Opinion ID: 155161
Heading Depth: 2
Heading Rank: 2

Heading: Failure to Plead Falsity

Text: 37 After distilling out the immaterial portions of the statements of which Grossman complains, we are left with the following statements: Wise's statement on April 27, 1994 that there were indications WordPerfect is gaining market share in the Windows word processing software market from less than 20% in 1992 to more than 40% today; Frankenberg's statement that we have not slowed down the effort to create new products, we've accelerated it; Rietveld's statement that the merger was perhaps the smoothest in recent history; and Frankenberg's statement that he was pleased with the accelerating pace of product development since the acquisition was announced in March. These statements cannot be dismissed as mere corporate optimism, because each of these statements could have, and should have had, some basis in objective and verifiable fact. Further, Novell's risk disclosures would not immunize those statements under the bespeaks caution doctrine, at least to the extent the statements may be construed as indicating the speakers' beliefs concerning then-present factual conditions. As the Supreme Court noted in Virginia Bankshares, such statements of opinion or belief must rest on a factual basis that justifies them as accurate, the absence of which renders them misleading. 501 U.S. at 1093, 111 S.Ct. at 2758. 38 Our conclusion in that regard is bolstered by the allegations in the complaint that analysts in fact relied upon these statements in upgrading their recommendations regarding Novell stock to buy. Although, of course, an analyst's response to a statement by the company is not dispositive, it certainly needs to be taken into account in determining whether the statement could, as a matter of law, be determined to be immaterial. 39 Nonetheless, the dismissal of Grossman's claims based on these statements may be affirmed on the alternative ground that nowhere in the complaint are facts alleged showing that anything about these statements is false. Mere conclusory allegations of falsity are insufficient. Fed.R.Civ.P. 9(b) requires that to state a claim for securities fraud, [t]he plaintiff must set forth what is false or misleading about a statement, and why it is false. In other words, the plaintiff must set forth an explanation as to why the statement or omission complained of was false or misleading. In re GlenFed Sec. Litig., 42 F.3d 1541, 1548 (9th Cir.1994) (en banc); cf. 15 U.S.C. § 78u-4 (b) (requiring plaintiff to set forth each statement alleged to have been misleading and the reason or reasons why the statement is misleading in securities fraud cases); Hillson, 42 F.3d at 209 (holding that [w]here fraudulent projections are alleged, the plaintiffs must identify in the complaint with specificity some reason why the discrepancy between a company's optimistic projections and its subsequently disappointing results is attributable to fraud). 40 This requirement ensures that securities claims will not be based on fraud by hindsight. As the Ninth Circuit recently explained, 41 What makes many securities fraud cases more complicated is that often there is no reason to assume that what is true at the moment plaintiff discovers it was also true at the moment of the alleged misrepresentation, and that therefore simply because the alleged misrepresentation conflicts with the current state of facts, the charged statement must have been false. Securities fraud cases often involve some more or less catastrophic event occurring between the time the complained-of statement was made and the time a more sobering truth is revealed (precipitating a drop in stock price). Such events might include, for example, a general decline in the stock market, a decline in other markets affecting the company's product, a shift in consumer demand, the appearance of a new competitor, or a major lawsuit. When such an event has occurred, it is clearly insufficient for plaintiffs to say that the later, sobering revelations make the earlier, cheerier statement a falsehood. In the face of such intervening events, a plaintiff must set forth, as part of the circumstances constituting fraud, an explanation as to why the disputed statement was untrue or misleading when made. 42 GlenFed, 42 F.3d at 1548-49 (emphasis in original). 43 Grossman has not come close to satisfying this requirement. Grossman alleges that the stock price drop on August 22, 1994 was caused by the disclosure of disappointing earnings figures for the third quarter of that year. While the alleged statements may have helped to bolster the share price during the class period, there is no allegation of fact that there was anything materially misleading about these statements, let alone that the statements were material to the drop in Novell's stock price on August 22, 1994. There has been no allegation that the merger was not smooth, that Novell was not stepping up the pace of new product development, or that WordPerfect was not gaining market share. Nor has there been any allegation that the market ever discovered these assertions to be untrue, or that such discoveries had an adverse impact on Novell's stock price. Accordingly, the district court properly concluded Grossman had not stated a claim based on those statements. 44 Additionally, we note that Grossman's failure to satisfy the Rule 9(b) requirement of specifically pleading facts showing falsity extends to many of the other statements we have found immaterial as a matter of law. Thus, Rule 9(b) stands as an alternative, and self-sufficient, basis for dismissing many of the non-material allegations found in Grossman's complaint.C. Duty to Disclose 45 The district court further correctly held that Novell had no duty to disclose its third quarter earnings forecasts prior to its August 19, 1994, disclosure of actual third quarter earnings, which showed them to be disappointing. Grossman, 909 F.Supp. at 845. Under Basic, silence, absent a duty to disclose cannot serve as the basis for liability under Rule 10b-5. 485 U.S. at 239 n. 17, 108 S.Ct. at 987 n. 17. However, if a defendant makes a statement on a particular issue, and that statement is false or later turns out to be false, the defendant may be under a duty to correct any misleading impression left by the statement. See, e.g., In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir.1993), cert. denied, 511 U.S. 1017, 114 S.Ct. 1397, 128 L.Ed.2d 70 (1994). Grossman contends that the statement by defendant Wise that the merger would not dilute future earnings gave rise to a duty to disclose actual third quarter earnings forecasts before the actual third quarter earnings themselves were known and disclosed. The district court concluded Wise's statement was too vague and indefinite to give rise to such a duty to disclose. Grossman, 909 F.Supp. at 845 n. 5. We agree. 46 Wise's vague, optimistic statement that future earnings would not be diluted was not a definite positive projection with respect specifically to third quarter earnings. See Time Warner, 9 F.3d at 267 (requiring definite positive projections before such a duty will be imposed). Further, there was no allegation of facts showing that Wise's statement was false when made or that third quarter earnings forecasts by Novell even existed before actual third quarter earnings were released. Second quarter earnings were, in fact, timely released before the merger was consummated and pro forma income figures were released showing that, had the merger been completed as of the second quarter, pro forma net income would have been reduced by $.09 per share. Requiring premature quarterly earnings forecasts itself could give rise to potential claims of liability if the forecasts should turn out to be inaccurate. Here, Novell gave copious warnings regarding the potential fluctuations in quarterly earnings and regarding the risks to its earnings posed by the proposed merger. There is no challenge that Novell failed timely and accurately to release the actual third quarter earnings figures. We do not believe that Wise's statement about non-dilution of future earnings created any duty on behalf of Novell to make further disclosures beyond those actually made. 47 Grossman also alleges that Novell made materially misleading omissions regarding its sales and revenues figures, its allegedly excessive research and development costs for new spreadsheet programs, and the fact that it would take a $120 million charge against third quarter earnings due to its acquisition of Quattro Pro. However, these alleged omissions concern matters discussed in great detail in the registration statement, and Grossman has not alleged that there was anything materially misleading about that document. With respect to the Quattro Pro write-off in particular, the Quattro Pro acquisition was a cash purchase of a product from another company, and thus Grossman does not suggest that Novell had any choice but to account for the purchase as a one time charge against income for the quarter in which the transaction occurred. Thus, Novell was under no duty to make further disclosures concerning these subjects. II. Dismissal Under Fed.R.Civ.P. 9(b) 48 for Failure to Allege Scienter with Particularity 49 Because we conclude that Grossman failed to allege any material misstatements or omissions, we need not address whether the district court properly dismissed the complaint for failing to sufficiently allege facts showing scienter pursuant to Fed.R.Civ.P. 9(b). III. Denial of Motion to Amend 50 The district court dismissed the complaint, finding it would be futile to allow amendment. Grossman, 909 F.Supp. at 852. The court provided two bases for this conclusion. First, the court pointed to new (and what it viewed as invalid) scienter theories in Grossman's memorandum in opposition to the motion to dismiss as indicating proper scienter allegations were not forthcoming. Id. Second, the court concluded that its bespeaks caution conclusion meant that Grossman could not raise any allegations that would tend to show that investors were mislead about the potential impact of the WordPerfect merger. Id. 51 We review the district court's decision to deny leave to amend a complaint for abuse of discretion. T.V. Communications Network v. Turner Network, 964 F.2d 1022, 1028 (10th Cir.1992). Although Fed.R.Civ.P. 15(a) provides that leave to amend shall be given freely, the trial court may deny leave to amend where amendment would be futile. Id. (citing Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962)). While it is an abuse of discretion for the court to deny leave to amend without expressing any justification ..., if the denial rests on articulated reasons such as failure to cure deficiencies or futility of amendment the district court's decision shall stand. Id. However, if the stated reasons are incorrect as a matter of law, the district court will be found to have abused its discretion in dismissing the claim with prejudice. 52 The district court denied leave to amend, in part, because its conclusion that Novell's SEC registration statements adequately disclosed the potential risks of the WordPerfect merger mean[t] that Grossman could not raise any new allegations sufficient to show that investors were mislead about the potential impact of the WordPerfect merger, and the alleged false statements were generally nonmaterial as corporate optimism. Grossman, 909 F.Supp. at 852. Thus, the amendments did not attempt to add a new misstatement, but rather went to scienter. We agree with the district court, and affirm the denial of leave to amend on that basis. 53 Grossman alleged that the fraud was exposed when Novell announced its third quarter earnings on August 19, 1994. The only alleged misstatement relevant to this earnings announcement was the alleged statement by defendant Wise that future earnings would not be diluted. However, under the bespeaks caution doctrine, this statement was immaterial in light of the disclosures in Novell's registration statements. 54 Grossman has not argued that the other alleged statements were false when made, that they were ever revealed to be false, or that they had any negative impact on Novell's stock price when they were revealed to be false. Nor has he made any suggestion that he intends to make such allegations. In fact, Grossman provides no indication as to what any amendment to the complaint would allege, aside from an unsupported assertion that there was sufficient information regarding Novell's stock sales that the District Court believed was relevant but had not been alleged in the complaint. Br. for Aplt. at 45-46. Moreover, Grossman failed to make a formal request to amend, and the lack of a record on such a request deprives us of a clear understanding of exactly what Grossman hoped to cure through amendment. Here, Grossman has failed to show us that any amendment would cure the deficiencies we have identified. Accordingly, we can find no error in the district court's conclusion that any amendment would be futile.