Opinion ID: 731320
Heading Depth: 3
Heading Rank: 1

Heading: The Alleged False and Misleading Statements

Text: 11 In a securities fraud case, summary judgment is improper if a plaintiff shows a genuine issue of fact with regard to a particular statement by the company or its insiders. In re Worlds of Wonder Securities Litigation (WOW ), 35 F.3d 1407, 1412 (9th Cir.1994) (quotations and citations omitted), cert. denied, --- U.S. ----, 116 S.Ct. 185, 133 L.Ed.2d 123 (1995) and --- U.S. ----, 116 S.Ct. 277, 133 L.Ed.2d 197 (1995). As we have explained, [l]iability depend[s] on the plaintiffs' success in demonstrating that one of the statements made by the company was actually false or misleading. In Re Convergent Technologies Securities Litigation, 948 F.2d 507, 512 (9th Cir.1991). Thus, to determine whether summary judgment was proper in this case, we must examine each false or misleading statement allegedly made by defendants.
12 Plaintiffs allege that during the class period in question defendants made false statements in MIPS' quarterly income statements when they recognized revenue before it was earned. According to plaintiffs, under Generally Accepted Accounting Principles (GAAP) and MIPS' own policies, defendants could not recognize income until a binding agreement existed, until deliverables 1 were shipped, and until material contingencies were satisfied. When revenue can be recognized is what is at issue in this case. 13 Although defendants maintain that during the class period at issue no specific GAAP rules existed governing revenue recognition for technology licensing agreements, defendants do not appear to dispute plaintiffs' contentions that, under GAAP, revenue must be earned before it can be recognized. Defendants concede that, under GAAP, the earnings process must be substantially completed and an exchange must have occurred before revenue can be recognized. MIPS' own policy, which was in existence during the class period, states that technology revenue is recognized upon the completion of contract requirements. 14 That contract requirements had to be completed before revenue could be recognized as earned makes perfect sense given the way that MIPS and its customers structured their deals and given the fact that intellectual property was involved. The purchase orders that were signed by customers contained various contingencies, including the approval of foreign governments and the receipt of deliverables. In some instances, the terms of the licensing agreements had not yet been negotiated or finalized when customers signed the purchase orders. Although the signed purchase orders stated that the licensing fee was nonrecoverable, normally no money exchanged hands until after customers received the deliverables. As a result, MIPS had a policy of not shipping any deliverables until a binding agreement existed. Finally, the technology that customers purchased was not completed or taped out until March 1991. Before that date, and until MIPS' customers received the actual technology, MIPS customers had received nothing they could use. 15 Defendants, however, contend, and the district court agreed, that the bulk of MIPS' technology was transferred during the sales process. As the district court explained: 16 The manner by which MIPS recognized revenue appears to have basically been consistent with its own written policy on the subject and GAAP.... The evidence indicates that while in some instances partial deliverables remained unshipped after revenue was recognized, the bulk of the terms of the technology transfers (i.e. transfer of sufficient technology to allow the purchaser to begin RISC utilization, payment and acceptances of nonrecoverable fees, etc.) had been substantially satisfied. 17 (Emphasis added.) 18 The evidence, however, is not so clear and tells a more complicated story. We have combed through the record and are unable to determine what exactly was transferred to customers during the sales process. The technology, although licensed, had not yet been completed. If any technology was transferred during the sales process, such transfers would have been inconsistent with MIPS' policy of not transferring any technology until a binding contract had been executed. Thus, we find that plaintiffs have raised genuine issues of material fact as to whether technology transfers in fact occurred during the sales process and whether such transfers were sufficient under GAAP to support the recognition of revenue. Further, looking at the evidence in the light most favorable to plaintiffs, it appears that, in the transactions described below, defendants recognized revenue before binding agreements existed and before contract requirements were completed. 19
20 Plaintiffs contend that, in the fourth quarter of 1990, defendants recognized nearly $3 million in revenue from transactions with Sony, NEC, Control Data, Convex, and Olivetti. According to plaintiffs, had defendants not recognized this revenue, MIPS would have reported a $2,576,000 loss rather than the $546,000 loss, that was actually reported. 2 21
22 In the fourth quarter of 1990, defendants recognized $1 million in revenue from Sony based on a letter from Sony stating that it was exercising an option to purchase a license. The letter, however, stated that Sony was agree[ing] to discuss, in good faith, the details and schedule associated with the above option during the first quarter of 1991. The discussions over the licensing agreement appear to have taken place after the income was recognized. An agreement was executed in April 1991 and provided that Sony's obligation to pay was conditioned on its receipt of all deliverables. In May 1991, Sony still had not received all deliverables. 23
24 In the fourth quarter of 1990, defendants recorded $250,000 in revenue from NEC based on a signed purchase order. That purchase order contained various contingencies, none of which had been satisfied when the revenue was recognized. In addition, plaintiffs provided evidence that suggests the actual agreement may have been finalized sometime in April 1991. 25
26 In the fourth quarter of 1990, defendants recognized $250,000 in revenue from Control Data. Plaintiffs provided evidence that suggests material terms of the licensing agreement were still being negotiated when defendants recognized the revenue. 27
28 In the fourth quarter of 1990, defendants recognized $950,000 in revenue from Olivetti. According to defendants, a binding agreement in the form of a signed letter of intent existed when the revenue was recognized. However, plaintiffs have provided documentary evidence that suggests that a binding agreement may not have been executed until after the fourth quarter ended and that Olivetti may have signed a backdated agreement. It also appears that the deliverables were not shipped until February 19, 1991. 29
30 In the fourth quarter of 1990, defendants recognized $450,000 in revenue from Convex based upon a December 28, 1990 agreement, which gave Convex the right to cancel and receive a full refund if MIPS failed to tape out the R4000 by December 31, 1991. There is evidence in the record that suggests the R4000 microprocessor was behind schedule. In addition, the deliverables had not yet been shipped when the revenue was recognized. 31
32 According to plaintiffs, in the first quarter of 1991, defendants recognized $8 million in revenue from NKK, NEC, and Wang, which had not yet been earned. 3 As a result, MIPS reported a $624,000 profit for the quarter. Had defendants not recognized the alleged unearned revenue, MIPS would have recorded a loss of more than $4.3 million. 33
34 In the first quarter of 1991, defendants recognized $5 million in revenue from NKK based upon an agreement which was subject to approval from the Japanese government. In addition, plaintiffs contend that this agreement was subject to another material contingency--set out in a side letter--which stated that MIPS was required to ship deliverables by December 31, 1991. Defendants recognized the revenue before the deliverables were shipped and before the Japanese government provided its approval of the agreement. 35
36 In the first quarter of 1991, defendants recognized $2.25 million in revenue from NEC based on a purchase order for the extension of an existing licensing agreement. The purchase order, however, indicated that NEC could not formally enter into an agreement at that time. Apparently, the parties may not have reached an agreement until June 26, 1991. The June 26, 1991 agreement provided that it was not effective until executed and the Japanese government's approval obtained. 37
38 According to plaintiffs, in the second quarter of 1991, defendants improperly recognized $4.5 million revenue from NEC, Daewoo, and Tandem. 39
40 In the second quarter of 1991, defendants recognized $2 million in revenue from NEC based upon a purchase order for a joint venture with NEC called the Advanced Computing Environment (ACE) initiative. Plaintiffs, however, provided evidence that suggests that at the time the revenue was recognized, NEC and MIPS were just beginning to negotiate the terms of the licensing agreement. In fact, as will be discussed below, ACE had not yet been announced. Thus, there is a question as to whether ACE in fact existed when the revenue was recognized. 41
42 In the second quarter of 1991, defendants recognized $2 million in revenue from Daewoo based on an agreement which required the Korean government's approval before it could be considered binding. Plaintiffs' evidence shows that when the income was recognized, the terms of the licensing agreement were still being negotiated, and the Korean government had not yet approved the agreement. In fact, the approval was not obtained until the third quarter of 1991, and only after the Korean government sought various changes to the licensing agreement. 43
44 In the second quarter of 1991, defendants recognized $600,000 in revenue from Tandem. Plaintiffs contend that a licensing agreement with Tandem was not binding when signed on June 30, 1991, because the agreement had not been finalized. Plaintiffs provided evidence that suggests drafts of the agreement were circulated as late as August and September 1991. An agreement was executed on October 1, 1991. In addition, it appears that Tandem did not execute a purchase order until November 6, 1991.
45 Plaintiffs contend that MIPS' failure to record a restructuring charge of $25.5 million before June 30, 1991 violated GAAP. Plaintiffs' experts assert that defendants should have recorded the restructuring by the end of the second quarter of 1991, because at that time defendants knew a restructuring was necessary. In April 1991, MIPS and twenty other companies announced the formation of ACE, the Advanced Computing Environment initiative. 46 MIPS, however, waited until the third quarter of 1991 to record the restructuring charge. Apparently, defendants waited until then because MIPS had not yet made a formal decision to redirect its new product development around ACE. MIPS made this decision at the end of the second quarter of 1991. At that time, MIPS warned that a restructuring in the third quarter would be significant and would cause a loss position for the third quarter and for total year 1991. 47 We fail to see why waiting to record the restructuring charge until the third quarter was unreasonable. In reviewing the whole record, we find nothing that suggests this accounting decision violated GAAP or any of MIPS' policies. Thus, we hold that the defendants' decision to record the restructuring in the third quarter rather than the second quarter is not actionable as a false or misleading statement.
48 Plaintiffs contend that defendants' forecasts for the second and third quarters of 1991 were false or misleading. The district court rejected plaintiffs' contentions. The district court explained: 49 Plaintiffs ... have pulled isolated statements out of context. The overall effect of defendants' statements was cautionary and could not be said to have misled the market. As one analyst wrote in June 1990, MIPS has a complex business model that is still in the process of maturing.... This is not a stock for the fainthearted. 50 By this explanation, the district court is alluding to the bespeaks caution doctrine and the truth-on-the-market doctrine, both of which have been developed by the courts to immunize defendants from liability for false and misleading statements. See WOW, 35 F.3d at 1413-15 (The bespeaks caution doctrine provides a mechanism by which a court can rule as a matter of law ... that defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud.) (quoting Donald C. Langevoort, Disclosures that Bespeak Caution, 49 Bus.Law. 481, 482-83 (1994)); Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 516 (7th Cir.1989) (Prompt incorporation of news into the stock price is the foundation for the fraud-on-the-market doctrine and therefore supports a truth-on-the-market doctrine as well.) 51 Before we consider these doctrines, we must first determine whether defendants' forecasts are actionable as false or misleading statements. 52 A projection is a factual misstatement if (1) the statement is not actually believed, (2) there is no reasonable basis for the belief, or (3) the speaker is aware of undisclosed facts tending seriously to undermine the statement's accuracy. Kaplan v. Rose, 49 F.3d 1363, 1375 (9th Cir.1994) (citing In re Wells Fargo Securities Litigation, 12 F.3d 922, 930 (9th Cir.1993) (emphasis added), cert. denied, 513 U.S. 917, 115 S.Ct. 295, 130 L.Ed.2d 209 (1994)). In this case, plaintiffs focus on various statements made during conference calls with analysts. 53
54 In an April 25, 1991 conference call with market analysts, defendant Ludvigson, MIPS' chief financial officer (CFO), stated that MIPS expected technology revenues to decline slightly from the Q1 levels but expected higher technology revenue performance ... for the total year. Although Ludvigson cautioned that he would be hesitant to put a total number on it, he suggested that MIPS' earnings for the second quarter would be similar to the $624,000 earnings reported for the first quarter. Specifically, Ludvigson stated that his expectations for Q2 would be bottom line about Q1. 55 Plaintiffs' claim that these statements were false and misleading is based on a MIPS' internal spread sheet which predicted a loss of 17 cents per share. The spread sheet was dated April 17, 1991, eight days before the conference call. The spread sheet showed that MIPS' internal forecasts projected a loss of $4,000,000 for the second quarter. 56 The district court, however, did not think that the internal spreadsheet raised a triable issue of material fact. As the district court explained: 57 Plaintiffs ignore all of the other documents and testimony that put the spread sheet in context. The spreadsheet was the starting point for the discussion at the April 22-23 quarterly business review, not the quarterly forecast. The entire purpose of the quarterly business review was to develop a forecast for the quarter, known as the QBR commitment. The QBR commitment is consistent with the general guidance given during the April 25 conference call, was distributed shortly thereafter, and was presented to the board on May 15, as a second quarter forecast. There is no evidence that the spreadsheet was other than a preliminary worksheet and, as such, was not something that should have been disclosed to the public. Nor does it suggest, given the way it was prepared, that defendants were hiding adverse facts. 58 The district court is partially correct. As we recently explained in In re Stac Electronics Sec. Litig.: 59 Issuers need not reveal all projections. Any firm generates a range of estimates internally or through consultants. It may reveal the projection it thinks best while withholding the others, so long as the one revealed has a reasonable basis--a question on which other estimates may reflect without automatically depriving the published one of foundation. 60 89 F.3d 1399, 1411 (9th Cir.1996) (quoting In re VeriFone Sec. Litig., 784 F.Supp. 1471, 1487 (N.D.Cal.1992)), aff'd, 11 F.3d 865 (9th Cir.1993). 61 In this case, Ludvigson predicted a profit when in fact MIPS had information that the company would suffer a loss. We found no evidence in the record that the defendants disclosed to analysts the financial information upon which the internal forecast was based. Further, according to the deposition testimony of MIPS' employees, the internal forecast represented the best, most accurate representation as of the time it was prepared of what the company's financial results [would] be like for the prospective quarter. Based on this evidence, a reasonable trier of fact could conclude that defendants' forecasts or projections of a profit in the second quarter were unreasonable in light of the internal forecasts which indicated a loss for the second quarter. We find that plaintiffs have raised a genuine issue of material fact as to whether defendants' projections for the second quarter made during the April 25, 1991 conference call were false or misleading. 62
63 In a July 30, 1991 press release, MIPS announced that it was going to take a significant restructuring charge in the third quarter. In a conference call with market analysts that same day, Ludvigson said that the restructuring charge would be significant enough to put [MIPS] in a loss position for the third quarter and for total year 1991. Ludvigson, however, represented that, without the restructuring charge, the loss of revenue for the third quarter would be small. 64 Plaintiffs contend that these statements were misleading because defendants knew that there would be a huge loss without the restructuring charge. Plaintiffs point out that, only five days before the conference call, at the MIPS' Board of Directors meeting, defendants predicted a loss of more than $4.3 million without the restructuring charge. 65 The district court, however, rejected plaintiffs' evidence and found that MIPS' forecasts were not inconsistent with the financial information they had concerning product and service revenue. At the July 30, 1991 teleconference, MIPS disclosed facts which suggested that it would suffer a multi-million dollar loss in the third quarter of 1991, independent of the restructuring charge. This forecast was consistent with the information that defendants had. We therefore conclude that the third quarter forecast is not actionable as a false or misleading statement. 66
67 Plaintiffs also allege that defendants failed to disclose that MIPS was having serious technical problems with its R6000 line. The district court, however, did not find defendants' failure to disclose this information to be misleading because the defendants had already disclosed that MIPS was having problems with its supplier. Defendants identified sourcing and cost problems with the R6000 line in their SEC Form 10-K and 10Q filings. 68 But a jury may find that such disclosures were not sufficient. As we have explained: 69 There is a difference between knowing that any product-in-development may run into a few snags, and knowing that a particular product has already developed problems so significant as to require months of delay. 70 Convergent Technologies, 948 F.2d at 515, n. 2 (citing Apple Computer, 886 F.2d at 1113-14). 71 Here, plaintiffs have provided evidence suggesting the R6000 line was experiencing more than simply supply problems. The R6000 line was plagued with delays and performance problems so severe that MIPS was losing orders and constantly cutting sales forecasts. Defendants, however, continued to represent to analysts that there was pretty significant demand and that shipment levels would increase in the third quarter of 1991. Based on this evidence, we believe that a jury could reasonably find that defendants' statements about the R6000 line were false or misleading.