Greenberg v. Crossroads Systems, Inc.

• Decision Date: 14 April 2004
• Docket Number: No. 03-50311.,03-50311.
• Citation: 364 F.3d 657
• Parties: Stephen GREENBERG, Individually and on behalf of all others similarly situated; Aviel Marrache, Lead Plaintiff; Charles Binks, Individually and on behalf of all others similarly situated; Ryan Bristol, on behalf of himself and all others similarly situated; Ryan W. Connors, on behalf of himself and all others similarly situated; Peter Margonelli, on behalf of themselves and all others similarly situated; Randall Simon, on behalf of themselves and all others similarly situated; Roger D. Lynch, individually and on behalf of all others similarly situated; Myrna Alzaga, Individually and on behalf of all others similarly situated; Sam Rhoades, Individually and on behalf of all others similarly situated; Steven Wallerstien, on behalf of all others similarly situated; Eric Schuessler, on behalf of himself and all others similarly situated; Ian Gotlib, on behalf of himself and all others similarly situated, Plaintiffs-Appellants, v. CROSSROADS SYSTEMS, INC.; Brian R. Smith; Reagan Y. Sakai; John R. Middleton, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

364 F.3d 657

Stephen GREENBERG, Individually and on behalf of all others similarly situated; Aviel Marrache, Lead Plaintiff; Charles Binks, Individually and on behalf of all others similarly situated; Ryan Bristol, on behalf of himself and all others similarly situated; Ryan W. Connors, on behalf of himself and all others similarly situated; Peter Margonelli, on behalf of themselves and all others similarly situated; Randall Simon, on behalf of themselves and all others similarly situated; Roger D. Lynch, individually and on behalf of all others similarly situated; Myrna Alzaga, Individually and on behalf of all others similarly situated; Sam Rhoades, Individually and on behalf of all others similarly situated; Steven Wallerstien, on behalf of all others similarly situated; Eric Schuessler, on behalf of himself and all others similarly situated; Ian Gotlib, on behalf of himself and all others similarly situated, Plaintiffs-Appellants, v. CROSSROADS SYSTEMS, INC.; Brian R. Smith; Reagan Y. Sakai; John R. Middleton, Defendants-Appellees.

No. 03-50311.

United States Court of Appeals, Fifth Circuit.

April 14, 2004.

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Sanford Svetcov (argued), Dennis Jeremy Herman, Milberg, Weiss, Bershad, Hynes & Lerach, Laurence D. King, Kaplan, Fox & Kilsheimer, San Francisco, CA, William S. Lerach, Milberg, Weiss, Bershad, Hynes & Lerach, San Diego, CA, Frederic S. Fox, Kaplan, Kilsheimer & Fox, New York City, James D. Baskin, III, The Baskin Law Firm, Austin, TX, Katherine Blanck Radsan, Washington, DC, for Plaintiffs-Appellants.

Paul R. Bessette (argued), Michael John Biles, Jennifer R. Brannen, Akin, Gump, Strauss, Hauer & Feld, Austin, TX, for Defendants-Appellees.

Appeal from the United States District Court for the Western District of Texas.

Before DAVIS, WIENER, and STEWART, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Purchasers of Crossroads Systems, Inc. stock between January 25, 2000, and August 24, 2000, filed this putative class action against Crossroads and three of its officers seeking recovery for securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5. The action is based on several statements made by defendants relating to the capabilities of Crossroads's products and financial results for the first three quarters of Fiscal Year 2000. The defendants moved for partial summary judgment on the ground that the plaintiffs cannot establish reliance on any of Crossroads's alleged false statements under the theory of fraud-on-the-market. We agree with the district court's analysis as to most of the alleged false statements but disagree with respect to the allegedly false statements made on 24 May 2000, 6 June 2000, 12 June 2000, and 5 July 2000. We therefore vacate the summary judgment as to these latter statements and remand for further proceedings.

I.

Crossroads is a public company based in Austin, Texas, that designs, manufactures, and sells storage routers.¹ On January 25, 2000, Crossroads announced that production was beginning on its "Third Generation" of storage routers, comprised of models 4150, 4250, and 4450. The release included details on several features of the new line of routers, such as interoperability, increased speed, and server-free backup. Over the next several months, Crossroads made additional statements concerning the capabilities of its Third Generation line of routers. On July 27, 2000, Crossroads released multiple items of unfavorable news, including the news that Crossroads had issued a temporary stop-ship of its products because of interoperability problems. After the July 27 release, the price of Crossroads stock fell by about one-half.

In February, 2001, the plaintiffs filed this private securities fraud class action on behalf of purchasers of Systems, Inc. (Crossroads) common stock between January 25, 2000, and August 24, 2000 (the "Class Period"), alleging violations by Crossroads and its principal executives of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The Plaintiffs alleged that during the Class Period Crossroads made several material public misrepresentations overstating the interoperability and other capabilities of its router products that tended to inflate the price of the company's stock. In addition, the plaintiffs alleged that Crossroads overstated the company's financial results during the class period.² Plaintiffs also alleged that the "truth" about these statements was revealed on 27 July 2000 and 24 August 2000, causing the price of Crossroads stock to decline sharply.

The Defendants filed a motion to dismiss under Rule 12(b)(6). The district court denied this motion on August 15, 2001. In September of 2001, this court issued its opinion in Nathenson v. Zonagen, Inc., 267 F.3d 400 (5th Cir.2001), which clarified, inter alia, the rule in this circuit concerning the proof required to establish reliance in a securities fraud case based on fraud-on-the-market. After completing discovery and deposing the lead plaintiff, Crossroads filed a motion for partial summary judgment arguing that under Nathenson the plaintiffs were not entitled to a presumption of reliance under the fraud-on-the-market theory of their case. The district court held that under Nathenson, plaintiffs asserting a fraud-on-the-market theory are not entitled to the presumption of reliance where the alleged misrepresentations do not affect the market price of the stock. The district court concluded that an efficient market will digest unexpected new information within two days of its release. The district court used this two-day window to determine whether the alleged misrepresentations sufficiently affected the price of Crossroads stock so that the plaintiffs would be entitled to the fraud-on-the-market presumption of reliance.³ For various reasons discussed below, the district court concluded that the plaintiffs were not entitled to the presumption of reliance for any of the alleged misrepresentations. The district court then designated this partial summary judgment a final judgment and dismissed the plaintiffs case.

II.

We review the district court's grant of summary judgment de novo, considering all evidence in a light most favorable to the non-movant. Campos v. City of Houston, 113 F.3d 544, 545 (5th Cir.1997). Summary judgment will be affirmed where, after independent review, there is no genuine issue of material fact and the movant is entitled to a judgment as a matter of law. Walker v. Thompson, 214 F.3d 615, 624 (5th Cir.2000). Summary judgment may be affirmed on any basis supported by the record. Conkling v. Turner, 138 F.3d 577 (5th Cir.1998).

III.

To state a private securities fraud claim under § 10(b)⁴ and Rule 10b-5,⁵ "a plaintiff must allege, in connection with the purchase or sale of securities, (1) a misstatement or an omission (2) of material fact, (3) made with scienter (4) on which plaintiff relied (5) that proximately caused [the plaintiffs'] injury." Nathenson v. Zonagen, Inc., 267 F.3d 400, 406-07 (5th Cir.2001) (quotation omitted) (emphasis added). The Supreme Court recognized that requiring proof of "actual reliance" in class actions was unduly burdensome because of the obvious difficulty of showing that every class member individually relied on the alleged misstatement. To ease this burden the Supreme Court, in Basic v. Levinson, recognized the securities fraud theory of fraud-on-the-market. 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). Under this theory, reliance on the statement is rebuttably presumed if the plaintiffs can show that (1) the defendant made public material misrepresentations, (2) the defendant's shares were traded in an efficient market, and (3) the plaintiffs traded shares between the time the misrepresentations were made and the time the truth was revealed. Id. at 247 n. 27, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194.⁶ The Defendants may rebut this presumption by "[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at fair market price [.]" Id. at 247, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194.

During the discovery phase of the instant case, this court issued its opinion in Nathenson v. Zonagen, Inc., 267 F.3d 400, 406-07 (5th Cir.2001), where we stated,

Basic plainly states that the presumption of reliance may be rebutted by "[a]ny showing that severs the link between the alleged misrepresentation and ... the price received (or paid) by the plaintiff." This would include a showing that "the market price would not have been affected by" the alleged "misrepresentations," as in such a case "the basis for finding that the fraud had been transmitted through market price would be gone."

Nathenson, 267 F.3d at 414 (citations omitted). Accordingly, Nathenson held that "in cases depending on fraud-on-the-market theory, [] the complained of misrepresentation or omission [must] have actually affected the market price of the stock[.]" Id. at 415. The Nathenson plaintiffs could not show that the price of Zonagen's stock was actually affected by the allegedly false statements, either by showing an increase in price following the allegedly false positive statements or a corresponding decrease in price following the revelation of the misleading nature of these statements. As such, the plaintiffs were not entitled to the fraud-on-the-market presumption of reliance.

Crossroads moved for partial summary judgment on the issue of presumption of reliance based on Nathenson's requirement of an actual effect on stock price. The district court noted that the price of Crossroads stock either declined or did not increase in a statistically significant manner in the two days following the alleged misrepresentations made on 25 January 2000, 22 February 2000, 23 February 2000, 24 March 2000, 27 March 2000, 19 April 2000, 23 May 2000, 24 May 2000, 6 June 2000, 12 June 2000,...