§ 5_35                   

Grossman and the Tenth Circuit

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The Tenth Circuit adopted bespeaks caution doctrine, notwithstanding the cautionary statements did not accompany the forward-looking statements under attack.[1] The case grew out of acquisition by Novell, the world’s leading provider of network operating systems, by way of merger of the company that developed Word Perfect, a leading word processing application. The complaint asserted a class period extending from April 27, 1994 to August 19, 1994. The alleged misrepresentations were made in press releases on April 27, June 27, June 28, and July 28, 1994 and in interviews with the press. The misrepresentations allegedly inflated the price of the stock. The representations allegedly were revealed as false when Novell on August 19, 1994 disclosed that its earnings for the third quarter would be 15 to 20 percent below analyst’s forecasts. The price of the stock dropped 7 percent on August 22, 1994, the first business day following the announcement. The cautionary statements relied upon were included in the extensive “Risk Factor” section of the registration statement covering shares to be issued in the merger. The registration statement was filed on April 22, 1994 and amendments were filed on June 10, 20, and 23, 1994. The merger was completed on June 24, 1994. The complaint did not include any allegations of misrepresentations based on the statements included in the registration statement. The Tenth Circuit sustained the District Court’s dismissal for failure to satisfy Rule 9(b) pleading with particularity requirements and also its refusal to grant plaintiff leave to amend the complaint, in the process reaching its own de novo conclusions.

The registration statement was not explicitly incorporated in the complaint. The parties and the court below, however, had referred to it liberally. The court considered the registration statement in its opinion based on the apparent consent of the parties that it was relevant to the motion to dismiss.[2] In adopting the bespeaks caution doctrine the court noted that “every circuit that has addressed the issue has endorsed the doctrine” and the PSLRA (which was not applicable) “created a statutory version of the doctrine.”[3] The court referred to the representations in the press releases and interviews as having been made “in conjunction” with the registration statement. The Risk Factor section of the registration statement “made specific, repeated disclosures regarding the precise subjects addressed in the alleged misstatements. Novell outlined the complexity of integrating the two companies, and highlighted the risks involved in entering the competitive software applications market. Importantly, the statements specifically disclosed that revenues would tend to fluctuate following the merger, and Amendment No. 1 specifically stated that short-term quarterly earnings were diluted by $.09 (over 15%) per share through the second quarter. With respect to quarterly earnings in particular, Novell’s cautionary statements could hardly have been more explicit.”[4] The referenced cautionary statement noted: “Future earnings and stock price could be subject to significant volatility, particularly on a quarterly basis. [Novell’s] revenues and earnings may be unpredictable. . . . Quarterly financial results are difficult to predict and quarterly financial results may fall short of anticipated levels.”[5] Further, Novell had no duty to disclose its forecast for the third quarter before the disclosure of its actual third quarter earnings. Plaintiff had alleged no specific representation by the defendant that was misleading or that needed correction as the result of such failure.[6]

The court alluded to the specific forward-looking statements that were not material under the bespeaks caution doctrine because of the cautionary statements in the risk factor section. The court noted some general references in cases that assumed that the cautionary statements had to accompany the forward-looking statement to invoke bespeaks caution. The court specifically noted a district court decision in its own circuit holding bespeaks caution inapplicable to forward-looking statements not coupled with cautionary statements.[7] In Synergen, the case alluded to, Judge Babcock refused to consider risk factors in a registration statement in conjunction with statements made by corporate executives in road shows and at various investor oriented conferences. He did so not only because the cautionary statements did not accompany the representations attacked, but because in his view the representations related to existing facts.[8] The court in Grossman noted cases in which other courts apparently had considered cautionary statements that did not accompany the particular forward-looking statements. “It does not appear, the court concluded, that any court has squarely held that the risk disclosures must be in the same document as the alleged misstatement.”[9] Further, “[p]articularly in a fraud on the market case, the relevant inquiry concerns the total mix of information available to the market at the time of the allegedly fraudulent statements.”[10]

The cautionary statement must be reasonably related to the allegedly false forward-looking statement to invoke “bespeaks caution.” It is of some significance that they appeared here “in formal documents of considerable legal weight ¾ the registration statement and amendments thereto.”[11] The alleged false forward-looking statements “were all closely proximate in time to the registration statement and they all were obviously directly related to the transactions described in great detail in the registration statement. Under the circumstances presented in this case, in a claim of fraud on the marketplace, we believe the cautionary statements contained in the registration statement may fairly be considered as limiting the forward-looking predictions made in subsequent discussions of the same transaction.”[12]

The court in Grossman does not specifically refer to the truth in the market concept. See § 1/04[5]. In some respects, it may be a better fit. In Synergen, Judge Babcock refused to consider whether the cautionary statements invoked truth in the market by making the market aware of the risk involved. To do so, he said, “places incorrectly the initial burden of proof on the plaintiffs. More importantly, a genuine issue of material fact exists on this question and, thus, summary judgment is inappropriate.”[13] The court in Grossman said, “the relevant inquiry concerns the total mix of information available to the market at the time of the allegedly fraudulent statements.”[14] This appears to make truth in the market an aspect of the materiality issue. Courts are not reluctant to determine materiality issues on a motion to dismiss, as evidenced by Grossman, if immateriality is apparent from documents referenced in the complaint. The court in Grossman did so, notwithstanding its admonition that “dismissals are difficult to obtain because the cause of action deals primarily with ‘fact-specific inquiries’ such as materiality.”[15]