Opinion ID: 197221
Heading Depth: 2
Heading Rank: 1

Heading: statements in bailey's prospectus

Text: 17 The complaint quotes extensively from various Bailey corporate documents, alleging that these quotes were materially false and misleading. These statements tend to fall into two categories: (1) statements about past performance of the company; and (2) statements about future performance. The district court succinctly and accurately summarized the alleged false representations made by Bailey: 18 1. The Company falsely stated that it would achieve increased profits by moving production from its plant in Seabrook, New Hampshire, to newly acquired factories in Michigan. Complaint, p 2. 19 2. The Company knowingly issued false predictions regarding future earnings prospects during pre-offering road shows. Complaint, p 5. 20 3. When the Company made the public offering it knew but failed to disclose that its profitability would decline sharply because of a much less profitable mix of parts to be supplied to Ford. Complaint, p 8. 21 4. The Company failed to disclose to the public severe problems it began experiencing at its Contour facility beginning in February, 1994 (i.e., 6 months after the first day of the public offering and after issuance of all but one of the public documents of which plaintiffs complain). Complaint, p 13. 22 Order of December 29, 1995, at 6. Paragraph 62 of the Second Amended Complaint attempts to describe why these statements were false and misleading: Bailey's earnings would not continue to grow, they would decline materially due to a massive shift of Bailey's production to a much less profitable product mix. Second Amended Complaint at p 62(a). 23 Regarding statements about past performance, appellants present no argument that such statements were false or inaccurate. At most, appellants suggest that Bailey's presentation of figures indicating past performance somehow implies that the company would attain the same level of profitability in the future. In presenting figures of past performance, Bailey's prospectus does not in any way project future earnings. 24 Instead, the contention here is that the company's predictions would prove to be false and that earnings would not continue to grow. Appellants contend that Bailey's Prospectus promised increased revenue. See Second Amended Complaint, pp 54, 55, 57, 61. The statements cited by appellants, however, make no such representations and, in fact, are tempered with cautionary language. For example, appellants cite the following sentence to support its contention that Bailey's prospectus indicated that revenues would continue to grow rapidly: While the Company expects continued revenue growth, revenue may or may not increase at the same rate as the number of components in the Company's product line. This statement is certainly not a promise of future profitability and contains language indicating uncertainty as to future revenues. Appellants cite the following statement as indicating that Bailey would become even more profitable: The Company intends to transfer certain labor intensive operations from Seabrook to Hillsdale and Madison to take advantage of lower average labor cost and more fully utilize existing capacity. Again, there is no suggestion or promise of increased profits in this statement. Finally, the following is quoted in support of the contention that the company had secured supply agreements that would make up for the loss of certain discontinued products: [T]he Company believes that these components in aggregate, will provide the Company with opportunities comparable to those that have been provided by the Taurus/Sable and Tempo/Topaz models. While the company states that it believes the opportunities will be comparable, the statement contains no promise to that effect. 25 Bailey's 1993 Annual Report to Shareholders, registered with the SEC on October 28, 1993, indicated that Bailey expected [certain accomplishments of 1993] to help to sustain growth and strengthen our competitive position in future years. That same document labels Bailey's mid-western plants as cost-efficient. Additionally, an annual report filed on a Form 10-K for fiscal year 1993 stated that the acquisition of the mid-western plants provided the company with additional manufacturing capacity at lower average labor costs than prevail at the Company's Seabrook[, New Hampshire] facility. Appellants contend that these statements were misleading because Bailey failed to disclose that the shift in production would materially reduce the Company's revenue and earnings, Complaint, p 74, and because the mid-western plants were not cost efficient. No facts have been provided in support of the contention that Bailey had reason to know that the production shift would be less profitable, nor do appellants indicate why Bailey should have known, prior to operating a plant with lower labor costs, that the plant would be less cost efficient than the Seabrook plant, at which labor costs were higher. 26 Certainly, predictions 'are not exempt' from the securities laws ... but they are actionable only if the forecast might affect a 'reasonable investor' in contemplating the value of a corporation's stock. Colby v. Hologic, Inc., 817 F.Supp. 204, 211 (D.Mass.1993) (citation omitted). While these statements may convey the company's desire for profitable performance in the future, they do not convey any promises about future performance and do not project specific numbers that the company will certainly attain. No reasonable investor would have read these statements, especially as they are accompanied by cautionary language, as promises or guarantees of future performance. 27 The statements above, standing alone, are not false or misleading. Had the appellants presented facts known by Bailey, and contemporaneous with the statements above, that would show that Bailey's anticipated success was unlikely, such facts would have adequately alleged a claim of securities fraud. Instead, all appellants present as factual support is the receipt by Bailey of 26-week forecasts from Ford, with no indication from appellants as to what information contained within those reports contradicts Bailey's projections, other than a vague reference in paragraph 67 of the complaint that, [a]s [will be] set forth below, Ford's demand for certain parts supplied by Bailey was lower in the Company's first calendar quarter of 1994 and Bailey knew that would be so as of the day [of] the Offering. The only information set forth below regarding a decrease in Ford's demand for parts was discussed in a Hancock analyst's report publicly disseminated on June 8, 1994. The comments regarding Ford in this document suggest that, at the time the report was prepared, nearly a year after the Prospectus, Annual Report and Form 10-K were issued, Ford was scaling back production plans. This hardly amounts to a contemporaneous factual allegation indicating that statements made by Bailey in August of 1993 regarding future prospects were false or misleading, or that it was unreasonable for Bailey to make such statements about future profitability. 28 In addition, appellants state that Bailey's earnings ... would decline materially due to a massive shift of Bailey's production to a much less profitable product mix. Appellants allege no facts to indicate that Bailey had any reason to suspect at the time the statements were made that the product mix would prove to be less profitable. 29 Although appellants specify statements that they contend were fraudulent, identify the speaker, and state where and when the statements were made, they fail, on every allegation of fraud, to explain why the statements were fraudulent. Appellants offer no factual support for their conclusory allegations that Bailey knew that a product mix would become unprofitable or that production problems would arise at a plant it was not even operating at the time the Prospectus was issued. Thus, there is no factual support that Bailey made materially false or misleading statements when it presented positive future expectations. Appellants repeatedly recite their contention that the 26-week forecasts received from Ford indicated to Bailey Ford's projected supply requirements through the company's fiscal third quarter, the time at which the actual requirements allegedly diminished, causing the decline in Bailey's earnings per share. Appellants fail, however, to identify information in the forecasts that would have put Bailey on notice that supply requirements would decline. That Ford presented forecasts of its requirements does not guarantee that forecasts presented to Bailey 26 weeks prior to the third quarter, and perhaps contemporaneously with the dissemination of the Bailey Prospectus, accurately identified the actual requirements of the third quarter. Those requirements may have changed dramatically after Ford presented Bailey with its forecasts for that third quarter. Because appellants fail to cite with specificity anything in the 26-week forecasts that would have put Bailey on notice of a decline in products to be supplied, they have not shown that Bailey's expectations were unreasonable or fraudulently presented. That Bailey may have been mistaken in its projections, which were apparently based on facts that appellants do not contend were false, is not enough. 30 [Appellants] record[ ] statements by defendants predicting a prosperous future and hold[ ] them up against the backdrop of what actually transpired.... This technique is sufficient to allege that the defendants were wrong; but misguided optimism is not a cause of action, and does not support an inference of fraud. We have rejected the legitimacy of 'alleging fraud by hindsight. '  31 Shields, 25 F.3d at 1129. Because all of plaintiffs' 10(b) claims rely fundamentally on such unsupported allegations, the district court properly dismissed these claims for failure to meet Rule 9(b). Lucia, 36 F.3d at 174.
32 Appellants contend that the district court improperly dismissed their claims arising under Section 12(2) of the Securities Act of 1933 and Section 20(a) of the Securities and Exchange Act of 1934. They argue that the district court's dismissal of their complaint was pursuant to Rule 9(b). As appellants correctly note, neither of these claims contain an element of fraud and Rule 9(b)'s pleading with particularity requirements do not apply. Nevertheless, the district court properly dismissed these claims as well.
33 First, for a violation of Section 12(2), the plaintiff must show that the defendant made an untrue statement of a material fact or omitted such material fact. Appellants contend that Rule 9(b)'s pleading requirements do not apply to claims under Section 12(2), claiming that Section 12 does not contain an element of fraud. As we find that appellants have failed to even meet the minimal requirements of a Section 12(2) claim, we need not decide whether their Section 12(2) claim sufficiently sounds in fraud such that Rule 9(b)'s pleading requirements apply. 34 Appellants have failed to point us to any untrue statements of material fact, nor have they identified material facts whose omission would render a previous statement misleading. [I]nformation is 'material' only if the disclosure would alter the 'total mix' of facts available to the investor and 'if there is a substantial likelihood that a reasonable shareholder would consider it important' to the investment decision. Milton v. Van Dorn Co., 961 F.2d 965, 969 (1st Cir.1992) (quoting Basic, Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 983-84, 99 L.Ed.2d 194 (1988)). The statements that appellants challenge were either true at the time they were made and continued to be so, or consisted of future predictions that later proved to be incorrect. These predictions were not of the sort that would need to be corrected by a later statement. The statements addressed by appellants indicate that Bailey projected positive future earnings, but these statements were tempered with language indicating that Bailey did not, and could not, guarantee the future profitability of the company.  'Soft,' 'puffing' statements such as these generally lack materiality because the market price of a share is not inflated by vague statements predicting growth. Raab v. General Physics Corp., 4 F.3d 286, 289 (4th Cir.1993). 35 Appellants' complaint contends that the market's reliance on statements by Bailey artificially inflated the company's price per share. We find, however, that [n]o reasonable investor would rely on these statements, and they are certainly not specific enough to perpetrate a fraud on the market. Analysts and arbitrageurs rely on facts in determining the value of a security, not mere expressions of optimism from company spokesmen. Id. at 290. A reasonable purchaser would know that these statements consisted of optimistic predictions of future potential and would not have been misled by them. Therefore, the district court properly dismissed appellant's Section 12(2) claims.
36 Finally, regarding the Section 20(a) claim, which attempts to attribute joint and several liability to the individual defendants as control persons, appellants have failed to allege an underlying violation of the securities acts. The district court properly dismissed appellants' Section 20(a) claims.