Court Opinion

ID: 9480634
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:54:14.139469+00
Date Added: 2024-06-11T17:47:48.962496
License: Public Domain

BAILEY ALDRICH, Senior Circuit Judge.
This is a class action brought by Irving A. Backman on behalf of himself and all other persons who purchased shares of stock of defendant Polaroid Corporation on the open market between January 11 and February 22, 1979, allegedly misled by defendant’s conduct that violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the regulations promulgated thereunder. Suit was filed in June, 1979. The case came on for trial, on a second amended complaint, in June, 1987, by which time the docket showed 363 entries. The improprieties asserted, both in the complaint and in plaintiffs’ opening to the jury, as responsible for plaintiffs’ purchasing shares before a substantial drop in the market, were defendant’s failure to dis*12close unfavorable facts about its new product, Polavision, an instant movie camera. Following trial on liability, the jury found for plaintiffs. Defendant moved for judgment n.o.v., or, alternatively, for a new trial, but the court denied both motions. On appeal, a divided panel affirmed as to the former, but granted a new trial. On this rehearing en banc we reverse, and order judgment for defendant.
THE FACTS AND THE LAW: PHASE ONE
While we have been surprised before, we have never been so reminded that, no matter how fully expressed, our opinions do not always command response. In their amended complaint plaintiffs alleged that defendant failed to disclose that Polavision, introduced in the spring, had been unprofitable throughout 1978, and would continue so, significantly, at least through 1979; that it had been excessively inventoried and had suffered lagging sales; that little, if any, information had been made public; that defendant knew that this undisclosed information was material to investors, and that major investment research firms had publicly projected defendant’s earnings based on assumptions defendant knew were contrary to the true facts, all of which non-disclosure was in violation of the securities laws.
Secondly, plaintiffs re-alleged the above, and added that over the years defendant had advertised that it was a growth company, and that, through its successes, the investment community had come to consider it the best of the growth companies, and that its failing to make the above disclosures operated as a fraud and deceit on the investing public, was a “fraud on the market,” and constituted an unlawful manipulation thereof.
Defendant moved to dismiss on the ground that the complaint did not state a cause of action. This motion was denied. We have not reviewed the possible correctness of that ruling as of that date, but later it became clearly incorrect. In March, 1987, three months before trial, we decided Roeder v. Alpha Industries, Inc., 814 F.2d 22 (1st Cir.1987). In that case officers of the defendant bribed an employee of a defense contractor in order to obtain a subcontract. When it was learned that its officers were about to be indicted, defendant released that information to the public. Plaintiff brought a class action on behalf of himself and others who had purchased stock on the market following the bribery, but before the announcement, claiming that its non-disclosure was a violation of the securities laws. The district court dismissed, holding that although there was a duty to disclose material facts, there were no material facts to disclose until an indictment became probable, and that, as to this, defendant acted promptly. We affirmed, but rejected the court’s reasoning. Rather, the fact of the bribery itself “reasonable investors might have considered ... to be important information they would want to have before they made their investment decisions.” 814 F.2d at 25. However, mere market interest is no basis for imposing liability. We said, at page 26,
The materiality of the information claimed not to have been disclosed ... is not enough to make out a sustainable claim of securities fraud. Even if information is material, there is no liability under Rule 10b-5 unless there is a duty to disclose it.
A duty to disclose “does not arise from the mere possession of non-public information.” Chiarella v. United States, 445 U.S. 222, 235, 100 S.Ct. 1108, 1118, 63 L.Ed.2d 348 (1980).
Continuing, at pages 27-28,
Roeder claims that a corporation has an affirmative duty to disclose all material information even if there is no insider trading, no statute or regulation requiring disclosure, and no inaccurate, incomplete, or misleading prior disclosures. The prevailing view, however, is that there is no such affirmative duty of disclosure ....
Roeder relies on the “fraud on the market” theory, which has been employed by a number of courts in nondisclosure cases, for his argument that *13there is an affirmative duty to disclose material information to the public, [cit. omitted] Contrary to Roeder’s claim, the fraud on the market theory has nothing to do with an affirmative duty to disclose material information. It only addresses ... reliance_ In every fraud on the market case Roeder cites, there was a duty to disclose because of misleading reports or statements_
In sum, Roeder’s complaint does not allege facts that, if proved, would establish Alpha had a duty to disclose the alleged illegal payments.
It would seem difficult to find language, or a holding, that more closely tracked, and completely invalidated, both aspects of plaintiffs’ complaint. Notwithstanding, in total disregard, plaintiffs’ opening, trespassing at length on the court’s own prerogative, informed the jury that the law was that it could find an unfulfilled duty to disclose if it found that what defendant failed to disclose about Polavision would have been material to the investing public.1 At the side bar, at the close of the opening, defendant correctly pointed out that there had been no indication that defendant had traded in its own stock, or had made a misrepresentation, or had violated any reporting requirements, and moved for a directed verdict pursuant to Roeder, of which it had previously given the court a copy. The court, unhappily, failed to see that plaintiffs’ case was dead on arrival, and denied the motion without comment.
Nor did Roeder stimulate plaintiffs to change their tack, and meet Roeder, by claiming “inaccurate, incomplete, or misleading prior disclosures.” Rather, in a twelve day trial, they precisely followed their opening, alleging, simply, nondisclosure of material information. As summarized in their final argument,
Polaroid ... violated the federal securities laws which require full disclosure so that people who purchase and sell securities do so on a fair playing field; that people have the same information and people can make their investment decisions based on having all of the information and having truthful information.... [Y]ou have to find that Polaroid had adverse information, that information was material — i.e., that it was important— and that Polaroid knowingly and deliberately withheld it. And that’s all we’re asking you to do here. (Emphasis supplied).
The summation was not an inadvertence, but was in accord with plaintiffs’ own testimony.
Q. Now, Mr. Backman, in this action you are not claiming, are you, that the financial information put out by Polaroid was in any way false and misleading, are you?
A. I think you’ll have to refer to the complaint. I believe the failure to disclose is just as improper as providing false information. And I believe the essence of my suit deals with the failure to disclose.... I do claim it was false and misleading because the failure to disclose is just as misleading a (sic) improper disclosure.
This, of course, is not so. “Silence, absent a duty to disclose, is not misleading under Rule 10b-5.” Chiarella, ante.2
*14Plaintiffs’ summation was followed by the court’s charge, equally contrary to Roe-der. 3
TRANSITION
We have gone into this at length, not so much to show the emptiness of plaintiffs’ first claim — agreed to by the full panel— but to accent our finding that there had been no falsity or misleading by defendant in any respect. In eight years of preparation and twelve days of trial, the words misrepresentation and misleading never crossed plaintiffs’ lips, even when challenged by defendant’s citation of Roeder, except to deny that they were claimed. Surely in plaintiffs’ four law firms, there must have been someone who read Roeder with dismay, and called attention to the escape route. The inference seems manifest that to shift to a claim of misrepresentation and misleading seemed even less hopeful than to stay where they were.
Finally facing up to the problem of Roe-der, plaintiffs, on defendant’s appeal to the panel, used these words thirty-two times. “Polaroid’s third quarter 1978 report [issued in early November] contained material misrepresentations_” “Polaroid’s representations in its third quarter report were misleading in November, and blatantly false by the end of Polavision’s critical Christmas season.” These facts are so clear, plaintiffs now tell us, “This rehearing petition should never have been filed.”
Before the panel, defendant protested that this was a total variance. Taking the position that on a motion for a directed verdict the test is what the record permitted, not what was claimed, the panel opinion overruled the protest. Defendant now seeks to renew what would seem, on this record, a reasonable complaint. It is not however, before us. Counsel’s obligatory certification accompanying the petition for rehearing and suggestion for rehearing en banc made no mention of it. Presumptively, this was waiver. Cf. Irvine v. California, 347 U.S. 128, 129, 74 S.Ct. 381, 381, 98 L.Ed. 561 (1954) (“We disapprove of the process of smuggling additional questions into the case after we grant certiorari.”). In its en banc brief defendant devotes four pages to the alleged impropriety of plaintiffs’ “switching theories” on appeal, and, correspondingly, consumed a substantial portion of its limited time for oral argument. Ironically, if found justified, this would moot the questions for which defendant had sought, and we had granted, review. A party should not address a petition to an important question and then, after we have accepted it, argue that it does not arise. Particularly this should be so when the petition has evoked a number of important amici.
Equally not before us are the findings and conclusions of the panel majority opinion, hereinafter the panel opinion. Plaintiffs frequently cite such, sometimes as their sole authority. The opinion “no longer [has] standing,” except to the extent that we adopt it. United States v. Klubock, 832 F.2d 664, 665 (1st Cir.1987) (en banc). With one exception, we do not respond to specific assertions that we may disagree with, but disregard the opinion altogether. Correspondingly, we do not cite the dissent.
*15THE FACTS AND THE LAW: PHASE TWO
Much of the trial was devoted to matters that need not be considered. For present purposes, it appeared that Dr. Edwin H. Land, the founder and at all times president or C.E.O. of Polaroid, had added to his invention of the world-famous instant still camera another exceptional invention-an instant movie camera, Polavision. It appeared throughout the case, however, that Polavision's sales appeal did not correspond with the quality of the invention. Launched in early 1978 with great fanfare, the estimates for fall, to which production had been geared, proved to be substantially excessive. As a result, in late October, Eumig, the Austrian manufacturer, having earlier been told to increase production, was instructed to reduce by 20,000. In mid-November Eumig was told to take out another 90,000 sets, and to halt production. Plaintiffs' panel brief, quoting the fortuitous language of Eumig's cable acknowl-edgement, "to now finally stop production entirely," gives the impression that the halt was intended to be permanent. Conveniently, from plaintiffs' standpoint, dots in the quotation replace the subsequent sentence, "Steps have been taken to ensure a quick new start-up of production on a reduced scale." This omission aids plaintiffs in their recitation, the regrettable incorrectness of which we will come to, that "management knew that Polavision was a commercial failure." Thereafter, fourth quarter internal figures, not publicly released, confirmed that the original Polavision estimates (also not released) had been substantially excessive.
The next event was a newspaper release published on January 9, 1979, that Rowland Foundation, a charitable trust established by Dr. and Mrs. Land, was to sell 300,000 shares of Polaroid, in part for funds for a new project, and in part to diversify its portfolio. Defendant participated in the preparation of the release, but not in the action itself. It is not claimed that the release was in any way untrue. Plaintiffs' claim it misleading because additional information should then have been given the public. The sale was consummated on January 11. For some reason, never explained, plaintiffs take January 11, rather than January 9, or the date of the November report, as the day on which fraudulently affected purchases began.
On February 22, 1979, immediately following the annual meeting, defendant announced further facts about Polavision's lack of success, and the market fell, shortly, by some 20%. In a separate trial on damages, the jury found that plaintiff purchasers' recovery should be $9.75 a share. This matter is not before us. Further facts will appear in the course of the opinion.
1. Misrepresentation
By way of introduction we note that while securities fraud is an exception to the general rule that a party must show reliance, it being presumed that the fraud affected the market, Basic, Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); see Roeder, 814 F.2d at 27, it must be asked what effect could there have been, on anyone, of conduct not discovered to have been misleading even by hostile examiners, until, after eight years and completion of trial, it was concluded that discovery of such was necessary for recovery.
Starting with the Third Quarter Report, that plaintiffs' brief now finds assisted misrepresentation because "Polaroid featured Polavision on the cover," plaintiffs point out that after President McCune "announced record worldwide sales and earnings for both the third quarter and the first nine months of 1978, ... Mr. McCune noted that the Company's worldwide manufacturing facilities continue to operate at close to maximum capacity," whereas, in fact, Pola-vision's contract supplier, Eumig, was told, shortly before the report, to hold up on 20,000 units. We note, first, that the statement, taken as a whole, was true; it expressly recognized an absence of totality.4 *16Of more specific importance, it flagged, on three of its three and a half pages of text, that Polavision’s effect on earnings was negative. On page one, “He noted also that earnings continue to reflect substantial expenses associated with Polavision, Polaroid’s new system of instant movies.” This sentence was recast on the two subsequent pages, “The ratio of cost of sales to net sales increased ... due primarily to ... and to substantial expenses associated with Polavision.” With this emphasized three times, we ask did this report mislead investors to buy stock because Polavision was doing so well?
Plaintiffs quote Roeder, 814 F.2d at 26, that even a voluntary disclosure of information that a reasonable investor would consider material must be “complete and accurate.” This, however, does not mean that by revealing one fact about a product, one must reveal all others that, too, would be interesting, market-wise, but means only such others, if any, that are needed so that what was revealed would not be “so incomplete as to mislead.” SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir.1968), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). Disclosing that Polavision was being sold below cost was not misleading by reason of not saying how much below. Nor was it misleading not to report the number of sales, or that they were below expectations.
Plaintiffs do make a contention that, if correct, would trouble us. In their brief they say,
[B]y late October 1978 Polaroid knew that Polavision was a commercial failure. Polaroid had begun marketing the product to dealers below cost.... Sales nonetheless continued significantly under plan.
We could agree that if management knew at the time of the report that Polavision was a commercial failure, to say simply that its earnings were negative might well be found to be a material misrepresentation by half-truth and incompleteness. Plaintiffs’ own recital, however, was not even a half-truth. Defendant had not “begun” selling below cost “by late October” (in spite of which sales continued to fall below estimate). Polavision’s earnings had been negative, and so reported, in the Second Quarter Report to Shareholders. But, far more serious, on the uncontradicted evidence defendant did not, at any material time, know that Polavision was a commercial failure.5 The most convinced of all of eventual success, and the most significant, was Dr. Land. The only difference in internal opinion was that some of defendant’s officers contemplated a smaller number of sales than did others, but none thought there would be failure. On this record, we find it incomprehensible that plaintiffs could make a statement so far from the truth.
We come, next, to the January 9 Rowland Foundation sale release. There was nothing untrue or misleading in the release itself, but plaintiffs say, with support from the panel opinion, that it should have contained additional information in order to keep the November report from being misleading. We turn to this broad matter that has interested the amici.
2. Duty to Update
Obviously, if a disclosure is in fact misleading when made, and the speaker *17thereafter learns of this, there is a duty to correct it. In Greenfield v. Heublein, Inc., 742 F.2d 751, 758 (3d Cir.1984), cert. denied, 469 U.S. 1215, 105 S.Ct. 1189, 84 L.Ed.2d 336 (1985), cited by the panel, the court called for disclosure if a prior disclosure “becomes materially misleading in light of subsequent events,” a quite different duty. We may agree that, in special circumstances, a statement, correct at the time, may have a forward intent and connotation upon which parties may be expected to rely. If this is a clear meaning, and there is a change, correction, more exactly, further disclosure, may be called for. Cf. In re Phillips, 881 F.2d 1236 (3d Cir.1989); Wilson v. Comtech Telecommunications Corp., 648 F.2d 88 (2d Cir.1981). The amici are concerned that this is a principle with grave dangers of abuse. Fear that statements of historical fact might be claimed to fall within it, could inhibit disclosures altogether. And what is the limit? In the present ease if the shoe were on the other foot, and defendant could have, and had, announced continued Polavision profits, for how long would it have been under a duty of disclosure if the tide turned? Plaintiffs’ contention that it would be a jury question is scarcely reassuring.
We do not, however, face this question. The panel opinion was a mixed marriage of a duty to update and outright rejection of Roeder. After indicating reluctance to accept plaintiffs’ contention that the Third Quarter Report was misleading when made, the panel opinion, in holding that it could be found misleading in light of later developments, said as follows.
[E]ven if the optimistic Third Quarter Report was not misleading at the time of its issuance, there is sufficient evidence to support a jury’s determination that the report’s relatively brief mention of Pola-vision difficulties became misleading in light of the subsequent information acquired by Polaroid indicating the seriousness of Polavision’s problems. This subsequent information included ... Polaroid’s decision to ... stop Polavision production by its Austrian manufacturer, Eumig, and its instruction to its Austrian supplier to keep this production cutback secret. We feel that a reasonable jury could conclude that this subsequent information rendered the Third Quarter Report’s brief mention of Polavision expenses misleading, triggering a duty to disclose on the part of Polaroid. (Emphasis in orig.)
At the time of the Rowland sale,
while selling the stock had absolutely nothing to do with Polaroid’s financial health.... some might find it less than forthcoming for the press release not to have at least mentioned Polavision’s difficulties so that the investing public could assess for themselves the reasons behind the sale.
That this was an improper mix was made conspicuous by plaintiffs’ oral argument.
[WJe’ve cited the specific passages of Mr. McCune’s testimony in our brief, where Mr. McCune testified that the expression, “continued to reflect substantial expenses” was intended to convey that that condition would continue in the future.
What we’re saying is that a jury could find that this statement, even if it wasn’t misleading when issued, became misleading because of the forward-looking nature.
This is a failure to recognize that what Mr. McCune said was a single, simple, statement, that substantial expenses had made Polavision’s earnings negative. Though the panel opinion characterized it as “relatively brief,” it was precisely correct, initially. Even if forward-looking, it remained precisely correct thereafter. Plaintiffs’ claim, “The statement was plainly intended to survive the date of issuance, and therefore a jury could reasonably find a duty to update and correct exists,” means nothing, unless “update” means something more than “correct.” . And, indeed, in arguing that the statement did not “remain true,” plaintiffs’ brief, unabashedly, points solely to matters outside the scope of the initial disclosure, in no way making it incorrect or misleading, originally, or later.
The shell in plaintiffs’ gun at trial, and the one substituted on appeal, are all per*18cussion cap and no powder. We understand the amici apprehension because of the panel opinion’s not only requiring update, but requiring it in terms of a new duty that had never been undertaken. With those errors corrected, however, we see no reason to proceed further. Plaintiffs have no case.
This decision moots plaintiffs’ appeal on the subject of interest.

The court’s denial of judgment for defendant n.o.v. is reversed, with costs in this court, and the cause is remanded for dismissal of the complaint, with costs in the district court.

. E.g., "The idea [of the law] is that there should be full disclosure so that everyone has all of the relevant facts, that the marketplace has the relevant facts concerning a particular stock. And then, being fully informed, people can make their judgments.”

. In spite of these positive statements, the dissent, in n. 6, maintains that "plaintiffs’ theory consistently has been that Polaroid's failure to disclose information misled investors.” The dissent’s quotation of plaintiffs’ listings of non-disclosed facts, however, makes full sense in terms of simple non-disclosure as distinguished from misleading. But lest there be doubt we note that plaintiffs expressly requested that the jury be instructed that their claims were other than of being misled by untrue or incomplete statements.
REQUEST TO CHARGE NO. 7 Explanation of Rule 10b-5
The Class’ claims arise under Section 10(b) of the 1934 Act, and 10b-5 of the Securities and Exchange Commission, which has the force of law. Rule 10b-5 provides that it is unlawful for any person, directly or indirectly, in connection with the purchase or sale of any security:
(a) to employ any device, scheme, or artifice to defraud,
*14(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of circumstances under which they were made, not misleading, or
(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
Plaintiffs claim that Polaroid violated subsections (a) and (c) above during a period of time beginning on January 11, 1979 and continuing through February 22, 1979, in connection with the class’ purchase of Polaroid securities.
Excluding subsection (b) was not some early, abandoned, view. The requests were filed on the last day of trial.

. For example,
Did Polaroid ... know material adverse facts concerning its business prior to January 11, 1979?....
It is unlawful to omit to state a material fact. A fact is material if it is one that an investor would consider important in deciding whether or not to purchase stock.

. The entire paragraph read,
Mr. McCune noted that the Company's worldwide manufacturing facilities continue to op. erate at close to maximum capacity. Construction of a new building in Norwood, Massachusetts, to house expanded camera manu- *16facturing facilities is on schedule. "Planning is proceeding," Mr. McCune said, "for the development of the recently acquired site for film assembly in Andover, Massachusetts, and film assembly expansion continues at Polaroid’s facility in Enschede, The Netherlands.” The Company has also concluded an agreement with the Government of Ireland, he stated, for the construction of a new facility near Dublin to manufacture SX-70 film and cameras as an additional element of its program to supply the indicated increase in worldwide demand.

. Mr. Buckler, an executive vice president and a member of the management executive committee testified,
Q. Mr. Buckler, in 1978 and early January and February 1979 was there any intent on the part of Polaroid to abandon Polavision? A. No, there wasn’t.
Q. In 1978 and early 1979, Mr. Buckler, did you believe Polavision could be a commercial-Iy-successful venture for Polaroid?
A. Yes, I did, and I was committed to it at that time.