Opinion ID: 571326
Heading Depth: 2
Heading Rank: 1

Heading: Did the defendants' public disclosures mislead investors?

Text: 30 We recently declared in In re Apple Computer Securities Litigation, 886 F.2d 1109, 1118 (9th Cir.1989), cert. denied, --- U.S. ----, 110 S.Ct. 3229, 110 L.Ed.2d 676 (1990), that [p]laintiffs may defeat summary judgment only by showing a genuine issue of fact with regard to a particular statement by the defendant corporation or its insiders. In Apple Computer we reviewed in seriatim sixteen allegedly misleading statements. Liability depended on the plaintiffs' success in demonstrating that one of the statements made by the company was actually false or misleading. 31 Of course, as the plaintiffs note, an issuer's public statements cannot be analyzed in complete isolation. Some statements, although literally accurate, can become, through their context and manner of presentation, devices which mislead investors. For that reason, the disclosure required by the securities laws is measured not by literal truth, but by the ability of the material to accurately inform rather than mislead prospective buyers. McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576, 579 (2d Cir.1990). 32 Thus, to prevail, the plaintiffs must demonstrate that a particular statement, when read in light of all the information then available to the market, or a failure to disclose particular information, conveyed a false or misleading impression. 33
34
35 The plaintiffs first contend the defendants misled the market by overstating the demand for Convergent's AWS/IWS workstation. 2 The plaintiffs begin by pointing to two statements made in the March Prospectus: 36 Burroughs Corporation accounted for approximately 48% of the total revenue of the Company in 1982. While the level of the Company's future revenues from sales to Burroughs cannot be predicted with any certainty, the Company believes that Burroughs may continue to account for a similar percentage of revenue in 1983. 37 In view of the Company's anticipated orders of its existing products, the Company believes it will be required to increase inventories, to carry increased levels of receivables and to acquire additional capital equipment. 38 These statements were true. Convergent did in fact expect a large increase in orders, and that increase materialized as sales grew in 1983. Moreover, Convergent increased inventories and receivables and acquired substantial capital equipment in 1983. Likewise, Burroughs accounted for 46% of Convergent revenues in 1983. 39 The plaintiffs contend the statements in the March Prospectus, while true as far as they go, did not reveal the entire picture. More specifically, the plaintiffs contend the two statements misled the market because they (1) implied growth would continue at the torrid pace Convergent had set in the past, and (2) failed to reveal that Burroughs had decreased its orders for 1983. The district court properly rejected these contentions. 40
41 The challenged statements do not imply any comparison between the rate of past and future growth. They simply report past performance and assert specific limited predictions for the future. 42 Moreover, the market clearly understood that Convergent could not maintain the growth it had enjoyed in the past. In Apple Computer, we noted that, in a fraud on the market case, see Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), an omission is materially misleading only if the information has not already entered the market. If 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. Apple Computer, 886 F.2d at 1114. We concluded: [I]n a fraud on the market case, the defendant's failure to disclose material information may be excused where that information has been made credibly available to the market by other sources. Id. at 1115. 43 The market clearly knew demand for the AWS/IWS workstation would decrease as Convergent began to make NGEN available to its customers. As a general matter, investors know of the risk of obsolescence posed by older products forced to compete with more advanced rivals. See, e.g., In re Seagate Technology II Sec. Litig., [1989 Tr. Binder] Fed.Sec.L.Rep. (CCH) p 94,502 at 93,202, 1989 WL 222969 (N.D.Cal.1989) (technical obsolescence of computer [equipment] in a field marked by rapid technological advances is information within the public domain ...) 44 More specifically, securities analysts knew that NGEN posed just such a risk to sales of the AWS/IWS workstation. As early as February 1983, analysts reported the major product transition on the horizon, and noted that [i]n anticipation of the next generation of products, it is possible that ... major new customers may defer taking delivery of current products in favor of the new line. (Robertson, Colman, Stephens & Woodman's Feb. 3, 1983 research report at 12). Additional information on this situation was reported to the market after the March Prospectus: [A]s Convergent introduces and readies new products, customers will prolong the decision-making procedure for ordering the current workstations.... (Woodman, Kirkpatrick & Gilbreath's May 6, 1983 research report at 4). Other analysts echoed this refrain: [T]he product cycle of the current line of workstations is beginning to crest ... new workstation customers will want to wait for NGEN to be available in quantity ... current customers probably will start to work down their IWS/AWS inventories in anticipation of volume availability of N-GEN early next year. (Cowen Institutional Services' May 23, 1983 research report at 3). 45 In all, the district court considered more than 60 analyst reports and articles in the trade and financial press discussing Convergent's prospects for 1983. There can be no doubt that the market was aware AWS/IWS demand would not increase at the same rate it had in the past. 46
47 The plaintiffs also contend the statements in the March Prospectus misled the public because Convergent did not disclose the alleged decrease in Burroughs' orders from 30,000 units to 7,500 units. In making this argument, the plaintiffs do not contend Convergent was obligated to disclose the 30,000-unit figure or the existence of negotiations with Burroughs or the result of those negotiations. They argue instead that even though the 30,000 figure was not disclosed, when Burroughs decided to decrease this figure to 17,500, this should have been disclosed. Of course, if there was no decrease in committed orders, the plaintiffs' argument fails. 48 There was no such decrease. Undisputed evidence in the record shows that in the computer industry generally, an agreement to purchase has far different consequences than an actual purchase order. Deposition of Allen Michels at 75-76. While the former represents a mere forecast of anticipated product demand, the latter is an actual obligation to buy. Id. Burroughs and Convergent never incorporated into their master Agreement the 30,000-unit figure, and it never became part of Burroughs' contractual obligation. The July 29 letter agreement, which contained the 30,000-unit figure, specifically provided that its terms remained subject to Burroughs' internal approval cycle, and that internal approval was never obtained. Finally, the defendants demonstrated that neither Burroughs nor Convergent viewed the 30,000-unit figure as binding on Burroughs. The plaintiffs, other than pointing to the July 29 letter, offer no evidence disputing this characterization. The plaintiffs' argument, therefore, fails because it mischaracterizes the 17,500 purchase commitment as a decrease in existing orders. The 30,000 figure never was a commitment to buy. The 17,500 figure, which was such a commitment, amounted to nearly a 100% increase over Burroughs' previous purchase commitment. 49
50 The plaintiffs next point to a statement made in Convergent's May 18, 1983 First Quarter Report to Shareholders: Our growth in the [first] quarter [of 1983] was the result of increases in shipments to our large OEM customers. This statement purports to describe only the first quarter of 1983. The plaintiffs take no exception to the accuracy of its factual description. The plaintiffs instead contend the statement misled investors by implying that Convergent expected the upward first quarter trend to continue throughout the year. We reject this contention. Although in its annual Form 10-K filing a company must discuss factors that would cause reported financial information not to be necessarily indicative of future financial operating results, no such obligation exists in the quarterly report at issue here. See 17 C.F.R. § 229.303. 51
52 The plaintiffs also challenge Convergent's August 8, 1983 press release. In this release, Convergent stated: 53 [N]et sales for the third quarter of 1983 will be approximately equal to its net sales for the second quarter because of customer anticipation of deliveries of its new generation of products, which are expected to be available for volume shipments in the first half of calendar 1984. Fourth quarter revenues cannot be predicted with certainty, but could be below third quarter revenues. Because of price reduction on existing products and startup costs associated with three new product lines, the Company anticipates that until volume shipment of its new products begins there will be a decrease in gross profit margin, and may be a substantial decrease in net income. 54 The plaintiffs contend this statement misstated the demand for Convergent's AWS/IWS workstation because Convergent knew at the time that third and fourth quarter revenues for 1983 would actually decline, not just remain flat. 55 The plaintiffs made no such showing. Convergent's revenues for the second half of 1983 were pretty much what the August press release predicted. Third quarter revenues, rather than being merely flat, declined in relation to second quarter revenues, but only by approximately 10%. For the fourth quarter, Convergent actually posted revenues greater than those recorded in the second and third quarters. Thus, while Convergent was somewhat optimistic regarding the third quarter, it actually underestimated fourth quarter revenues. 56 Plaintiffs also contend that if Convergent had excluded from its year-end financial statements one-time software license sales, it would not have shown a profit for the fourth quarter. That may be so. But plaintiffs do not explain why Convergent would want to exclude such sales. Plaintiffs suggest Convergent made the sales in the fourth quarter to post better numbers on its year-end financials and thus further the scheme to inflate its stock price. Plaintiffs provide no evidence to support this suggestion.
57 The plaintiffs argue the defendants misled investors by concealing from the market certain cost and production problems regarding Convergent's NGEN product line. They point out that, because of these cost and production problems, Convergent sold some configurations of the NGEN workstation at a negative gross margin through 1983 and into the beginning of 1984. 58 The defendants contend they adequately disclosed the NGEN cost problems in the March Prospectus: 59 [T]he Company anticipates [NGEN] will be both significantly more powerful and less expensive than existing workstation products.... While the Company believes that the technical risks in the development of these products are well controlled, the product cost objectives are very aggressive and there is no assurance that they can be achieved. 60 Clearly, Convergent's disclosures warned investors that problems with attaining internal cost objectives could impact the ultimate profitability of NGEN. The plaintiffs counter, however, that this disclosure did not sufficiently warn investors as to the particularized risks then known by Convergent, or the magnitude of those risks. In Apple Computer we stated: 61 There is a difference between knowing that any product-in-development may run into a few snags, and knowing that a particular product has already developed problems so significant as to require months of delay. 62 886 F.2d at 1115. The Fifth Circuit niftily expressed the same principle when it noted: 63 To warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit. 64 Huddleston v. Herman & MacLean, 640 F.2d 534, 544 (5th Cir.1981), aff'd in relevant part and rev'd in part on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). 65 In Huddleston, the Fifth Circuit found ineffective the prospectus' statement: THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. Id. at 543 (emphasis in original). Here, by contrast, the March Prospectus virtually overflows with Convergent's repeated emphasis of significant risk factors: (1) The Company is undertaking substantial development, manufacturing and marketing risks; (2) There can be no assurance that the Company will successfully complete the development of its new products or that it will be successful in manufacturing the new products in high volume or marketing the products in the face of intense competition; (3) Lack of availability of components from sole or limited sources would have a temporary adverse affect on the Company by delaying shipments; (4) While the Company believes that the technical risks in the development of NGEN are well controlled, the product cost objectives are very aggressive and there is no assurance they can be achieved. Convergent's March Prospectus has very little in common with the prospectus in Huddleston. 66 The defendants also continued during the class period to warn investors of the risks posed by NGEN. In the August Prospectus, for example, Convergent disclosed: (1) The[ ] risks [involved with NGEN] relate to the completion of the new products in accordance with their technical specifications, the availability of advanced components critical to high volume production of the new products and the achievement of product cost objectives; (2) As a result of these risks, the new product areas may not contribute to revenues within the time periods the Company anticipates; (3) There is no assurance that the aggressive cost objectives for these products can be achieved, nor is there assurance of the availability of necessary quantities of disk drives or the advanced microprocessors necessary to permit timely production of these products; (4) NGEN's microprocessor, which to date has only been manufactured in limited quantities, is being allocated by its sole source manufacturer. No investor, in the face of these substantive disclosures, could reasonably conclude that Convergent had surmounted all obstacles in NGEN's path. 67 True, Convergent had at its disposal more detailed internal NGEN projections. But Convergent was not obliged to disclose these internal projections. As we explained in Vaughn v. Teledyne, Inc., 628 F.2d 1214, 1221 (9th Cir.1980): 68 It is just good general business practice to make such projections for internal corporate use. There is no evidence, however, that the estimates were made with such reasonable certainty even to allow them to be disclosed to the public. 69 (emphasis in original). 70 In support of their argument that Convergent should have disclosed its internal projections, the plaintiffs point to Item 303(a)(3)(ii) of SEC Regulation S-K which requires that known trends or uncertainties be disclosed in certain filings with the SEC. Without passing on the relevance of Regulation S-K to this case, we note that Instruction 7 to Item 303(a) explicitly states that forward-looking information need not be disclosed in Regulation S-K filings. 17 C.F.R. § 229.303(a) (1990).
71 The plaintiffs next insist, as they did regarding NGEN, that the defendants' risk disclosures were too general and were misleading given the known delays and mechanization problems that existed with Workslate. We disagree. 72 The March and August Prospectuses provided more than generalized statements of risk. For example, the August Prospectus warned: (1) For [Workslate], risks also include the implementation of advanced manufacturing processes and the development and management of retail distribution channels; (2) The successful volume production and sale of [Workslate] will be dependent upon the timely availability of several advanced components (some of which have not been manufactured by their suppliers in volume to date), the implementation of the Company of advanced manufacturing processes ... and the development and management by the Company of retail channels of distribution, an area in which the Company has no prior experience; (3) The Company has not manufactured its new products in volume.... All of the Company's products use new components based on advanced technology. Many of these new components have yet to be manufactured in volume by their suppliers. The Company's ability to manufacture these products may be adversely affected by the inability of the Company's vendors to supply high quality components in adequate quantities; (4) In light of the complex nature of the manufacturing process of its new products, the Company may experience unanticipated problems in their manufacture. One of these, [Workslate], will use advanced manufacturing processes which have not to date been widely used in the United States. 73 The plaintiffs argue that apart from the foregoing, the defendants were obliged to release information as it became known to them. That is, the plaintiffs contend Convergent had a duty to disclose the progress of its efforts to implement a new mechanization structure. We reject this argument. 74 A company need not detail every corporate event, current or prospective ... Marx v. Computer Sciences Corp., 507 F.2d 485, 491 (9th Cir.1974). The securities laws do not require management to bury the shareholders in an avalanche of trivial information--a result that is hardly conducive to informed decisionmaking. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 448-49, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976).B. Underwriter Liability for Alleged Misstatements in the Research Reports 75 As to the underwriters, the plaintiffs contend the district court erred when it determined their research reports unquestionably have a sufficient factual and/or historical basis so that Rule 10b-5 liability cannot be imposed on the underwriters. In re Convergent Technologies, 721 F.Supp. at 1139. The plaintiffs apparently concede that liability would not attach if the research reports were supported by a sufficient historical or factual basis. See Meier v. Texas Int'l Drilling Funds, Inc., 441 F.Supp. 1056, 1063 (N.D.Cal.1977). They also apparently concede that, barring any additional knowledge, an analyst could reasonably support an optimistic report concerning Convergent's future on the company's history of success. See Convergent Technologies, 721 F.Supp. at 1139. 76 The plaintiffs provide no evidence, aside from pure supposition, to support their contention that the underwriter defendants knew of additional facts they failed to reveal in their research reports. The district court correctly granted the underwriters' motion for summary judgment. C. The Section 11 Claim 77 Plaintiffs finally argue the district court erred when it determined they failed to institute their section 11 suit before the expiration of the applicable statute of limitations. We need not address this contention. No liability can attach under section 11 unless a prospectus contains an untrue statement of a material fact or [omits] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.... 15 U.S.C. § 77k(a) (1988). As we have previously stated, no misleading statements or material omissions exist. 78 AFFIRMED.