Opinion ID: 6929117
Heading Depth: 2
Heading Rank: 1

Heading: VeriFone’s IPO Documents, SEC Filings, and Press Releases

Text: Each of the federal securities laws invoked by the shareholders requires a plaintiff to allege that the defendants were responsible for a misrepresentation in, or material omission from, a stock prospectus, registration statement, or other document. 3 In re Lyondell Petrochemical Co. Sec. Litig., 984 F.2d 1050, 1052 (9th Cir.1993). Section 10(b) prohibits any person from using or employing any “manipulative or deceptive device” in connection with the sale of a security. Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated under section 10(b), forbids the making of “any untrue statement of a material fact or [omitting] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading....” Section 11 provides that any signer, officer of the issuer, or underwriter may be held hable for a registration statement containing “an untrue statement of a material fact or omitt[ing] to state a material fact ... necessary to make the statements therein not misleading....” 15 U.S.C. § 77k(a). Similarly, § 12(2) establishes liability for those persons who sell a security “by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading....” 15 U.S.C. § 111. Shareholders argue that the district court improperly “lumped” their claim under § 11 of the ’33 Act with their claims under § 12(2) of the ’33 Act and § 10(b) of the ’34 Act (and Rule 10b-5 thereunder). Citing Kronfeld v. Trans World Airlines, Inc., 832 F.2d 726, 730-31 n. 8 (2nd Cir.1987), cert. denied, 485 U.S. 1007, 108 S.Ct. 1470, 99 L.Ed.2d 700 (1988), they maintain that a “duty to disclose” analysis is irrelevant with respect to § 11, and that alleging the “existence of a material omission is, by itself, sufficient to state a prima facie claim under section 11.” Contrary to shareholders’ characterization, we interpret the district court’s discussion of a “duty to disclose” as bearing on whether they adequately allege a material misrepresentation or omission, a question common to all statutory provisions at issue in this case. Lyondell, 984 F.2d at 1052; accord Kronfeld, 832 F.2d at 730-31 n. 8 (reading the district court’s opinion, spealdng of “facts as to which there was a duty to disclose,” as “finding the alleged omissions immaterial as a matter of law”). Accordingly, our central inquiry is whether a reasonable investor would have been misled about the nature of his investment in VeriFone stock. See Durning v. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir.), cert. denied, 484 U.S. 944, 108 S.Ct. 330, 98 L.Ed.2d 358 (1987).
Shareholders argue that VeriFone and the Underwriters concealed adverse facts in order to complete VeriFone’s public offering. Their pleading, however, has to do with a failure to disclose a forecast of future sales and revenue. Paragraph 21 sets out the undisclosed adverse facts and trends about which shareholders complain. 4 It avers that before the public offering, VeriFone and the Underwriters learned of “the following adverse material facts and trends, which were not publicly known”: ¶ 21(a): “Sales growth to VeriFone’s core market segment ... had slowed substantially ... to revenue growth rates projected to be less than 17-18% for fiscal year 1990.” ¶ 21(b): “Unit sales ... had materially declined ... and [were] projected to show little, if any, growth for fiscal year 1990.” ¶ 21(c): “VeriFone’s historical sales channels ... were showing little growth in potential revenue....” ¶ 21(d), (e): ‘VeriFone was forced to directly market its products to new markets [and] ... VeriFone’s direct marketing sales force ... had no reasonable basis to predict VeriFone’s ability to sell its product in these [new] markets.” ¶ 21(f): “A material portion of VeriFone’s future sales_” ¶ 21(g): ‘VeriFone’s Petroleum/Convenience market was saturated, and ... Ver-iFone’s sales to this market segment would plummet unless VeriFone was able to convince customers in this market to upgrade to more complex and costly systems. ...” ¶ 21(h): “Revenue growth for the next few quarters ... was dependent ... upon the potential sale.... ” ¶ 21(i): ‘VeriFone’s revenues for the first half of fiscal year 1990 would be.. ¶ 21(j): “Sales to the petroleum market were not expected by defendants to grow over the next few years.” (Emphases added). These alleged nondisclo-sures are, in substance, failures to make a forecast of future events. Put another way, what the complaint avers is that VeriFone omitted to state the “fact” that future prospects may not be as bright as past performance. Absent allegations that VeriFone withheld financial data or other existing facts from which forecasts are typically derived, the alleged omissions are not of material, actual facts. Therefore, the forecasts need not have been disclosed, and the failure to make the omitted forecasts did not render other statements that were made misleading. See Lyondell, 984 F.2d at 1053; see also Convergent Technologies, 948 F.2d at 516; Vaughn v. Teledyne, Inc., 628 F.2d 1214, 1221 (9th Cir.1980) (“[T]he SEC does not require a company to disclose financial projections.”). 5 Nor do we believe that VeriFone’s listing of 52 prominent customers in the prospectus was misleading. Shareholders argue that the list was misleading, in that VeriFone failed to disclose an actual fact, that it did not have current orders with these customers. However, we read the listing, which appears in a discussion of VeriFone’s historical marketing strategy, as simply a compilation of past and current customers that connotes nothing material about the status of existing or prospective orders. In summary, because the shareholders fail to allege non-disclosed material facts which could have rendered the defendants’ assessment of VeriFone’s prospects for the future any more accurate or reliable than a forecast based on information then available to the market, shareholders’ Amended Complaint does not state a claim under the federal securities laws.
Shareholders also rely on allegations that VeriFone failed to comply with the mandate of SEC Regulation S-K, Item 303, 17 C.F.R. § 229.303(a)(3)(ii), and various Stock Exchange rules, to show a violation of § 10(b) and Rule 10b-5. We disagree. Lyondell and Convergent Technologies rejected similar arguments. While § 229.-303(a)(3)(ii) provides that “known trends or uncertainties” be disclosed in certain SEC filings, another SEC regulation, which expressly addresses forecasts, states that forward-looking information need not be disclosed. 17 C.F.R. § 229.303(a), Instruction 7; see Lyondell, 984 F.2d at 1053. Shareholders’ contention that disclosure was compelled by the reporting and disclosure requirements which govern members of the New York Stock Exchange, the American Stock Exchange, and the National Association of Securities Dealers is similarly baseless. It is well established that violation of an exchange rule will not support a private claim. Jablon v. Dean Witter & Co., 614 F.2d 677, 680-81 (9th Cir.1980) (Securities Exchange Act does not provide a private cause of action for violation of stock exchange rules, NASD rules); see also Carrott v. Shearson Hayden Stone, Inc., 724 F.2d 821, 823 (9th Cir.1984). Shareholders’ argument that a violation of those rules violates § 10(b) or Rule 10b-5 amounts to the same thing. Mihara v. Dean Witter & Co., 619 F.2d 814, 823-24 (9th Cir.1980), upon which shareholders rely, is distinguishable. Mi-hara involved the use of New York Stock Exchange Rule 405 to help establish that the defendant had the requisite scienter — i.e., that the defendant securities broker did not “know his customer.” Id. By contrast, the issue here is whether the shareholders sufficiently allege material misstatements or omissions, not whether misleading information was disseminated knowingly or recklessly. We decline to hold that a violation of exchange rules governing disclosure may be imported as a surrogate for straight materiality analysis under § 10(b) and Rule 10b-5. 6