Opinion ID: 731320
Heading Depth: 4
Heading Rank: 3

Heading: Defendants' Forecasts

Text: 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