Opinion ID: 203099
Heading Depth: 2
Heading Rank: 2

Heading: Application to the Factual Allegations

Text: We apply these principles to the amended complaint's allegations about four categories of misleading statements and omissions in the Official Statement. The amended complaint alleges that the Official Statement was issued within the context of a serious financial crisis at Bradford, and the defendants had motivation to conceal the crisis so that they could continue to finance their operations. For instance, the amended complaint alleges defendants were well aware of the college's financial instability. The amended complaint describes a meeting of the Board of Trustees on February 6, 1997, a year before the Board approved the bond offering. At that meeting, the Chair of the Board stated that the then-current cash flow model indicates that the College may be able to survive for five more years. To stem cash bleeding, however, which would occur in that period would be devastating to the faculty and staff in terms of no salary increases and other cost cutting measures. Kiszka, the college's chief financial officer, apparently rejoined that this was too optimistic: [T]here is a possibility of the College surviving five years assuming more layoffs and no salary increases, but [Kiszka] felt that it would be more like two or three years. Looking at the bigger picture, layoffs and cutbacks would be very disruptive and send a bad message. The amended complaint alleged that the college took no steps to lay off personnel or freeze salaries, which were necessary [t]o stem cash bleeding, because that would be disruptive and send a bad message. The amended complaint alleges that this reluctance to send a bad message extended to the representations in the Official Statement. The amended complaint alleges that one trustee resigned when the Board of Trustees initially voted in 1996 to approve construction of new dormitories because he concluded that student enrollment could not support the expansion. Despite having implemented no widespread cost-cutting measures and after a decade of budget deficits, the Bradford defendants approved the issuance of the bonds. This in turn obligated the college to incur an additional cash flow drain of over $1.2 million annually through the year 2028. At the time, the college's annual operating budget, excluding financial aid, was $11.7 million. The amended complaint alleges that the ability to meet this additional obligation was dependent primarily upon two factors: the College's level of student enrollment, and the degree to which the College discounted its tuition revenues by funding financial aid awards to students. The plaintiffs' lead theory of misrepresentation was that the college's ability to pay the bonds depended upon the school's meeting its increased enrollment targets, which would substantially increase the size of the student body. The Official Statement, they allege, had several flaws: It was too optimistic when it said the college believed it could meet its goals. It failed to disclose available information suggesting that the college was unlikely to meet its goals. And it fudged on the level of the college's equity contribution to the project. The plaintiffs' secondary theory was that even if the college could increase its enrollment, this would not improve the college's financial condition if it gave high financial aid to reach this result. The plaintiffs concede the Official Statement informed investors of this connection between enrollment and high financial aid. The Statement contained the college's projections that it would reduce financial aid, and said that its financial plan called for reducing aid in the upcoming 1998-1999 academic year to 28.8% of student income. The plaintiffs argue that the district court erred in rejecting as immaterial the difference between the projections in the Official Statement, what was in the school's budget, and what actually happened. We start with the allegations relevant to increased enrollment targets.
The amended complaint alleges that the Official Statement misled investors by failing to refer to Bradford's severe, long-standing problem with student attrition. The short answer is that the Statement warned that the college's ability to pay debt service was highly dependent upon tuition and fee revenues from students, and that a failure to attract and retain students in sufficient numbers . . . could adversely affect the ability of [the college] to make required payments on the Series 1998 Bonds. The Official Statement also presented enough information to notify investors that student attrition factored into the risk associated with the bonds. Tables in the Statement containing enrollment and admissions statistics covering academic years 1993 to 1997 revealed that the college enrolled new students each fall in numbers far exceeding one-quarter of total enrollment. [8] While some portion of the additional number of incoming students might be attributable to fluctuations in the number of transfer students and others not enrolled in a traditional four-year program at the college, these tables gave notice that some portion of the discrepancy would be due to attrition. The attrition rate at Bradford had, according to the amended complaint, been an extraordinary 60% since 1989. The amended complaint alleges that omitting that figure from the Official Statement concealed the college's inability to repay its bond debt. The defense argues those figures may be derived from the information provided. The plaintiffs argue that it is impossible to calculate from the tables the alleged 60% attrition rate. This may be true, but it is insufficient to make the other statements misleading. The amended complaint does not explain why omitting information about the precise attrition rate at Bradford would mislead investors when more pertinent measures of the college's financial health are presented forth-rightly in the Statement. [9] The Statement alerts investors that repayment of the bond debt depended entirely on Bradford's revenues, and that like most colleges, Bradford was highly dependent upon tuition and fee revenues from students. Student-generated revenue is, at any given time, a function of total enrollment levels, not of attrition. The Statement provided information about past and current enrollment levels, and the amended complaint never disputes the accuracy of those numbers. [10] Furthermore, the Statement contained information on admissions trends that would allow a potential investor to evaluate whether the college's enrollment level was sustainable. The college did not have a duty to disclose in the Statement every possible material fact about its operations and finances, so long as the disclosures that were made satisfied the statute. Cf. Gross v. Summa Four, Inc., 93 F.3d 987, 992 (1st Cir.1996) ([A] corporation does not commit securities fraud merely by failing to disclose all nonpublic material information in its possession. (citing Roeder v. Alpha Indus., Inc., 814 F.2d 22, 26 (1st Cir. 1987))). The Official Statement needed only disclose enough accurate information and not omit pertinent information to allow investors to make an informed decision about whether to invest. It did so.
Again, on the theory that accurate enrollment projections were key, [11] the plaintiffs find fault with this passage from the Official Statement: As of April 3, 1998, applications received by the College to date total 879, an increase of more than 18% from April 3, 1997. The total of 879 exceeds total applications received for the fall 1997. The majority of increases have been the traditional freshman application pool. Based on this increase in applications, historic rates for conversion of applications into enrollments, the number of applications from freshmen and deposits received to date, the College believes that it can reach its goal of enrolling 225 new students for the fall of 1998. . . . The plaintiffs do not challenge the facial accuracy of the college's contemporaneous figures, but allege that the use of the number of applications for the fall of 1998 was misleading for several reasons. The plaintiffs argue that because Bradford had begun accepting standardized applications submitted over the internet, this artificially inflated the applications numbers. The goal of 225 new students in fall 1998 was allegedly unrealistic because ultimately, the acceptance rate dropped and Bradford had fewer actual acceptances for fall 1998 than the previous year. Finally, the plaintiffs allege that by the date of the Official Statement, the defendants knew that the number of students who had placed deposits for fall 1998 had declined by almost 20%. These allegations fall short of establishing that the enrollment projections were materially misleading at the time of the Statement. A plaintiff may not plead fraud by hindsight; i.e., a complaint may not simply contrast a defendant's past optimism with less favorable actual results in support of a claim of securities fraud. Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1223 (1st Cir.1996). There is nothing in the amended complaint to establish that the defendants were aware of facts, at the time they made their predictions, that would have made those predictions unreasonable, if they were unreasonable. Even now there is no basis to conclude, from the plaintiffs' premises, that the predictions were unreasonable. It has not been demonstrated that accepting applications by internet for the fall of 1998 would inflate the college's application numbers or somehow lead to lower matriculation rates, or that the defendants had any reason to think this. Similarly, while the amended complaint, without giving specific numbers, quotes the actual acceptance rate for fall 1998 and claims that Bradford had fewer actual acceptances [in fall 1998] than it had for Fall 1997, it does not allege in any detail how the defendants could have forecast that outcome in May 1998. The allegation regarding the drop in actual deposits, as opposed to projected deposits, comes closer, but it does not allege enough detail to satisfy the pleading standards of the PSLRA. The amended complaint alleges there was a 20% year-over-year drop in actual deposits as of May 1998, but does not state with particularity all facts on which that belief is formed. 15 U.S.C. § 78u-4(b)(1). The plaintiffs have not included details about how they were able to identify the 20% figure, much less whether this information was known to the defendants at the relevant time. Standing alone, this is insufficient for an allegation of securities fraud. It is true, as the plaintiffs argue, that the PSLRA does not require plaintiffs to plead evidence. See Cabletron, 311 F.3d at 33 (citing Cooperman v. Individual Inc., 171 F.3d 43, 48-49 (1st Cir.1999)); Shaw, 82 F.3d at 1225. But more meat was needed on these bones.
The amended complaint alleges that the Official Statement also skewed the school's future financial health by misrepresenting Bradford's intentions regarding a planned equity contribution to the construction and renovation project. The Statement, under the heading of Estimated Sources and Uses of Funds, said that a $1 million contribution of the college's own funds would be used for the construction and renovation project. The amended complaint alleges that at a February 5, 1998 meeting of two committees of the Board of Trustees, those committees determined that the bond issue would not cover the entire cost of the project and resolved to recommend to the full Board that [t]he College will have to review the project and attempt to reduce the final two phases to correspond with the bond financing or the College will have to include an equity contribution to fund a portion of the construction. It was agreed that the bond financing would proceed as recommended with Advest and that the College would make every effort to reduce its construction costs or make an equity contribution at the end in the final phase of the project. (Emphases added in amended complaint.) The plaintiffs interpret this as revealing the Bradford defendants' intention not to contribute any funds to the project, but rather to cut corners on the project in an effort to bring project costs down to the level of the bond financing. The Official Statement was allegedly misleading because it failed to disclose the contingent and delayed nature of the College's putative `equity' contribution. Even accepting the allegations as true, and adopting the plaintiffs' preferred inference that the committees' recommendation was implemented by the full Board prior to the bond offering, the allegations simply do not establish any misrepresentation. The Official Statement does not speak in any way to the timing of Bradford's expected contribution. By like token, the committees' statement from the February 5, 1998 meeting does not at all foreclose the college from making an equity contribution; in fact, it clearly states an intention that the college would contribute should the cost of completing the project so require.
We turn to the plaintiffs' second tier of arguments  that the financial condition of the college would be adversely affected even if enrollment increased unless financial aid did not increase, and that the statements on this point were misleading. The amended complaint alleges that projections in the Official Statement for financial aid levels in the 1997-1998 and 1998-1999 academic years were false and misleading when made. The Official Statement acknowledges that there has been a substantial increase in financial aid funded by the College between 1989 and 1997. However, the plaintiffs point to the Statement's projections: [D]uring the 1997-98 academic year, the College estimates that financial aid will be reduced to 29.9% of student income versus 30.3% the previous year. This expected reduction is a result of a change in methodology of aiding students with college-funded support versus additional loans funded by students and/or parents. The College's financial plan currently calls for a further reduction of financial aid spending for [the] 1998-1999 academic year to 28.8% of student income. The amended complaint alleges that these statements were untrue  that the actual percentage of financial aid awarded in 1997-1998 was over 35% of student income. The plaintiffs also allege that the 1998-1999 budget, as of the date of the Official Statement, contemplated that financial aid would be 31.3% of student income, not 28.8%.
Again, the allegations concerning the discrepancies between the actual percentage for the 1997-1998 academic year and the estimated ones in the Official Statement come from hindsight. [12] The amended complaint obtained the 35% figure from Bradford's audited financials for the year, which were not produced until after the close of the fiscal year in June 1998, after the date of the Official Statement. No facts are pled to support the general allegation that [a]t the time the Official Statement was distributed, the College possessed, and the Defendants had access to, the data that proved the 1997-98 `estimate' was substantially incorrect. These allegations do not state with particularity facts giving rise to a strong inference that the defendant acted with [scienter]. 15 U.S.C. § 78u-4(b)(2). The plaintiffs do point to information which they say was available at the time of the Official Statement about the 1997-1998 academic year. They allege the college knew that enrollment for the spring term in 1998 was lower than in the budget and knew what its financial aid commitments were. They also say the defendants knew the financial aid commitments were almost $250,000 more than budgeted. Those two pieces of data, however, do not, without more, tell one of the actual percentage of financial aid as against student income, either as of May 1, 1998, or as of the end of that academic year.
The most troublesome issue in the case is presented by the allegations regarding the Official Statement's description of the financial plan for the 1998-1999 school year's financial aid levels. These are not mere optimistic projections because the statement is that [t]he College's financial plan currently calls for a further reduction of financial aid spending for [the] 1998-1999 academic year to 28.8% of student income. (Emphasis added.) This sentence would misrepresent the facts if the defendants, as of May 1, 1998, had actually decided to budget a significantly greater amount of the college's funds for student aid. The amended complaint alleges that Bradford's 1998-1999 budget was originally submitted to the Trustees on April 29, 1998, and reviewed by the Finance Committee of the Board on May 8, 1998. The allegation is that the budget was revised at a meeting of college administrators later in May. The finalized budget pegged financial aid spending for 1998-1999 at 31.3% of student income. According to the amended complaint, that amount was $280,000 greater than the sum referred to in the Official Statement issued on May 1. There is no allegation as to the budgeted figures in the April 29 draft budget. The plaintiffs draw the inference that the final figure of 31.3% was in the initial draft budget of April 29. The claim is that the makers of the statement about the 1998-1999 budget had actual knowledge that the statement was false or misleading, thus removing it from the safe harbor provisions of the PSLRA. See 15 U.S.C. §§ 77z-2, 78u-5; Greebel, 194 F.3d at 201. We cannot say that the discrepancy between the 28.8% figure in the Statement and the 31.3% figure alleged in the amended complaint is immaterial as a matter of law, as defendants argue. Materiality is usually a matter for the trier of fact. Shaw, 82 F.3d at 1217 (citing Basic Inc. v. Levinson, 485 U.S. 224, 236, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)). Although $280,000 represents only a small portion of the college's operating revenues, which exceeded $13 million in fiscal year 1997, it amounts to about 7% of the amount Bradford spent on student aid that year. Put another way, $280,000 would cover about a third of the debt service due on the bonds in 1999. The 31.3% figure could indicate a trend of rising financial aid contributions, not the anticipated downward trend portrayed in the Statement. The Statement named the amount of financial aid awards as a risk factor in the college's ability to repay the bonds. Even assuming materiality, the amended complaint provides no information on what proposed budget figures were known to the Bradford defendants before the Official Statement was completed. One might infer that at least President Short, as an ex officio member of the Board of Trustees, knew that financial aid was budgeted to be 31.3% at the time he helped draft the Statement. But few specifics are given to support the inference that the defendants knew the representation about the budget was wrong when made. We must assess whether the plaintiffs have pleaded sufficient facts to give rise to a strong inference that the defendants wrote that passage in the Official Statement with intent to deceive, manipulate, or defraud. Ernst & Ernst, 425 U.S. at 193 n. 12, 96 S.Ct. 1375. More than mere proof that the defendants made a particular false or misleading statement is required to show scienter. Aldridge, 284 F.3d at 83; see also Geffon v. Micrion Corp., 249 F.3d 29, 36 (1st Cir.2001). But the fact that a defendant knowingly made a false statement is classic evidence of scienter. Aldridge, 284 F.3d at 83. One inference, urged by plaintiffs, is that the defendants  or at least Short and the Trustees  were in possession of a budget that clearly contradicted the numbers they planned to quote in the Official Statement. The argument is that they feared that portraying an upward trend in financial aid expenditures would warn off investors, so they opted instead to spin the numbers to suggest that Bradford was heading for a turnaround. According to the amended complaint, the Bradford defendants determined to operate the College at all costs rather than preserve its assets for the benefit of creditors. The defendants, on this theory, saw the 1998 bond offering as a means of continuing operations, even though the defendants knew it could not save Bradford from insolvency. With that in mind, the plaintiffs allege, the defendants were willing to misrepresent the amount of the funds they had earmarked for student aid in order to shade the college's operational health and induce hapless investors to purchase bonds to finance an already doomed project. But there are other inferences, which in our view are stronger. After years of budget deficits, the Bradford defendants realized by early 1997 that the college would have to cease operations within five years unless they could implement a plan to stabilize its budget. Still, within a year, the college had experienced a spike in its matriculation rate and the number of incoming students, leading the defendants to believe that demand would support an increase in the college's enrollment capacity. The Bradford defendants thus settled on an expansion plan to be funded by the 1998 bonds, and they expected that expansion would save the school. The defendants considered a draft budget for the 1998-1999 school year just a matter of days before the bond offering. That budget may or may not, at that time, have matched the defendants' sanguine financial aid projections in the Official Statement. However, the defendants would know that the draft budget would yet be revised, as the amended complaint confirms. In addition, the defendants may have been operating under a different set of assumptions. For instance, the Statement indicates that phase one of the project, to be financed by the bonds that had not yet been issued as of the time of the draft budget, would be completed by fall 1998. The resulting addition of new, townhouse-style dormitories could increase enrollment capacity and Bradford's attractiveness to current and prospective students. Given the defendants' enrollment targets for the 1998-1999 school year and their assumption that the expansion project would be financed and underway by that time, it would be reasonable to infer that they believed the 28.8% figure to be achievable. There is no set pattern of facts that will establish scienter; it is a case-by-case inquiry. Greebel, 194 F.3d at 196. There are several reasons why the plaintiffs' inference of scienter is not at least equally as strong. First, the Official Statement as a whole candidly laid out the sorry financial history of the college and, for most of its estimates and projections as to a happier future, it provided accurate and non-misleading information, as we discussed. The Official Statement fully disclosed that despite the college's enrollment growth, the college had (a) incurred operating deficits every year since 1989 and (b) done so with a substantial increase in financial aid funded by the college. It was careful to say it could only estimate that for the 1997-1998 academic year, there would be a reduction in financial aid as a proportion of student income, and that it would be a modest four-tenths of a percentage point. It explained the basis for the estimate. As to the 1998-1999 academic year, the Statement was careful to say that the college's financial plan currently called for a reduction of one and a tenth percentage points in financial aid over its estimates for the prior year. The Official Statement fully disclosed that some 80% of full-time students received Bradford-funded aid. And the Statement said that based on four factors, the college believed it could reach its enrollment goals and reduc[e] slightly the average amount of financial aid awards . . . from College funds. Conversely, the Statement said, failure to meet these goals could adversely affect the College's ability to reach Financial Equilibrium. In addition, the Bradford College defendants have different characteristics than are typical in securities fraud cases, characteristics which make it more difficult to infer a high degree of recklessness or an intent to defraud. They are unlike the paradigmatic securities fraud defendant, who is likely to be a corporate insider standing to profit from the sale of artificially inflated securities. Here, the defendants are Officers and Trustees of a non-profit educational institution. [13] There are no allegations that the proceeds from the Bradford bonds would be spent on anything that would personally enrich any of the Bradford defendants. There is no allegation that they are particularly sophisticated in securities transactions. Of course the self-interested motivation of defendants in the form of saving their salaries or jobs is relevant  though not necessarily sufficient  to a showing of scienter. Greebel, 194 F.3d at 196. There is no reason to credit the inference that the Official Statement was made in order to save Short's job as President, as he resigned a few months later, by July 1998. Short's resignation had long been anticipated, as the Official Statement itself referred to his expected resignation on June 30, 1998. In this case there is no allegation of any additional motive other than the defendants' desire to keep the college operating and to deprive creditors of their due in an inevitable bankruptcy proceeding. These are shaky grounds for leaping to the conclusion that there is a strong inference that the defendants intentionally or recklessly disregarded the facts available to them when quoting financial aid figures in an offering statement accompanying a multi-million dollar bond offering. We hold that the plaintiffs' allegations regarding planned financial aid expenditures for the 1998-1999 school year fail to establish an inference of scienter that is cogent and at least as compelling as available competing inferences of non-fraudulent conduct. [14] The dismissal of the section 10(b) and Rule 10b-5 claims against all of the Bradford defendants was appropriate. [15]