Opinion ID: 773420
Heading Depth: 2
Heading Rank: 7

Heading: plaintiffs' allegations concerning the effect of the balanced budget act

Text: 50 In this case, the district court stated that plaintiffs had met the pleading requirements of the PSLRA. Because the case was before the court on a motion to dismiss, this conclusion should have cleared plaintiffs over the Rule 12(b)(6) hurdle. Yet the court, sua sponte, without notice to either party and without further discovery, converted the motion to dismiss into a motion for summary judgment and ruled for the defendants. This was a serious error. Rule 12 authorizes such a conversion but mandates that parties be given an opportunity to submit materials to support or oppose summary judgment. We have underscored this requirement of unequivocal notice on numerous occasions. See, e.g., Salehpour v. Univ. of Tenn., 159 F.3d 199, 204 (6th Cir. 1998); Briggs v. Ohio Elections Comm'n, 61 F.3d 487, 493 (6th Cir. 1995); Yashon v. Gregory, 737 F.2d 547, 552 (6th Cir. 1984). In fact, the federal rules quantify this notice period, requiring at least 10 days between service and hearing of a summary judgment motion. Fed. R. Civ. P. 56(c). Noncompliance with the time provision of the rule deprives the court of authority to grant summary judgment, unless the opposing party has waived this requirement, or there has been no prejudice to the opposing party by the court's failure to comply with this provision of the rule. Kistner v. Califano, 579 F.2d 1004, 1006 (6th Cir. 1978) (per curiam) (internal citations omitted). 51 The district court concluded that plaintiffs had failed to prove their claims, pointing out that they could not simply rest on their pleadings. Because plaintiffs never had an opportunity to introduce support for their claims, we find the court's conversion to summary judgment a prejudicial surprise. Defendants have asked the court to overlook this procedural flaw, suggesting that no amount of notice could cure the pleading deficiencies in the complaint. A panel of this court accepted that argument, noting that an appellate court may affirm on any ground supported by the record. Helwig v. Vencor, 210 F.3d 612, 619 (6th Cir. 2000) (quoting Warda v. Commissioner, 15 F.3d 533, 539 n.6 (6th Cir. 1994)). The panel then affirmed dismissal on the grounds that plaintiffs did not state a claim under the PSLRA. We accept the premise of that ruling and likewise look to the allegations of the complaint, though we now reach a different conclusion. 52 Rather than reverse on the basis of the procedural error, we have undertaken a de novo review of the proceedings consistent with the proper Rule 12(b)(6) posture of the case. Accordingly, we must construe the complaint in a light most favorable to the plaintiff, and accept all of [the] factual allegations as true. When an allegation is capable of more than one inference, it must be construed in the plaintiff's favor. Bloch v. Ribar, 156 F.3d 673, 677 (6th Cir. 1998) (internal citation omitted). Our willingness to draw inferences in favor of the plaintiff remains unchanged by the PSLRA. While Congress unquestionably strengthened the pleading standard for securities fraud, the Reform Act would hardly serve its purpose to protect investors and to maintain confidence in the securities markets, see H.R. Conf. Rep. No. 104-369, at 31 (1995), were it to become a choke-point for meritorious claims. The danger of muzzling plaintiffs is enhanced by the stay provisions of the PSLRA, which authorize suspension of all discovery pending a motion to dismiss. 15 U.S.C. § 78u-4(b)(3)(B). 53 Contrary to defendants' contention, the Reform Act did not reverse the polarity of securities pleading. As always under Rule 12(b)(6), we will indulge plaintiffs' inferences of fraud--provided, of course, those inferences leave little room for doubt as to misconduct. See 15 U.S.C. § 78u-4(b)(2) (requiring the plaintiff to state with particularity facts giving rise to a strong inference of scienter). Inferences must be reasonable and strong--but not irrefutable. Strong inferences nonetheless involve deductive reasoning; their strength depends on how closely a conclusion of misconduct follows from a plaintiff's proposition of fact. Plaintiffs need not foreclose all other characterizations of fact, as the task of weighing contrary accounts is reserved for the fact finder. Rather, the strong inference requirement means that plaintiffs are entitled only to the most plausible of competing inferences. See Black's Law Dictionary 1423 (6th ed. 1990) (defining strong as cogent, powerful, forcible, forceful). This represents a significant strengthening of the pre-PSLRA standard under Rule 12(b)(6), which gave the plaintiff the benefit of all reasonable inferences, Cameron v. Seitz, 38F.3d 264, 270 (6th Cir. 1994) (emphasis added), and contemplated dismissal only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations. Bloch, 156 F.3d at 677 (emphasis added) (quoting Hishon v. King & Spalding, 467 U.S. 69, 73 (1984)). 54 With the aid of additional briefing and oral argument, the court has examined plaintiffs' allegations in light of the pleading standards for private securities litigation. Whether certain of these statements, which are clearly forward-looking within the meaning of the Reform Act, enjoy safe harbor immunity is a close question. In fact, as an exemption from liability, this provision would seem to produce a factually complex question more appropriate for summary judgment. This is especially so considering that the plaintiff must prove that the forward-looking statement . . . was made with actual knowledge to prevail, a formidable burden at the pleading stage. 15 U.S.C. § 78u-5(c)(1)(B). Nevertheless, Congress apparently intended the applicability of the safe harbor to be addressed even on a motion to dismiss. See 15 U.S.C. § 78u-5(e) (instructing courts to consider any cautionary statement accompanying the forward-looking statement upon a motion to dismiss based on the safe harbor provisions). 55 Accordingly, we must decide whether defendants can claim safe harbor protection for their forward-looking statements. For those statements that are not forward-looking or do not fit within the statutory shelter, we must determine whether plaintiffs have stated a claim under the PSLRA. As we apply the pleading standards of the Reform Act, we keep in mind the substantive elements of a claim for securities fraud. To prevail on a § 10(b)(5) / Rule 10b-5 claim, a plaintiff must establish (1) a misrepresentation or omission, (2) of a material fact, (3) made with scienter, (4) justifiably relied on by plaintiffs, and (5) proximately causing them injury. See Aschinger v. Columbus Showcase Co., 934 F.2d 1402, 1409 (6th Cir. 1991). We conclude that the pleadings permit a strong inference that defendants engaged in securities fraud concerning their statements about the Balanced Budget Act and its adverse impact on Vencor's business. Because we also find that these statements cannot fit within the statutory safe harbor, we REVERSE in part the judgment of the district court and REMAND for further proceedings.
56 Plaintiffs have alleged a class period of February 10, 1997, until October 21, 1997. During this time, defendants made numerous statements concerning the Balanced Budget Act and its effect on Vencor's business. In its quarterly and annual reports filed with the Securities and Exchange Commission, Vencor stated that it could not gauge the impact of the legislation as it progressed through Congress. At the same time, the company projected fourth-quarter earnings of $0.59 to $0.64 per share and yearly returns between $2.10 to $2.20 for 1997 and $2.60 to $2.65 for 1998. According to plaintiffs, Vencor told analysts that it was comfortable with these figures as late as September 25, 1997, nearly seven weeks after the Balanced Budget Act was signed into law. These statements were forward-looking within the meaning of the PSLRA in that they reflected predictions about earnings, revenue, and future economic performance. See 15 U.S.C. § 78u-5(i)(1). Plaintiffs urge that Vencor's professed inability to assess the impact of the Budget Act was a statement of then-present fact. Even as a statement of existing condition, however, these statements were forward-looking in that they concerned assumptions underlying or relating to economic predictions. 15 U.S.C. § 78-5(i)(1)(D). Therefore, all of defendants' earnings projections and statements about the Balanced Budget Act qualify as forward-looking. As such, defendants are liable only if the statements were material; if defendants had actual knowledge that the statements were false or misleading; and if the statements were not identified as forward-lookingor lacked meaningful cautionary language. See 15 U.S.C. § 78u-5(c)(1). 2 57 1. Materiality--Defendants would dismiss their optimistic projections and internal estimates as soft, puffing statements that are immaterial as a matter of law. There is support for the proposition that sales figures, forecasts and the like only rise to the level of materiality when they can be calculated with substantial certainty. James v. Gerber Prod. Co., 587 F.2d 324, 327 (6th Cir. 1978). Yet we do not agree that Vencor's estimates of strong earnings were so uncertain or casually disregarded by the marketplace. In the context of the Budget Act--whose form and effect the company denied knowing until seven weeks after its passage--the projections were framed as material reassurances of continued good fortune. As one securities commentator puts the point: 58 Arguably, matters that are not material because they are not so probable or relevant as to be required to be disclosed in a particular context may be material if information about them is stated falsely or misleadingly in communications that are not otherwise required to be made. If, by assumption, there is no need to make the statement, a volunteered false statement about the future is more likely to be uttered to serve the speaker's purpose, and pro tanto may be misleading, than a failure to make any statement about the future. 59 Victor Brudney, A Note on Materiality and Soft Information Under the Federal Securities Laws, 75 Va. L. Rev. 723, 750 (1989). 60 The Supreme Court has endorsed a fact-intensive test of materiality in securities fraud cases. Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988). Specifically, materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information. Id. Basic involved a company's denials of preliminary merger negotiations, which were in fact on-going. A panel of our court reversed summary judgment for the defendant company, holding that once a statement is made denying the existence of any discussions, even discussions that might not have been made material in absence of the denial are material because they make the statement made untrue. Levinson v. Basic Inc., 786 F.2d 741, 749 (6th Cir. 1986). On appeal, the Supreme Court rejected this standard of materiality, 3 explaining that in order to prevail on a Rule 10b-5 claim, a plaintiff must show that the statements were misleading as to a material fact. It is not enough that a statement is false or incomplete, if the misrepresented fact is otherwise insignificant. Basic, 485 U.S. at 238. Though Basic did not address earnings forecasts or projections, see id. at 232 n.9, 108 S. Ct. 978, we find its articulation of the basic policies underlying securities regulation applicable here as well: There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy. Id. at 230, 108 S. Ct. 978 (quoting H. R. Rep. No. 1383, at 11 (1934)). The Court added that it repeatedly has described the fundamental purpose of the Act as implementing a philosophy of full disclosure. Id. (citation and internal quotations omitted). 61 In this case, it cannot be said that Vencor's preliminary appraisals and internal assessments of the Balanced Budget Act were material solely by virtue of their omission. As discussed infra, plaintiffs have alleged facts to produce a strong inference that defendants knew that the Budget Act could adversely affect their operations. Yet defendants simply rested on their disavowals of knowledge while continuing to make favorable earnings predictions. We conclude that there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available. Id. at 231-32, 108 S. Ct. 978 (citation omitted). Thus, this information cannot be deemed immaterial within the meaning of the PSLRA. 15 U.S.C. §78u-5(c)(1)(A)(ii). 62 2. Actual Knowledge of Misleading or False Nature--Defendants claim that the Balanced Budget Act was a moving target until it was signed, subject to committee compromise and negotiation, and that its complexity and impact were impossible to assess until long after it was enacted. As Vencor maintains, Defendants did come to a reasonably certain conclusion that the impact of the [Balanced Budget Act] would be negative. But there are no facts suggesting that this occurred even a day earlier than October 22, 1997. The thrust of defendants' argument is not that they were surprised or caught unprepared for the Budget Act on October 22, 1997, the day Vencor announced lower earnings and triggered a nearly thirty percent decline in its stock. Rather, Vencor asserts that any assessment of the act before that time was tentative and did not require disclosure. 63 Vencor's claimed inability to assess the adverse impact of the Budget Act is plausible--but only to a point. As the legislation progressed through Congress, this protestation of ignorance became increasingly hollow. In their second-quarter 10-Q filing, defendants reiterated that [m]anagement cannot predict whether such proposals will be adopted or if adopted, what effect, if any, such proposals would have on its business. This was filed July 25, 1997, one month after budget bills had passed both the House of Representatives and the Senate, fifteen days after a committee conference was held, and six days before the final bill was cleared for the President's signature. On or about September 25, plaintiffs allege that Earl Reed, executive vice president and chief financial officer of Vencor, and Bruce Lunsford, executive vice president and chief executive officer, informed analysts that Vencor was still comfortable with favorable earnings per share figures made before the Budget Act, which was by then seven weeks old. 4 Yet by August 5, if not before, the form of the legislation had become fixed and its impact measurable. 64 These predictions and opinions contain at least three implicit factual assertions: (1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement. Schneider v. Vennard (In re Apple Computer Sec. Litig.), 886 F.2d 1109, 1113 (9th Cir. 1989). When defendants disclaimed any ability to predict health care legislation, while persisting in favorable earnings estimates even seven weeks after enactment of the Budget Act, Vencor was representing that it knew of no way the Budget Act could adversely affect its operations. 5 However, plaintiffs point out numerous red flags that warned Vencor of impending problems in the industry. As early as April 1997, Thomas A. Scully, president of the Federation of American Health Systems, testified before the Senate Finance Committee on the Budget Act. In describing the effect of the legislation on his organization's members, which included Vencor, he explained, [W]e are concerned about both the level of cuts and the direction of many of the policies included in the President's Budget. Am. Compl. ¶ 49, J.A. 122. 65 As previously noted in section I.2 above, plaintiffs have alleged that Executive Vice President Barr told Transitional Hospitals employees in June 1997 that they would be laid off because of the impact of the Budget Act and the tough times coming that were going to make it difficult for Vencor to make money and stay profitable. Vencor now explains that Barr's reference to Medicare cutbacks was limited to Vencor's hospital operations, which defendants claim comprised only 20 percent of the company's revenues. What Barr intended by his warning is not an issue we are prepared to resolve at this stage. For now, we note only that Vencor knew of tough times ahead for at least some of its operations. 66 Also as noted above, plaintiffs state that defendants sold nearly a quarter million shares from July to September 1997, yielding proceeds of $9.5 million. Defendant Reed alone sold more than $3 million in stock in mid-September, after passage of the Budget Act but before Vencor released its revised earnings estimates. This amount was substantial enough to attract the attention of the financial media. Vencor told inquiring analysts that Reed was selling stock simply to retire a personal loan. Whether this explanation is accurate is not an issue we can decide on the pleadings. See Mayer v. Mylod, 988 F.2d 635, 639 (6th Cir. 1993) (explaining, in reversing dismissal of a securities fraud complaint alleging deceptive corporate statements, [w]hether the statements here were true or false is not an issue to be decided under Rule 12(b)(6)). We observe only that third- party analysts regarded Reed's sales as disproportionate. 67 These allegations suggest that it was obvious that the impact of the Balanced Budget Act would be adverse to Vencor before October 22, 1997. A health care executive whose organization represented Vencor testified before Congress about his concerns in April. The timing of Vencor's estimates and purported myopia concerning the Budget Act, when compared against the progress of the legislation through Congress, indicates that defendants consciously disregarded the warning signs of health care cutbacks. Certain defendant executives even acknowledged that tough times were ahead for at least part of the company and sold millions of dollars in stock after the act was signed but before prices plummeted. We have previously compared the common law requirements for fraud to a showing of scienter under federal securities laws.Mansbach, 598 F.2d at 1024. Though the comparison is not exact, it is instructive as to the allegations in this case. 68 A defendant who asserts a fact as of his own knowledge or so positively as to imply that he has knowledge, under the circumstances when he is aware that he will be so understood when he knows that he does not in fact know whether what he says is true, is found to have intent to deceive, not so much as to the fact itself, but rather as to the extent of his information. 69 Prosser and Keaton on Torts 741-42 (5th ed. 1984) (citations omitted). On the basis of these allegations, we conclude that plaintiffs have produced a strong inference that defendants persisted in making favorable predictions and feigning ignorance of the Budget Act with actual knowledge that their statements were misleading. 70 3. Not Identified as Forward-Looking / Absence of Meaningful Cautionary Statements--Though defendants described their predictions as forward-looking in the 1996 10-K, other SEC filings and press releases during the class period lacked this designation. Moreover, the first- and second-quarter 10-Q filings contained only a generic disclaimer of knowledge about whether such proposals will be adopted or if adopted, what effect, if any, such proposals would have on its business. The safe harbor provision, in contrast, requires that defendants identify important factors that could cause actual results to differ materially from those in the forward-looking statements. 15 U.S.C. § 78u-5(c)(A)(i). While the Conference Committee explained that a company need not list all factors, the legislative history makes clear that boilerplate warnings will not suffice . . . . The cautionary statements must convey substantive information about factors that realistically could cause results to differ materially from those projected in the forward-looking statements, such as, for example, information about the issuer's business. H.R. Conf. Rep. No. 104-369, at 43 (1995). 71 The safe harbor was designed to encourage company disclosure of future plans and objectives by removing the threat of liability. H.R. Conf. Rep. No. 104-369, at 45 (1995). In crafting it, Congress drew on the judicially created bespeaks caution doctrine, which states that beliefs about future statements which turn out to be incorrect are not actionable under Section 10(b) if the statements contain sufficient cautionary language. Mayer, 988 F.2d at 639. As the Eleventh Circuit observed, In short, when an investor has been warned of risks of a significance similar to that actually realized, she is sufficiently on notice of the danger of the investment to make an intelligent decision about it according to her own preferences for risk and reward. Harris v. IVAX Corp., 182 F.3d 799, 807 (11th Cir. 1999). 72 According to the plaintiffs, that is not what happened here. In its 1996 10-K filing, dated March 27, 1997, Vencor described proposals for healthcare reform and specifically warned that its projections could differ from actual results due to possible legislation, cost-containment measures, problems in state licensure, and difficulties in integrating acquired entities. Yet as the Budget Act neared enactment and as the warning signs flared, Vencor's precautions grew more cursory and abstract. In its first- and second-quarter filings of 1997, the company stated only that it could not predict the form, effect, or likelihood of any proposed legislation. Substantially similar language also appeared in Vencor's 10-K filings from 1995, 1994, and 1993. In applying the bespeaks caution doctrine, we have noted that cautionary statements must be substantive and tailored to the specific future projections, estimates, or opinions . . . which the plaintiffs challenge. Charal v. Royal Appliance Mfg. Co., No. 94-3284, 1995 U.S. App. LEXIS 24626, at  (6th Cir. Aug. 15, 1995) (unpublished disposition) (quoting In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 371-72 (3d Cir. 1993)). Vencor's blanket statements concerning pending legislation offered investors no guidance about the consequences of health care reform upon the company's business. These statements were not meaningful and were hardly even cautionary. Accordingly, they are not sheltered by the safe harbor provided by the PSLRA. 73 Defendants rely on a line of cases preceding the PSLRA that holds that a company need not disclose soft information to the investing public. This type of information is defined only by its uncertainty: predictions, matters of opinion, and asset appraisals have all been regarded in this Circuit as soft. See Murphy v. Sofamor Danek Group, Inc., 123 F.3d 394, 401 (6th Cir. 1997); Starkman v. Marathon Oil Co., 772 F.2d 231, 241 (6th Cir. 1985). Hard information, in contrast, is typically historical or other factual information that is objectively verifiable. Sofamor Danek, 123 F.3d at 401 (quotingGarcia v. Cordova, 930 F.2d 826, 830 (10th Cir. 1991)). In Sofamor Danek, this court recognized that our cases firmly establish the rule that soft information . . . must be disclosed only if ... virtually as certain as hard fact. Id. at 402 (quotingStarkman, 772 F.2d at 241). 74 Sofamor Danek involved alleged misrepresentations and omissions by a company that manufactured and marketed spinal implant devices. According to the complaint, which was dismissed prior to the enactment of the PSLRA, the defendant corporation failed to disclose that it was promoting its devices for unauthorized use and that it was making improper sales of loaner kits to hospitals. Plaintiffs claimed securities fraud, alleging that these omissions, along with related misstatements, artificially elevated the company's stock price. A panel of this court affirmed dismissal, explaining that this information did not give rise to a duty to disclose. The court noted that a warning letter from the United States Food and Drug Administration concerning defendant's practices was available to analysts and that the company had stated publicly its premium prices for hospital loaner kits. According to the court, the significance of this already public information--the warning letter and the loaner kit charges--was a matter of opinion and did not require further explanation by the company. Id. 75 Starkman also featured allegations of securities fraud. There, a shareholder of Marathon Oil sued the company for not disclosing merger negotiations with U.S. Steel. According to the complaint, the defendant did not divulge asset appraisals and earnings projections prepared in connection with a friendly tender offer. These figures, according to the plaintiff, would have informed his decision whether to sell his shares or await a higher price. A panel of this court affirmed summary judgment for the defendant, concluding that a tender offer target must disclose projections and asset appraisals based upon predictions regarding future economic and corporate events only if the predictions underlying the appraisal or projection are substantially certain to hold. Starkman, 772 F.2d at 241. 76 Defendants maintain that their statements concerning the Balanced Budget Act are not actionable because they qualify as soft information under the non-disclosure rules of Starkman and Sofamor Danek. This conclusion is mistaken because these cases are inapposite. In Sofamor Danek, the information claimed as adverse to the company had already been disclosed and was publicly available to permit an independent assessment by investors and analysts. And Starkman was a case about non-disclosure. This case, in contrast, is about selective disclosure of information known exclusively to defendants and essential to complete a picture they had only partially revealed. While it is true that silence, absent a duty to disclose, is not misleading under Rule 10b-5, Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988), Vencor here did not maintain its silence. Defendants' segue from non-disclosure to non-actionability overlooks the fact that they had already volunteered much soft information. 77 Under Starkman and Sofamor Danek, it is true that defendants had no independent duty to divulge their internal appraisals of the Budget Act, a comprehensive study that plaintiffs allege began in April and was completed by July. Nor do we disagree that the non-disclosure cases survive the Reform Act. But the protections for soft information end where speech begins. Though forward-looking statements may contain soft information, they do not themselves constitute soft information; thus, public revelation cannot partake of the shelter under Starkman. In fact, the argument defies application: how can a rule of non-disclosure apply to a company's disclosure? If--as defendants contend--the protection for soft information remains intact even after a company speaks on an emerging issue, the speaker could choose which contingencies to expose and which to conceal. On any subject falling short of reasonable certainty, then, a company could offer a patchwork of honesty and omission. This proposition is untenable, however, both as a matter of policy and precedent. 78 On the facts of Starkman, a corporation that chooses to divulge uncertain estimates must also inform the shareholders as to the basis for and limitations on the projected realizable values. Starkman, 772 F.2d at 241. In Rubin v. Schottenstein, we elaborated on the idea that, even absent a duty to speak, a party who discloses material facts in connection with securities transactions assume[s] a duty to speak fully and truthfully on those subjects. Rubin v. Schottenstein, 143 F.3d 263, 268 (6th Cir. 1998) (en banc). There, a lawyer touted his client's securities to prospective investors, failing to mention the company's banking default. When the company filed for bankruptcy, the investors sued it as well as the lawyer for securities fraud. Sitting en banc, we disagreed with the panel majority opinion that had found no duty of disclosure under Rule 10b-5. Concluding that the lawyer was under a duty not to omit material facts, we noted: 79 In sum, while an attorney representing the seller in a securities transaction may not always be under an independent duty to volunteer information about the financial condition of his client, he assumes a duty to provide complete and non-misleading information with respect to subjects on which he undertakes to speak. 80 Id. 81 Contrary to the way in which the district court and panel majority framed the issue, the question in this case is not whether Vencor had a duty to divulge its internal assessments of the Balanced Budget Act. Rather, the question is whether the company had a duty to complete the information already given concerning the Budget Act and earnings estimates. Though the Reform Act does not impose a duty to update, see 15 U.S.C. § 78u-5(d), and we do not decide today whether such an obligation exists, 6 we at least require an actor to provide complete and non-misleading information with respect to the subjects on which he undertakes to speak. Rubin, 143 F.3d at 268. The characterization of opinions and projections as soft is beside the point in this case. Again, the question here is not the duty to speak but liability for not having spoken enough. In Rubin, we quoted the pithy observation of the Seventh Circuit that under Rule 10b-5 . .. the lack of an independent duty does not excuse a material lie. Id. (quoting Ackerman v. Schwartz, 947 F.2d 841, 848 (7th Cir. 1991)). With regard to future events, uncertain figures, and other so-called soft information, a company may choose silence or speech elaborated by the factual basis as then known--but it may not choose half-truths. 82 Vencor points to policy reasons against disclosure of information that has not achieved reasonable certainty. See, e.g.,Searls v. Glasser, 64 F.3d 1061, 1067 (7th Cir. 1995) (Before management releases estimates to the public, it must ensure that the information is reasonably certain. If it discloses the information before it is convinced of its certainty, management faces the prospect of liability.) (internal citations omitted). This point is well-taken. It would seem that extending Rubin to situations involving contingent events such as predicting the effect of legislation on a business may subject corporations to liability or deter them from alerting investors. However, a company should not be allowed to bolster its stock price by predicting rosy earnings while knowing, as plaintiffs allege here, that legislation is nearing its finals stages that could capsize those projections. As we have recognized previously, Material statements which contain the speaker's opinion are actionable under Section 10(b) of the Securities Exchange Act if the speaker does not believe the opinion and the opinion is not factually well-grounded. Mayer, 988 F.2d at 639. 83 Thus, it appears that the need for information in the name of completeness can conflict with the need to incubate uncertain data and avoid liability. These competing interests are reconciled in the Reform Act. If a company chooses to speak on an uncertain subject--as here, when Vencor claimed an inability to assess the Budget Act while simultaneously issuing flush earnings estimates--it cannot duck liability by pointing to the soft nature of the information it volunteered. It may, however, find refuge in the safe harbor of the Reform Act, provided that the statutory requirements are met. Here, we find they were not.
84 Having concluded that defendants' statements concerning the Balanced Budget Act are outside the statutory safe harbor, we now ask whether plaintiffs have alleged sufficient facts to state a cause of action for securities fraud. Because we find plaintiffs to have produced a strong inference that defendants made projections and disavowed the impact of the Balanced Budget Act with actual knowledge that their statements were misleading, a fortiori plaintiffs have produced a strong inference that defendants acted recklessly in their statements and omissions concerning earnings estimates and the Budget Act. As to these allegations, then, plaintiffs have met the pleadings standards of the Reform Act. 15 U.S.C. § 78u-4(b)(1)-(2).
85 The dissent is out of bounds in relying upon this Circuit's soft information cases. The dissent has challenged the writer of this opinion, claiming an inconsistency between what is said here and what he wrote in Starkman v. Marathon Oil Co., a case decided ten years before the PSLRA was passed. Though we find the result here to be consistent with Starkman, we do not view that case as controlling or even especially relevant to the matter at hand. Starkman was an attempt by this court before the PSLRA to strike a balance between optimal disclosure of facts and permissive withholding of corporate prospects. In 1995, Congress re-calibrated that balance by passing the Reform Act. It is that Act, not Starkman, that we must apply now. 86 Applying the PSLRA, it is clear that the earnings estimates are forward-looking statements within the definition of 15 U.S.C. § 78u-5(i)(1). The dissent would characterize the unidentified contingencies affecting these projections--such as the company's awareness of the Budget Act--as soft information that need not be disclosed. Yet this soft information designation appears nowhere in the Reform Act. On the contrary, the PSLRA compels disclosure of such limiting assumptions by conditioning availability of the statutory safe harbor upon inclusion of meaningful cautionary statements. Here, according to the complaint, Vencor issued strong, optimistic projections but suppressed additional data that it believed would mean tough times for the company. Plaintiffs have alleged that the company unveiled a bleak picture for certain employees while painting a rosy picture for the public. As with the other elements required for securities fraud, plaintiffs are entitled to prove these alleged statements and omissions upon remand. 87 The dissent has a second line of attack: simply brush aside plaintiffs' allegations as immaterial. This strategy is equally unconvincing. As the Supreme Court has noted, the issue of materiality is a mixed question of law and fact. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976) (defining materiality under the proxy rules of the Securities Exchange Act of 1934). Courts generally reserve such questions for the trier of fact. See, e.g., EP Medsystems Inc. v. Echocath, Inc., 235 F.3d 865, 875 (3d Cir. 2000); Simon DeBartolo Group v. Richard E. Jacobs Group, Inc., 186 F.3d 157, 172 (2d Cir. 1999). At this stage in the proceedings, a complaint may not properly be dismissed . . . on the ground that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their unimportance. Ganino v. Citizens Util. Co., 228 F.3d 154, 162 (2d Cir. 2000) (emphasis added) (quoting Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985)); see also EP Medsystems, 235 F.3d at 875. 88 Accusing us of sleight-of-hand, the dissent states that we have turn[ed] the question from whether future earnings were capable of being calculated with substantial certainty to whether there was a substantial certainty that the [Budget] Act, if enacted, would have any adverse effect on Vencor's business. Dissent at 3-4. Yet it is the dissent that clouds the issue by pursuing a secondary line of inquiry. Materiality is about marketplace effects, not just mathematics. The question is not whether the earnings were precisely calculable--rather, the question is whether those projections, when viewed against the backdrop of the Budget Act, were significant to the reasonable investor. 89 In Basic v. Levinson, the Supreme Court stated the common sense principle that materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information. Basic, 485 U.S. at 240. To be sure, the faith an investor would place in a company's statement--and hence, its materiality--depends in part on whether given figures can be calculated with reasonable certainty. Starkman, 772 F.2d at 241; James v. Gerber Prod., 587 F.2d 324, 327 (6th Cir. 1978). But the Supreme Court has drawn the test more broadly than the numbers alone, holding that materiality is evidenced by a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available. Basic, 485 U.S. at 231-32 (citation omitted). The instant case involves favorable estimates issued despite imminent health care reform, whose adverse impact defendants long denied knowing. Even Starkman--the case the dissent relies so heavily upon--requires disclosure of any information that would qualify such uncertain estimates and projections. Cf. Starkman, 772 F.2d at 241 (If a target chooses to disclose projections and appraisals which do not rise to this level of certainty, then it must also inform the shareholders as to the basis for and limitations on the projected realizable values.). The dissent's conclusory observation that defendants' statements were somehow immaterial simply overlooks what a potential investor in Vencor would have wanted to know. 90 The dissent insists that any data Vencor possessed concerning the Budget Act was likewise immaterial. In essence, the dissent offers a syllogism that any study of the Budget Act was tentative, that tentative information is soft, that soft information is immaterial, and that immaterial information need not be disclosed--thus, Vencor's study need not be disclosed. But this assumes the very conclusion by positing that Vencor's knowledge of the Budget Act was somehow tentative or preliminary. The dissent states that [t]here is absolutely no indication that the form or the effect of the Act was objectively verifiable when Vencor made its projections. Dissent at 5. Yet that is the whole thrust of plaintiffs' case: that Vencor had reliable information concerning the adverse effect of health care legislation, as proposed and later passed, before the company announcement of lower earnings in October and that its firing of employees in anticipation of the Budget Act belied its rosy projections to the public. 91 Finally, the dissent claims it is unsure of what we have held. We think today's ruling is fairly clear: a company may remain silent about estimates, projections, and preliminary data until the fullness of time and additional detail permit confident disclosure. If, however, the company chooses to make projections and issue estimates despite the uncertainty of that information, the Reform Act then controls the elective disclosure. At that point, the company cannot duck liability by pointing to the 'soft' nature of the information it volunteered. It may, however, find refuge in the safe harbor of the Reform Act, provided that the statutory requirements are met. Supra p. 562. Among those requirements is the inclusion of meaningful cautionary statements. 15 U.S.C. §78u-5(c)(1)(A)(i). This is entirely consistent with our requirement that an actor speak fully and truthfully when making a voluntary disclosure. Rubin, 143 F.3d at 268. See also Kowal v. MCI Communications Corp., 16 F.3d 1271, 1277 (D.C. Cir. 1994) (Statements of opinion or forward-looking statements such as projections, estimates or forecasts are considered 'statements of fact' for the purposes of the securities laws. As such, while a company is generally under no obligation to disclose its expectations for the future to the investing public, if the company chooses to volunteer such information, its disclosure must be full and fair, and courts may conclude that the company was obliged 'to disclose additional material facts . . . to the extent that the volunteered disclosure was misleading . . . .') (citations omitted). 92 Rather than confront plaintiffs' allegations that Vencor spoke partially and misleadingly, the dissent attempts to re-characterize the facts. According to the dissent, defendant Barr's alleged statement to outgoing employees of tough times ahead in the industry was only commiseration, not analysis. We think a fact-finder might regard this as more than an oddly detailed, prescient expression of sympathy. As for allegations of insider stock sales, the dissent finds that plaintiffs have made no allegation that the amount sold by defendants was not in line with prior practices. Dissent at11. We would note that the amended complaint clearly alleges otherwise, with accompanying charts. See Am. Compl. ¶ 12, J.A. 98. The point is not that one account of events is right and one is wrong--that determination awaits further findings. The point is that plaintiffs are entitled to prove their case, having at least produced a strong inference of securities fraud. Fact-splitting is hardly persuasive or appropriate considering the Rule 12(b)(6) posture of this case.