Opinion ID: 731320
Heading Depth: 3
Heading Rank: 6

Heading: Defendants' Cautionary Statements

Text: 96 The district court found that defendants' cautionary statements undercut an inference of scienter. As the district court explained: A review of the analysts statements on MIPS through the class period show that the outlook for MIPS reflected in the market was far from overly optimistic. But as suggested above, the district court appears to have merged the bespeaks caution doctrine with the truth-on-the-market doctrine. These doctrines represent distinct legal theories. In this appeal, the defendants argue that these doctrines provide separate grounds for affirming the district court's grant of summary judgment. We disagree.
97 In a fraud on the market case an omission is materially misleading only if the information has not already entered the market. Convergent Technologies, 948 F.2d at 513 (citing Apple Computer, 886 F.2d at 1114). As we have explained, [i]f the market has become aware of the allegedly concealed information, 'the facts allegedly omitted by the defendant would already be reflected in the stock's price' and the market 'will not be misled.'  Id. (quoting Apple Computer, 886 F.2d at 1114). This principle has been termed by some courts as the truth-on-the-market doctrine or corollary. See e.g., Associated Randall Bank v. Griffin, Kubik, 3 F.3d 208, 213-14 (7th Cir.1993); Wielgos, 892 F.2d at 516. 4 98 However, before the truth-on-the-market doctrine can be applied, the defendants must prove that the information that was withheld or misrepresented was  'transmitted to the public with a degree of intensity and credibility sufficient to effectively counterbalance any misleading impression created by insider's one-sided representations.'  Kaplan, 49 F.3d at 1376 (quoting Apple, 886 F.2d at 1116). 99 The defendants bear a heavy burden of proof. Summary judgment is proper only if they show that no rational jury could find that the market was misled. Kaplan, 49 F.3d at 1376. If the evidence presents a sufficient disagreement to require submission to the jury, summary judgment should be denied. Id. 100 Here, defendants claim that information about the risky nature of MIPS' stock entered the market. In support of their position, defendants submitted 31 analyst reports and articles. According to defendants' evidence, as early as October 1990, one analyst rated the stock as SELL. Another analyst, on February 13, 1991, recommended that MIPS be avoid[ed] because technology revenues are only partially predictable. 101 We do not think that these reports effectively counterbalance[d] defendants' false and misleading statements. Kaplan, 49 F.3d at 1376. There is no mention in the reports of defendants' allegedly improper revenue recognition practices, negative forecasts, or sales decline with the R6000 line. Most of the analysts link MIPS' riskiness with the unusual business model 5 adopted by MIPS and the unsuccessfulness of alliances like ACE. In these circumstances, we cannot say as a matter of law that defendants have sustained their contention that the truth-on-the-market doctrine applies.
102 In granting summary judgment in this case, the district court also held that the overall effect of defendants' [April 25 and July 31, 1991] statements was cautionary and could not be said to have misled the market. With respect to the April 25, 1991 statement, we disagree. 103 Summary judgment based on the bespeaks caution doctrine is only appropriate when reasonable minds could not disagree as to whether the mix of information in the document is misleading. Fecht, 70 F.3d at 1082 (emphasis added). As we have explained: 104 The bespeaks caution doctrine provides a mechanism by which a court can rule as a matter of law (typically in a motion to dismiss for failure to state a cause of action or a motion for summary judgment) that defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud. 105 WOW, 35 F.3d at 1413 (quoting Donald C. Langevoort, Disclosures that Bespeak Caution, 49 Bus.Law. 481, 482-83 (1994)). 106 But as we have recognized, the bespeaks caution doctrine is not new but a reformulation of two fundamental concepts in securities fraud law: reliance and materiality. WOW, 35 F.3d at 1414. To put it another way, the 'bespeaks caution' doctrine reflects the unremarkable proposition that statements must be analyzed in context. Id. (citations and quotations omitted). 107 Thus, to determine whether the bespeaks caution doctrine immunizes defendants' allegedly false and misleading statements, we must analyze what, if any, cautionary statements defendants made. The cautionary statements must be precise and directly address[ ] ... the [defendants'] future projections. WOW, 35 F.3d at 1414 (quotations and citations omitted). Blanket warnings that securities involve a high degree of risk [are] insufficient to ward against a federal securities fraud claim. Id. 108 In this case, the alleged cautionary statements appear to be too general to trigger the bespeaks caution doctrine. For example, when MIPS reported its loss in the fourth quarter of 1990, MIPS warned that it lacked visibility and ... [was] living in an uncertain economic environment so ... [it was] approaching the next six months with a very conservative outlook and conservative management posture. MIPS predicted that its technology licensing fees would remain fairly flat on a year to year basis. MIPS, however, did not disclose to the market that it was recognizing revenue before the terms of certain contracts had been negotiated, before the deliverables were shipped, and before certain contingencies were satisfied. In fact, the opposite was true. Defendants represented in its Form 10-K that technology revenue is recognized upon the completion of contract requirements. 109 Defendants also contend that Ludvigson made cautionary statements during the April 25, 1991 conference call. Ludvigson's statements, however, were too general to trigger the bespeaks caution doctrine. Ludvigson simply stated that second quarter technology revenue was expected to decline, that gross margin would be flat to slightly down, and that technology revenue for 1991 looked a lot like last year but he would be hesitant to put a total number on loss of revenue. Although these statements referred to MIPS' projections, there is no evidence that defendants disclosed the information that was relied upon to arrive at the internal forecast of a $4 million loss. If anything, Ludvigson's cautionary statements led the analysts to believe that the second quarter earnings would be similar to the first quarter earnings.