Opinion ID: 567021
Heading Depth: 2
Heading Rank: 3

Heading: Third Quarter Press Releases

Text: 42 Appellants argue that Convergent's press releases in the third quarter regarding management's expectations for third quarter earnings were fraudulent and misleading. Statements of expectation are actionable under § 10(b) of the Securities Act if (1) the material statement is not genuinely believed by the one making it, (2) there is no reasonable basis for the expectation, or (3) the speaker is aware of undisclosed facts that tend to seriously undermine the statement's accuracy. Apple Computer, 886 F.2d at 1113. It should not be forgotten that statements of expectation are not statements of fact. They are not fraudulent simply because they are not fulfilled. However, if a speaker is reckless 4 with regard to the adverse undisclosed information, the scienter element necessary for 10(b) liability is met. Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir.), cert. denied, 439 U.S. 970 (1978).
43 The September releases reported that Convergent had decided to wait to issue its planned debenture offering until third quarter results were disclosed, but that it anticipated no change in its profit expectations, which were in line with those of securities analysts ranging from fifteen to twenty cents per share. As it turned out, Convergent made a profit of only seven cents per share in the third quarter. Appellants list several facts which they allege were known or should have been known at the time of the September releases which make the releases fraudulent. 44 Appellants allege that Convergent failed to disclose the real reason the debenture offering was postponed: because the president of the company, Mr. Michels, refused to guarantee a profit or give strong assurances of a profit, for the underwriters before the quarter results were in. They allege that Michels' hesitancy in negotiations with the underwriters is evidence that he did not believe the positive earnings forecast published in the September releases. This allegation lacks merit. The September 18 release stated that the debenture offering was postponed to await third quarter results. The appellants have no evidence that Michels' hesitancy to give strong assurances to the underwriters meant that he did not believe his company's internal profit forecasts. In fact, one of the underwriters testified that at the same time that Michels refused to guarantee a profit, he also told the underwriters that he did expect the company's objectives to be met. E.R. at 2976-77. Michels testified in his declaration that he believed the forecasts would be met and was surprised by the actual results. Supp.E.R. 203:14 at p 32. Other high-ranking executives testified similarly. Supp.E.R. 206:9-10 at p 19 (Wegbreit, Chief Operating Officer); Supp.E.R. 205:13 at p 28 (Willits, Vice President of Finance). 45 Appellants argue, in the alternative, that facts existed at the time of the statements that seriously undermined the statements' accuracy and show that they had no reasonable basis. They argue that Convergent knew or should have known that it had insufficient orders to meet its projections. However, appellants present no evidence that Convergent had insufficient orders. They point out that as much as one-half of the shortfall in the third quarter, according to Convergent's calculations after-the-fact, may be attributed to insufficient demand or lack of orders. E.R. 1340-42. However, Convergent gives several unrebutted explanations for why their projections were reasonable, although part of the shortfall did ultimately result from insufficient orders. First, several Convergent executives stated in their affidavits that Convergent routinely sought and received orders late in the quarter. 5 Supp.E.R. 203:4-5 at p 10; Supp.E.R. 206:5-6 at p 10; Supp.E.R. 201:8-9 at pp 20-21. Second, customers unexpectedly ordered more of the basic, less profitable NGEN modules than the complex, more profitable NGEN modules. Supp.E.R. 203:17-18 at p 39; Supp.E.R. 10 at p 21. Third, Burroughs, a major customer, completely cancelled $700,000 worth of orders for complex NGEN modules in the last few days of September. Contrary to appellants' assertions, Burroughs testified in an affidavit that although Convergent knew that Burroughs intended to begin manufacturing some of the products it usually purchased from Convergent, Burroughs did not tell Convergent that that would occur as early as the third quarter, or that Burroughs would be replacing Convergent's high profit, not low profit, modules with its own. Supp.E.R. 207:7 at pp 12-14. Finally, notes from a meeting of high-ranking executives on September 21, three days after the September press releases, says that there are enough orders to cover forecasts. E.R. at 1989. Appellants offer nothing, but their assertions that Convergent somehow should have foreseen the orders shortfall. Assertions cannot create a genuine factual issue. 46 Finally, appellants argue that the great disparity between earnings and projections in July and August alone eviscerated the optimistic September releases of any reasonable basis. They point out that minus Workslate losses, losses in the first two months of each of the first and second quarters were only 3cents per share, whereas losses in July and August totalled 9cents per share. Also, earnings per share for the same period in the first and second quarters were 4cents below projections, but earnings per share for July and August were 15cents below projections. This disparity is indeed troubling and suggests a presumption that something was wrong with the third quarter projections. To boost such a presumption into a genuine issue of fact, however, the appellants would need to provide evidence from Convergent's business records that showed with particularity how the projections were faulty, such as which assumptions made in the calculations were unreasonable. Then they would need to provide evidence that the unreasonable assumptions were so unreasoanble that Convergent's management was reckless to rely on them. 47 The appellants have not provided the evidence necessary to create a genuine issue of fact regarding the September press releases. We affirm summary judgment with regard to them.
48 The October 4 press release revealed that, based on preliminary indications, 6 revenues for the third quarter would be substantially higher than those for the second quarter, but that earnings from continuing operations would be approximately the same as in the second quarter (11cents per share). During the October 3 meeting in which management decided on the language for the release, management had only a revenue flash report to work with from which to estimate the third quarter earnings per share. Supp.E.R. 203:14-15 at p 33; 205:13-14 at p 29; Supp.E.R. 212/44. 49 The appellants argue that the October 4 press release was misleading and without a reasonable basis. The appellants' evidence for their allegation is the deposition testimony of the Director of Investment Relations, Mr. Dunmire, 7 and some preliminary figures for earnings per share that were several cents lower than the 11cents implied in the release. 8 50 Dunmire testified that during the October 3 meeting, Mr. Willits, the Vice President of Finance at the time, expected that the company would earn somewhere around 8cents per share. E.R. at 3204. Willits denies the statement. Supp.E.R. 205:17 at p 35. Assuming that Willits made the statement during the meeting, Dunmire also testified that he and the others present eventually concluded that 11cents per share was the best view of the earnings the company may have made in the third quarter, E.R. at 3203-04, and was not misleading. Supp.E.R. 249/150:288. The estimation had a basis in the estimation of the profit margin on the unsold goods, which was converted to earnings per share (7cents) and subtracted from the last earnings per share forecast of 19cents to get 12cents. 9 Supp.E.R. 205:14-15 at p 31; see also Supp.E.R. 212/108:181-82, 185-87 (Michel's deposition). 51 The preliminary earnings per share figures computed by the company on the same day as the press release estimated an earnings per share figure of 7cents. E.R. at 565. The appellants argue that this is also evidence that the release was misleading. However, the appellants do not rebut the appellees' explanations that management knew this figure was incorrect because the preliminary worksheet contained overstated bonuses and sales commissions (based on outdated sales forecasts) and did not reflect the forthcoming audit or accounting adjustments. Supp.E.R. 201:13-14 at p 30; 205:16 at pp 33-34. Also, because revenue was up 25% from the second quarter, management believed that third quarter earnings had to be at least as high as in the second quarter, Supp.E.R. 203:16 at p 36; 205:14-15 at p 31; 208:10 at p 21, an apparently reasonable assumption that proved incorrect. 52 The appellants also highlight Dunmire's testimony that Michels told him that he had promised Mr. Towbin, an outside director and holder of a substantial number of shares in Convergent, that he would put out a positive press release to stop the decline in stock. E.R. at 3206, 3248. The appellants argue that this is evidence that the October 4 release was in reckless disregard of the truth. Without more evidence to rebut that already discussed, we disagree. The evidence already discussed shows that preliminary indications that earnings per share would be approximately the same in the third quarter as in the second were reasonable. See Apple Computer, 886 F.2d at 1117 (unrebutted explanations can defeat inferences of bad faith). 53 We affirm summary judgment against the appellants for each of the third quarter press releases.