Opinion ID: 751831
Heading Depth: 3
Heading Rank: 1

Heading: Falsity of Statements

Text: 53 GlenFed I sets out a useful hypothetical for determining whether the complaint alleged a false statement that was both false when uttered and false when the plaintiff-shareholders discovered the truth: 54 [A] plaintiff might allege that he bought a house from defendant, that defendant assured him that it was in perfect shape, and that in fact the house turned out to be built on landfill, or in a highly irradiated area; plaintiff could simply set forth these facts (presumably along with time and place), allege scienter in conclusory fashion, and be in compliance with Rule 9(b). We agree that such a pleading would satisfy the rule. Since in perfect shape and built on landfill are at least arguably inconsistent, plaintiff would have set forth the most central circumstance constituting fraud--namely, that what defendant said was false. Notably, the statement would have been just as false when defendant uttered it as when plaintiff discovered the truth. 55 Id. Here, the shareholders argue that they have satisfied this test. The complaint alleges that they purchased Merisel's stock, and that Merisel assured them (through its financial statements, its own positive statements, and optimistic projections mirrored in analysts' reports) that Merisel was in good shape due to its acquisition of Computerland, its reorganization overseas, and its positive sales figures. In fact, the Computerland acquisition had plunged Merisel deep into debt, its overseas operations continued to lose money, and it was improperly recognizing revenue from shipments of unordered goods and goods shipped on consignment to keep up the appearance of high sales; as a result, its second quarter earnings for 1994 were disastrously low. Merisel's stock plummeted in value. Merisel's assurances took place at specified times during the class period, and the defendants knew they were false. Merisel's financial house, in other words, was built on a landfill. Because falseness is clear from the facts that had existed all along and were later revealed, id. at 1549, the complaint meets GlenFed I 's requirements on this skeletal analysis, Warshaw, 74 F.3d at 960 (setting forth a similar brief analysis). 56 In Fecht, we applied the rule that a complaint must contain allegations that fraudulent statements were false when made, and found the complaint satisfied Rule 9(b). 70 F.3d at 1083-84. Applying Fecht 's analysis here, the complaint alleges that the positive statements about the Computerland acquisition were false when made, because in truth the purchase created a debt that Merisel could not support. To ensure that a stock offering would ease its debt burden, Merisel misrepresented the state of its overseas operations and its overall prospects to stock analysts, who passed that misinformation on to the market. To keep its annual and quarterly reports positive, Merisel engaged, with Deloitte's help, in deceptive accounting practices. For purposes of Rule 9(b), allegations of specific problems undermining a defendant's optimistic claims suffice to explain how the claims are false. Id. at 1083. 57 In addition, the complaint alleges that Merisel decided to cancel the stock offering very shortly after optimistic statements were made (three weeks before June 7). This shortness of time is circumstantial evidence that the optimistic statements were false when made. Id. The circumstantial evidence mounts with the allegations that the need for the proceeds from a stock offering was great, and that company officials sold their stock at inflated prices while Merisel expressed optimism for the future. See id. at 1084. 58 We hold that the complaint adequately alleged the falsity of the statements.