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. e du/thir dc ir c uit_2000/259Filed 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 AppelleeOPINION 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 Off icer of EchoCath enticed MedSystems into investing $1.4 mil lion in EchoCath by assuring MedSystems that lengthy negotiations had already taken place with four prom inent companies to market certain new EchoCath products a nd that contracts with these companies were "imminent. " Relying on cautionary language contained in several public documents filed by EchoCath with the Securities Exc hange Commission, the District Court held that these representations, as well as other r elated represen tations, were immaterial as a matter of law under the"bespea ks caution" doctrine and the general test for material ity. It also held that MedSystems failed to adequately plead sci enter, reasonable reliance, and loss causation and could n ot do so. It accordingly dismissed the complaint without leave to

amend.

Our review of a decision granting a motion to dismi ss is plenary. We must accept as true all the factual all egations in the complaint. See United States v. Gaubert , 49 9 U.S. 315, 327 (1991).

I.

BACKGROUND

The following facts are drawn largely fr om the ame nded complaint and the documents attached to the pleadin gs by the parties, including several EchoCath public fili ngs 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 enh ance and expand the use of ultrasound technology for med ical

2applications and procedures. Among the pr oducts th at

EchoCath has developed with the company's pr opriet ary ultrasound technology are ColorMark, which highligh ts metallic objects such as needles and other interven tional instruments in color to permit them to be seen on e xisting ultrasound imaging screens, and EchoMark, which electronically marks and displays the position of n onmetallic 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 pr oducts as enabling physicians to perform pr ocedures such as needle biopsies, catheterizations, and intravascula r imaging more safely and efficiently.

EchoCath consummated its initial public offering on January 17, 1996 and issued a lengthy Prospectus th at included details of the company's technologies, fut ure plans, capitalization, collaborative agreements, an d selected financial data. The Prospectus also included the ca ution that "[a]n investment in the securities of fered . . . is speculative in nature and involves a high degr ee o f risk," App. at 81, and set forth several pages of risk fac tors. In particular, EchoCath cautioned investors that the c ompany "intend[ed] to pursue licensing, joint development and other collaborative arrangements with other strategic par tners . . . [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 partner s will ever devote sufficient resources to the Company's techno logies." App. at 84.

More than six months after the public of fering, MedSystems began consideration of a sizable investm ent in EchoCath. MedSystems is itself a small company invo lved in the development, marketing, and sales of car dia c electrophysiology products used to diagnose and tre at certain cardiac disorders. See Amended Complaint P 5. In August 1996, the chief executive officers of the tw o companies met at EchoCath's plant in Monmouth Junct ion, New Jersey, where MedSystems management tour ed EchoCath's facilities to evaluate the technology un der development. See id. P 9.

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

EchoCath, made a lengthy presentation during the Au gust meeting to David Jenkins, MedSystems President and CEO, James Caruso, its Chief Financial Officer (CFO), an d Anthony Varrichio, a Director.See id. PP 9, 10. DeB ernardis 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 medica l companies, which he identified as including Ur oHea lth, Johnson & Johnson, Medtronic, and C.R. Bar d, Inc., to develop and market EchoCath's women's health pr odu cts.

See id.

Negotiations between MedSystems and EchoCath

commenced "in earnest" in November 1996. See id. P 12. Throughout the negotiations and until the closing i n February 1997, EchoCath's CEO continued to r eprese nt to MedSystems officials that EchoCath was actively mov ing forward with the line of women's health pr oducts d escribed in the August meeting, see id., and that the contra cts with UroHealth, Johnson & Johnson, Medtronic and C.R. Ba rd to develop these products were "imminent," see id. P 15. The complaint points to a specific telephone conver sation 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 grou p of documents to MedSystems, which included the pr evio usly issued 1996 EchoCath Prospectus and EchoCath'sfinan cial projections and marketing plan for fiscal years 199 7 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 19 96 - January 1998)." App. at 29. It projected sales from the women's health products of $852,000 in 1997 ($736,0 00 for ColorMark and $116,000 for EchoMark) and $3,286 ,000 in 1998 ($2.5 million for ColorMark and $786,000 fo r EchoMark) and represented that these sales projecti ons were "conservative" estimates. App. at 19. The Oper ating

Model contained the statements that the Model "is i ntended as a beginning guide, and it is expected that it wi ll be revised," and it is "a simplified for m of accounti ng" 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. a t 19.

The Operating Model also stated that EchoCath expec ted other income in 1996 and 1997, including $450,000 i n the form of license fees and Milestone payments fr om Medtronic, arising out of a licensing agr eement Ec hoCath had with Medtronic for the use of leads with perman ent pacemakers and defibrillators, a grant of $560,000 from the National Institute of Health, and $500,000 fr om an other 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 co mpany would provide sufficient operating funds to allow E choCath 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, MedSyst ems specified that it "ha[d] not relied upon any repres entation or other information (oral or written) other than as c ontained in documents or answers to questions so furnished t o [MedSystems] by [EchoCath]," that it had "relied on the advice of, or has consulted with, only its own Advi sors," 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 entir e investment." App. at 63. Nonetheless, MedSystems al leges in the complaint that it relied on the r epresentat ions from EchoCath's CEO of imminent contracts, the for ecast ed sales, the expected fees and payments referr ed to in the Operating Model, and the assurance that EchoCath wo uld have sufficient liquidity to continue operation for 18 to 24 months. See Amended Complaint P 32.

5In 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 mar keting 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 w as not forthcoming. See id. P 27.

MedSystems filed suit in the United States District Court for the District of New Jersey, alleging that EchoC ath intentionally or recklessly made misrepr esentation s to MedSystems in connection with the sale of securitie s in an effort to induce MedSystems to purchase its securit ies, 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 3 0, 35. MedSystems also alleged a supplemental state law fr aud claim. MedSystems alleged that EchoCath was not on the verge of signing contracts with any company to deve lop 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 wh en it drew up the Operating Model that it was highly unli kely the company would meet the performance r equirements on which the Milestone payments were contingent. See i d. P 22. It further alleged that EchoCath made this mi sleading 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 Civi l Procedure. It attached to its motion: (1) the Janua ry 17, 1996 Prospectus; (2) the February 27, 1997 Subscrip tion Agreement between EchoCath and MedSystems for the purchase of the stock; (3) its annual 10-KSB r epor t filed with the SEC on December 12, 1996 for the 1996 fisc al year ending August 31, 1996 ("Annual Report"), whic h reported, inter alia, that as of August 31, 1996, E choCath's operations had not generated significant r evenues and which contained substantial cautionary language; 1 (4)

___________________________________________________ ______________

1. Among the cautions contained in the Annual Repor t were statements that "[n]o assurance can be given that the Company will successfully

6EchoCath's quarterly update filed with the SEC on J anuary

21, 1997 for the three months ending on November 30

, 1996 ("Quarterly Report"), which reported that Echo Cath 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 c ertain milestones," that its current cash r eserves, toget her with anticipated sales, should be sufficient to fund r e search and development and other capital needs through Decembe r 1997, that it anticipated additional cash resources that would be provided by the completion of unspecified licensing agreements and strategic alliances, but t hat 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 2 14-15. EchoCath took the position that these documents established that any alleged misrepresentations wer e immaterial under the "bespeaks caution" doctrine be cause they contained sufficient cautionary language.

The District Court concluded as an initial matter t hat it was appropriate to examine these documents without transforming the motion to dismiss into a motion fo r summary judgment, as they were expressly or implici tly 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 contai ns no direct reference to the Annual Report or the Quarte rly Report, MedSystems does not contest that decision. There is no indication that MedSystems ever received a co py of these documents, but they were readily available to the public.

The District Court then dismissed the complaint wit h prejudice. In an exhaustive and lengthy opinion, th e court concluded that the representations wer e immaterial as a

___________________________________________________ ______________

commercialize any of its products or achieve profit able operations," that the report contained "forward-looking statements" w ithin the meaning of the Private Securities Litigation Reform Act of 199 5, and that many known and unknown risks may cause the actual r esul ts to be materially different from the company's futur e predictions. A pp. at 157-58.

7matter of law under the "bespeaks caution" doctrine

because of the cautionary language accompanying the se alleged misrepresentations. See id. at 745-51, 760 -69. The court also stated that MedSystems had failed to ple ad scienter with sufficient particularity as r equired by Rule 9(b) and 15 U.S.C. S 78u-4(b)(2). See id. at 751-5 6. 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 cla im, 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 federa l

securities claim under 15 U.S.C. SS 77v and 78aa an d the state fraud claim under 28 U.S.C. S 1367(a). W e ha ve jurisdiction under 28 U.S.C. S 1291. W e exercise p lenary review over the District Court's dismissal of MedSy stems' complaint under Rule 12(b)(6). See Wheeler v. T owa nda Area School Dist., 950 F.2d 128, 129 (3d Cir. 1991)

.

II.

DISCUSSION

Section 10(b) of the Securities Exchange Act pr ovi des that it is unlawful for any person to "use or emplo y, in connection with the purchase or sale of any securit y . . . , 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 wer e made, not misleading . . . in connection with the pur cha se or sale of any security." 17 C.F.R. S 240.10b-5(b). Togethe r, these provisions establish a private right of action for plaintiffs to recover for false or misleading statements or omiss ions of material fact. See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 535 (3d Cir. 1999).

8Under the legal principles governing actions allegi ng

securities fraud, MedSystems must prove that EchoCa th (1) made misstatements or omissions of material fact; ( 2) with scienter; (3) in connection with the purchase or sa le 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 principle s, and the precedents applying them, in dismissing MedSystems' complaint as a matter of law.

At the outset, it is important to recognize that th ere are important distinctions between this case and the us ual securities actions for which these principles wer e developed. Although EchoCath, like the companies su ed in those cases, sought to sell its securities in the m arket by an offering accompanied by the January 1996 Pr ospe ctus, 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 i t was induced to make the substantial $1.4 million invest ment 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 contrac t action than a securities action, and that may be the claim encompassed in its state law fraud count that the D istrict Court did not consider. However, as MedSystems chos e to base its initial claim on the securities law, we ca nnot fault the District Court for analyzing it as such. Nevert heless, the distinction between the fact pattern alleged here a nd 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 s quare peg in a round hole. While the question whether EchoCath's alleged misrepresentations are immaterial as a matt er 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

9distinction but also that the District Court dismis sed the

complaint without leave to amend.

A.

General Principles of Materiality

That materiality is a prerequisite to a viable secu rities action based on a misrepresentation is too well est ablished to require citation. Nor can there be any disagreem ent as to the general definition of materiality under the sec urities laws. As the Supreme Court has defined it, a misrepresentation or omitted fact "is material if t here is a

substantial likelihood that a reasonable shar ehold er would consider it important in deciding how to [act]." TS C Industries, Inc. v. Northway, Inc., 426 U.S. 438, 4 49 (1976). Although the TSC Industries case involved a proxy solicitation dispute, the TSC Industries standard o f materiality was expressly applied by the Court to t he 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 " `the re 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.' " I d. 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 statem ents of optimism, which " `constitute no mor e than `puffer y' and are understood by reasonable investors as such.' " In r e 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 statemen ts

would not alter the total mix of relevant infor mat ion available to a reasonable investor. W e have recogn ized that "[a]lthough questions of materiality have tradition ally 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

10unimportant that courts can rule them immaterial as a

matter of law at the pleading stage." In r e Burlin gton Coat Factory Sec. Litig., 114 F.3d at 1426.

The materiality requirement has been further refine d in recent years. In 1995, Congress enacted the Private Securities Litigation Reform Act (the "Reform Act") because of significant evidence of abuse in private securit ies litigation, particularly the filing of frivolous su its alleging securities violations designed solely to coer ce co mpanies 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. Th e Reform Act contains, inter alia, a statutory safe h arbor for forward-looking written or oral statements. 2 Under that provision, an issuer is not liable for a forwar d-l ooking

statement if it is "identified as a forwar d-lookin g statement, and is accompanied by meaningful cautionary stateme nts identifying important factors that could cause actu al

___________________________________________________ ______________

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

(A) a statement containing a projection of r evenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital str ucture, or other

financial items;

(B) a statement of the plans and objectives of man agement for future operations, including plans or object ives relating to the products or services of the issuer;

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

statement contained in a discussion and anal ysis offinancial condition by the management or in the result s of operations included pursuant to the rules and regulatio ns of the Commission;

(D) any statement of the assumptions underly ing or relating to any statement described in subparagraph (A), (B) , or (C);

(E) any report issued by an outside r eviewe r retained by an issuer, to the extent that the report assesses a for war d-looking statement made by the issuer; or

(F) a statement containing a projection or e s timate of such other items as may be specified by rule or regulat ion of the Commission.

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

statement." 15 U.S.C.A. S 78u-5(c)(1)(A)(i) (West S upp. 2000). The safe harbor is also available for oral f orwardlooking statements under certain conditions.3

In this case, the District Court did not rely on, n or 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 esenta tions on which MedSystems brought suit were not identified a s forward-looking as required by the safe harbor prov ision. See supra note 3. Instead, the District Court found that the misrepresentations were immaterial under the "bespe aks caution" doctrine as adopted by this court in In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357 (3d Cir. 19 93).

Under the "bespeaks caution" doctrine, "cautionary language, if sufficient, renders the alleged omissi ons or misrepresentations immaterial as a matter of law." Id. at 371. In In re Trump Casino Sec. Litig., we held tha t a suit brought by a class of investors who pur chased bond s 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 ob stacles

the venture would face. See id. at 364. We stated t hat "bespeaks caution" represents new nomenclature, but it "is essentially shorthand for the well-established prin ciple that

a statement or omission must be considered in conte xt, so that accompanying statements may render it immateri al as

a matter of law." Id.

___________________________________________________ ______________

3. Under the Reform Act, an issuer is not liable fo r any oral forwardlooking statements if (1) the issuer informs the au dience that the statement is forward-looking and that actual r esul ts may differ materially from the predictions; (2) the issuer ora lly 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 for th satisfactory cautionary statements. See 15 U.S.C.A. S 78u-5(c)(2 )(B) (West Supp. 2000).

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

Inc., 24 F.3d 480 (3d Cir. 1994), we considered app lication of the "bespeaks caution" doctrine to alleged misrepresentations and omissions in an opinion lett er written by a law firm to its client. W e rejected t he 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 o n which investors claim to have relied." Id. at 489. Quotin g In re Trump Casino Sec. Litig., we recognized that:

[A] vague or blanket (boilerplate) disclaime r which merely warns the reader that the investment has risks will ordinarily be inadequate to pr ev ent misinformation. To suffice, the cautionary s tatements must be substantive and tailored to the spec ific future projections, estimates or opinions in the pr ospectus which the plaintiffs challenge. 7 F.3d at 37 1-72.

Id.

Later, in In re Westinghouse Sec. Litig., 90 F.3d 6 96 (3d Cir. 1996), we reversed the dismissal of a suit bas ed on alleged misstatements in Westinghouse's 1991 Prospe ctus. The district court had held that the cautionary lan guage in the prospectus rendered the alleged misstatements immaterial under the "bespeaks caution" doctrine. S ee id. at 707. We held that "notwithstanding the cautionar y language" in the prospectus, the alleged misreprese ntations about the adequacy of the loan loss reserves likely "would have assumed actual significance to a reasonable in vestor contemplating the purchase of securities." Id. at 7 10.

By its terms, the "bespeaks caution" doctrine, like the safe harbor provision in the Reform Act, is directe d only to forward-looking statements. When we first r ecogniz ed the doctrine, we stated that "when an offering document 's forecasts, opinions or projections are accompanied by meaningful cautionary statements, the forwar d-look ing

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 tha t the doctrine only applied to forward-looking statements . See,

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

Cir. 2000) (noting that the plaintiffs"maintain tha t the `bespeaks caution' doctrine is inapplicable, becaus e 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 st atements . . . as forward-looking, and thus subject to the b espeaks 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" d octrine 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-look ing statements."); Shaw v. Digital Equip. Corp. , 82 F. 3d 1194, 1213 (1st Cir. 1996) (explaining that a statement m ay contain "both a forward-looking aspect and an aspec t that encompasses a representation of pr esent fact," and "[t]o the extent that plaintiffs allege that the . . . statem ent encompasses the latter representation of present fa ct, 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 la w.") (emphasis omitted); Harden v. Raffensperger, Hughes & Co., Inc., 65 F.3d 1392, 1405-06 (7th Cir . 1995) (refus ing to apply "bespeaks caution" doctrine to statement of " hard fact" regarding the company's "plans to restore pro fitability to its day-to-day operations"); Rubinstein v. Colli ns, 20 F.3d 160, 167 (5th Cir. 1994) (discussing the"bespeaks c aution" doctrine's applicability to "predictive statements" ). But cf. Harris v. Ivax Corp., 182 F.3d 799, 805-06 (11th Ci r. 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 cauti on" doctrine to apply, the cautionary language must be directly related to the alleged misrepresentations or omissi ons. See Kline, 24 F.3d at 489. Although we have never expli citly held that the cautionary language must actually

14accompany the alleged misrepresentation or omission , we

have noted in many cases that the cautionary langua ge 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 m eet the obligations of the bonds [set forth in the pr ospec tus], [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 o f a misleading statement." Id. at 372.

In Kline, we pointed out that the opinion letters a t issue contained cautionary language but ultimately conclu ded that the disclaimer did not directly relate to the statements by which plaintiffs claimed to have been misled, an d thus

we concluded the claim could be maintained. See 24 F.3d at 489-90. Similarly, in In re Westinghouse Sec. Li tig., even though the cautionary language appeared in the prospectus, we held that it did not sufficiently ne gate some

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

EchoCath argues that the cautionary language need n ot 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 publi c meeting on August 4, 1994 that he was "confident of achieving at least 7% real earnings gr owth" in fis cal 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 affir med the dismissal of this claim, we did so only after findi ng 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 al leged 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 ap plies if the cautionary language in public filings addr esse s the substance of the alleged misrepresentations and pro vokes uncertainty, even if the cautionary language does n ot

15accompany or directly negate the misrepr esentation s.

Weiner cannot stand for that proposition because we specifically noted that the "bespeaks caution" doct rine was only applicable if the forecasts, opinions and proj ections were accompanied by a meaningful cautionary stateme nt, and the August 4 statement "was accompanied by no s uch language." See id. at 320. Instead, we held that th e earnings growth projection was immaterial as a matt er 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 f ind material a prediction of seven-percent gr owth foll owed by the qualifier `over time.' " Id. at 321.

Notwithstanding our precedent suggesting that the "bespeaks caution" doctrine requir es the cautionar y language to accompany the misrepresentation, we nee d not make such a holding today. Ultimately, this court m ay recognize such a requirement, but we choose to exer cise restraint in that connection because we r ecognize that possible fact scenarios may arise that we cannot no w envision. See Grossman, 120 F .3d at 1122 (rejectin g 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 repres entation is so obviously unimportant to an investor that r easo nable minds could not differ on the question of materiali ty, 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 easonabl e shareholder would draw from a given set of facts ar e 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.

16B.

Alleged Misrepresentations

1. "Imminent Contracts"

The principal allegation of MedSystems is that Echo Cath repeatedly misrepresented the existence of imminent contracts for its women's health products. The comp laint alleges that EchoCath's CEO represented that it "ha d engaged in lengthy negotiations with and was on the verge of signing contracts with a number of companies inc luding UroHealth, Johnson & Johnson, Medtronic and C.R. Ba rd, Inc. to develop and market [EchoCath's] women's hea lth 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, 199 7," EchoCath "continued to represent . . . that EchoCat h was actively moving forward with the line of women's he alth products . . . ." Id. P 12. Allegedly, EchoCath's C EO 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. P P 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 pr oducts

were imminent." Id. P 15.

The District Court, referring to this claim as the Possible Contracts Allegation, concluded that this repr esen tation

was immaterial as a matter of law under both the "bespeaks caution" doctrine and the general test of materiality.4 Applying the "bespeaks caution" doctr ine, the court assumed that the imminent contracts repr esen tation was forward-looking but never explicitly deter mine d that it was. In addition, the court found that the document s containing the cautionary language were "for the mo st part contemporaneous" with the imminent contracts

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4. We note that the District Court discussed the "b espeaks caution" doctrine under its section on reliance, see EP MedS ystems, 30 F. Supp. 2d at 760, though the doctrine actually concer ns m ateriality.

17representation. EP MedSystems, 30 F. Supp. 2d at 76 7. It

later stated that cautionary language neutralized t he alleged misrepresentation "[i]rr espective of the t ime of issuance of the [documents]." Id. at 769.

As we noted earlier, the "bespeaks caution" doctrin e applies only to forward-looking statements. On revi ew, we cannot say as a matter of law that the repr esentat ion 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 cont racts were "imminent." See Amended Complaint P 15. An eve nt 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 a s a representation about the current state of negotiati ons between EchoCath and the four companies it had identified. As such, the representation could be re asonably construed by a trier of fact to be a statement of f act rather than a prediction of future events.

This view is consistent with that of other cir cuit s. See, e.g., Grossman, 120 F.3d at 1123 (concluding that t he "bespeaks caution" doctrine would not apply because the statements at issue contained "then-present factual conditions, or implied background factual assumptio ns a reasonable investor would regard the speaker as bel ieving 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-orient ed" aspects and was therefore not subject to the "bespe aks caution" doctrine); Harden, 65 F .3d at 1405-06 (determining that a statement regar ding the compan y's "plans" to restore profitability was "a present ass ertion of fact, i.e., `plans' exist or are being for mulated" ).

There is also a question whether the cautionary lan guage cited by the District Court was sufficiently pr oxi mate to the imminent contracts representations to meet the rela tedness test established by our precedent. The r epresentat ions were not accompanied by any cautionary language. The cautionary language referred to by the District Cou rt to have put MedSystems on notice that the contracts mi ght

18never 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 cautio nary warnings regarding the futur e of EchoCath.5

However, the 1996 Prospectus was published seven months before the August 1996 meeting wher e EchoCa th's CEO first made the representation that it was "on t he verge of signing contracts" with the four companies. By t he time EchoCath gave the Prospectus to MedSystems, over te n 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. Whatev er the state of the negotiations between EchoCath and the four companies when the Prospectus was published in Janu ary 1996, the MedSystems executives might have r easona bly believed that significant progress in the negotiati ons 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 s imilar to those made by EchoCath's CEO in the August 1996 meeting. See EP MedSystems, 30 F. Supp. 2d at 747-4 8. However, the Prospectus contained general language of intentions to make arrangements and agreements with

___________________________________________________ ______________

5. For example, the Prospectus includes the followi ng:

[EchoCath] has no binding commitments fr om any third parties to provide funds to [EchoCath] . . . [and] ther e can be no assurance that [EchoCath] will be able to obtain finan cing from any other sources on acceptable terms. App. at 99.

[EchoCath] intends to pursue licensing, join t development and other collaborative arrangements with other strate gic partners. There can be no assurance, however, that [EchoCath] wi ll be able to successfully reach agreements with any strat egic partners, or that other strategic partners will ever devote su fficient resources to [EchoCath's] technologies. App. at 84.

No assurance can be given that [EchoCath] wi ll ever be able to establish commercial scale manufacturing ope rations. App. at 84.

19third parties. Nothing in the Prospectus specifical ly refers

to the imminent contracts with the four companies EchoCath identified in August 1996.

The District Court also cited to cautionary languag e contained in EchoCath's Annual Report for the fisca l year ending August 31, 1996 and the Quarterly Report for the quarter ending November 30, 1996, which both cautio ned

investors that there could be no assurance that Ech oCath would ever successfully commercialize any of its pr oducts 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 Quarterl y Report was filed on January 21, 1997 and pr ovided information as of November 30, 1996. Whether they w ere sufficient to neutralize the initial repr esentatio n 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 C EO repeated his assurance that the four contracts were imminent between November 1996, when the parties be gan negotiations for the subscription agreement, and Fe bruary 1997, when the subscription agreement was finally c losed. See Amended Complaint P 12. Ther efore, we cannot a gree with the District Court that the cautionary languag e contained in these documents rendered the imminent contracts representation immaterial under the "besp eaks

caution" doctrine.

Nor do we agree that dismissal of the complaint sho uld 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 tha t the contracts would be consummated, such statements, ta ken in context, are not false and misleading," EP MedSy stems, 30 F. Supp. 2d at 748, and cited as support our dec ision in

Weiner. The District Court also held that the 1996 Prospectus put MedSystems on notice of the possibil ity that the four contracts might not be consummated. Ther e fore, according to the court, no reasonable sophisticated investor would view such representations as altering the tot al mix of

information.

20We find little support in Weiner where, as discuss ed

above, the claim that was dismissed was based on a public statement of earnings growth projections that was f ollowed by an equally public qualifier. Her e, MedSystems b ases its claim on oral representations personally made by EchoCath's CEO to executives of MedSystems fr om Au gust 1996 until its subscription was finalized in Februa ry 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, whi ch 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 C ourt and EchoCath that the imminent contracts repr esent ation

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 heal th products it had always represented it was committed to marketing and developing." Amended ComplaintP 14. These representations were contained in the Operati ng Model for the fiscal years 1997 and 1998, which Ech oCath delivered to MedSystems in December 1996. Specifica lly, the Operating Model states: "ColorMark sales ar e p rojected 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 2 nd

21year, respectively. We believe these sales projecti ons are

conservative." App. at 19.

The District Court discussed the sales projections along with the imminent contracts representation, apparen tly 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. Ordin arily, sales projections such as these are characterized a s forward-looking statements that may fall within the "bespeaks caution" doctrine. See In r e Advanta Cor p. 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 dr iven by a number of assumptions," and warned that"[t]his Mode l is a simplified form of accounting, but does r eflect accurately cash and income flows." App. at 19. It further stat ed that the sales and marketing goals outlined were"intende d as a beginning guide, and it is expected that [they] wil l be revised." App. at 29. Such statements could be suff icient 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 bas is of the sales projections independent of the imminent contr acts representation. At oral argument, its counsel state d that the sales projections and financial model wer e tie d into the representation that these contracts wer e imminent. He further conceded that the sales projections tur n o n the validity of that representation and that the immine nt contracts representation is by far the most importa nt misrepresentation in this case. Ther efore, we are not prepared to hold that the sales pr ojections are co mpletely immaterial at this pleading stage of the proceeding , as they may reinforce the materiality of the imminent contr acts representation.6

___________________________________________________ ______________

6. Because the sales projections are not an indepen dent basis for the action, we need not consider whether they would be actionable under our language in Weiner, where we declined to recogn ize 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 companie s from "the need

223. Milestone Payment and Other Licensing Receipts

MedSystems also alleged that EchoCath's Operating Model misrepresented the likelihood that it would r eceive $450,000 in "Milestone payments" under its r ecent contract with Medtronic, and $500,000 from a company that wi shed 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 epresentat ion 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 Mileston e payment and other licensing fees as "[o]ther income over the coming two-year period." App. at 19 (emphasis a dded).

The statement is thus akin to the "over time" state ment in Weiner which neutralized an earnings growth project ion. See 129 F.3d at 321. Indeed, the qualifying languag e accompanied the representation and we see no reason why the "bespeaks caution" doctrine would be inapplicab le. The District Court did not err in holding these stateme nts to be

immaterial.

4. Sufficiency of Funds

The final misrepresentation alleged in the complain t 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 togeth er with "other outside investments" would pr ovide Ech oCath

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to speak truthfully about the future." Id.; see als o Kline, 24 F.3d at 486 (stating that opinions are actionable under federal securities law if made without a reasonable genuine belief or factual basi s); 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 genuin ely believe and ha[s] no reasonable basis to support the projection s set forth" in its Operating Model, an allegation that, if proven, wil l be equally relevant

to the representation about the imminence of the contr acts upon which this case is based. Amended Complaint P 18.

23with sufficient operating funds to allow it to acti vely develop

and market the products for at least 18 to 24 month s. Amended Complaint P 26. The District Court conclude d that this statement was neither misleading nor mate rial 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 th e representation at issue, which would likely have ne gated whatever effect might be attributable to the cautio nary language in the Prospectus. MedSystems executives c ould have reasonably believed that new developments had occurred that prompted the Co-Chair man to make tha t oral representation.

However, we agree with the District Court's conclus ion that the representation is not material. As alleged , the representation was of "anticipated" investment in E choCath -- not guaranteed. Amended Complaint P 26. Unlike t he imminent contracts representation, the Co-Chairman' s statements did not refer to specific companies (bes ides MedSystems itself). Nor was this representation rep eated over a six-month period. MedSystems was well awar e that it was dealing with a start-up company and should h ave expected that cash flow would be an issue. No r eas onable investor could find that one optimistic statement m ade 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 im minent contracts representation as well as the r elated sa les projection do not fall within the "bespeaks caution " doctrine as the District Court held but that they may be vie wed by a factfinder as statements of present fact. Therefo re, they may not be dismissed as immaterial as a matter of l aw. On the other hand, the District Court did not err in d ismissing the claims regarding the expected r eceipts from ot her contracts and the anticipated sufficiency of funds, although our analysis differs to some extent fr om the Distr ict

Court's.

24C.

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 m eet the heightened pleading required for the scienter e lement in securities fraud cases. Rule 9(b) of the Federal Ru les of Civil Procedure, which applies to all complaints fi led in federal court, provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mi stake shall be stated with particularity." Fed. R. Civ. P . 9(b). The 1995 Reform Act requires, inter alia, that a "compl aint shall, with respect to each act or omission alleged to violate [the Securities Exchange Act], state with particula rity facts giving rise to a strong inference that the defendan t acted with the required state of mind." 15 U.S.C.A. S 78u -4(b)(2) (West Supp. 2000). After considering these r equire ments, we recently held that it "remains sufficient for pl aintiffs [to] plead scienter by alleging facts `establishing a mo tive and an opportunity to commit fraud, or by setting forth facts

that constitute circumstantial evidence of either r eckless or conscious behavior.' " In r e Advanta Corp. Sec. Li tig., 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 r e Westinghouse Sec. Litig. would apply her e. Our ear lier conclusion that the representations as to expected receipts from other contracts and the representation as to t he anticipated sufficiency of funds are immaterial obv iates 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 wi th four identified companies and the related sales pr oject ions.

MedSystems' complaint alleges that "[c]ontrary to EchoCath's repeated representations to EP MedSystem s, EchoCath was not on the verge of signing contracts with

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

or any other company to market and develop a line o f women's health products in September, 1996 or at an y 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 pr ospects of entering into the contracts it had identified to EP MedSystems." Id. P 18. The complaint then notes tha t "EchoCath has failed to entered [sic] in to a singl e contract and has yet to receive any income fr om the sale of women's health products" since September 1996. Id. P 19 (em phasis in original).

MedSystems argues that these allegations constitute strong circumstantial evidence of conscious misbeha vior 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 s ustain a claim of fraud. See In re Advanta Sec. Litig., 180 F.3d at 536-37. And in In re Burlington Coat Factory Sec. L itig., 114 F.3d at 1429, we stated that it is not enough for a plaintiff

to state that defendants had no reasonable basis fo r making the representation. However , we believe tha t 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 t o materialize within a year of the representations. W hile it is possible that all of these companies discover ed so me characteristic of EchoCath or its products that exp lained why the putative contracts did not materialize, we cannot dismiss the possibility that EchoCath, in an ef for t to coax a substantial investment, did not fairly repr esent to MedSystems the status of its negotiations with thes e companies.

As we noted earlier, this case presents a factual s ituation unlike that in our prior precedent and, indeed, unl ike those

that were the basis for the 1995 Reform Act. The le gislative history of the Reform Act makes clear that it was p rimarily

directed at the abuse and misuse of securities clas s action lawsuits where defendant companies "choose to settl e

26rather 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 arefil ed as

class actions has had an in terrorem ef fect on Corporate America. A whole stable of "profes sional plaintiffs," who own shares--or sometimes fr actions of shares--in many companies, stand ready to le nd their names to class action complaints.

* * *

The "victims" on whose behalf these lawsuit s are allegedly brought often receive only pennies on the dollar in damages. Even worse, long-term inv estors ultimately end up paying the costs associate d with the

lawsuits. As the Council for Institutional I nvestors advised: "We are * * * hurt if a system allo ws someone to force us to spend huge sums of money in l egal costs by merely paying ten dollars and filing a me ritless cookie cutter complaint against a company or its accountants when that plaintiff is disappoin ted in his

or her investment."

Id. (footnotes omitted).

MedSystems stands in contrast to the professional plaintiffs who were the focus of the statute. MedSy stems invested the substantial sum of $1.4 million in Ech oCath. It did so on the basis of personal repr esentations by EchoCath executives to MedSystems officers concer n ing negotiations that had occurred and the imminent res ults expected of those negotiations. MedSystems' complai nt is not a "cookie cutter complaint" or a class action b rought 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 pl ed fraud or scienter with more specificity without hav ing 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 de fendant's hands. In cases prior to the Reform Act, we noted t hat the

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

relaxed "when factual information is peculiarly wit hin the defendant's knowledge or control." Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 645 (3d Cir . 1990); see al so 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' allegation s 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 pleadi ng scienter, the Second Circuit concluded that the Ref orm Act "effectively raised the nationwide pleading standar d 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 essential ly adopted the Second Circuit's interpretation. See 180 F.3d a t 584. This court's earlier requirement for pleading scien ter did not differ materially from that of the Second Circu it. 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 negoti ations with the four companies, if indeed there wer e nego tiations, as it has not had the opportunity to acquire such

information. We conclude that will suffice under th e Reform

Act.

The District Court also found that the cautionary language in the January 1996 Prospectus and EchoCat h's Operating Model eviscerated any inference of the re quisite intent to commit fraud. However, as we commented ea rlier, cautionary language in the publicly disseminated Prospectus in January 1996 hardly negates any possi ble inference of fraud as to personal statements made f rom August 1996 to February 1997. There is no suggestio n that EchoCath ever cautioned MedSystems before it made i ts investment in February 1997 that there was a change in

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

28circumstances, we believe that the scienter pleadin g

requirement has been adequately met.

D.

Reliance

It is undisputed that a plaintiff seeking r elief u nder Rule

10b-5 must show reasonable reliance on a false stat ement or omission of material fact. See Kline, 24 F.3d at 487-88. MedSystems' complaint alleges that its executives b elieved the "representations concerning EchoCath's line of women's health products were true and would not have made i ts

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 woul d be consummated. The court repeated its position that t he representation was contradicted by disclaimers and cautionary language in the 1996 Prospectus, the Ann ual 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 epresentat ion 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 ou r discussion on materiality where we concluded that n one of the documents containing cautionary language suffic iently neutralized the materiality of the imminent contrac ts representation. It follows that reliance on the rep eated oral representations by EchoCath's CEO was not unreasona ble

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 exi stence of long-standing business or personal relationships, a nd

access to the relevant information. See id. EchoCat h argues

29that MedSystems was a very sophisticated investor a nd

that it should have taken more care to per form due diligence before it signed the subscription agr eem ent. But, as we noted in Straub, "a sophisticated investor is not barred by reliance upon the honesty of those with w hom he deals in the absence of knowledge that the trust is misplaced. Integrity is still the mainstay of comme r 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 con tracts with four companies were imminent, should have approached one or more of the four companies and as ked for a verification of the present state of negotiat ions 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 dism issal was appropriate because the complaint fails to plea d loss causation. The Reform Act provides that in a securi ties law action, "the plaintiff shall have the bur den of pr oving that

the act or omission of the defendant . . . caused t he loss for which the plaintiff seeks to recover damages." 15 U .S.C.A. S 78u-4(b)(4) (West Supp. 2000). Although this prov ision does not deal with pleading, the District Court, de scribing

loss causation as the "causal link between the alle ged misrepresentations and the harm incurred when a sec urity 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 de cline in value rather than merely inducing the transactio n," id. (quotation omitted), and noted that MedSystems did not allege that the value of its investment has decline d, but

30rather "that it has `sustained substantialfinancial losses'

as a direct result of the fraudulent misr epresenta tions [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 st ated 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) (c iting Huddleston v. Herman & MacLean, 640 F .2d 534, 549 (5th Cir. 1981)). In Semerenko, we equated loss causatio n with proximate cause, stating that there must be a "suff icient 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 sec urities case, alleged that it purchased shares at a price t hat was inflated due to misrepresentations by several direc tors and officers and that when the truth was made known, th e 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 c ause of, the damages sustained by plaintiff and the o ther

members of the Class. The misstatements . . . had the effect of creating in the market an unr eali stically positive assessment of Cendant, as well as o f its financial condition, causing ABI's common st ock 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 th at argument. Drawing all reasonable infer ences in a l ight most favorable to plaintiffs, we found that an allegatio n that the misrepresentations "directly or pr oximately caused , or were a substantial contributing cause of, the damages su stained by plaintiff " adequately pled loss causation. Id. Semerenko,

which was issued after the District Court decided t his case, adopted a practical approach, in effect applying ge neral causation principles.

Some of the other courts of appeals have also adopt ed a practical view of loss causation. For example, the Eighth

31Circuit has stated that "[p]laintif fs are not requ ired 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 Co ntrol Data Corp. Sec. Litig., 933 F.2d 616, 619 (8th Cir. 1991 ) (quotation omitted). The Second Circuit similarly h eld 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) (quotat ion omitted). In Ambassador Hotel Co., Ltd. v. W ei-Chu an Investment, 189 F.3d 1017, 1027 (9th Cir . 1999), t he Ninth Circuit stated that "the loss causation r equiremen t limits the ability of plaintiffs to recover for losses sus tained on the basis of factors unrelated to any misrepr esentatio n or fraud." As the Eleventh Circuit stated in Robbins v . Koger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir. 19 97), "the loss causation requirement must be applied on a cas e-bycase basis."

In considering loss causation, it is important to r ecognize once again how this case differs from the usual sec urities action. In the usual securities action, plaintif fs complain because some announcement emanating from the company, whether regarding a tender of fer, see Sem erenko, 223 F.3d at 169, earnings, see In r e Burlington Co at 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 affair s. Plaintiffs claim that, as a result, they purchased the securities at a price that was artificially inflate d, only to

suffer a loss when the true situation was made know n. See, e.g., Hayes v. Gross, 982 F .2d 104, 105 (3d Cir. 1 992) (involving a claim that defendants knowingly or r e cklessly misrepresented the company's financial condition, t hus artificially inflating the stock price).

This case differs. In this case, MedSystems claims that as a result of fraudulent misrepresentations made in p ersonal communications by EchoCath executives, it was induc ed to make an investment of $1.4 million which tur ned ou t to be

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

___________________________________________________ ______________

7. While the complaint may not have set forth that damage theory with specificity, MedSystems' counsel clarified its dama ge theory at the oral argument.

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

another circuit nor have we found one. It follows t hat although we take guidance from the language in othe r 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 i s usually reserved for the trier of fact. See, e.g. , Huddles ton, 640 F.2d at 549-50 (reversing for failure to submit causatio n to the jury). MedSystems' complaint was dismissed at the p leading stage. Although, as noted above, the allegation tha t 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 fav or, we conclude that MedSystems has adequately alleged los s causation.

III.

CONCLUSION

The District Court, in its scholarly opinion leadin g 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 rest rictively. While Congress and some judicial decisions have ten ded to cabin the large securities class actions that may h ave 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 Dis trict Court failed to recognize that this complaint by MedSyste ms does not fall into the pattern of the usual securities a ction and that application of certain legal requir ements mus t be adjusted to fit the particular action.

Specifically, we have concluded that MedSystems' ce ntral allegation, that EchoCath's CEO gave MedSystems executives assurances that, after lengthy negotiati ons,

33contracts with four identified companies wer e "imm inent"

and provided sales projections that wer e an integr al part of these assurances, should not have been dismissed. T his was a statement of fact in the context in which pr esented by MedSystems' complaint that could be found to mee t the requirement of materiality. The allegation that Ech oCath

knew or had reason to know that this was not the ca se adequately met the requirement of pleading scienter . A trier

of fact could find that reliance was r easonable an d that there was the requisite causal connection between t he assurances and MedSystems' loss, i.e., its investme nt.

On the other hand, we have concluded that the Distr ict Court did not err in dismissing the allegations as to certain other expected income and anticipated sufficiency o f funds because there was qualifying language that should h ave 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 sugges t that it is obliged now to permit a wide ranging discover y effort by plaintiff. We have been influenced to some exten t by MedSystems' counsel's statements that limited disco very into the facts surrounding the central allegation s hould disclose in short order whether there was an adequa te basis in fact for the assurances given from August 1996 through February 1997. If there is some evidence th at 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 orde r dismissing the complaint and remand for further proceedings in accordance with this opinion. Each p arty to

bear its own costs.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

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