Opinion ID: 691379
Heading Depth: 2
Heading Rank: 2

Heading: The four additional statements rejected by the district court

Text: 20 Kaplan further argues that the district court erred in failing to consider four other statements which Kaplan alleged were false in his motion for summary judgment. 1 None of these statements appear in Kaplan's second amended complaint. Instead, two appear in the Kramer complaint, filed June 11, 1991, less than a month after the deadline to amend the pleadings in Kaplan. By the time the parties filed their motions for summary judgment, the Kramer complaint had been dismissed as barred by the statute of limitations. 21 The other two appear in the amended complaint in Kramer, filed March 17, 1992, after Kramer's Sec. 10(b) claims were reinstated, more than four months after the parties submitted motions for summary judgment in Kaplan, and more than two months after argument on the summary judgment motions. 22 Thus at the time the summary judgment motions were filed, these four statements were not before the court in pleadings in either Kaplan or Kramer. The first two were in the initial Kramer complaint which already had been dismissed, and the last two, which appeared in the Kramer amended complaint, had yet to be alleged at all. 23 Nevertheless, Kaplan argues that the district court should have considered these four statements. First, he argues that the four statements were fairly reflected in his second amended complaint because they were connected to other statements alleged there. Second, he argues that the inclusion of these new statements constituted a motion to amend the complaint under Federal Rule of Civil Procedure 15, the denial of which was an abuse of discretion.
24 Federal Rule of Civil Procedure 9(b) requires that the circumstances constituting fraud ... shall be stated with particularity. In a securities fraud action, a pleading is sufficient under Rule 9(b) if it identifies the circumstances of the alleged fraud so that the defendant can prepare an adequate answer. Wool v. Tandem Computers Inc., 818 F.2d 1433, 1439 (9th Cir.1987). The pleadings must state precisely the time, place, and nature of the misleading statements, misrepresentations, and specific acts of fraud. Id. at 1439-40. See also Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir.1989) (the allegations should include the misrepresentations themselves with particularity and, where possible, the roles of the individual defendants in the misrepresentations). 25 The four statements are missing entirely from Kaplan's second amended complaint and, at the time when the motions for summary judgment were filed, were not present in any pleading before the district court, except for Kaplan's summary judgment motion. We therefore conclude that the four statements are not fairly reflected in the complaint. The district court did not err in refusing to consider them. Id.
26 An addition of new issues during the pendency of a summary judgment motion can be treated as a motion for leave to amend the complaint. Roberts v. Arizona Bd. of Regents, 661 F.2d 796, 798 n. 1 (9th Cir.1981). A district court's denial of leave to amend is reviewed for an abuse of discretion, keeping in mind the strong policy in favor of allowing amendment, and considering four factors: bad faith, undue delay, prejudice to the opposing party, and the futility of amendment. DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir.1987). 27 The district court found that Medstone would suffer prejudice if Kaplan were allowed to amend the complaint, stating: The parties have engaged in voluminous and protracted discovery.... Expense, delay, and wear and tear on individuals and companies count toward prejudice. Trial was only two months away, and discovery was completed. See Texaco, Inc. v. Ponsoldt, 939 F.2d 794, 799 (9th Cir.1991) (no amendment allowed where defendant would have been unreasonably prejudiced by the addition of numerous claims so close to trial, regardless of [plaintiff's] argument that they were 'implicit' in the previously pleaded claims). Further, Kaplan had already amended the complaint twice, and a district court's discretion over amendments is especially broad 'where the court has already given a plaintiff one or more opportunities to amend his complaint.'  DCD Programs, 833 F.2d at 186 n. 3 (quoting Mir v. Fosburg, 646 F.2d 342, 347 (9th Cir.1980)). Finally, two documents containing two of the statements were known to Kaplan from the beginning of the litigation, as evidenced by his complaint, which quotes from different portions of them both. Kaplan offers no evidence that he was unaware of the sources of the other two statements. [L]ate amendments to assert new theories are not reviewed favorably when the facts and the theory have been known to the party seeking amendment since the inception of the cause of action. Acri v. International Ass'n of Machinists, 781 F.2d 1393, 1398 (9th Cir.), cert. denied, 479 U.S. 816, 107 S.Ct. 73, 93 L.Ed.2d 29 (1986). The district court did not abuse its discretion in refusing to consider the new allegations. 28 We therefore hold that the district court properly excluded Statements 10-13.II. Kaplan's Sec. 11 claims 29 Kaplan alleges that Statements 1-3 in Medstone's registration statement were material, false, and misleading, and that the statements omitted material information about the success of and market for Medstone's system. 30 Under Sec. 11 of the Securities Act of 1933, anyone who buys a security pursuant to a false and misleading registration statement may sue for damages. Section 11 states that any signer of the registration statement, any partner or director of the issuer, any professional involved in preparing or certifying the statement, and any underwriter of a registration statement may be liable [i]n case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.... 15 U.S.C. Sec. 77k (1988). 31 The plaintiff in a Sec. 11 claim must demonstrate (1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment. See In re VeriFone Sec. Litig., 11 F.3d 865, 868-69 (9th Cir.1993). See also In re Keegan Management Co. Sec. Litig., 794 F.Supp. 939, 944 (N.D.Cal.1992) (misstatement is material if correct disclosure would have deterred, or tended to deter, the average prudent investor from buying the offered securities). Cf. 17 C.F.R. Sec. 230.405 (information is material if reasonable investor would attach importance to it in considering whether to purchase securities). 32 No scienter is required for liability under Sec. 11; defendants will be liable for innocent or negligent material misstatements or omissions. Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 103 S.Ct. 683, 687, 74 L.Ed.2d 548 (1983). Defendants other than the issuer can establish a due diligence defense if they show that after reasonable investigation they had reasonable ground to believe (and did believe) that, at the time the registration statement became effective, the statements were true and there was no material omission. 15 U.S.C. Sec. 77k(b)(3)(A). 33 Three of the nine misstatements alleged by Kaplan appear in Medstone's June 2, 1988, Registration Statement. The defendants potentially liable under Sec. 11 are Medstone, as the issuer; Payne and Penfil, as directors and signatories; Radlinski, as a signatory; and Weeden, as the underwriter. The district court granted summary judgment in favor of the defendants on Statements 2 and 3 without mentioning Statement 1, although Statement 1 appears in Medstone's motion for summary judgment, Kaplan's opposition, and Medstone's reply, and Kaplan raises and discusses this statement on appeal. Statement 1 was fully briefed in the district court and is fully argued before us. Because we review a grant of summary judgment de novo, Jones v. Union Pac. R.R. Co., 968 F.2d 937, 940 (9th Cir.1992), we consider all three statements. A. Misrepresentation 34 Kaplan alleges that Statements 1-3 were false and misleading. 35 1. Statement 1: The Company believes the Medstone System compares favorably with other lithotripters presently being offered by competitors with respect to the precision of its imaging system ... and its success rate in treating patients. 36 Kaplan argues that this statement was misleading because on June 2, 1988, the date of the offering, the clinical trials of Medstone's gallstone lithotripsy system could not be considered successful. Kaplan relies on a May 4, 1988 memorandum from Josh Burke, Medstone's Vice President of Regulatory Affairs, in which Burke presents a brief, preliminary summary of data obtained from the first phase of the gallstone study at Baylor University. That memorandum states that five of 27 patients, or 18.5%, showed significant fragmentation of their gallstones (to fragments less than or equal to three millimeters) within 24 hours of treatment with the Medstone system. Those patients were classified as successes.Kaplan contends that this dismal success rate was misleadingly characterized as comparing favorably with Medstones' competitors' rates of success, and could mislead potential investors by portraying that Medstone possessed a device that would be well received in the marketplace. Kaplan relies on a February 1988 New England Journal of Medicine article about a German test using a Dornier lithotripter on gallstone patients. Medstone submitted the article as an exhibit in support of its motions for summary judgment. The German study showed that 139 of 175 patients, or almost 80%, had no stones or had significant fragmentation (also to fragments less than or equal to three millimeters) within 24 hours of treatment. Kaplan argues that it was at least misleading to state that the Medstone system, with a 24-hour success rate of 18.5%, compares favorably to Dornier's system, with its 80% success rate. 37 Medstone responds by claiming that the German success rate cannot be compared to Medstone's, because the patients in the German study had undergone six months of lithotripsy. That is simply wrong. The German study reported that one day after the first shock-wave treatment, of 175 patients two had no stones and 137 had small fragments (emphasis added). At between four and eight months, 63% of all patients in the German study had no stones at all. Contrary to Medstone's statement that plaintiffs have submitted no evidence that Medstone's 18.5% success rate after just 24 hours of treatment compared poorly to the success rate achieved by the German studies for a comparable time period, there was material evidence to that effect in the article showing the German success rate of 80% after 24 hours. 38 We find there is a genuine issue of material fact whether Statement 1 was misleading. 39 2. Statement 2: The Medstone [lithotripsy system] has been used successfully to treat kidney stone patients since October 1986 and gallstone patients since January 1988. 40 Kaplan argues that because clinical trials of the Medstone system on gallstone patients had failed to achieve a significant or competitive level of success, it was false and misleading to state that the system had been used successfully to treat ... gallstone patients since January 1988, when the clinical trials began. As explained above, Medstone's system had achieved a success rate of 18.5% at the time of the prospectus statement, while the system of its competitor Dornier had a success rate of 80%. 41 Medstone replies that this statement was not literally false because one patient was stone-free in 36 hours, and 18.5% had significant fragmentation in 24 hours. The system was thus used successfully on this limited group of patients. Nevertheless, while it is literally true that some gallstone patients were treated successfully by the Medstone system, a material issue of fact remains whether Medstone misleadingly represented that the system was being used successfully on a regular basis, especially given the much higher success rate of the German machine. See McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576, 579 (2d Cir.1990) (statement that is literally true may be considered material misrepresentation if misleading in context), cert. denied, 501 U.S. 1249, 111 S.Ct. 2887, 115 L.Ed.2d 1052 (1991). 42 We find there is a genuine issue of material fact whether Statement 2 was false or misleading. 43 3. Statement 3: The Company's marketing plan is based upon its belief that within the next five to ten years there will be a total of approximately 2,000 lithotripters installed in the United States which will be used to treat kidney stone and gallstone patients. 44 Kaplan argues that this statement was misleading because it implies that Medstone would have a significant share of the lithotripter market. Kaplan also argues that Medstone knew the lithotripter market was saturated, relying on a September 1988 document in which Freeman Rose, then Medstone's CEO, wrote of the kidney machine market: It's dead. Kaplan also points to Medstone's sluggish sales in 1988, and claims that Medstone knew it would not participate in any future market because of its system's low success rate with gallstone patients. 45 Medstone responds that there is no evidence that the market was saturated at the time the prospectus was circulated in June 1988. Medstone points to an independent study prepared as part of Weeden's two due diligence investigations, as the source of the projection of 2,000 installed lithotripters. Medstone also points out that Rose's It's dead statement was made three months after the date of the prospectus, and that the statement applied only to the market for single-purpose kidney lithotripsy systems. Rose testified at his deposition that the lack of demand for single-purpose machines gave Medstone's dual-purpose (kidney and gallstone) machine a competitive advantage. Finally, Medstone again asserts that the clinical trials were successful. 46 A statement in a prospectus will be grounds for liability under Sec. 11 only if it was false or misleading at the time that the registration statement became effective. See 15 U.S.C. Sec. 77k(a). Rose's It's dead statement was made three months after the prospectus was issued; it thus is not evidence to support a Sec. 11 claim. See Keegan Management, 794 F.Supp. at 942 (Because this information appeared so soon after the [public offering], it is tempting to assume, as Plaintiffs do, that Defendants must have had an inkling of it before the [public offering]. Yet the assumption may not be warranted; on summary judgment, Plaintiffs must produce evidence that it is.). Medstone also provided market figures to show that a substantial number of lithotripters were sold between 1988 and 1991, as evidence that the market was not actually saturated. 47 Finally, there is a basic flaw in Kaplan's argument. Statement 3 is not a prediction of Medstone's market but a general statement about the entire market for lithotripters. The success of Medstone's clinical trials thus has no direct relevance to this market estimate. 48 We conclude that there was no genuine issue of material fact regarding whether the market projection of 2,000 machines was false at the time that the registration statement became effective. Summary judgment in favor of Medstone on Statement 3 was appropriate. 2 B. Materiality 49 Whether Statements 1 and 2 were material is also a question that should have been left for the jury. We find a rational jury could conclude that reasonable investors, reading these statements in the prospectus, could have been misled about the nature of an investment in Medstone. Such investors might have hesitated to buy Medstone stock if they had known that the success rate of Medstone's system, however preliminary, was far below that of its main competitor in the U.S. market. Reasonable jurors certainly could differ on whether this information might affect the stock-purchasing decision. See Keegan Management, 794 F.Supp. at 945. 50 Medstone argues that because its prospectus contained a cautionary statement, its optimistic assessment of the competitiveness and success rate of its system in Statements 1 and 2 is not misleading. In the Risk Factors section of the Prospectus, Medstone stated that To date the System has only been used at one hospital on a limited number of patients. No assurance can be given that the clinical trials for the use of this System in treating patients with gallstones under the IND/IDE [the FDA approval to conduct clinical trials] will be successful. Medstone is not saved by pointing to this statement. 51 This court recently has adopted the bespeaks caution doctrine, which holds that if  'precise cautionary language ... directly addresses itself to future projections, estimates, or forecasts in a prospectus,'  the projections will not give rise to a claim of securities fraud. In re Worlds of Wonder Sec. Litig. (Worlds of Wonder II ), 35 F.3d 1407, 1414, 1415 (9th Cir.1994) (quoting Worlds of Wonder I, 814 F.Supp. at 858). See Worlds of Wonder II, at 1414-15 (citing cases from the First, Second, Fifth, Sixth, Seventh, and Eighth Circuits adopting the doctrine); In re Convergent Technologies Sec. Litig., 948 F.2d 507, 515 (9th Cir.1991) (applying a similar analysis without explicit reference to the doctrine). We need not apply the doctrine in this case, however, because the cautionary statement quoted by Medstone does not relate directly to Statements 1 and 2. While the statement that no assurance can be given that the clinical trials ultimately will be successful might bespeak caution as to the future success of clinical trials, see Worlds of Wonder I, 814 F.Supp. at 858-59, at least a jury question remains whether it neutralized Medstone's statement that its system already had been used successfully and was thus competitive. 52 We find that there is a genuine issue of fact whether Statements 1 and 2 were material.