Court Opinion

ID: 3019216
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:20:34.105676+00
Date Added: 2024-06-11T11:47:15.020117
License: Public Domain

United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT
                                    ___________

                                    No. 96-1559
                                    ___________

Ari Parnes; Deborah Slyne; Corey           *
Emert; Faye Martin Anderson; Edward        *
R. Pepper, on behalf of themselves and     *
all others similarly situated,             *
                                           *
                Appellants,                *
                                           *   Appeal from the United States
        v.                                 *   District Court for the
                                           *   District of South Dakota.
Gateway 2000, Inc.; Theodore W.            *
Waitt; Richard D. Snyder; James            *
Cravens; George H. Krauss; Douglas L. *
Lacey; Norman W. Waitt, Jr.,               *
                                           *
                Appellees.                 *
------------------------------             *
                                           *
Faye Martin Anderson, on behalf of         *
herself and all others similarly situated, *
                                           *
                Appellant,                 *
                                           *
        v.                                 *
                                           *
Gateway 2000, Inc.; Theodore W.            *
Waitt; Richard D. Snyder; James            *
Cravens; George H. Krauss; Douglas L. *
Lacey,                                     *
                                           *
                Appellees.                 *
                                     ___________

                           Submitted: December 12, 1996
                               Filed: August 8, 1997
                                   ___________

Before McMILLIAN and MAGILL,1 Circuit Judges, and WEBBER,2 District Judge.
                           ___________

MAGILL, Circuit Judge.

    The Plaintiffs are individual investors3 who purchased
Gateway 2000, Inc. (Gateway) stock soon after the stock
was publicly offered. The stock subsequently decreased
in value after Gateway revealed disappointing earnings,
and the Plaintiffs brought this securities fraud suit
against Gateway and Gateway's corporate officers,

      1
       The Honorable Frank J. Magill was an active judge at the time this case was
submitted and assumed senior status on April 1, 1997, before the opinion was filed.
      2
       THE HONORABLE E. RICHARD WEBBER, United States District Judge for
the Eastern District of Missouri, sitting by designation.
      3
         The Plaintiffs are Ari Parnes, who purchased 50 shares of Gateway common
stock after December 7, 1993, and before June 23, 1994; Deborah Slyne, who
purchased 300 shares of Gateway common stock during the same period; Corey Emert,
who purchased 200 shares of Gateway common stock during the same period; Faye
Martin Anderson, who purchased 500 shares of Gateway common stock during the
same period; Craig Langweiler, who purchased 200 shares of Gateway common stock
during the same period; and Edward R. Pepper, who purchased 7000 shares of
Gateway common stock during the same period. The Plaintiffs sought certification as
a class, but this motion was denied as moot by the district court when it dismissed their
complaint. See Mem. Op. and Order I at 17.

                                          -2-
directors, and principal shareholders (Defendants).4                            The
Plaintiffs allege that the

      4
       The Plaintiffs also brought suit against Goldman Sachs & Co. and Painewebber,
Inc., which underwrote Gateway's offer of stock to the public. The Plaintiffs' claims
against the underwriters were voluntarily dismissed without prejudice on January 17,
1995.

                                         -3-
Defendants violated securities laws by misrepresenting
facts in Gateway's prospectus, registration statement,
and other company communications and by committing fraud
on the market.      The district court5 dismissed the
Plaintiffs' complaint for failure to state a claim and
for failure to plead fraud with sufficient particularity.
After dismissal, the Plaintiffs sought leave to file an
amended complaint, which the district court denied. The
Plaintiffs now appeal, and we affirm.

                                         I.

      Gateway, founded in 1985 by Theodore Waitt and
Michael Hammond, is a South Dakota-based manufacturer and
direct marketer of personal computers.        Gateway was
initially created as a Subchapter S corporation, and the
bulk of Gateway's stock was held by Theodore Waite and his
brother Norman.    The company grew dramatically between
1985 and 1993, reaching sales of more than a billion
dollars per year.6 On

      5
      The Honorable John B. Jones, United States District Judge for the District of
South Dakota.
      6
       In its prospectus, Gateway describes itself as

      the leading direct marketer of personal computers in the United States.
      The Company develops, markets, manufactures and supports a product
      line of IBM-compatible desktop, notebook and subnotebook PCs for use
      by businesses, individuals, government agencies and educational
      institutions. On October 1, 1993, the Company entered the European
      market with the opening of a facility in Dublin, Ireland. Founded in 1985,
      Gateway 2000 has sold over 1.3 million PCs and has increased its net
      sales from approximately $11.8 million in 1988 to over $1.5 billion for the
      twelve months ended September 30, 1993.

                                         -4-
December 7, 1993, Gateway became a public corporation and,
pursuant to a registration statement and prospectus,
offered stock to the public.

    While expressing confidence in its likely continued
growth, see Prospectus (Dec. 7, 1993) at 6, Gateway's
prospectus contains a variety of warnings to prospective
investors. The prospectus explains that,

      [a]lthough the Company anticipates significant
      growth in the future, it does not expect its
      growth to continue at the rates previously
      experienced. The Company's operating results for
      the fourth quarter of 1993 are expected to
      reflect the growth historically experienced by
      the Company in its fourth quarters, although not
      necessarily at the rates previously experienced.

Prospectus at 3.   In addition, the front cover of the
prospectus contains, in bold type, a reference to "Risk
Factors."    The text of the prospectus includes a
description of sixteen risk factors. These risk factors
include:

      Short Product Life Cycles

          To maintain its competitive position in the
      PC industry, the Company must continue to
      introduce new products and features that address
      the needs and preferences of its target consumer
      markets.   The PC industry is characterized by
      short product life cycles resulting from rapid
      changes in technology and consumer preference and
      declining product prices. In 1993, the Company

Prospectus (Dec. 7, 1993) at 3.

                                  -5-
has   introduced   numerous  new   products   and
features. There can be no assurance that these
products or features will be successful, that the
introduction of new products or features by the
Company or its competitors will not materially
and adversely affect the sale of the Company's
existing products or that the Company will be
able to adapt to future changes in the PC
industry. . . .

                       -6-
Management of Growth

    From   its   inception,   the  Company   has
experienced a rapid rate of growth. Although the
Company attempts to forecast growth accurately,
the Company has experienced, and may continue to
experience, problems with respect to the size of
its work force and production facilities and the
adequacy of its management information systems
and inventory controls.      These problems can
result in a high backlog of product orders and
delays in customer service and support. . . .

Potential for Fluctuating Operating Results

    The PC industry generally has been subject to
seasonality and to significant quarterly and
annual fluctuations in operating results.     The
Company's operating results are also subject to
such fluctuations. Fluctuations can result from
a wide variety of factors affecting the Company
and its competitors, including new product
developments or introductions, availability of
components, changes in product mix and pricing
and product reviews and other media coverage. . .
.

Potential Liability for Sales, Use or Income Taxes

    The Company does not collect or remit sales
and use taxes with respect to its sales in any
state other than the State of South Dakota, where
its physical plant and employees are located. It
does not pay income taxes in any state (South
Dakota currently has no corporate income tax) and
pays franchise taxes only to Delaware and South
Dakota.    Taxing authorities in certain other
states have solicited information from the
Company to determine whether the Company has
sufficient contacts with such states as would
require payment of income taxes or collection of

                       -7-
sales and use taxes from customers in those
states. The Company has not paid any such income
or sales and use taxes for any prior period, nor
has it established any reserves for payment of
such taxes. The Company believes that any amount
it might ultimately be required to pay for prior
periods would not have a material adverse impact
on its results of operations or financial
condition, but there can be no assurance that
there would not be such an effect.

                      -8-
        In the future, the Company may be required to
    collect sales and use taxes or to pay state
    income and franchise taxes in states other than
    South Dakota.     Although any requirement to
    collect sales or use taxes in the future could
    negatively affect the Company's sales, the
    Company believes the collection of such taxes
    would not have a material adverse effect on the
    Company's results of operations or financial
    condition. However, there can be no assurance
    that there would not be such an effect. . . .

    Absence of Public Market and Possible Volatility
    of Stock Price

        There has been no public market for the
    Common Stock prior to the Offerings, and there
    can be no assurance that a significant public
    market for the Common Stock will develop or will
    continue after the Offerings. The market price
    for the Company's Common Stock may be highly
    volatile. The Company believes factors such as
    product announcements by the Company, or its
    competitors or suppliers, or quarterly variances
    in financial results could cause the market price
    of the Common Stock to fluctuate substantially.
    . . .

Prospectus at 7-10.

    Gateway offered 11.7 million shares of stock at a
price of $15 per share.      Roughly half of the income
generated by the stock sales was distributed to the Waite
brothers, in part to satisfy Gateway-related tax
liabilities. In the months that followed, Gateway stock
climbed to a high of $24-3/4 price per share.

                           -9-
    The fourth quarter results of 1993, which were
announced on February 10, 1994, showed $545.9 million in
revenues, an increase of 36% over the third quarter of
1993 and 54% over the fourth quarter of 1992. The first
quarter of 1994 showed $615.9 million in revenues, but a
decline in per share earnings. Following the announcement
of the decline in earnings, price per share of Gateway
stock dropped from $20-7/16 to $15-1/2. The earnings per
share dropped again during the second quarter of 1994, and
the price of Gateway stock plummeted to $9-1/4 per share
on June 23, 1994. The

                           -10-
announced reasons for Gateway's reduced earnings included
product transitions, unanticipated sales mix, and
technical problems with a new line of portable computers.
To address these problems, the company took cash reserves
and wrote-down against inventory and accounts receivables
of $20 million.

    Between June 27, 1994, and July 1, 1994, the
Plaintiffs filed three identical class-action complaints
against the Defendants. The actions were consolidated in
the district court, and the Plaintiffs were given leave to
file an amended complaint.7    In count I of the amended
complaint, the Plaintiffs allege violations by the
Defendants of Section 11 of the Securities Act of 1933,
codified at 15 U.S.C. § 77k (misrepresentation or omission
of a material fact in a registration statement) (Section
11). In count II of the amended complaint, the Plaintiffs
allege a violation by the Defendants of Section 12(2) of
the Securities Act of 1933, codified at 15 U.S.C. § 77l
(misrepresentation or omission of material fact in a
prospectus or communication) (Section 12(2)). In count
III of the amended complaint, the Plaintiffs allege a
violation by the Defendants of        Section 15 of the
Securities Act of 1933, codified at 15 U.S.C. § 77o
(liability for controlling persons) (Section 15).       In
count IV of the amended complaint, the Plaintiffs allege
a violation by the Defendants of Section 10(b) of the
Securities Exchange Act of 1934, codified at 15 U.S.C. §
78j, and SEC Rule 10b-5 (fraudulent security transaction)

      7
        The district court ordered that the record in this case be sealed, and the parties'
briefs were filed under seal. See Clerk's Order (July 19, 1996) at 1. The parties have
agreed that the briefs no longer need to be sealed. Accordingly, we order that the briefs
in this case be unsealed.

                                           -11-
(Section 10(b) and Rule 10b-5). In count V of the amended
complaint, the Plaintiffs allege a violation by the
Defendants of Section 20(a) of the Securities Exchange Act
of 1934, codified at 15 U.S.C. § 78t (liability for
controlling persons) (Section 20(a)).

    As the basis for these assertions, the Plaintiffs
allege--based almost exclusively on information and
belief--that the Defendants engaged in a variety of
wrongdoing to

                           -12-
artificially inflate the price of Gateway stock.       The
Plaintiffs contend that in Gateway's prospectus the
Defendants: (1) overstated earnings in 1993 and 1994 by
failing to adequately reserve for uncollectible accounts
receivable, failing to make adequate reserves for product
returns, and failing to write down inventories in a timely
fashion; (2) misrepresented Gateway's prospect for growth;
(3) misrepresented the existence and extent of obsolete
and defective inventories; (4) misrepresented that
Gateway's reserves for doubtful accounts receivable were
adequate, thereby overstating Gateway's assets by at least
$6.8 million; (5) misrepresented the quality of Gateway's
new portable computers, which suffered from malfunctioning
track-balls and malfunctioning power supplies; (6)
misrepresented    serious   deficiencies    of   Gateway's
purchasing and inventory control systems, management
information and order systems, and management and
forecasting procedures; and (7) misrepresented Gateway's
obligations to pay sales taxes to states other than South
Dakota.

    In addition, the Plaintiffs allege that the Defendants
committed fraud by meeting with and misleading security
analysts and by issuing press releases, broker's reports,
an Annual Report, and a first quarter report which were
misleading.     The Plaintiffs also allege that the
individual defendants who controlled Gateway Service
Corporation (GSC) had GSC purchase Gateway products at
inflated prices, thereby artificially inflating Gateway's
profits.

    The district court issued two decisions disposing of
this case. The first decision dismissed the Plaintiffs'

                           -13-
first amended complaint. Following this dismissal, the
Plaintiffs filed Federal Rules of Civil Procedure 59(e)
and 60(b) motions, and sought to file another amended
complaint. The district court's second decision denied
the Plaintiffs' Rules 59(e) and 60(b) motions and denied
the Plaintiffs' motion to amend their first amended
complaint after dismissal.

    In dismissing the Plaintiffs' first amended complaint,
the district court held that all of the Plaintiffs'
allegations of fraud failed to state the circumstances of
fraud with

                           -14-
sufficient particularity to satisfy Federal Rule of Civil
Procedure 9(b).    The district court accordingly struck
count IV of the Plaintiffs' complaint, which alleged
Section 10(b) and Rule 10b-5 violations.     The district
court further held that, based on the bespeaks caution
doctrine, most of the of the alleged misrepresentations
were immaterial as a matter of law, and that liability
could therefore not attach. The district court also held
that a failure to discount $6.8 million from a company
with assets of $343,769,000 and earnings of $68,645,000
was not material as a matter of law. The district court
therefore dismissed count II of the complaint, which
alleged Section 11 violations, pursuant to Federal Rule of
Civil Procedure 12(b)(6) for failure to state a claim.

    The district court originally dismissed count I of the
complaint, which alleged Section 11 violations, because
the    Plaintiffs   failed    to    refer   to    material
misrepresentations or omissions in the registration
statement, but instead referred only to the prospectus.
In its second decision, the district court held that, even
if this was an improper basis for dismissing count I, the
district court would have dismissed count I because all of
the alleged misrepresentations were immaterial.8

       8
         The Plaintiffs argue, and we agree, that the district court erred in dismissing
count I for the Plaintiffs' failure to refer specifically to Gateway's registration statement
in their complaint. The Defendants have acknowledged that Gateway's prospectus was
filed as part of its registration statement, see Appellees' Br. at 3, and the Plaintiffs'
reference in their complaint to the prospectus necessarily referred to the registration
statement as well. As is discussed below, however, we affirm the district court's
dismissal of count I on the alternative basis provided in the district court's second
memorandum decision.

                                            -15-
    Because the Section 10(b), Rule 10b-5, Section 11, and
Section 12(2) counts had been dismissed, the district
court also dismissed counts III and V, which alleged
controlling person liability under Section 15 and Section
20(a), for failure to state a claim.

                           -16-
    In its second decision, the district court examined
the Plaintiffs' proposed complaint and determined that the
Plaintiffs' modifications did not save the complaint.
Relying on much the same reasoning as in its first
decision, the district court held that the Plaintiffs had
failed to plead fraud with sufficient particularity to
satisfy Rule 9(b), that the bespeaks caution doctrine
rendered immaterial most of the Defendants' alleged
misrepresentations, and that the Defendants' alleged
failure to discount $6.8 million was immaterial in light
of Gateway's earnings and assets.

    The Plaintiffs now appeal. On appeal, the Plaintiffs
argue that the district court misapplied the bespeaks
caution doctrine when it dismissed the Plaintiffs' Section
11 and Section 12(2) claims for lack of materiality. The
Plaintiffs also argue that materiality is necessarily a
jury question and that the district court erred in ruling
on materiality as a matter of law.       In addition, the
Plaintiffs contend that, because their           complaint
satisfied Rule 9(b)'s particularity requirement, the
district court erred in dismissing their Section 10(b) and
Rule 10b-5 claims. Finally, the Plaintiffs argue that the
district court abused its discretion in dismissing the
complaint with prejudice and in denying the Plaintiffs
leave to amend.

                           II.

                           -17-
    In reviewing a dismissal under Federal Rule of Civil
Procedure 12(b)(6),9 this

    9
     In granting the Defendants' motion to dismiss, the district court considered the
prospectus which accompanied Gateway's December 7, 1993 offer of stock to the
public. See Mem. Op. and Order I at 11. Normally, a district court's decision to
consider matters outside of the pleadings will transform a motion to dismiss for failure
to state a claim into a motion for summary judgment. See Fed. R. Civ. P. 12(b).
However, "[i]n the event that a plaintiff alleges a claim based on a prospectus, as is the
case here, the court may consider the prospectus in ruling on a Rule 12(b)(6) motion
even if the prospectus was not attached to the complaint . . . ." Maywalt v. Parker &
Parsley Petroleum Co., 808 F. Supp. 1037, 1045-46 (S.D.N.Y. 1992) (citing cases); see
also In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 368 n.9 (3d Cir. 1993) ("[A]
court may consider an undisputedly authentic document that a defendant attaches as an
exhibit to a motion to dismiss if the plaintiff's claims are based on the document."
(quotations and citation omitted)).

                                          -18-
Court "is constrained by a stringent standard . . . . A
complaint should not be dismissed for failure to state a
claim unless it appears beyond doubt that the plaintiff
can prove no set of facts in support of his claim which
would entitle him to relief." Fusco v. Xerox Corp., 676
F.2d 332, 334 (8th Cir. 1982) (quotations and citations
omitted). In addition,

    [a] complaint must be viewed in the light most
    favorable to the plaintiff and should not be
    dismissed merely because the court doubts that a
    plaintiff will be able to prove all of the
    necessary factual allegations.       Thus, as a
    practical matter, a dismissal under Rule 12(b)(6)
    is likely to be granted only in the unusual case
    in which a plaintiff includes allegations that
    show on the face of the complaint that there is
    some insuperable bar to relief.

Id. (quotations and citations omitted).

     To present a cognizable claim for securities fraud,
a   plaintiff   must   allege   that   a  defendant   made
misrepresentations that were material.        See Hillson
Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204,
208-09 (4th Cir. 1994).     Accordingly, a complaint that
alleges only immaterial misrepresentations presents an
"insuperable bar to relief," Fusco, 676 F.2d at 334
(quotations omitted), and dismissal of such a complaint is
proper.

    The Plaintiffs argue that the district court erred in
determining the materiality of the Defendants' alleged
misrepresentations as a matter of law, because materiality

                           -19-
is necessarily a factual question for a jury to decide.
We disagree.

                         -20-
    A misrepresentation or omission is material if 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." Basic Inc. v. Levinson, 485
U.S. 224, 231-32 (1988) (quotations and citations
omitted). In many circumstances, of course, this presents
a factual question for a jury to decide. See, e.g., In re
Control Data Corp. Sec. Litig., 933 F.2d 616, 621 (8th
Cir. 1991) ("Determination of whether a misrepresentation
would have the effect of defrauding the market and
inflating the stock price is a jury question. The trier
of fact is uniquely competent to determine materiality, as
that inquiry requires delicate assessments of inferences
a reasonable investor would draw from a given set of
facts."   (citations and quotations omitted)).     Where a
reasonable investor could not have been swayed by an
alleged misrepresentation, however, a court may determine,
as a matter of law, that the alleged misrepresentation is
immaterial. See, e.g., Hillson, 42 F.3d at 211.

    There are a variety of reasons why an alleged
misrepresentation or omission may, as a matter of law, be
immaterial. Some matters are such common knowledge that
a reasonable investor can be presumed to understand them.
Id. at 213-14 ("It is not a violation of any securities
law to fail to disclose a result that is obvious even to
a person with only an elementary understanding of the
stock market." (quotations and citations omitted)). For
example, "[a]s a general matter, investors know of the
risk of obsolescence posed by older products forced to
compete with more advanced rivals.           '[T]echnical
obsolescence of computer equipment in a field marked by

                           -21-
rapid technological advances is information within the
public domain.'"    In re Convergent Technologies Sec.
Litig., 948 F.2d 507, 513 (9th Cir. 1991) (quoting In re
Seagate Tech. II Sec. Litig., Fed. Sec. L. Rep. (CCH) ¶
94,502 at 93,202 (N.D. Cal. 1989) (parentheses omitted)).

    Alleged misrepresentations may also present or conceal
such insignificant data that, in the total mix of
information, it simply would not matter to a reasonable
investor.

                           -22-
In this case, the district court concluded, and we agree,
that the Defendants' alleged overstatement of assets by
$6.8 million was immaterial as a matter of law. Taken in
context, this amount represented only 2% of Gateway's
total assets. It seems clear that a reasonable investor,
faced with a high-risk/high-yield investment opportunity
in a company with a history of very rapid growth, would
not have been put off by an asset column that was 2%
smaller. While there may certainly be many cases where
this amount of money would be material and would
dramatically affect the total mix of information relied on
by a reasonable investor, this simply is not the situation
in this case.

    Furthermore, some statements are so vague and such
obvious hyperbole that no reasonable investor would rely
upon them. "The role of the materiality requirement is
not to attribute to investors a childlike simplicity but
rather to determine whether a reasonable investor would
have considered the omitted information significant at the
time." Hillson, 42 F.3d at 213 (quotations and citation
omitted). The Hillson court explained that "soft, puffing
statements generally lack materiality because the market
price of a share is not inflated by vague statements
predicting growth. No reasonable investor would rely on
these statements, and they are certainly not specific
enough to perpetrate a fraud on the market." Id. at 211
(citations and quotations omitted); see also Lasker v. New
York State Elec. & Gas Corp., 85 F.3d 55, 59 (2d Cir.
1996) (per curiam) (statements that a company would not
"compromise its financial integrity," had a "commitment to
create earnings opportunities," and that these "business
strategies would lead to continued prosperity" were

                           -23-
"precisely the type of puffery that this and other
circuits have consistently held to be inactionable."
(quotations omitted)); Searls v. Glasser, 64 F.3d 1061,
1066 (7th Cir. 1995) (Use of phrase "recession-resistant"
"is simply too vague to constitute a material statement of
fact. . . . It is a promotional phrase used to champion
the company but is devoid of any substantive information.
Just as indefinite predictions of 'growth' are better
describe as puffery rather than as material statements of
fact, describing a company as 'recession-resistant' lacks
the requisite specificity to be considered anything but
optimistic rhetoric. Its lack of

                           -24-
specificity precludes it from being deemed material; it
contains no useful information upon which a reasonable
investor would base a decision to invest." (citation
omitted)).

    The Plaintiffs' complaint is filled with allegations
that precisely these types of "puffing" statements made by
the Defendants in Gateway's prospectus and other
communications were misrepresentations. For example, the
Plaintiffs allege that the Defendants' projection in
Gateway's   prospectus   of   "significant   growth"   was
misleading. See Am. Compl. at 38, 44-45. As the Fourth
Circuit has explained,

    Predictions on future growth . . . will almost
    always prove to be wrong in hindsight.       If a
    company predicts twenty-five percent growth, that
    is simply the company's best guess as to how the
    future will play out. As a statistical matter,
    twenty percent and thirty percent growth are both
    nearly as likely as twenty-five.       If growth
    proves less than predicted, buyers will sue; if
    growth   proves   greater,  sellers   will   sue.
    Imposing liability would put companies in a
    whipsaw, with a lawsuit almost a certainty. Such
    liability would deter companies from discussing
    their prospects, and the securities markets would
    be deprived of the information those predictions
    offer. We believe that this is contrary to the
    goal of full disclosure underlying the securities
    laws, and we decline to endorse it.

Raab v. General Physics Corp., 4 F.3d 286, 290 (4th Cir.
1993). Accordingly, any misrepresentation regarding the

                           -25-
Defendants'   prediction   of     "significant   growth"   is
immaterial.

    Finally, a defendant's alleged misrepresentations or
omissions may be immaterial as a matter of law if
accompanied by sufficient cautionary statements.       The
"bespeaks caution doctrine," created by this Court in
Polin v. Conductron Corp., 552 F.2d 797, 806 n.28 (8th
Cir. 1977), and recently reaffirmed in Moorhead v. Merrill
Lynch, 949 F.2d 243, 245-46 (8th Cir. 1991), provides that

                           -26-
    when an offering document's forecasts, opinions
    or projections are accompanied by meaningful
    cautionary   statements,   the   forward-looking
    statements will not form the basis for a
    securities fraud claim if those statements did
    not affect the "total mix" of information the
    document provided investors.    In other words,
    cautionary language, if sufficient, renders the
    alleged    omissions    or    misrepresentations
    immaterial as a matter of law.

In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 371
(3d Cir. 1993).    The cautionary language must "relate
directly to that by which plaintiffs claim to have been
misled." Kline v. First Western Gov't Sec., Inc., 24 F.3d
480, 489 (3d Cir. 1994); see also Virginia Bankshares,
Inc. v. Sandberg, 501 U.S. 1083, 1097 (1991) (noting that
"not every mixture with the true will neutralize the
deceptive. If it would take a financial analyst to spot
the tension between the one and the other, whatever is
misleading will remain materially so, and liability should
follow.").

    A dismissal of a securities fraud complaint under Rule
12(b)(6) should be granted under the bespeaks caution
doctrine only where "the documents containing defendants'
challenged statements include enough cautionary language
or risk disclosure that reasonable minds could not
disagree that the challenged statements were not
misleading." Fecht v. Price Co., 70 F.3d 1078, 1082 (9th
Cir. 1995) (citations and quotations omitted) (emphasis in
original), cert. denied, 116 S. Ct. 1422 (1996).

    In this case, the district court properly dismissed
the Plaintiffs' Section 11 and Section 12(2) claims,

                           -27-
contained in counts I and II of the Plaintiffs' complaint,
because the Defendants' cautionary statements rendered
immaterial all of their alleged misrepresentations. "We
can say that the prospectus here truly bespeaks caution
because, not only does the prospectus generally convey the
riskiness of the investment, but its warnings and
cautionary language directly address the substance of the
statement[s] the plaintiffs challenge." In re Trump, 7
F.3d at 372.

                           -28-
    For example, in their complaint, the Plaintiffs argue
that the Defendants misrepresented Gateway's obligations
to pay sales taxes to states other than South Dakota.
While never asserting that Gateway was liable for, or
actually paid, non-South Dakota sales taxes prior to the
December 7, 1993 public offering of stock, the Plaintiffs
allege that the Defendants had entered into negotiations
with various states regarding Gateway's obligations to pay
non-South Dakota sales taxes. See Am. Compl. at 43.10 In
Gateway's prospectus, the Defendants specifically warned
that "[t]axing authorities in certain other states have
solicited information from the Company to determine
whether the Company has sufficient contacts with such
states as would require payment of income taxes or
collection of sales and use taxes from customers in those
states.    The Company has not . . . established any
reserves for payment of such taxes. . . . In the future,
the Company may be required to collect sales and use taxes
or to pay state income and franchise taxes in states other
than South Dakota."     Prospectus at 9.     Clearly, any
reasonable investor would be on notice that Gateway faced
potential state tax liability for states other than South
Dakota, and could not have been misled by the prospectus
to believe that Gateway did not face such potential
liability.

    Similarly, the Plaintiffs' allegation that the quality
and desirability of Gateway's portable computer products
was misrepresented does not constitute a material

      10
        At oral argument, the Defendants represented that, during the first quarter of
1994, well after the December 7, 1993 public offering of stock, Gateway entered into
an agreement with various states to pay non-South Dakota sales taxes.

                                        -29-
misrepresentation in light of the Defendants' cautionary
statements. The Defendants went to great lengths to warn
potential investors that, due to the nature of a volatile
industry, new product lines of computers represent a risky
venture.    See id. at 7. Specifically referencing the
"numerous new products and features" that Gateway
introduced in 1993, the prospectus warned that "[t]here
can be no assurance that these products or features will
be successful . . . ." Id. In light of this explicit
cautionary statement, no reasonable investor could have
been misled that Gateway's new portable

                           -30-
products, which represented a small fraction of Gateway's
total sales, were anything but a risky venture.

    Furthermore, the Defendants provided explicit warnings
which render immaterial the alleged misrepresentations
regarding Gateway's obsolete and defective inventories,
deficiencies in Gateway's purchasing and inventory control
systems, management information and order systems, and
management and forecasting procedures.           Gateway's
prospectus advised that, "[a]lthough the Company attempts
to   forecast   growth   accurately,   the   Company   has
experienced, and may continue to experience, problems with
respect to the size of its work force and production
facilities and the adequacy of its management information
systems and inventory controls. These problems can result
in a high backlog of product orders and delays in customer
service and support. . . ." Id. Any reasonable investor
apprised of these warnings would not be misled to believe
that Gateway did not face potential problems in these
areas.

    Only by discarding common sense and ignoring the
multitude of explicit and on-point warnings contained in
Gateway's prospectus could investors have been misled by
the misrepresentations allegedly made by the Defendants in
Gateway's prospectus. Because a reasonable investor would
not   have   ignored   such   warnings,    these   alleged
misrepresentations are immaterial as a matter of law.11

      11
        Relying on Gustafson v. Alloyd Co., 115 S. Ct. 1061 (1995), the Defendants
argue, for the first time on appeal, that relief under Section 11 and Section 12(2) is
unavailable to those who purchase stock from the open market rather than directly from
a company at a public offering. Because the Plaintiffs did not allege that they

                                        -31-
                                        III.

    The Plaintiffs argue that the district court erred in
dismissing their Section 10(b) and Rule 10b-5 claims,
contained in count IV of their complaint, for the
Plaintiffs' failure to plead fraud with sufficient
particularity. We disagree.

    Federal Rule of Civil Procedure 9(b) provides that
"[i]n all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with
particularity.    Malice, intent, knowledge, and other
conditions of mind of a person may be averred generally."
In   the   context   of   securities    litigation,   this
particularity requirement serves three purposes:

      First, it deters the use of complaints as a
      pretext for fishing expeditions of unknown wrongs
      designed to compel in terrorem settlements.
      Second,   it    protects   against    damage   to
      professional     reputations    resulting    from
      allegations of moral turpitude.        Third, it
      ensures that a defendant is given sufficient
      notice of the allegations against him to permit
      the preparation of an effective defense.

Weisburgh v. St. Jude Med., Inc., 158 F.R.D. 638, 642 (D.
Minn. 1994), aff'd, 62 F.3d 1422 (8th Cir. 1995)
(unpublished) (per curiam).

purchased the stock from Gateway during the public offering, the Defendants argue that
the Plaintiffs have failed to state a cognizable claim. Because we affirm the district
court's dismissal of the Plaintiffs' complaint on other grounds, we decline to consider
this argument.

                                         -32-
    This Court has explained that, for Rule 9(b),
"'[c]ircumstances' include such matters as the time, place
and contents of false representations, as well as the
identity of the person making the misrepresentation and
what was obtained or given up thereby. . . . [C]onclusory
allegations that a defendant's conduct was fraudulent and
deceptive are not sufficient to satisfy the rule."
Commercial Property Invs., Inc. v. Quality Inns Int'l,
Inc., 61 F.3d 639, 644 (8th Cir. 1995) (quotations and
citations omitted); see also DiLeo v. Ernst & Young, 901
F.2d 624, 627 (7th Cir. 1990) ("[T]he circumstances
[constituting fraud] must be pleaded in detail.       This
means the who, what, when, where, and how: the first
paragraph of any newspaper story. None of this appears in
the complaint, although the flood of information released
about Continental

                           -33-
Bank since 1984 offers ample fodder if there is indeed a
tale to tell." (quotations omitted)); Bennett v. Berg, 685
F.2d 1053, 1062 (8th Cir. 1982) ("The location of other
allegedly false statements is said to be a 'pamphlet,'
'promotional material,' or a 'typical life-care contract.'
These allegations are not sufficiently particular to
satisfy Rule 9(b)." (footnote omitted)), superseded and
reinstated in relevant part on rehearing en banc, 710 F.2d
1361 (8th Cir. 1983); In re Lifecore Biomedical, Inc.
Sec. Litig., 159 F.R.D. 513, 516 (D. Minn. 1993) (Rule
9(b) requires that "the complaint must allege the time,
place, speaker and sometimes even the content of the
alleged misrepresentation."). Where "allegations of fraud
are explicitly or, as in this case, implicitly, based only
on information and belief, the complaint must set forth
the source of the information and the reasons for the
belief." Romani v. Shearson Lehman Hutton, 929 F.2d 875,
878 (1st Cir. 1991).

    We agree with the district court that the Plaintiffs'
complaint is entirely lacking in the particularity
required by Rule 9(b). For example, the Plaintiffs allege
that:

    In an effort to boost Gateway's earnings and
    thereby increase the marketability of Gateway
    stock, the Controlling Shareholders caused
    [Gateway Service Corporation] to purchase $6
    million of product from Gateway at prices far in
    excess of their fair market value, which had a
    material favorable effect on Gateway's razor-thin
    net   margins.     Likewise,   [Gateway   Service
    Corporation] sold Gateway $4 million of products
    and services at lower than fair market value in
    a similar attempt to improve Gateway's financial
    performance in advance of the Offering.         A

                           -34-
    significant   amount    of   these    fraudulent
    transactions took place in the third quarter of
    1993, artificially boosting Gateway's unaudited
    financials just prior to the Offering.

Am. Compl. at 41.

    This allegation of fraud is simply not particularized.
Plaintiffs fail to identity      the goods and services
allegedly purchased and sold by Gateway at deflated and
inflated

                           -35-
prices.   The Plaintiffs fail to allege the amount of
fraudulent profit allegedly obtained by Gateway. Although
the Plaintiffs declare that a total of $10,000,000 in
goods and services were bought and sold, the Plaintiffs
fail to provide the source for the gross amounts they
allege. The Plaintiffs provide the barest clue as to when
the alleged fraud took place, and the Defendants are left
to guess which controlling shareholders were responsible
for this alleged fraud. Neither this nor the Plaintiffs'
other allegations of fraud meet Rule 9(b)'s particularity
requirements, and the district court properly struck
them.12

                                          IV.

    Finally, the Plaintiffs argue that the district court
erred in dismissing their complaint with prejudice and
denying them leave to amend their complaint after its
dismissal. We disagree.

    Although a motion to amend a complaint should be
freely given under Federal Rule of Civil Procedure 15(a),
"different considerations apply to motions filed after
dismissal." Humphreys v. Roche Biomedical Lab., Inc., 990
F.2d 1078, 1082 (8th Cir. 1993).     The Humphreys court
explained that:

      12
        Because the Plaintiffs presented no actionable claim for violation of Section 11,
Section 12(2), Section 10(b), or Rule 10b-5, the claims for controlling person liability
were also properly dismissed. See Van Dyke v. Coburn Enter. Inc., 873 F.2d 1094,
1100 (8th Cir. 1989) (Section 15); Deviries v. Prudential-Bache Sec., Inc., 805 F.2d
326, 329 (8th Cir. 1986) (Section 20(a)).

                                          -36-
After a complaint is dismissed, the right to
amend under Fed.R.Civ.P. 15(a) terminates. Leave
to amend may still be granted, but a district
court does not abuse its discretion in refusing
to allow amendment of pleadings to change the
theory of a case if the amendment is offered
after summary judgment has been granted against
the party, and no valid reason is shown for the
failure to present the new theory at an earlier
time.

                      -37-
Id. (quotations and citations omitted).

    The Plaintiffs in this case have failed to provide any
valid reason for failing to amend their complaint prior to
the grant of summary judgment against them. Accordingly,
we conclude that the district court did not abuse its
discretion in denying them leave to amend their complaint
after it had been dismissed under Rule 12(b)(6).

                            V.

    While it is unfortunate that the Plaintiffs in this
case lost money in their investments, their misfortune
alone does not create a viable cause of action.       "The
federal securities laws should not be mistaken for
insurance against risky investments; the federal reporters
are replete with failed attempts to do just that.
Securities laws protect investors against fraud; they do
not provide investors with a recourse against unsuccessful
management strategies." Searls v. Glasser, 64 F.3d 1061,
1069 (7th Cir. 1995). As the district court noted, Judge
Frank Easterbrook's description of the litigation in
another case succinctly and accurately describes the
instant case as well:

    The story in this complaint is familiar in
    securities litigation.    At one time the firm
    bathes itself in a favorable light. Later the
    firm discloses that things are less rosy. The
    plaintiff contends that the difference must be
    attributable to fraud. "Must be" is the critical
    phrase, for the complaint offers no information
    other than the differences between the two
    statements of the firm's condition. Because only
    a fraction of financial deteriorations reflects

                           -38-
fraud, Plaintiffs may not proffer the different
financial statements and rest.    Investors must
point   to  some   facts  suggesting   that  the
difference is attributable to fraud.

                      -39-
DiLeo, 901 F.2d at 627 (quoted in part at Mem. Op. and
Order II at 14). The Plaintiffs in this case have simply
failed to produce an actionable complaint. Accordingly, we
affirm the district court's dismissal of their claims
against the Defendants.

    A true copy.

        Attest:

             CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

                           -40-