Fecht v. Price Co.

• Decision Date: 20 November 1995
• Docket Number: No. 93-55541,93-55541
• Citation: 70 F.3d 1078
• Parties: Fed. Sec. L. Rep. P 98,946, 33 Fed.R.Serv.3d 658, 95 Cal. Daily Op. Serv. 8802, 95 Daily Journal D.A.R. 15,422 Max FECHT, On behalf of himself and all others similarly situated; Errol Marcus; Norman Cooper; Hamilton J. Sah, et al., Plaintiffs-Appellants, v. The PRICE COMPANY; Robert W. Price; Dennis R. Zook; Theodore Wallace, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1078

70 F.3d 1078

Fed. Sec. L. Rep. P 98,946, 33 Fed.R.Serv.3d 658,

95 Cal. Daily Op. Serv. 8802,

95 Daily Journal D.A.R. 15,422

Max FECHT, On behalf of himself and all others similarly situated; Errol Marcus; Norman Cooper; Hamilton J. Sah, et al., Plaintiffs-Appellants, v. The PRICE COMPANY; Robert W. Price; Dennis R. Zook Theodore Wallace, et al., Defendants-Appellees.

No. 93-55541.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 4, 1994.

Submission Withdrawn Oct. 20, 1994.

Resubmitted Jan. 3, 1995.

Decided Nov. 20, 1995.

William S. Lerach, Eric A. Isaacson & Dennis Stewart, Milberg, Weiss, Bershad, Hynes & Lerach, San Diego, California, for plaintiffs-appellants.

Gerald L. McMahon, James P. Delphey, Seltzer, Caplan, Wilkins & McMahon, San Diego, California, for defendants-appellees.

Appeal from the United States District Court for the Southern District of California.

Before: D.W. NELSON, NORRIS, and BOGGS, ^* Circuit Judges.

WILLIAM A. NORRIS, Circuit Judge:

Plaintiffs appeal the district court's dismissal of their securities fraud action on the grounds that it failed to meet the requirements of Fed.R.Civ.P. 12(b)(6) and 9(b). We review the district court's dismissal de novo, Wool v. Tandem Computers Inc., 818 F.2d 1433, 1439-40 (9th Cir.1987), and reverse and remand to the district court.

I

Over the course of two days in early April, 1992, the price of the stock of The Price Company ("Company") fell from $45 per share to $32 per share. The decline occurred immediately after the Company announced a drop in its net income for the first quarter of 1992, the first year-to-year earnings decline in the Company's history. On the day following the announcement, plaintiffs filed this class action seeking damages for violations of Secs. 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), Rule 10b-5 promulgated by the Securities and Exchange Commission ("SEC"), and various California laws prohibiting fraud.

In their second amended complaint ("Complaint"), plaintiffs allege that prior to the April 2 announcement, the Company and three of its top-ranking officers intentionally misrepresented the financial condition of the Company, in particular its expansion program's prospects for enhancing the Company's earnings. The Complaint cites various public statements--either prepared by the Company itself (Shareholder Reports, Form 10-Qs, Form 10-K, newspaper interviews) or prepared by securities analysts with the approval and guidance of the Company--and alleges that these statements created the impression that the Company was successfully expanding its retail warehouse operations when, in fact, the Company's expansion program was failing. Complaint, pp 27-56, 59. The Complaint asserts that these statements were thus "false and misleading and operated to inflate the market price of Price Company's publicly traded securities." Complaint p 25. The Complaint also alleges that the Company's SEC reports were "false and misleading because of their omission of the material adverse information" known to the defendants regarding the expansion program. Complaint p 26. The district court concluded that the allegations of 10b-5 violations and of fraud were insufficient and dismissed the Complaint pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) without leave to amend.

II

The district court held that the Complaint failed to plead adequately the first element of a 10b-5 cause of action--that the defendant made materially misleading statements or omissions, Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 983-84, 99 L.Ed.2d 194 (1988). After examining the full texts of the source documents cited in the Complaint, ¹ the district court concluded as a matter of law that (1) the public statements were not misleading because they included cautionary or guarded language, and (2) the defendants' failure to disclose the losses sustained by the warehouses opened in the expansion program was not a material omission because it is the profitability of the Company as a whole, not any one particular aspect of the Company's operations, that is significant. We disagree that the question whether an omission is material or a statement is misleading can be determined in this case as a matter of law.

Whether an omission is "material" is a determination that "requires delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct 2126, 2133, 48 L.Ed.2d 757 (1976); accord United States v. Gaudin, --- U.S. ----, ----, 115 S.Ct. 2310, 2314, 132 L.Ed.2d 444 (1995) (materiality is an "application-of-legal-standard-to-fact sort of question ... [that] has typically been resolved by juries"); Kaplan v. Rose, 49 F.3d 1363, 1375 (9th Cir.1994) ("materiality" is a "fact-specific issue[ ] which should ordinarily be left to the trier of fact"), cert. denied, --- U.S. ----, 116 S.Ct. 58, 133 L.Ed.2d 21 (1995). Similarly, whether a public statement is misleading, or whether adverse facts were adequately disclosed is a mixed question to be decided by the trier of fact. Durning v. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir.) (quoting TSC Indus., 426 U.S. at 450, 96 S.Ct. at 2133, and stating that "[l]ike materiality, adequacy of disclosure is normally a jury question"), cert. denied, 484 U.S. 944, 108 S.Ct. 330, 98 L.Ed.2d 358 (1987). Therefore, only if the adequacy of the disclosure or the materiality of the statement is "so obvious that reasonable minds [could] not differ" are these issues "appropriately resolved as a matter of law." Durning, 815 F.2d at 1268; accord TSC Indus., 426 U.S. at 450, 96 S.Ct. at 2133.

The cautionary statements cited by the district court, when considered against the backdrop of the allegations set forth in Paragraph 59 of the Complaint ("Price Company's Undisclosed Adverse Information") ²--allegations which at this stage we must accept as true, Durning, 815 F.2d at 1267,--do not "so obviously" render the challenged public documents not misleading as to permit the adequacy of the disclosure to be determined as a matter of law.

For example, in one Report to Shareholders, the Company states that it "anticipates a continuation of its accelerated expansion schedule...." Complaint p 27. This statement, even in the context of the Company's acknowledgment that it "feel[s] a little more optimistic about our near-term future than [it] did at the end of the last quarter," which the district court relied on as an admission that the Company had not been too happy with the earlier sales, could reasonably be interpreted as conveying a level of confidence in the continued viability of the expansion program not borne out by the adverse facts allegedly known to the defendants. In another Report to Shareholders, the Company predicted an "overall improvement in the sales trend due [in part] to the large number (24) of new Price Clubs." Complaint p 32. This statement could also reasonably be considered misleading when, as alleged by plaintiffs, most of the new stores were actually losing money. The follow-up statement relied on by the district court that "[e]arnings may not increase at as high a rate as sales because of the ... operating costs associated with opening new Price Clubs," not only does not cure, but arguably contributes to the alleged misconception that the new stores were increasing the Company's profitability because it assumes an increase in earnings and focuses only on the rate of that increase. Thus, as these examples illustrate, the mix of information contained in the public documents issued by the Company does not clearly preclude "reasonable minds" from differing on the question of whether they included misleading statements.

Defendants attempt to support the district court's resolution of the "misleading" question as a matter of law by relying on the "bespeaks caution" doctrine. We have recognized that the "bespeaks caution" doctrine "provides a mechanism by which a court can rule as a matter of law ... that defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud." In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413 (9th Cir.1994) (citation omitted), cert. denied, --- U.S. ---- & ----, 116 S.Ct. 185 & 277, 133 L.Ed.2d 123 & 197 (1995). However, we have also recognized that the "bespeaks caution" doctrine reflects nothing more than "the unremarkable proposition that statements must be analyzed in context." Id. at 1414 (quoting Rubinstein v. Collins, 20 F.3d 160, 167 (5th Cir.1994)). In other words, the doctrine is merely a new name for a venerable precept that does not alter the standard for deciding questions as a matter of law.

The "bespeaks caution" doctrine is thus wholly consistent with our analysis that whether a statement in a public document is misleading may be determined as a matter of law only when reasonable minds could not disagree as to whether the mix of information in the document is misleading. Inclusion of some cautionary language is not enough to support a determination as a matter of law that defendants' statements were not misleading. See Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1097, 111 S.Ct. 2749, 2760, 115 L.Ed.2d 929 (1991) ("a misleading statement will not always lose its deceptive edge simply by joinder with others that are true...."). A motion to dismiss for failure to state a claim will succeed only when the documents containing defendants' challenged statements include "enough cautionary language or risk disclosure," Worlds of Wonder, 35 F.3d at 1413 (citation omitted) (emphasis added), that "reasonable minds" could not disagree that the challenged statements were not misleading. The defendants'...