Aldridge v. A.T. Cross Corp.
| Decision Date | 20 March 2002 |
| Docket Number | No. 01-1989.,01-1989. |
| Citation | 284 F.3d 72 |
| Parties | Michael ALDRIDGE, individually and on behalf of all others similarly situated, Plaintiff, Appellant, v. A.T. CROSS CORPORATION, Bradford R. Boss, Russell A. Boss, W. Russell Boss Jr. Trust A, W. Russell Boss Jr. Trust B, W. Russell Boss Jr. Trust C, John E. Buckley, and John T. Ruggieri, Defendants, Appellees. |
| Court | U.S. Court of Appeals — First Circuit |
Lawrence Deutsch with whom Shanon J. Carson, Berger & Montague, P.C., Matthew F. Medeiros, and Little, Bulman, Medeiros & Whitney, P.C. were on brief for appellant.
John F. Sylvia with whom R. Robert Popeo, Stephen T. Murray, Justin S. Kudler, and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. were on brief for appellees A.T. Cross Company, Bradford R. Boss, Russell A. Boss, John E. Buckley, and John T. Ruggieri.
William R. Grimm with whom Charles D. Blackman and Hinckley, Allen & Snyder LLP were on brief for appellees W. Russell Boss Jr. Trust A, W. Russell Boss Jr. Trust B, and W. Russell Boss Jr. Trust C.
Before TORRUELLA, Circuit Judge, STAHL, Senior Circuit Judge, and LYNCH, Circuit Judge.
In early 1998 the A.T. Cross Corporation, a venerable New England maker of fine pens and pencils, entered the personal electronic devices market by offering penbased computing products through its Pen Computing Group (PCG). The stars of its new line were the CrossPad and its later-introduced smaller cousin, the CrossPad XP. Cross had high hopes for its new product line and expressed those hopes publicly in September 1997 by saying it expected to report a minimum of $25 million in profitable sales for PCG in 1998. Indeed, one of Cross's officers compared its fledgling product to the highly successful Palm Pilot.
Reality did not keep pace with these projections. By late 1999 Cross had discontinued the product line and suffered losses that year of $24.3 million, which essentially eliminated profits from the $24.8 million in sales on the PCG products in 1998.
Michael Aldridge brought this securities action in April 2000 as a putative class action on behalf of those who purchased Cross common stock between September 17, 1997 and April 22, 1999 (the class period). An amended complaint asserts claims against the company, four officers of the company, and certain trusts which own part of Cross. The complaint alleges violations of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (2000), and Rule 10b-5 under that Act, 17 C.F.R. § 240.10b-5 (2001), against the company, the individual defendants, and the trusts. It also alleges a section 20(a) claim against the individual and trust defendants as "controlling person[s]."1 15 U.S.C. § 78t(a) (2000).
On a Rule 12(b)(6) motion by the defendants, the district court dismissed the action. Aldridge v. A.T. Cross Corp., No. 00-203ML (D.R.I. June 4, 2001). The court did not reach the question of whether to certify a class.
We reverse the dismissal of the claims against the individual defendants and the company. We find that there is sufficient factual support for the allegations of fraud and a strong inference of scienter to survive a motion to dismiss under the Private Securities Litigation Reform Act (PSLRA). We affirm the dismissal of the section 20(a) claim against the trust defendants on different grounds; on these pleadings, the trust defendants cannot be considered "controlling persons" for the purpose of section 20(a) liability.
Because this is an appeal from a motion to dismiss, we describe the facts in the case in the light most favorable to Aldridge, the plaintiff and nonmoving party. Doe v. Walker, 193 F.3d 42, 42 (1st Cir.1999).
Cross is a publicly traded company on the American Stock Exchange. For over a century, Cross has been producing traditional high-end writing instruments. By the mid 1990s, sales of these products were dropping off, and the company's stock price had decreased significantly since 1990. In July 1996, Cross established a new division it called the Pen Computing Group (PCG) in an effort to "bridge ... the worlds of traditional and electronic paper," to expand the company's traditional product base, and "to return Cross to acceptable margins and earnings."
One of these PCG products was the CrossPad, unveiled in November 1997, and first shipped in March 1998. The CrossPad XP, a smaller model, was introduced to the market in October 1998. The CrossPads were electronic note pads with digital pens, with which a user wrote on a note pad atop a battery powered unit. The pens wrote on the paper in the traditional way and also recorded the pen strokes for later connection to a computer. Once the information was stored in a computer, it could be viewed, searched, and otherwise used.
There was a great deal of optimism about the CrossPads and their positive impact on Cross as a whole. On September 17, 1997, even before unveiling the CrossPad, Cross issued a press release announcing that the company expected at least $25 million in profitable sales from PCG in 1998. On March 23, 1998, Cross filed a 10-K report with the SEC for the fiscal year 1997, which stated: "We look at 1998 as a year where ... our Pen Computing Group will provide its first year of significant sales and earnings." The bulk of PCG's business was the CrossPad product line. In an April 1998 article in Value Line, an investment publication, Cross's management said that sales of the CrossPad would drive PCG's growth, and predicted sales of $200 million in the year 2000. In a June 1998 article in Barron's, another investment publication, management predicted that CrossPad could triple the size of the company. On June 30, 1998, the Cross share price peaked for the class period at $14.25.
In Cross's 1998 filings with the SEC, the company continued to report significant sales growth for PCG products. In a business article dated February 4, 1999, the Providence Journal quoted Brian Mullins, the Director of Marketing for PCG, as saying that PCG's "sales for all of 1998 did meet the Company's goal of $25 million in sales."
Despite the earlier optimism, Cross began to lower the market's expectations beginning in early 1999. The same February 4 Providence Journal article discusses Mullins's comments on the recently announced price reductions for both the CrossPad and the CrossPad XP. He stated that the price cuts were not related to the sales of the products but were "planned... from the get go" and were expected by the retailers. The article paraphrases Mullins as saying that "even with the price cuts, the company will still make a profit." He also said that more price cuts were expected later in the year. On March 23, 1999, the company filed its 10-K report with the SEC. The report stated the success of the CrossPad sales in 1998, but it also acknowledged the price reductions and "greater marketing support and technical development [than] planned, which resulted in a loss for Pen Computing operations."
On April 22, 1999, Cross announced in a press release that the company's sales had dropped dramatically from $9 million in the first quarter of 1998 to $1.1 million in the first quarter of 1999. It also expressed its expectation that revenues from PCG would be a great deal lower in 1999 than they were in 1998.
On the same day, Cross's management held a conference call with securities analysts and investors to discuss the company's results for the first quarter of 1999. During the call, Russell Boss, President and CEO of Cross, explained that PCG sales had decreased in the first quarter "because of price protections." He also mentioned "take backs" from customers. Robert Byrnes, President and CEO of PCG also spoke about "price protection," and said that the price reductions were part of the company's original sales strategy. John Buckley, Cross's Executive Vice President and Chief Operating Officer, also acknowledged the company's price protection practices. Cross did not disclose any price protection plans or take back agreements in its public financial disclosures in 1998.
Also on April 22, Russell Boss and Bradford Boss announced that they were stepping down from their positions as CEO and executive Chairman respectively, and stepping into the positions of non-executive Chairman, and non-executive Chairman Emeritus. Immediately after the end of the class period, on April 22, 1999, the share price for Cross fell below $4.
PCG sales continued to decline in 1999. On May 13, 1999, the company filed a 10-Q report for the first quarter of the year and revealed for the first time in a SEC filing a "rebate" program it had with its customers. In a 10-Q report issued on August 13, 1999, the company reported over $8 million in losses for PCG in the second quarter of 1999, and an 85% decline in PCG sales compared to the same quarter the previous year. The company pointed to the excess inventory its customers had as a reason for the decrease in sales.
Finally, the CrossPad product line was discontinued at the end of 1999 because of poor performance in the market. In a Form 10-K filed on March 23, 2000, Cross's new President and CEO discussed PCG's decline in 1999. He stated:
Early in the year [1999] it became clear that our investment[] in the Pen Computing Group ... w[as] a significant drain on the Company's financial and human resources. As a result, in the fourth quarter, the Company discontinued the CrossPad product line....
The company also described a revenue recognition policy not disclosed earlier, which stated:
Aldridge, the plaintiff, brought a claim under section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (2000), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (...
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