obliged now to permit a wide ranging discovery effort 

by plaintiff. We have been influenced to some extent by 

MedSystems' counsel's statements that limited discovery 

into the facts surrounding the central allegation should 

disclose in short order whether there was an adequate 

basis in fact for the assurances given from August 1996 

through February 1997. If there is some evidence that there 

was inadequate basis for such assurances, then, of course, 

it becomes an issue for the jury. 

For the reasons set forth, we will reverse the order 

dismissing the complaint and remand for further 

proceedings in accordance with this opinion. Each party to 

bear its own costs. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 34