Opinion ID: 740651
Heading Depth: 2
Heading Rank: 2

Heading: Optimistic Forecasts

Text: 11 Evidentiary problems aside, Appellants have failed to raise a triable issue as to whether any of the challenged statements are actionable. In addition to the statements in the newspaper articles and reports, Appellants challenge several optimistic predictions and forecasts about Cypress's fourth and first quarter earnings and revenues that Cypress insiders made during teleconferences with market analysts and in press releases. For example, Appellants challenge Rodgers's statement in the August 19, 1991 edition of Barron's that Cypress expects $300 million in revenues for 1991 and that Cypress is bullish on its outlook for 1992 and comfortable with analysts' predictions for Cypress's 1991 and 1992 earnings. (Statement B). Appellants also challenge Rodgers's October 14, 1991 statement to market analysts that Cypress expected a record for revenue in the fourth quarter of 1991, (Statement F), and Rodgers's comments appearing in the November 4, 1991 edition of Defense News stating that Cypress's 1991 revenues would be approximately $300 million and that he was bullish about 1992. (Statement K). Finally, Appellants contend that a statement that the company expects some improvement in the first quarter of 1992 appearing in the January 21, 1992 edition of the Wall Street Journal is also misleading. (Statement U). 12 As we have stated before, a forecast or statement of optimism is actionable as a fraudulent misrepresentation only if (1) the defendants did not believe the forecast at the time they issued it; (2) the defendants had no reasonable basis to rely on the forecast; or (3) the defendants failed to disclose material adverse facts which tended to seriously undermine the accuracy of the statement. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir.1989). Here, Appellants do not contend that Cypress did not believe these statements when the insiders made them. In fact, Appellants concede that all of the optimistic statements coincided with Cypress's internal forecasts for these quarters. (See, e.g., Pl. Statement Resp. to Defs.' Statement of Undisputed Material Facts at 5-7). Instead, Appellants contend that Appellees lacked a reasonable basis to rely on their internal forecasts and earning predictions and that Appellees were aware of undisclosed adverse facts which would have undermined the accuracy of Cypress's internal forecasts.
13 The record establishes that Cypress's internal forecasts, known as the beginning-of-quarter forecast (BOQ) and the end-of-quarter forecast (EOQ), had accurately predicted Cypress's earnings and revenues for the fourteen quarters prior to the start of the class period. Such historical accuracy gave Cypress a reasonable basis to rely on its fourth and first quarter predictions. See In re Convergent Tech. Sec. Litig., 948 F.2d 507, 517 (9th Cir.1991) (a company's history of success reasonably supports an optimistic forecast); see also, Kowal v. M.C.I. Communications Corp., 16 F.3d 1271, 1279 (D.C.Cir.1994) (same). 14 Appellants contend that despite the forecasting processes' past successes, Cypress could no longer reasonably rely on its forecasts because the defendants had begun to doubt Cypress' [sic] ability to generate accurate forecasts. (Pl.Br. at 10). To demonstrate Appellees' reservations about Cypress's internal forecasts, Appellants point to several internal memoranda describing the BOQ process as broken and failing. (Id. at 10-11). These include an October 25, 1991 status report prepared by Cypress's Chief Financial Officer Kenneth Goldman and enclosed in the Board of Directors' package for its October 31, 1991 meeting, (ER 280:18-20); a November 16, 1991 memo from Cypress Treasurer Marcel Gani to Goldman, (ER 318:344-46); a December 12, 1991 status report prepared by Goldman and enclosed in the Board of Directors' package for its December 19, 1991 meeting, (ER 280:21-25); and a December 30, 1991 memo from Goldman to several Cypress officers and distributed to Rodgers, (ER 318:51-54). The earliest of these documents originated on October 25, 1991 and was not distributed until October 31, 1991. However, Rodgers purportedly made two of the challenged statements before then. Therefore, these memoranda cannot establish that Rodgers lacked a reasonable basis to rely on Cypress's internal forecasts when he made the challenged statements. 15 Moreover, as the district court noted, when read in its entirety, each of these documents criticizes the time it took Cypress to complete the BOQ rather than the accuracy of the BOQ. For example, Appellants contend that Defendant Goldman privately stated in October 1991 that Cypress' 'BOQ' process--by which Cypress generated a forecast at the beginning of each quarter--has been 'poorly managed' and was 'failing '. (Pl.Br. at 10). However, the portions of the memorandum from which Appellants quote the above language read in their entirety, 5.4Q BOQ process poorly managed; revenue finalized October 23 and 3.BOQ forecast system failing--new rules required. (ER 280:20). Similarly, Appellants cite to a memorandum from Goldman to several Cypress officers and distributed to Rodgers describing the BOQ process as a limping system. (Pl.Br. at 11). However, the memorandum actually describes the BOQ process as a 'limping' system, suggesting that Goldman himself did not characterize the system as limping. (ER 318:51). Rather, he was repeating someone else's characterization. The memorandum does not identify who this third party is, nor does it explain whether Goldman agreed with the characterization. Furthermore, the memorandum proposes instituting several actions to improve the BOQ process, including creat[ing] simple BOQ flow charting, highlighting key dates and milestones and put[ting] on corporate calendar manufacturing BOQ production meeting. (Id.) These actions and others proposed in the memorandum relate to improving the time it took Cypress to complete the BOQ, rather than improving the accuracy of the BOQ. 16 Appellants contend that the court is not permitted to read these documents in their entirety on summary judgment because determining the context of a statement is akin to ruling on a witness's credibility, (Pl.Br. at 6), or interpreting a document. Appellants reason that both of these determinations fall clearly within the realm of the jury. Appellants are correct that the district court may not interpret a document on a motion for summary judgment. However, the district court, likewise, is not prohibited from reviewing an entire document, nor is it restricted to reviewing the snippets which the non-moving party puts forth. Furthermore, the district court is not bound to accept the non-moving party's characterization of the document. Rather, the district court is entitled to view the entire document put forth in opposition to summary judgment and need only draw all reasonable inferences in favor of the non-moving party. See Hanon v. Dataproducts Corp., 976 F.2d 497, 507 (9th Cir.1992) (in reviewing summary judgment, the court is entitled to consider the plausibility and reasonableness of inferences arising from circumstantial evidence). As demonstrated above, when read in their entirety, these documents do not support a reasonable inference that the Appellees believed that the BOQ and EOQ were unreliable. Therefore, the district court properly concluded that Appellants had not put forth any evidence demonstrating that the Appellees lacked a reasonable basis for their optimistic predictions and forecasts. 17 Moreover, the only document which arguably supports an inference that the author did not believe that the BOQ process was reliable is the November 16 memorandum from Gani to Goldman. The memorandum states that The BOQ process at Cypress is broken and needs to be fixed, and it lists the unreliability of Ross data and informing controllers and vice presidents that their performance review will be heavily weighted by their accuracy on forecast as BOQ Issues. (ER 280:344-45). However, that memo also states that The purpose of this memo is to propose some ideas to improve the flow of the BOQ process at Cypress.... In the last few quarters, we have put some fixes in place,.... (Id. at 344). The memorandum goes on to list other issues and suggest improvements, including addressing the timeliness of the sales and package plan; addressing the timeliness of the manufacturing plan; and listing BOQ review dates as distinct dates on the corporate calendar. (Id. at 344-45). Additionally, the memorandum concludes with a proposed timetable for completing various aspects of the BOQ process. (Id. at 346). Reading this memorandum in its entirety reveals Gani believed that the timing of the BOQ process rather than the accuracy of the forecasts was broken and need[ed] to be fixed. Furthermore, the memo lists Goldman as its only recipient, and Appellants have offered no evidence that Rodgers ever received a copy of the memorandum or read it. As such, Appellants have offered no evidence to suggest that Rodgers knew that anyone at Cypress questioned the reliability of the BOQ process. Unfortunately for Appellants, Rodgers purportedly made three out of the four statements that Appellants challenge. The fourth--the Wall Street Journal statement--is attributed only to the company, and Appellants have offered no other evidence establishing the declarant. Therefore, Appellants cannot rely on the Gani memorandum to create a material issue of fact. 18 Appellants also contend that Rodgers's optimistic statements were unreasonable because internal forecasts other than the BOQ and EOQ predicted flat revenues for the fourth quarter and that the fourth quarter would be a difficult quarter. (Pl.Br. at 9-10). For example, Appellants cite a passage from Rodgers's book, No Excuses Management, wherein he writes, [s]oon after [July 1991], we realized that Cypress was in for several lean quarters--that revenue might actually shrink rather than just grow more slowly than before. (SR 319). Likewise, Appellants rely on internal memoranda from Goldman stating that third quarter revenue was below internal and external expectations and that fourth quarter revenue will also be difficult, (ER 280:19), and that We have a serious profit shortfall in the third quarter.... Revenue is effectively flat Q2 to Q3. (ER 280:548). However, none of the documents upon which Appellants rely demonstrates that contradictory forecasts existed within Cypress. Rather, the fragments which Appellants present in their brief are yet another example of Appellants' deceptive omission of pertinent parts of documents in an effort to create a triable issue. For example, all Goldman's internal documents stating that Cypress will experience a flat quarter discuss third quarter revenue. Therefore, they do not contradict Rodgers's statement that Cypress would achieve record revenues for the fourth quarter, (Statement F), or the company's statement that Cypress would experience some improvement in the first quarter. (Statement U). Goldman's October 25, 1991 status report does state that the Q4 will also be difficult, but it continues -base forecast $76.1M revenue and $.21 EPS. (ER 280:19). Therefore, it, likewise, does not contradict Rodgers's purported statement that Cypress would achieve a record for revenue in the fourth quarter. 19 Similarly, Goldman's memoranda do not undermine the validity of Rodgers's prediction that Cypress's 1991 revenue would approximate $300M. (Statements B, F, K). At the times that Rodgers purportedly stated that Cypress revenues would approximate $300M, Cypress's annual plan predicted fourth quarter revenue of $84 million and Cypress's fourth quarter BOQ predicted $76 million in revenue. Therefore, if Cypress's third quarter revenue were flat to Cypress's $75 million second-quarter revenue, Cypress's 1991 revenue would be between $295 million and $303 million. (Cypress achieved $144 million in revenue for the first half of 1991). 20 Appellants also omit pertinent parts of Rodgers's book, No Excuses Management, in arguing that statements in the book show that Cypress's internal forecasts contradicted Rodgers's optimistic public statements. Although Rodgers noted that market conditions would be difficult in the fourth and first quarters in No Excuses Management, he also stated that Cypress was predicting record revenues for the third quarter and that Cypress was projecting third quarter revenue at an annual rate of $301.4 million. (SR 319). These projections also align with Rodgers's purported prediction of $300 million revenue in 1991. Additionally, as the district court noted, none of the forecasts in the book undercut the validity of Cypress's fourth quarter BOQ or EOQ. Therefore, the excerpts from No Excuses Management do not demonstrate that internally Cypress predicted less than record revenues for the fourth quarter. Accordingly, Appellants have presented no evidence that Cypress's internal projections contradicted Appellees' optimistic statements. As such, Appellants have put forth no evidence suggesting that these optimistic statements lacked a reasonable basis.
21 Appellants also point to volumes of documents in an effort to demonstrate that while Appellees made these optimistic predictions about Cypress's future it knew that storm clouds were gathering over Cypress. (Pl.Br. at 21). Appellants contend that Cypress's failure to disclose these adverse facts rendered its optimistic projections materially misleading. However, a corporation need not detail every corporate event, current or prospective, which has or might have some effect upon the accuracy of an earnings forecast. Marx v. Computer Sciences Corp., 507 F.2d 485, 491 (9th Cir.1974). Rather, a corporation must only disclose those adverse facts which tend[ ] to seriously undermine the accuracy of the statement. Apple Computer Sec. Litig., 886 F.2d at 1113. 22 In the instant action, Appellees have identified three factors which caused the fourth quarter revenue and earnings shortfalls and one factor which caused the first quarter earnings shortfall which Appellants allege caused their injuries. Appellees claim that problems in the test area, marketing's failure to obtain forecasted orders and product line slips caused Cypress's fourth quarter shortfalls, while price erosion in the market for a Cypress product called SRAM caused Cypress's first quarter shortfalls. (ER 280:268; SR 280: Rodgers Decl. pp 53-59; 65; SR 287/1: 524614-620). Appellants have put forth no contradictory evidence suggesting other causes contributed to the shortfalls. As such, we accept these causes as the reasons why Cypress failed to meet its internal projections. None of the allegedly omitted adverse facts relates to these causes. Therefore, none of these adverse facts tended to seriously undermine the accuracy of Cypress's projections. 23 For example, Appellants allege that Appellees failed to disclose that Cypress's relationship with one of its largest customers, Sun Microsystems, was deteriorating. They point to several documents suggesting such. However, the record indisputably establishes that Cypress either met or exceeded its forecasted sales to Sun during the class period. (SR 286/6: 165748; 287/4: 165923). Therefore, even if Cypress's relationship with Sun was deteriorating during the class period, this deterioration did not affect revenues or profits from sales to Sun and did not contribute to Cypress's financial shortfalls in the quarters in issue. Appellants also maintain that this deteriorating relationship caused Cypress to lose its market for a chip it was developing during the class period, the Pinnacle. However, Cypress did not project any revenues from Pinnacle during the class period. (SR 280: Ross Decl. p 26; 350: Rodgers Dep. at 408). As such, even if the deteriorating relationship had caused Cypress to lose a market for Pinnacle, that loss could not have contributed to Cypress's shortfalls during the class period. Accordingly, any undisclosed adverse facts about Cypress's relationship with Sun could not have seriously undermined the accuracy of Cypress's internal forecasts for the class period. Therefore, although Appellants' evidence may create a genuine issue about Cypress's relationship with Sun, that dispute is not material and does not preclude summary judgment. 24 Appellants also point to documents allegedly detailing delivery, manufacturing and production problems. However, the record demonstrates that these alleged problems did not contribute to Cypress's shortfalls. For example, Appellants point to several documents which they claim establish that Cypress had poor yields on products and that Cypress was unable to improve yields quickly enough to compensate for falling prices. (Pl.Br. at 15). However, Cypress's Director of Manufacturing Mark Allen testified that while poor yields would affect manufacturing costs, actual yields were within one percent of the forecasted yields in the fourth quarter. (SR 350: Allen Dep. at 260). Thus, any problem with Cypress's yields did not cause manufacturing costs to exceed the forecasted costs and, accordingly, did not contribute to revenue or profit shortfalls. Appellants offer no evidence to contradict this testimony. 25 Likewise, Appellants contend that several documents suggest that Cypress was aware of test problems which contributed to the fourth quarter shortfalls. (Pl.Br. at 15-16). While Cypress identified twelve separate test problems which contributed to its fourth quarter miss, (SR 287: 524663-64; SR 280: Allen Decl. pp 40-41; SR 280: Rodgers Decl. p 55), Allen and Rodgers testified that Cypress did not expect these problems. (SR 280: Allen Decl. p 41; SR 280: Rodgers Decl. p 54). Appellants' documents do not contradict this testimony. Appellants point to a November 25, 1991 memorandum from Allen to Rodgers alerting Rodgers that the number of units awaiting test is increasing from 600,000 units to 1 million because of a bottleneck at burn-in on 64 and 256K's, (ER 318:278), and a draft of an October 29, 1991 memorandum from Steve Alexander to Heber Clement, then test manager, alerting him that inventory of 7C310s, 7C322As and 7C322Bs available for test had increased at various stages of the test process over the past weeks. (ER 318:272-73). However, neither of these problems was one of the twelve problems Cypress identified, and the record establishes neither contributed to the shortfall. For example, Allen testified that Cypress fixed these problems and that they did not affect fourth and first quarter performance. (SR 350: Allen Dep. at 483). The documents themselves also indicate that Cypress corrected these problems shortly after the authors drafted the memoranda. (See, e.g., ER 318:278 (stating that Allen had diverted all the sockets from Cypress's subcontractor to the test division to alleviate the bottleneck); see also SR 350: Allen Dep. at 482-83). 26 Appellants also claim that Cypress failed to disclose its poor record for delivering customer orders on time and that this poor record undermined the accuracy of Cypress's forecasts because it hurt Cypress's relationships with its customers and caused Cypress to lose significant revenue. (Pl.Br. at 16-17). The record establishes that during the quarters at issue, Cypress reported that it delivered products to customers on time more than 90 percent of the time, (SR 285/8:97615), that Cypress's customers reported that they received deliveries on time between 75 and 78 percent of the time, (ER 318:334), and that Cypress's delivery performance was improving. (ER 318:332). However, Appellants cite to several memoranda detailing lines down situations at Cypress's customers as proof that Cypress's poor on-time delivery performance caused Cypress to lose significant revenues. Unfortunately for Appellants, none of these memoranda actually show that Cypress lost revenues during the quarters at issue as a result of these alleged delivery problems. For example, Appellants rely on a March 9, 1992 memorandum detailing past delivery problems with a European military customer and stating that if Cypress does not deliver a pending order a $1 million opportunity may be lost. (ER 318:161-62). However, it does not state that Cypress lost the opportunity or the pending sale, and Rodgers's handwritten note at the bottom of the memorandum requests that a Cypress vice president remedy the situation. (Id.) That Cypress vice president responded to Rodgers's request stating th he did remedy the problem. (SR 318:90). Likewise, an August 18, 1991 memorandum to Rodgers states that Cypress is at risk of losing its number one vendor status with another customer because of poor delivery performance between January 1, 1991 and June 30, 1991. (ER 318:286-87). However, it does not discuss delivery problems during the quarters at issue, nor does it state that Cypress did lose its number one vendor status or any revenues from sales to this customer at anytime--let alone during the quarters at issue. The other documents upon which Appellants rely suffer from similar failings. (See, e.g., ER 318:316-18; ER 318:301; ER 318:346-52; ER 318:50). Accordingly, any alleged delivery problems did not contribute to the fourth and first quarter shortfalls. Therefore, these problems would not tend to undermine the accuracy of Cypress's forecasts. 27 Finally, Appellants contend that Cypress's use of pull-ins undermined the accuracy of their forecasts and that, therefore, Cypress's failure to disclose its reliance on this practice was materially misleading. Appellants contend that pulling in orders in one quarter undermined the integrity of the forecast for the next quarter because Cypress based its forecasts on backlog. (Pl.Br. at 18). However, Appellants put forth no evidence to establish that quarter forecasts incorporated orders which had been pulled into the preceding quarter, and Ross Technologies President Roger Ross testified that Cypress always took pull-ins into account in preparing a forecast. (SR 350: Ross Dep. at 85). Moreover, Appellants put forth no evidence that using pull-ins was inherently fraudulent or deceptive, and the record demonstrates that pulling in orders is a common practice in the semiconductor industry. (SR 350: Lamond Dep. at 43, 44). 28 Appellants also contend that pull-ins undermined the accuracy of Cypress's forecasts because they made future sales more dependent on new customers. (Pl.Br. at 18). However, Appellants put forth no evidence that Cypress failed to make the required sales to new customers, and the record reflects that even though Cypress pulled in orders in the fourth quarter, Cypress started the first quarter with a higher percentage of its forecasted orders booked than it had in three years. (SR 280: Rodgers Decl. p 83(c)). Thus, despite its use of pull-ins in the preceding quarter, Cypress actually required less new sales to meet its first quarter forecast than it had in the past. Therefore, even drawing all reasonable inferences in favor of the Appellants, as we must on summary judgment, the record demonstrates no issue as to whether Appellees failed to disclose any adverse facts which would have undermined the accuracy of their optimistic statements. While the record may reflect some evidentiary disputes about whether certain problems existed at Cypress, the record reflects no dispute over whether these problems contributed to the complained-about shortfalls. Thus, summary judgment is appropriate.