Court Opinion

ID: 6998556
Source: CourtListenerOpinion
Date Created: 2022-07-24 03:37:49.991612+00
Date Added: 2024-06-11T16:09:40.410040
License: Public Domain

KENNEDY, Circuit Judge,
dissenting.
According to the majority, plaintiffs have alleged sufficient facts that Vencor knowingly made false or misleading statements to overcome the Private Securities Litigation Reform Act’s heightened pleading standards. Because the majority fails to identify any material statements that defendants knew were false or misleading and adopts an excessively expansive view of the phrase “strong inference,” I must respectfully dissent.
It is not entirely clear to me what the majority has held. At some points, it appears it is holding that management’s statements that it could not predict the effect of the Balanced Budget Act were false. At others, it appears the majority concludes that management’s projections *567were misleading because they did not include additional information about the effect the Act might have on Vencor’s revenue. Whether the majority’s holding includes one or both of these conclusions, I think it incorrect.
I. Materiality
According to the majority, this is not a case about failure to disclose. Rather, it asserts, this is a case about selective disclosure. Under this Circuit’s precedent, it concludes, once a corporation begins to speak, the corporation must disclose information such as the effect of yet to be enacted legislation on its revenue. Specifically, the majority points to Rubin v. Schottenstein, 143 F.3d 263, 268 (6th Cir.1998) (en banc), as establishing that “a party who discloses material facts in connection with securities transactions ‘assume[s] a duty to speak fully and truthfully on those subjects.’ ” (emphasis added). Maj. Op. at 561. Therefore, it concludes, Vencor was required to disclose any internal reports relating to the potential effect of the Balanced Budget Act. To begin, I do not believe the majority has provided a persuasive argument under its reading of our cases. But more importantly, I believe that the majority’s reading of our case law is not supported by the opinions they rely on, but instead, it establishes a new principle which contradicts prior cases in this Circuit.
I do not believe the statements the majority identifies as misleading are material nor do I believe the information Vencor omitted is material under established securities law. In reviewing Vencor’s motion, we are entitled to take into account documents referred to in the pleadings, something the majority did not do. See 11 James Wm. Moore Et Al., Moore’s Federal Practice § 56.30[4] (3d ed.1998).
The majority identifies three statements Vencor made that it believes Vencor knew were false or misleading. One, in Vencor’s financial filings, specifically its 1997 second quarter 10 Q filing, for the period of April 1, 1997 to June 30, 1997, it stated it could not predict whether the Balanced Budget Act would be enacted and what effect such proposals, if enacted, would have. Two, the complaint alleges that Vencor spoke with analysts and projected fourth quarter earnings for 1997 and earnings for all of 1998. And three, according to the complaint, Vencor’s management informed analysts in September of 1997 that it was “comfortable” with the earnings projections made by analysts prior to the enactment of the Budget Act. See Maj. Op. at 554. It bears emphasis that the analysts’ report included in the joint appendix does not say management said it was comfortable with the projections; rather it says “management comfortable,” J.A. at 856, with the estimates, which could very well be the analysts’ understandings of management’s statements. Nevertheless, these were all misleading, according to the majority, because management failed to disclose predictions about the impact of the Balanced Budget Act on Vencor’s revenue.

A Statements Made

As the majority points out, if a statement is immaterial, it is not actionable. See 15 U.S.C. § 78u-5 (c)(l)(A)(ii); see also 17 C.F.R. § 240.10b-5(b). “Material representations must be contrasted with statements of subjective analysis or extrapolations, such as opinions, motives and instructions, or general statements of optimism, which ‘constitute no more than puf-fery and are understood by reasonable investors as such.’ ” EP Medsystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 873 (3d Cir.2000) (quoting In re Advanta Corp. Securities Litig., 180 F.3d 525, 538 (3d *568Cir.1999)). “[A] CEO’s expression of ‘comfort’ with a financial analyst’s predictions of his company’s future earnings [is] not ... factual in that, as a future projection, it [is] not capable of being proved false.” Longman v. Food Lion, Inc., 197 F.3d 675, 683 (4th Cir.1999) (citing Malone v. Microdyne Corp., 26 F.3d 471, 479-80 (4th Cir.1994)). “[Statements containing simple economic projections, expressions of optimism, and other puffery are insufficient” to attach liability. Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir.2000); see also Friedman v. Mohasco Corp., 929 F.2d 77, 79 (2d Cir.1991). Like these circuits, we have held 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).
That management’s statements have to be material to be actionable is only tangentially addressed by the majority. According to the majority, it does not believe that “Vencor’s strong estimates of stronger earnings were so uncertain or casually disregarded by the marketplace” as to make the projections immaterial. Maj. Op. at 555. Of course, the question is not whether the projections were “so uncertain,” but rather, whether they were capable of being calculated with substantial certainty. I do not believe there is any indication that they were substantially certain and the majority points to no information to persuade me otherwise. Instead, it nimbly turns the question from whether estimates were capable of being calculated with substantial certainty to whether there was a substantial certainty that the Act, if enacted, would have any adverse effect on Ven-cor’s business. This is disingenuous. That the Act may have an adverse effect does not mean that estimates were capable of being calculated with substantial certainty. If anything, the fact that a bill was before Congress which, if enacted, would potentially have an impact on Vencor’s revenues makes estimates more uncertain. And Vencor made investors aware of this by informing them that management’s projections did not include the effect of the Act with its statement that it could not predict the effect of the Act. The majority never answers the question of whether information existed to calculate future earnings with substantial certainty. Nor does it suggest how a statement that the projection does not purport to take into account proposed legislation is false because it does not take that legislation into account.
Even if there was such information, it would not make material all the statements the majority identifies. Two of the statements-the statement of comfort and the statement regarding the Act-are not earnings estimates made by Vencor’s executives. The majority does not explain why these statements are material. Nor can I, as I believe they are not. I am at a loss for how an executive’s statement that he is comfortable with another’s projections is material. As the Fourth Circuit observed, such statements are incapable of being proven false, and, consequently, incapable of being material. See Longman, 197 F.3d at 683. The term comfortable in that context is vague; a reasonable investor would not rely on it. The report plaintiffs rely on, moreover, does not say that management said it was comfortable with the report. Accordingly, it is not material. Likewise, management’s statement in its second quarter 10-Q filing for 1997 that it could not predict the form or effect of the Balanced Budget Act is not material. Like earnings estimates, such statements concern predictions of future events and thus are evaluated under the same standard. It should be kept in mind that two of the four proposals that plaintiffs believed would adversely affect Vencor were *569not passed. The President had initiated a number of unsuccessful attempts to institute Medicare reform, moreover. All these factors added to the uncertainty of the Act’s form or passage this time around. The district court was entitled to take judicial notice of these facts when deciding the issue.

B. Information Omitted

More importantly, I think, the information the majority claims should have been disclosed — internal analyses by management of the Act’s effect — is immaterial. Our case law clearly establishes that such information need not be disclosed. In In re Sofamor Danek Group, Inc., 123 F.3d 394, 402 (6th Cir.1997), we held that a company does not have a duty to disclose soft information. “[0]ur cases firmly establish the rule that soft information ... must be disclosed only if ... virtually as certain as hard facts.” Id. (quoting Starkman v. Marathon Oil Co., 772 F.2d 231, 241 (6th Cir.1985)). Hard information is “typically historical information or factual information that is objectively verifiable.” Id. The reason for this distinction is that soft information is immaterial. See Starkman, 772 F.2d at 239-41.
The effect of the Act on Vencor’s revenue is undeniably soft information. There is absolutely no indication that the form or the effect of the Act was objectively verifiable when Vencor made its projections, which the majority seems to admit. “On any subject falling short of reasonable certainty, then, a company could offer a patchwork of honesty and omissions.” Maj. Op. at 560. But the majority finds “untenable ... both as a matter of policy and precedent,” Maj. Op. at 560-61, that information that is not reasonably certain- — that is, information that is by definition immaterial — need not be disclosed. In its mind, “the protections for soft information end where speech begins.” Maj. Op. at 560. Indeed, according to the majority, the argument “defies application: how can a rule of non-disclosure apply to a company’s disclosure?” Maj. Op. at 560. The answer is simple: exactly as § 78u-5(c)(A)(ii) says it does. Under that section, a forward-looking statement is not actionable to the extent that it is immaterial. 15 U.S.C. § 78u-5(c)(A)(ii). If a statement is not actionable, what principled reason is there for requiring disclosure?
The majority’s reliance on Rubin to answer this question is unfounded. According to the majority, in Rubin we established that an executive “assumes a duty to provide complete and non-misleading information with respect to subjects on which he undertakes to speak.” Maj. Op. at 561. That characterization omits the important restriction on the disclosure requirement. If the majority had gone one line further in the Rubin opinion, it would have realized that duty applies only to material information. “Having concluded that [the defendants] were under a duty not to misrepresent or omit material facts in connection with the proposed investment. ...” Rubin, 143 F.3d at 268 (emphasis added). The facts omitted in Rubin were hard facts relating to the transaction — by definition material. Hence, they were required to be disclosed. Here the information at issue is soft information- — • by definition immaterial- — and therefore management was not required to disclose it. Our precedent and § 78u-5(c)(A)(ii) make this clear.
The principle espoused by the majority contradicts our position previous to today’s ruling. For, as Judge Merritt states in Starkman, “we begin ... with the basic proposition that only material facts — those substantially likely to affect the deliberations of the reasonable shareholder — must be disclosed, and then only if the nondis*570closure of the particular material facts would make misleading the affirmative statements otherwise required by the federal securities laws and SEC regulations.” Starkman 772 F.2d at 238. The majority’s attempt to distinguish Starkman as a “case about non-disclosure,” Maj. Op. at 560, from this case which it says is about selective disclosure, is not supported by the facts of Starkman. In beginning his opinion in Starkman, Judge Merritt writes,
There are three public statements by Marathon management at issue here. First, Marathon’s November 11, 1981, press release, which states, in pertinent part that:
Our Board of Directors has determined that Mobil Corporation’s unsolicited tender offer is grossly inadequate. The offer is not in the best interests of Marathon Oil or its shareholders. It doesn’t reflect current asset values and it doesn’t permit the long-term investor the opportunity to participate in the potential values that have been developed.
Starkman argues that the failure of any of these communications to disclose the Strong and First Boston and the five-year earnings and cash flow projections constituted an omission of material facts....
Starkman, 772 F.2d at 236. In Ms opinion here, Judge Merritt begins by identifying the statements made by Vencor’s executives. “During [the class period], defendants made numerous statements concerning the Balanced Budget Act and its effect on Vencor’s business.” Maj. Op. at 554. He then concludes that these statements were misleading because Vencor did not “complete the information already given concerning the Budget Act and earnings estimates.” Maj. Op. at 561. In my opinion, the issue in Starkman is the same as the issue here. It is not a question of whether a company can selectively disclose material information — -it cannot. Rather it is a question of whether a company that makes statements on a matter is required to disclose immaterial information. Our precedent says no. I do not understand why the majority now says yes.1
II.
While the above analysis is sufficient to demonstrate that the outcome the majority *571reaches today is incorrect, I feel it necessary to point out a few other troubling principles the majority establishes.

A. Analysts’ Statements

The first of these principles is the majority’s implicit holding — -it does not discuss the question in any detail but such a conclusion is necessary to its decision— that Vencor may be liable for statements made by analysts. Specifically, analysts’ statements that management was comfortable with their projections. Our Circuit has not addressed the issue of whether a company’s executives can be liable for statements of analysts, and while the majority opinion makes clear they can, it does little to explain why and how. As the majority gives no explanation, I suggest that the Second Circuit’s position on the matter is persuasive.
In our original panel decision, relying on In re Time Warner, Inc., Securities Litig., 9 F.3d 259, 265 (2d Cir.1993), we held “a corporation cannot be held responsible for analysts’ statements about the corporation’s financial health unless the corporation takes more affirmative action than simply providing information to analysts.” Helwig v. Vencor, 210 F.3d 612, 620-21 (6th Cir.2000). Plaintiffs, in their briefs before this en banc panel, argue that holding oversimplified the Second Circuit’s position. According to plaintiffs, the Second Circuit allows liability to attach when (1) management intentionally fostered a mistaken belief concerning a material fact that was incorporated into a report or (2) management adopted the report. I do not quarrel with that statement of Second Circuit law nor do I think it inconsistent with what we originally said. The complaint says that the analysts’ report attributes statements to individuals; however, the text of the report makes clear that it does not. Nor does the report say that management even said it was comfortable with the projections. Rather, the report says, “Management comfortable with EPS [estimates] .... We have been in contact with the company this week to review our models.” J.A. at 856. Because the report does not indicate with whom the analysts spoke and does not attribute the statement to management, I do not think that the complaint meets the pleading requirement under the Second Circuit case law. See Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir.2000). As we said in the original panel opinion, analysts do not just regurgitate what management tells them, rather they do just what their title suggests: they analyze.

B. Strong Inference

Adoption of the reports and the materiality of the statements and omissions aside, the majority has not convinced me that plaintiffs have alleged facts giving rise to a strong inference that management knew the statements were false or misleading. According to the majority, Ven-cor’s statements were false or misleading because, “[w]hen defendants disclaimed any ability to predict health care legislation, while persisting in favorable earnings estimates seven weeks after the enactment of the Budget Act, Vencor was representing that it knew of no way the Budget Act could adversely affect its operations.” Maj. Op. at 557.
I do not think that is a precise statement of the facts and, moreover, I find that conclusion to be quite a leap. Management statements concerning the legislation were made on July 25, 1997, before the conference committee report was released on July 29 and before the legislation was signed into law on August 5, 1997.2 *572The conclusion by analysts regarding management’s feelings, which they did not attribute to any particular executive, was made on September 25, 1997. Even had they occurred at the same time, I hardly think that an appropriate reading of them is that Vencor was representing it knew of no way the Budget Act could adversely affect its operations. The only reasonable reading would be that, just as it said, Vencor was not certain of the effect— positive or negative — of the Act and therefore had not included the Act in its projections.
Proceeding from this more reasonable reading of the statements, I do not think the allegations to which the majority points give rise to a strong inference that management actually knew its statements were false or misleading. The majority points to three allegations in the complaint: (1) that in April of 1997, the president of the Federation of American Health Systems testified that the members of his organization, which included Vencor, were concerned about the effects the legislation might have, (2) “Barr told employees in June of 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,’ ” Maj. Op. at 557, and (3) that Reed sold three million dollars worth of stock.
As an initial matter, I do not believe the majority’s statement of the occasion at which Barr spoke, accurately conveys what the complaint alleges. According to the complaint, Barr met with employees of Transitional, a company recently acquired by Vencor, who were being laid off for reasons unrelated to the Budget Act. “Barr told [the employees] that they probably would have been laid off anyway because the proposed Medicare regulations were going to make it difficult for Vencor to make money and stay profitable.” J.A. at 130. Having cleared that up, I do not think that statement can be reasonably said to give rise to a strong inference. The statement is not the product of a reasoned report or analysis. Rather, the statement is from an executive attempting to let unhappy employees down easy. Similarly, that the president of an organization to which Vencor belonged testified in April of 1997 that its members were concerned about some of the proposals in the Bill is of little significance. At that time the final form of the Act was not yet certain — as I noted earlier, the Bill had gone through several changes — and its passage was also uncertain. How then, could Vencor predict what the final version of the Act would look like or how that version would affect its revenue? Finally, I find unconvincing the argument that defendants had actual knowledge of the false or misleading nature of their statements because of their sale of stock. Combined, the defendants’ ownership of stock during the class period decreased by less than five *573percent. See J.A. at 553. Moreover, during the class period, they purchased stock as well. Sale of stock is not evidence of scienter unless it is “unusual in scope or timing.” Oran v. Stafford, 226 F.3d 275, 290 (3d Cir.2000); see also In re Comshare, Inc. Securities Litg., 183 F.3d 542, 553 (6th Cir.1999). Here plaintiffs have made no allegation that the amount sold by defendants was not in line with prior practices. Consequently, the allegations of executive sales do not give rise to a strong inference of actual knowledge. See Oran, 226 F.3d at 290.
For all of the foregoing reasons, I dissent. I concur in the dismissal of the remaining claims.

. Lest there be any doubt that the majority is rejecting the long-standing principle that soft information is immaterial, it says in response to my dissent that Basic, Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) “has drawn the test [of materiality] more broadly” than what the majority characterizes as my test of "numbers alone.” I think the majority misunderstands the basis for — at least what was — this Circuit’s test for materiality. I agree with the proposition that whether information is material depends on whether it is determined that a reasonable investor would find the information important. We make that determination in the context of projections by ascertaining whether the projections are able to be calculated with substantial certainty. If they are not, then we have held that, as a matter of law, no reasonable investor could find the information important. See In re Sofamor Danek Group, Inc., 123 F.3d at 402. That was the test in this Circuit prior to Basic and it remained the test in this Circuit after Basic.
To the extent the majority is suggesting that the Supreme Court's application of the materiality standard in Basic controls our analysis here and does not permit us to hold as a matter of law that soft information is immaterial, I draw the reader’s attention to footnote nine of the Court's opinion which made clear the Court did "not address ... any other kinds of contingent or speculative information, such as earnings or forecasts." Basic, 485 U.S. at 232 n. 9, 108 S.Ct. 978 (emphasis added). This Circuit has continued to use the standard I rely on today well after the Supreme Court's decision in Basic. See In re Sofamor Danek Group, Inc., 123 F.3d at 402.

. The 10-Q warned, "Congress is currently considering various proposals which could re*572duce expenditures under certain government health and welfare programs, including Medicare and Medicaid. Management cannot predict whether such proposals will be adopted or if adopted, what effect, if any, such proposals would have on its business.” J.A. at 285. As indicated, the filing is for the quarter ending June of 1997; the signature sheet, however, is dated July 25, 1997. Thus, the filing was for a period ended almost two months before the conference report was printed and was signed four days prior to the report.
It seems to me that we have to look at the statement in terms of the quarter for which it was intended — the quarter ending June of 1997 — rather than the date on which it was signed. Anyone reading the statement should know that the analysis was made prior to the end of that quarter. The majority completely disregards the fact that the statement in the 10-Q was made in relation to a quarter that ended in June of 1997.