Opinion ID: 691552
Heading Depth: 3
Heading Rank: 1

Heading: Statements Predicting Future Performance

Text: 14 We have recently addressed whether public predictions of future performance are actionable as securities fraud: 15 Misstatements or omissions regarding actual past or present facts are far more likely to be actionable than statements regarding projections of future performance. Generally, the latter will be deemed actionable under Sec. 10(b) and Rule 10b-5 only if they are supported by specific statements of fact or are worded as guarantees. 16 Malone, 26 F.3d at 479 (emphasis in original) (citing Raab v. General Physics Corp., 4 F.3d 286, 289-90 (4th Cir.1993)); see also Hillson Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204, 212 (4th Cir.1994). 17 Statements which involve optimistic opinions or predictions of future performance, rather than representations of fact, are a type of sales talk or puffing.  '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, 4 F.3d at 289. 9 A reasonable investor would not rely on a discussion of growth which was nothing more than a loose prediction. Id. at 290. Once a statement is determined to be commonplace commercial puffery, our inquiry ends. We do not need to consider the remaining Rule 10b-5 elements because such a statement is not material, and thus is not actionable as a matter of law. Id. at 289 n. 1. 18 We now review each of these statements of future performance to determine whether a reasonable jury could find that they constitute federal securities fraud.
19 On January 26th, John F. Burton, Legent's Chief Executive Officer, distributed a confidential and urgent memo to Legent's management indicating that first quarter earnings per share was achieved [primarily] through expense savings, as opposed to revenue growth. (J.A. 2537.) The memo also noted that unless a major change occurs, we will undershoot the [second quarter] revenue budget in all areas. (Id.) The memo was not predominantly concerned with overall first quarter revenues, but rather with revenues in certain business lines that was far short of budget for Legent's North American and international markets. (Id.) The memo instructed top level management to reassess their revenue forecasts for the second quarter and to incorporate a hiring freeze and other expense-saving measures. It further warned that if we are not extraordinarily careful and expeditious in our action, we will quickly find ourselves in a position which we cannot rectify. (Id.) Yet, the next day in its January 27th press release, Legent quoted CEO Burton as stating that Legent's first quarter performance indicated it was firmly on its 1993 plan for revenue and earnings growth. 10 (J.A. 2613.) The press release announced a 20% increase in total first quarter revenues and indicated that the net income from the three months of the first quarter showed earnings per share of $0.54. During a conference call with analysts the same day, Burton again stated that Legent experienced a 20% revenue growth during the first quarter and noted that $0.05 of the $0.54 earnings per share was due to a rollover of the recently acquired Goal System International's thirteenth month (September 1992) earnings into Legent's first quarter earnings. 11 Near the close of the conference call, in response to a request for guidance on earnings, Burton stated that 20 with the earnings that we are announcing, it gives us even greater confidence in what the average is of the street expectations. We feel even more confident that we will comfortably make those estimates. 21 (J.A. 1586.) 22 We discussed in Cooke v. Manufactured Homes, Inc., 998 F.2d 1256 (4th Cir.1993), the type of factual assertion necessary to make a future prediction material, and thus actionable if false or misleading. In Cooke, the projections of future prosperity were supported by specific statements of fact representing specific business projects. For instance, the Cooke defendant asserted that the company would repurchase 400,000 shares of its own stock, and that it was negotiating with an insurance company to act as a guarantor on its loans. Id. at 1259. 23 Burton's statements--that Legent was firmly on its plan for earnings growth and that Legent would comfortably make the street expectations for annual earnings per share--simply lack the necessary level of specificity. All we discern in the January 27th predictions are the type of soft, puffing statements that we found not actionable as a matter of law in Malone. Malone, 26 F.3d at 479-80; see also Raab, 4 F.3d at 289 (such statements lack materiality because the market price of a share is not inflated by vague statements predicting growth). No reasonable jury could find that these statements, either individually or taken as a whole, constitute a guarantee; nor could a reasonable jury find that such statements are factually specific enough to perpetuate a fraud on the market. Therefore, as a matter of law, these statements are not actionable as fraud. Malone, 26 F.3d at 479-80. 12
24 A few months later, during an April 13th conference call, Burton noted that the company was on a slower track than we might have expected or wanted to be at this time, and announced second quarter revenues of $102 million and earnings per share of $0.52, which was at the very low end. (J.A. 1595.) He stated that we remain comfortable with street expectations for an annual earnings per share of $2.45 and that the pipelines [of unclosed deals] give us comfort that the expected annual earnings should be achieved. (J.A. 1600.) Burton noted that revenues were lighter than expected in the second quarter, but indicated that this was due to the failure to close approximately ten large deals worth $1 million to $9 million each that were in the pipeline. (J.A. 1635.) He also indicated that the unclosed deals were highly-qualified contracts but were not necessarily forecasted. (J.A. 1601.) 25 First, Appellants argue that the comfort statement was fraudulent because Legent was having difficulty meeting its internally forecasted estimates of earnings and revenues. However, the comfort statement here is much like the one we held not actionable as a matter of law in Malone. In Malone, we held that a February 1992 statement by Microdyne's president that he was 'comfortable with [an independent analyst's] earnings estimates for fiscal 1992 and 1993'  was not actionable as a matter of law because it obviously did not constitute a guarantee and was certainly not specific enough to perpetrate a fraud on the market. 26 F.3d at 473, 479-80. We noted a clear distinction between a company's strict 'duty to accurately report ... its past results,' on the one hand, and the company's relative freedom to 'prognosticat[e]' or make 'predictions of its future business prospects,' on the other hand. Id. at 479 (quoting Raab, 4 F.3d at 287, 289) (emphasis in Malone ). By the same token, Burton's statement that Legent was comfortable with expectations that annual earnings would be met is also an unactionable future prediction. 26 Second, Appellants contend that characterizing the large deals as highly-qualified implied that the deals would close during the third quarter, and therefore constituted fraud. We disagree. There was no guarantee or assurance here that the highly-qualified deals would close during the third quarter. Indeed, Burton indicated at the same time that the deals were not forecasted. 13 We do not believe that a reasonable investor would rely on such soft predictions that simply are not supported by specific statements of fact or expressed as guarantees. They, therefore, do not rise to the level of material statements of fact necessary to support a claim of securities fraud. Id.; Raab, 4 F.3d at 290.
27 Because of increasing discrepancies between the October budget forecast and internal monthly forecasts during the second quarter, on April 26, 1993, Legent's Chief Financial Officer, Franchon Smithson, with input by Legent's Treasurer, James Buchanan, prepared an internal document entitled Legent Forecast Range Estimates that revised the October budget forecast numbers. This revised internal forecast gave a target range for third quarter, fourth quarter, and fiscal year 1993 revenues, as well as earnings per share, that were slightly lower than the October budget forecast figures. Legent's management testified at trial that thereafter it measured the company's performance against the April revised forecast estimates. 14 Furthermore, during an April 27th conference call, Legent publicly revealed its revised estimates for third quarter and annual earnings per share. 28 During the April 27th conference call, Burton estimated a guidance figure for third quarter earnings per share in the 45-to 55-cent area, giving a 10-cent swing one way or another, and stated that Legent believed its predicted annual earnings per share for 1993 would be in the 2.25 to 2.50 range--two-and-a-quarter to two-dollars-and-fifty-cents. (J.A. 1693-94.) He also promised to keep [analysts] apprised of significant changes throughout the quarter. (J.A. 1701.) Burton further noted that during the second quarter, Legent's performance and its difficulty in forecasting the market had surprised him, and, as a result, he noted that Legent's accuracy and precision in forecasting was no longer as good as it had been in the past. He also reminded analysts that the fourth quarter had always been Legent's strongest quarter for new license revenues, which accounted for roughly half of Legent's annual revenues. 29 Viewing the April 27th predictions of quarterly and annual earnings per share in the context in which they were made, and particularly in light of the other cautionary statements made during the conference call, no reasonable jury would find that Legent's projections were expressed as guarantees or supported by specific statements of fact. Thus, the statements complained of were not of the type upon which a reasonable investor would rely, and, therefore, were not actionable under the securities laws. Malone, 26 F.3d at 479; see also Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir.1986) (no securities fraud liability when statements clearly 'bespeak caution.' ). 15 30 In sum, we find that all of Legent's public predictions of future performance lacked the factual specificity or guarantee required to make them material. The district court committed no error in granting judgment as a matter of law on this issue.