Opinion ID: 571326
Heading Depth: 3
Heading Rank: 2

Heading: Disclosures Regarding NGEN Profitability

Text: 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).