Court Opinion

ID: 623032
Source: CourtListenerOpinion
Date Created: 2012-02-17 18:12:40+00
Date Added: 2024-06-11T17:51:02.535779
License: Public Domain

United States Court of Appeals
                        For the First Circuit

No. 11-1436

            IN RE: SMITH & WESSON HOLDING CORP. SEC. LITIG.
                               __________

          OKLAHOMA FIREFIGHTERS PENSION & RETIREMENT SYSTEM,

                         Plaintiff, Appellant,

                                  v.

                     SMITH & WESSON HOLDING CORP.;
                    MICHAEL GOLDEN; JOHN A. KELLY,

                        Defendants, Appellees.

             APPEAL FROM THE UNITED STATES DISTRICT COURT
                   FOR THE DISTRICT OF MASSACHUSETTS

             [Hon. Michael A. Ponsor, U.S. District Judge]

                                 Before
                   Boudin and Lipez, Circuit Judges,
                      and Smith,* District Judge.

     Bryan A. Wood with whom Glen DeValerio, Norman Berman, John H.
Sutter and Berman DeValerio were on brief for appellant.
     John A. Sten with whom Jason C. Moreau and Greenberg Traurig,
LLP were on brief for appellees.

                           February 17, 2012

     *
         Of the District of Rhode Island, sitting by designation.
          BOUDIN,   Circuit   Judge.      A   class   of   plaintiffs

representing purchasers of Smith & Wesson Holding Corporation

securities sued the company ("Smith & Wesson") and two of its high-

ranking officers, Michael Golden and John A. Kelly, alleging that

the company issued false or misleading public statements about the

demand for its products in violation of the Securities Exchange Act

of 1934 and related regulations.1       The district court granted

summary judgment to Smith & Wesson, and the plaintiffs now appeal.

          Smith & Wesson is the parent company of the well-known

gun manufacturer; Golden was the President and Chief Executive

Officer of Smith & Wesson during the period in question, and Kelly

was the Chief Financial Officer.       The lead plaintiff, Oklahoma

Firefighters Pension and Retirement System, represents a class of

all persons purportedly suffering damages as a result of the

purchase of Smith & Wesson common stock on the open market between

June 14, 2007, and December 6, 2007.    It is common ground that the

stock suffered precipitous declines starting with the company's

release in late October 2007 of unfavorable preliminary second-

quarter earnings data and downwardly revised earnings projections.

     1
      Count I charged the corporation and individual defendants
with violations of Section 10(b) of the Act, 15 U.S.C. § 78j(b)
(2006), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (2011), while Count
II alleged violations by the individual defendants of Section 20(a)
of the Act, 15 U.S.C. § 78t(a). The latter claim is derivative,
ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 67-68 (1st Cir.
2008), and needs no separate discussion.

                                -2-
          By contrast, for the two quarters prior to the decline,

the company had provided investors with impressive sales numbers

and optimistic future earnings projections.     In plaintiffs' view,

ballooning   inventory   and   various   internal   reports   indicated

flagging business by the summer of 2007 and prompted the company to

inflate artificially the sales numbers through unusual promotions

and discounting that stripped revenues from future quarters.       The

chronology of press releases and public statements is as follows.

          The first relevant announcement, issued on June 14, 2007,

and titled "Smith & Wesson Holding Corporation Posts Record Annual

Revenues and Earnings," reported strong performance in the final

quarter of the company's fiscal year 2007 and the fiscal year

overall--periods not coinciding with ordinary calendar quarters.2

In addition to providing historical performance data, the company

made several statements about its expectations for fiscal year

2008; in particular, it announced that it was "raising [its] sales

expectations for fiscal 2008 from $320 million to $330 million,

which would represent a 40.5% increase over fiscal 2007 sales"; it

also upwardly revised earnings guidance from $0.60 per share to

$0.62 per share, which the company pointed out was double the

earnings guidance from the previous fiscal year.

     2
      Smith & Wesson's fiscal year runs from May 1 through April
30, so fiscal year 2007 covered the period May 1, 2006, through
April 30, 2007.   Accordingly, the final quarter of fiscal 2007
encompassed February-April 2007; the first quarter fiscal 2008,
May-July 2007; and the second, August-October 2007.

                                  -3-
          The projections were accompanied by a clearly labeled

"Safe Harbor Statement" warning that the press release contained

"forward-looking statements," including statements regarding future

sales, income, income per share, earnings, penetration rates for

new and existing markets, strategies, and the demand for the

company's products, and that those statements were "qualified by

important factors [identified in the statements] that could cause

actual results to differ materially from those reflected by such

forward-looking statements."3

          Golden and Kelly participated in an investor conference

call later that day, which began with a similar announcement that

all   forward-looking   statements    made   during   the   call   were

necessarily subject to uncertainty.      In response to a question

about why the company raised its guidance, Kelly stated:

          So as we look in the business, we ended the
          year with pretty good backlog.     Demand has
          been strong, and that's--the Thompson, our
          capacity in Thompson, we've gotten our barrel
          output up by 20% in the first whatever it's
          been, five months, that we've had it.      So
          we're putting all those together, and that's
          why we reacted confidently with our new
          guidance.

Kelly also noted that "[p]lanned capital expenditures for fiscal

2008 of $17.7 million represents [sic] a $1.7 million increase from

      3
      The "safe harbor" provisions of the Private Securities
Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-5, sharply limit
liability of companies and their management for certain "forward-
looking statements," defined in the statute, when such statements
are accompanied by appropriate cautionary language.

                                -4-
our previous estimate and allows for an expansion of our polymer

pistol manufacturing capacity due to increased demand."        The

company's stock price rose 8 percent the next trading day.

          On September 6, 2007, following the close of the first

quarter of fiscal 2008 (May-July 2007), Smith & Wesson issued a

press release reporting record earnings for the quarter: "Smith &

Wesson Holding Corporation Posts Record First Quarter Revenues and

Profits." It quoted Golden as offering the following explanation:

          Our results for the first quarter of fiscal
          2008   demonstrate    progress  across   many
          initiatives and reflect growth in our core
          handgun business as well as our newly
          established long gun business.     Our sales
          growth was particularly strong given that the
          comparable quarter of the prior year included
          $5.2 million in U.S. government orders for
          Afghanistan that were not duplicated in the
          current quarter.     Handgun sales into the
          retail channel increased by 41.0% for the
          quarter, driven by our direct sales force and
          a number of ongoing retail initiatives.

          The company once again increased its fiscal 2008 earnings

expectations, this time from the $0.62 per share amount announced

in June to $0.63 per share.    The release also stated that "[w]e

expect second quarter revenue to increase by approximately 60% over

revenue in second quarter of fiscal 2007, driven by continued

expansion in our existing markets and the addition of revenue from

Thompson/Center [acquired in January 2007]."   The September press

release, and the conference call that followed, contained "safe

                               -5-
harbor" statements similar to those contained in the June 2007

communications.

          In the conference call held later on the day of the

release, Golden and Kelly made several statements characterizing

the first-quarter results and offering some explanation for the

upward revision to earnings guidance:

          Th[e]   increase   in  our  annual   earnings
          projection from our previously announced
          guidance    reflects   the   stronger    than
          anticipated first quarter performance.

          [W]e continue to deliver double digit growth
          in year-over-year quarterly revenue, supported
          by strong sales into the retail channel and
          our ongoing penetration in law enforcement.

          The results we delivered this quarter in the
          retail channel reflect growth in our core
          handgun business as well as the addition of
          and growth in our newly established long gun
          business.

          I want to point out that our sales growth was
          particularly strong during the first quarter
          given that it compares to some major events
          that occurred in the comparable quarter in the
          prior year.

The company's stock price rose about 5 percent the next trading

day.

          However,   on   October    29,   2007,   the   company   revealed

disappointing preliminary financial results for the second quarter

(August-October 2007), which it attributed to

          a combination of factors that emerged late in
          the quarter.      Among these factors were
          softness in the market for hunting rifles and
          shotguns, driven by lower than expected

                                    -6-
          consumer demand, a buildup of pre-season
          retail inventories, and unseasonably warm
          autumn weather, which decreased retail traffic
          and compressed the fall hunting season.

The company also revised down its earnings guidance from $0.63 per

share to $0.53 per share.      Smith & Wesson's stock price dropped 40

percent the next trading day.

          On December, 6, 2007, the company released its final

second-quarter results, and further revised down its earnings

guidance from $0.53 per share to $0.40 per share, citing the same

factors listed in its October 29 press release as well as an

"industry-wide   inventory buildup, accentuated        by   lower   retail

traffic, caus[ing] order activity to slow beginning in October."

The stock price fell another 29 percent the next day.

          Three different lawsuits, later consolidated, were filed

against Smith & Wesson, Golden, Kelly and a third officer who was

later dismissed.     In a thorough and thoughtful decision, the

district court denied Smith & Wesson's motion to dismiss, In re

Smith & Wesson Holding Corp. Sec. Litig., 604 F. Supp. 2d 332

(D. Mass. 2009), which relied primarily on the "safe harbor"

provisions of the PSLRA; but the district court made clear that

those provisions narrowed the plaintiffs' case and that they had

gotten only a ticket to discovery.

          The district court agreed that the plaintiffs' complaint

"contain[ed]     allegations     based   mainly   on    forward-looking

statements" that qualified for protection under the PSLRA; but

                                   -7-
"distinguish[ing] carefully between non-actionable forward looking

statements and potentially actionable statements of present or

historical fact," In re Smith & Wesson Holding Corp. Sec. Litig.,

604 F. Supp. 2d at 334, the court found "sufficient, albeit thin,

allegations   of   Defendants'    intentionally   false   statements     of

present or historical fact."      Id. at 335.

          The   court   granted   class   certification   and    the   case

proceeded to discovery, after which Smith & Wesson sought summary

judgment and the plaintiffs sought partial summary judgment on one

issue.   Thereafter the court granted summary judgment for Smith &

Wesson, finding a lack of misrepresentation and of scienter,

without reaching two other issues raised by Smith & Wesson (loss

causation and "controlling person" liability).            In re Smith &

Wesson Holding Corp. Sec. Litig., No. 07-30238-MAP, 2011 WL 6089727

(D. Mass. Mar. 25, 2011).   The plaintiffs have now appealed to this

court.

          Summary judgment is proper where "the movant shows that

there is no genuine dispute as to any material fact and the movant

is entitled to judgment as a matter of law," Fed. R. Civ. P. 56(a);

we review grants of summary judgment de novo, considering the facts

in the light most favorable to the nonmoving party.             Bos. & Me.

Corp. v. Mass. Bay Transp. Auth., 587 F.3d 89, 98 (1st Cir. 2009).

In this case, the factual disagreements are largely about the

inferences to be drawn from the record.

                                   -8-
            Claims under Section 10(b) and Rule 10b-5 have six

elements:   (1)    a    material     misrepresentation     or     omission;    (2)

scienter, or a wrongful state of mind; (3) a connection with the

purchase or sale of a security; (4) reliance; (5) economic loss;

and (6) loss causation.            Miss. Pub. Emps.' Ret. Sys. v. Bos.

Scientific Corp., 649 F.3d 5, 20 (1st Cir. 2011).                 Only the first

two   elements    are   at   issue    in   this   appeal   and,    as   to   both,

plaintiffs rely heavily on three kinds of evidence to show that

Smith & Wesson knew demand was weakening when it reported strong

sales numbers in June and September.

            First, Smith & Wesson generated monthly inventory reports

that were distributed, along with other financial reports, in a

"red book" reviewed by senior management during monthly executive

meetings.    Although inventory generally built up in the first

quarter to satisfy increased demand later in the fiscal year,

plaintiffs say that the excess inventory was usually sold off by

August, yet in August 2007 inventory "exploded" to $12.8 million in

goods (compared to $3.9 million the previous year) and continued to

trend upward.

            Second, plaintiffs point to a host of internal tracking

data indicating that demand was flagging:

                   "Orderometer" reports containing up-to-
            date information about the company's progress
            toward meeting revenue goals, reviewed each
            day by senior management, showed the company
            consistently falling short of sales targets,
            including (by plaintiffs' calculations) a 54

                                       -9-
          percent total shortfall in August and even
          higher misses in subcategories described as
          strong in the company's press releases, such
          as M&P (69 percent miss) and Sigma (80 percent
          miss) model pistols.

                 "Call Reports," in which sales managers
          described interactions with customers at both
          the distributor and dealer levels, showed
          during the first quarter of fiscal 2008
          evidence of demand decreases due to bloated
          customer inventories with statements like:
          "[distributors are] Extremely Stuffed with
          product" (July 6, 2007), and "[distributors
          are] reporting inventory buildup at levels
          never seen by them at this time" (July 11,
          2007). Indeed, the plaintiffs note (and Smith
          & Wesson does not dispute) that four out of
          Smith & Wesson's six largest distributors
          declined or substantially reduced orders in
          July, all citing bulging inventories.

                 "End   of  Month   Backlog" reports--
          "backlog" referring to orders expected to ship
          in the following six months--similarly showed
          declining year-over-year performance in each
          month of the first quarter, culminating in a
          July backlog that was down 29 percent from the
          previous year.

          Third,   plaintiffs   point   to   various   promotions   and

discounts that Smith & Wesson used allegedly to pull revenues from

future quarters to compensate for declining sales.         Plaintiffs

point to two sets of promotions; the first consisted of three so-

called "pull forward" promotions in the fourth quarter of fiscal

2007; the second set of promotions occurred in July 2007, allegedly

pulling future revenues into the first quarter of fiscal 2008 (May-

July 2007).

                                -10-
           To show that senior management was aware of serious sales

problems before the company issued the September 2007 statements,

plaintiffs point to a pair of August 20, 2007, e-mails from Kelly:

"it seems like we are digging a deep hole to start the quarter,"

and "it looks like we will have net sales of about $16 million for

the month and miss the profit target by at least three to four

cents . . . We may not even be ahead of last year.           Ouch."    Also,

notes from an August 29, 2007, business review meeting attended by

Golden and Kelly recorded: "Market is booming. July is first month

in 32 months we were down year-over-year, August is second month in

33 months.      Industry is growing by 15-17% and we're shrinking."4

           Smith & Wesson's oft-repeated response to the plaintiffs'

evidence   is    that   the   June   and   September   statements   reported

accurate figures; but "the fact that a statement is literally

accurate does not preclude liability under federal securities

laws."   Lucia v. Prospect St. High Income Portfolio, Inc., 36 F.3d

170, 175 (1st Cir. 1994).            For Rule 10b-5 creates liability

(assuming scienter, causation and other elements of the offense)

not only where a material misstatement occurs, but also where a

material omission exists.       17 C.F.R. § 240.10b-5(b).

     4
      The company's former Operations Controller, Thomas Coghill,
said of the July and August sales that "[w]e were building [guns]
to plan, and the sales didn't materialize to reduce our inventory
levels"; Coghill also stated that Kelly and Vice President of
Finance John Dineen were aware of the troublesome inventory numbers
in July 2007.

                                     -11-
            "[M]ere possession of material, nonpublic information

does not create a duty to disclose it,"           Hill v. Gozani, 638 F.3d

40, 57 (1st Cir. 2011) (internal punctuation omitted), but "when a

company speaks, it cannot omit any facts 'necessary in order to

make the statements made, in the light of the circumstances under

which they were made, not misleading.'"             Id. (quoting 17 C.F.R.

§ 240.10b-5).    Materiality means a substantial likelihood exists

that   a   reasonable    investor   would    have    viewed   the   fact   as

significantly altering the total mix of information made available.

City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters

Corp., 632 F.3d 751, 756 (1st Cir. 2011).

            The gist of the plaintiffs' case is this: (1) that the

company's June and September 2007 press releases and accompanying

statements   indicated    or    implied    that   strong   existing   demand

supported the reported sales numbers; (2) that the strong sales

numbers resulted in part from discounts used to pull orders from

future quarters; and (3) that in any event at least by July signs

of declining demand were apparent and so should have been disclosed

in the early September statements.

            In our view, the strong sales numbers, however accurate,

and the company's cheerleading commentary (described and quoted

above) did carry with them (or at least a jury could so find) an

implied message that they reflected strong demand, as of the time

the sales were made.           Purely forward looking statements that

                                    -12-
accompanied the sales numbers do enjoy considerable protection, see

note 3 above; but the implication was that the sales numbers

represented market demand at the time of the sales, which concerned

past factual conditions--not predictions.

          Further, as to the September statements, because the past

sales and upbeat commentary were reported a month or more after the

quarter reported on had ended, a culpable omission could exist if

management knew that conditions had deteriorated significantly

after the quarter had ended.   To the extent that such an omission

was misleading, it would be made so by facts already known to have

occurred in July and August and not by errors in a mere forecast as

to expectations for the second quarter.

          Admittedly, with a possible ambiguous exception in the

June statements,5 the statements did not purport to be describing

overall demand--and this may be of some comfort to defendants. But

the September statements, which alone turn out to matter, could

still be taken to imply that overall demand in the first quarter

was strong; for example: "[o]ur sales growth was particularly

strong" and "we continue to deliver double digit growth in year-

     5
      One of the June 2007 references could be read, as the
district court did, as referring only to one line of business, but
it is arguably ambiguous; the other explicit mention of demand in
the June statements referred only to a specific line of products.
Plaintiffs also claim that nothing could reasonably be said about
demand based merely on sales figures--that inherently such
statements imply elaborate statistical studies--but this is not
evident to us.

                               -13-
over-year quarterly revenue, supported by strong sales into the

retail channel and our ongoing penetration in law enforcement."

           Turning then to the evidence, we start with the June

statements.     While the plaintiffs suggest that some signs of a

looming problem emerged prior to the June statements, that evidence

is razor thin and often limited to a single product line--for

example, Orderometer reports showing missed internal handgun sales

targets   in   five   of    the   seven   months   before   June   and   a   few

references to soft markets in other products.

           But the Orderometer reports plaintiffs cite were, at

best, mixed, as were the Call Reports, and their significance was

therefore limited.         Three of the five so-called failures to meet

handgun targets were misses of less than 5 percent, and the

plaintiffs also omit mention of some exceptionally strong results--

for example, April sales exceeding targets by 46 percent--during

the same period.       Further, internal targets may be designed as

incentives as much as predictions.           In re Smith & Wesson Holding

Corp. Sec. Litig., 2011 WL 6089727, at *8.

           And, Smith & Wesson enjoyed substantial sales growth

leading up to the June statements: using the most conservative

growth figures cited to us, 39 percent growth in Q3 over the

comparable quarter the previous year, 22 percent growth in Q4, and

34 percent growth in the fiscal year overall.               Minor failures to

meet aggressive internal sales growth targets do not show crumbling

                                     -14-
demand--especially when the sales themselves show growth.          Cf. In

re Symbol Techs. Class Action Litig., 950 F. Supp. 1237, 1243-44

(E.D.N.Y. 1997).

            Plaintiffs assert that the company's April promotions

accelerated revenues slated for Q1 2008 into Q4 2007 and amounted

to "channel stuffing," that is, "inducing purchasers to increase

substantially their purchases before they would, in the normal

course,    otherwise   purchase   products    from   the   company,"    thus

"shifting earnings into earlier quarters, quite likely to the

detriment of earnings in later quarters." Greebel v. FTP Software,

Inc., 194 F.3d 185, 202 (1st Cir. 1999).

            But   offering   discounts   to   stimulate    sales   is   not

automatically manipulation and may well stimulate demand.              Makor

Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 709 (7th Cir.

2008).    Anyway, here the plaintiffs' case as to June rests on only

three pull-in deals plus rhetoric; nothing shows that the pull-ins

were unusual, represented a significant percentage of the reported

sales for the quarter, or were otherwise suspect.           In re Smith &

Wesson Holding Corp. Sec. Litig., 2011 WL 6089727, at *9.

            That brings us to the company's September statements, and

we begin with the July discounts.         Here, both manipulation and

causation are open to question.          As Judge Posner explained in

Makor,

            [a] certain amount of channel stuffing could
            be innocent and might not even mislead--a

                                  -15-
          seller might have a realistic hope that
          stuffing the channel of distribution would
          incite his distributors to more vigorous
          efforts to sell the stuff lest it pile up in
          inventory.

513 F.3d at 709.    In sum, such practices are neither inherently

fraudulent   nor    always    innocent;   size,   design,   purpose,

transparency, and history are all relevant.       See In re Cableton

Sys., Inc., 311 F.3d 11, 34-35 (1st Cir. 2002); Aldridge v. A.T.

Cross Corp., 284 F.3d 72, 81 (1st Cir. 2002); In re Stac Elecs.

Sec. Litig., 89 F.3d 1399, 1407 (9th Cir. 1996), cert. denied, 520

U.S. 1103 (1997).

          Plaintiffs say that about $7 million of Smith & Wesson's

first-quarter 2008 revenues--one-third of its July sales and about

10 percent of the company's quarterly revenue--were the result of

discounting, but plaintiffs do not dispute that discounting is

common in the firearms industry nor do they offer comparable

figures from prior years.    And the July quarter, as the company had

disclosed in a 10-K statement, was traditionally the weakest, so

greater efforts to stimulate July sales would not be surprising.

          Further, the fall-off in demand in the second half of

2007 turns out to have lasted long after the July discounts and in

some degree to have affected the industry and not just Smith &

Wesson, so--notwithstanding one anecdotal opinion6--it is uncertain

     6
      Plaintiffs' point to an August 5, 2007, Call Report from one
of the company's National Accounts Managers, David McDaniel, who
noted under the heading "Key distributor activity and issues" that

                                 -16-
how far the July promotions explain the August fall-off of sales

for the defendant.     In all events, plaintiffs--who had access to

discovery--are surprisingly light in quantitative evidence that the

discounts exceeded what was traditional for the slack period. That

the July offers targeted individual customers who were proving

difficult to lure is hardly surprising or ominous.

           The failure to disclose the documented fall in sales in

August is a different matter. That sales did fall substantially is

reasonably clear--August net sales decreased about one-third from

the previous year (from $12,184,000 to $8,595,000) and gross

profits   fell   by   more   than   50     percent   (from   $2,736,000   to

$1,240,000). These are troubling figures even though the August 29

meeting notes also contained positive assessments7 and the hard

numbers are only for the first month of a quarter when sporting and

hunting sales usually picked up considerably.

           Still, even if we assume arguendo that bad present

numbers should trump optimism and ought to have been disclosed or

even that more should have been said about discounting, the present

"[w]e have pulled a tremendous number of sales from August and
September into July trying to make the numbers.     We'll have to
watch this closely as it might be an issue to deal with for August
and September."
     7
      "Walther is over plan"; "Consumer is above plan"; "Revolvers
over [plan]"; "Order flow is strong now"; "Feedback [from
distributors] so far is spotty, some guys up, some guys flat";
"[W]e have inventory to support additional orders, and we have
programs to drive those sales."

                                    -17-
suit fails for lack of proof of scienter.            Section 10(b) is

primarily a fraud provision and "a showing of either conscious

intent to defraud or a high degree of recklessness" is required.

Miss. Pub. Emps.' Ret. Sys., 649 F.3d        at 20 (internal quotation

marks omitted).      Recklessness in this context is

          a highly unreasonable omission, involving not
          merely simple, or even inexcusable negligence,
          but an extreme departure from the standards of
          ordinary care, and which presents a danger of
          misleading buyers or sellers that is either
          known to the defendant or is so obvious the
          actor must have been aware of it.

Miss. Pub. Emps.' Ret. Sys., 649 F.3d at 20.

          Scienter is inherently a fact-intensive inquiry, Dolphin

& Bradbury, Inc. v. SEC, 512 F.3d 634, 639 (D.C. Cir. 2008), and

courts are normally cautious about granting summary judgment for

the defense on this issue.8       But this hesitancy assumes that there

is   either   some     evidence    of   subjective   bad   intent,   or,

alternatively, misstatements or omissions so blatantly improper

that bad intent or recklessness can be inferred, e.g., Malone v.

Microdyne Corp., 26 F.3d 471, 478-79 (4th Cir. 1994).       There is no

evidence of the former in this case and, at best, a thin and

debatable case as to misstatements or omissions.

     8
      E.g., Miss. Pub. Emps.' Ret. Sys., 649 F.3d at 20; Provenz v.
Miller, 102 F.3d 1478, 1489-90 (9th Cir. 1996), cert. denied, 522
U.S. 808 (1997); P.H. Glatfelter Co. v. Voith, Inc., 784 F.2d 770,
774 (7th Cir. 1986); cf. In re Chavin, 150 F.3d 726, 727-28 (7th
Cir. 1998).

                                    -18-
           As City of Dearborn said, "[i]f it is questionable

whether a fact is material or its materiality is marginal, that

tends to undercut the argument that defendants acted with the

requisite intent or extreme recklessness in not disclosing the

fact."   632 F.3d at 757.   The July promotions have not been clearly

shown to be abnormal; and failure to disclose in early September

the decline evidenced from the August figures may have been a

negligent misjudgement; but, without more, an inference of culpable

recklessness is a bridge too far.

           Once   the   downward    trend   became   clear   with   the

second-quarter numbers, the company explicitly acknowledged that

its forecasts had been undermined; as described at the outset, it

offered preliminary negative figures in late October well before

the final numbers were in hand, attributing the decline to "a

combination of factors that emerged late in the quarter."      Whether

or not it was negligent to have remained too sanguine in early

September, there is no evidence of anything close to fraud.

           Affirmed.

                                   -19-