Opinion ID: 197221
Heading Depth: 2
Heading Rank: 2

Heading: reports of securities analysts

Text: 37 Appellants also allege that Bailey should be held liable for false and misleading statements made by analysts in independent reports disseminated to the public. The first of these reports was disseminated to the public by McDonald. Appellants allege that the analyst who prepared that report, David Garrity, spoke with Leonard Heilman, an officer of the company, in preparing the report. Garrity reviewed with Heilman his earnings estimates and the methodology and/or assumptions of those estimates. Thereafter, McDonald disseminated a report giving Bailey an aggressive buy rating. The report stated that it expected Bailey to earn $1.15 per share in fiscal 1994 and $1.60 per share in fiscal 1995. Finally, the report stated that it estimated that the price of Bailey stock would reach $20 per share, with a down-side risk to the $10 level. 38 The second report, prepared by Hancock analyst Jane Gilday, was reviewed with Heilman on or about December 20, 1993. Gilday informed Heilman of her revenue and earnings per share estimates and the methodology and assumptions used in reaching those estimates. She also indicated to Heilman her opinion of Bailey's financial prospects. Hancock's report, publicly disseminated on December 21, 1993, projected Bailey's earnings per share at $1.05 for fiscal 1994 and $1.25 for fiscal 1995. The report goes on to make predictions regarding Bailey's profitability in the coming year based on growth in its parts business and the company's shift of manufacturing to the mid-western plants. 39 A third report, disseminated to the public by McDonald on March 18, 1994, indicated that McDonald had concerns about Bailey's product mix shift and lowered its earnings per share forecasts slightly. The report still gave Bailey an Aggressive Buy rating. 40 After Bailey disclosed that its earnings for the third quarter of fiscal 1994 were only $0.16, Hancock lowered Bailey's investment rating from buy to sell, based in part on the serious credibility problem of Bailey management. Hancock called Bailey's third quarter earnings a major negative surprise. 41 In support of their argument that Bailey should be held liable for alleged misstatements in these analysts' reports, appellants cite cases in which courts have held that a defendant company may be held liable for any false or misleading statements contained in analysts' reports. See, e.g., Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir.1980) (holding that a company may sufficiently entangle itself with analysts' forecasts to render the predictions attributable to the company, but finding no such liability); In re RasterOps Corp. Sec. Litig., No. C-93-20349, 1994 WL 618970, at  3 (N.D.Cal. Oct.31, 1994) (finding that [a] company may be liable for analyst reports which it fostered and reviewed but failed to correct if it expressly or impliedly represented that the information was accurate or reflected the view of the company); Alfus v. Pyramid Technology Corp., 764 F.Supp. 598, 603 (N.D.Cal.1991) (finding that a company may be liable for not correcting analysts' forecasts where it undertakes to provide information regarding and pass on the analysts' forecasts, but finding no liability where a company officer merely examines and comments upon an analyst's report); In re Aldus Sec. Litig., [1992-1993 Transfer Binder] Fed. Sec. L. Rep. (CCH p 97,376 at 95,984-85) (W.D.Wash.1993) (finding plaintiffs' claim sufficiently alleged that defendants placed their imprimatur on analysts' reports, but employing a lower Rule 9(b) pleading requirement than is applied in this circuit); In re Cypress Semiconductor Sec. Litig., [1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) p 97,060 at 94,698 (N.D.Cal.1992) (holding that plaintiffs need only allege that defendants provided information to the securities analysts upon which the reports were based). 42 Appellants argue that we should adopt the more liberal approach adopted by these courts, rather than the restrictive approach, Appellants' Brief at 35, employed by the court below. Appellants' arguments are unpersuasive. Our review of the cases appellants cite indicates that the law applied by those courts is similar to, if not the same as, that applied by the court below. Where the cases may differ is in the pleadings each court requires in order to sufficiently allege that the analysts' reports are attributable to the defendant. We have repeatedly emphasized Rule 9(b)'s heightened pleading requirements because of our concern that plaintiffs will bring baseless strike suits against securities defendants in order to increase settlement amounts or to engage in a fishing expedition for evidence on which to base their claims. See Lucia, 36 F.3d at 174 (noting that we have been especially rigorous in applying Rule 9(b) to securities claims because of these concerns); Romani, 929 F.2d at 878 (same). We find, however, that the cases cited by appellants do not differ substantially from the law applied by the court below. 43 This circuit has not yet decided whether statements in an analyst's report may be attributable to a defendant company. As appellants claim that Bailey fraudulently misled the analysts who prepared these reports, Rule 9(b)'s heightened pleading requirements apply. Assuming arguendo that a company may be held liable for false or misleading statements in an analyst's report where that company has adopted, endorsed, or sufficiently entangled itself with the analyst's reports, see Elkind, 635 F.2d at 163, we find that appellants have failed to meet Rule 9(b)'s pleading requirements and their claim must fail. As we noted above, Rule 9(b) requires that plaintiffs  '(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'  Shields, 25 F.3d at 1127-28. The district court pointed out to appellants that their earlier complaints failed to meet Rule 9(b)'s requirements. Order of July 31, 1995 at 2; Order of Nov. 10, 1994 at 13. In an apparent attempt to cure these defects, in their Second Amended Complaint, appellants alleged the following: 44 [I]t was the Company's practice to have top managers, namely, Chief Financial Officer Heilman, communicate regularly with securities analysts ... to discuss, among other things, the Company's earnings prospects, its products, the efficiency of the Company's manufacturing plants, anticipated financial performance, and to provide detailed 'guidance' to these analysts with respect to the Company's business, including projected revenues, earnings, and of particular importance to analysts, earnings per share. 45 In its order dismissing the Second Amended Complaint, the district court found that appellants' attempts to satisfy the requirements of Rule 9(b) were insufficient because appellants failed to identify the statements made by Heilman or describe how those statements were false or misleading. Order of Dec. 29, 1995. We agree with the district court that appellants have failed to allege with particularity the false or misleading statements made by Heilman, or any other defendant, that would have induced the analyst to disseminate misleading forecasts. 46 We also find that appellants have failed to direct us to any facts to support their conclusory allegation that Bailey endorsed the contents of those reports, adopted them as its own, and placed its imprimatur on them. Second Amended Complaint, p 36. As presented by the appellants, the reports do not appear to quote any Bailey officer or employee, nor do they imply that the forecasts were supplied or confirmed by any Bailey officer or employee. Appellants' allegations regarding the analysts' reports fail to meet the pleading requirements of Rule 9(b) and the district court properly dismissed this count of the complaint.