Gross v. Summa Four, Inc.

Decision Date08 May 1996
Docket NumberNo. 96-1088,96-1088
Citation93 F.3d 987
PartiesFed. Sec. L. Rep. P 99,290, 35 Fed.R.Serv.3d 1157 David GROSS, Plaintiff, Appellant, v. SUMMA FOUR, INC., Barry R. Gorsun, James J. Fiedler, John A. Shane, William M. Scranton, and Robert A. Degan, Defendants, Appellees. . Heard
CourtU.S. Court of Appeals — First Circuit

Arthur R. Miller, with whom Lee S. Shalov, Milberg Weiss Bershad Hynes & Lerach LLP, Jules Brody, Mark A. Levine, Stull Stull & Brody, Edward L. Hann, McLane, Graf, Raulerson & Middleton, Joseph H. Weiss, and Weiss & Yourman, New York City, were on brief for appellant.

Peter J. Macdonald, with whom Donald J. Williamson and Hale and Dorr, Boston, MA, were on brief for appellees.

Before STAHL, Circuit Judge, CAMPBELL, Senior Circuit Judge, and LYNCH, Circuit Judge.

STAHL, Circuit Judge.

Investor David Gross appeals from the district court's dismissal of his securities fraud claim against Summa Four, Inc., its president, and other Summa Four officers and directors. 1 Gross claims that Summa Four committed "fraud on the market" by making a series of public statements from January to July 1994 that were either materially misleading in and of themselves, or incomplete and misleading due to the omission of materially relevant facts. Gross further complains that Summa Four improperly overstated its revenue during the same time period. After careful review, we affirm the district court's dismissal of Gross's claims.

I. Background

Summa Four is a Delaware corporation with its principal place of business in Manchester, New Hampshire. It develops and manufactures advanced-technology switching and signaling systems for use in telecommunications networks, which it markets and distributes to clients worldwide.

On September 23, 1993, Summa Four successfully completed an initial public offering ("IPO") of its common stock. The individual defendants sold a portion of their shares into the IPO (at a price of $17 per share), but remained significant shareholders following the offering. As provided in a "lock-up" agreement with the underwriter, the individual defendants were prohibited from selling any retained shares in the company for 180 days following the date of the offering. In late February 1994, however, the individual defendants obtained special permission from the underwriter to sell, and did sell, over 130,000 shares of Summa Four stock at an average market price in excess of $38 per share.

Gross, who purports to sue on behalf of himself and all other investors similarly situated, purchased 200 shares of Summa Four stock in late May 1994 at a price of approximately $27.50 per share. On July 5, 1994 (the closing date of the class period), 2 Summa Four's stock price fell from $22.25 to $11.75 per share following the company's announcement that its expected results for the first quarter of fiscal year 1995 (ending June 30, 1994) would fall short of earlier projections. Shortly thereafter, Summa Four terminated defendant James Fiedler who had served as its president throughout the class period.

A. Summa Four's Public Statements

From January to July 1994, Summa Four issued several public statements touting the company's performance and profitability. In the complaint, Gross relies on excerpts from three such statements to establish his claims of securities fraud. The first two excerpts are taken from press releases dated January 18 and May 3, 1994, that accompanied the release of Summa Four's results for the third and fourth quarters of its 1994 fiscal year. The third excerpt is taken from a June 29, 1994, letter to the shareholders from Summa Four's then president James Fiedler. The June 29 letter was sent in advance of the end of the first quarter of Summa Four's 1995 fiscal year. The relevant portions of the three statements are quoted below.

1. January 18, 1994, press release:

Competition at all levels and alternative technologies caused by divestiture in the U.S. and privatization in other markets are fueling growth for new customized services. We are also seeing increased demand for our SDS distributed switch in a number of international markets including China, Chile and Columbia where there is rapid development in infrastructure.... The SDS distributed switch is becoming the platform of choice for rapidly developing and deploying network-based enhanced services worldwide.

2. May 3, 1994, press release:

In the fourth quarter [ending March 31, 1994], the Company received significant orders from AT & T, McCaw, Sprint, GTE, Unisys, and IBM to address a broad range of applications.... These new orders were for both new and existing applications, domestically and internationally.

3. June 29, 1994, letter to shareholders:

We are pleased to report to you that fiscal year 1994, ended March 31, 1994, was a watershed year in Summa Four's history. It was a year in which we strengthened our competitive position, recorded our eighth consecutive increase in quarterly revenues, and generated record net income.

Our strong financial performance is primarily the result of our initiatives in the highly competitive long distance market.... Summa Four is committed to maintaining its worldwide leadership position in the public network-based distributed switch market. We have preeminent customers worldwide, broad-based strategic distribution channels, public network-certified products, a strong financial position, and an experienced management team.

Gross alleges that, during the class period, Summa Four possessed internal reports, documents, and board meeting minutes revealing that the company was experiencing declining growth in revenue and earnings, delayed orders, significant increases in expenses, and difficulties in its international operations. Specifically, in order to support his claims that the three public statements were materially false or misleading, Gross relies on certain internal "Flash Reports" and "Monthly Operating Reports" for the months of January through April 1994, and recorded minutes from board and internal operation meetings held in May and June 1994. As we progress with our analysis, we will discuss in more detail the content of these internal documents.

B. The Present Lawsuit

On July 12, 1994, shortly after Summa Four's announcement of its expected results for the first quarter of fiscal year 1995 and the ensuing sudden decline in Summa Four's stock price, Gross filed this securities fraud action in the New Hampshire federal district court. Gross purported to bring the complaint on behalf of all investors who purchased Summa Four stock during the class period. Following Summa Four's initial motion to dismiss, the district court granted Gross limited discovery. Upon completion of that discovery, Gross amended his complaint.

Subsequently, Summa Four moved to dismiss the amended complaint. After briefing and oral argument, the district court granted the motion, rejecting all of Gross's claims. The court disagreed with Gross that the excerpted portions of the statements could be viewed as affirmative misrepresentations, stating that A reasonable person could not infer from the pleaded acts that demand for [Summa Four's products] was no longer growing, that significant orders had not been received from major corporations, or that the company was not in a "strong financial position" simply because it did not meet its short-term budget projections, its orders for one month were lower than expected, and its international operations were in a state of disarray.

The court also rejected Gross's claim that the statements were misleading by omission. The court noted that, while many of the facts Gross alleged to support that allegation "might have been important to the reasonable investor," they were not sufficient to indicate that the challenged statements were so incomplete as to be misleading. The court further rejected Gross's final claim that Summa Four had overstated its revenue, reasoning that the allegations on which Gross relied did not reasonably support the claim. Gross now appeals. 3

II. Discussion

Gross contends that the district court erred in dismissing his claims. He argues that the amended complaint adequately alleged that Summa Four had a duty, which it breached, to disclose material nonpublic information in its possession necessary to make its public statements not materially misleading. Gross also contends that Summa Four improperly overstated its revenue and earnings during the class period by not following generally accepted accounting principles ("GAAP"). After discussing the standard of review and the relevant securities law, we address each issue in turn.

A. Standard of Review

We review the district court's dismissal of Gross's amended complaint de novo, taking all well-pleaded allegations as true and giving Gross the benefit of all reasonable inferences. See Roeder v. Alpha Indus., Inc., 814 F.2d 22, 25 (1st Cir.1987). Nonetheless, because Gross alleges fraud, he is subject to the heightened pleading requirements of Fed.R.Civ.P. 9(b), which provides that "[i]n all averments of fraud or mistake, the circumstances constituting the fraud or mistake shall be stated with particularity."

Rule 9(b) sets a demanding standard in order to "minimize the chance that a plaintiff with a largely groundless claim will bring a suit and conduct extensive discovery in the hopes of obtaining an increased settlement, rather than in the hopes that the process will reveal relevant evidence." Romani v. Shearson Lehman Hutton, 929 F.2d 875, 878 (1st Cir.1991) (internal quotations and citations omitted). We have been especially strict in demanding adherence to Rule 9(b) in the securities context, id., expressly stating that

"general averments of defendants' knowledge of material falsity will not suffice. Consistent with Fed.R.Civ.P. 9(b), the complaint must set forth specific facts that make it reasonable to believe that the defendant[s] knew that a statement...

To continue reading

Request your trial
129 cases
  • Lacedra v. Donald W. Wyatt Detention Facility
    • United States
    • U.S. District Court — District of Rhode Island
    • September 13, 2004
    ...Cooperman v. Individual Inc., 171 F.3d 43, 46 (1st Cir.1999); Figueroa v. Rivera, 147 F.3d 77, 80 (1st Cir.1998); Gross v. Summa Four, Inc., 93 F.3d 987, 991 (1st Cir.1996). Dismissal under Rule 12(b)(6) is appropriate only if "it appears beyond doubt that the plaintiff can prove no set of ......
  • In re Party City Securities Litigation
    • United States
    • U.S. District Court — District of New Jersey
    • May 29, 2001
    ...... plaintiffs [must] state what the unreasonable practices were and how they distorted the disclosed data."); Gross v. Summa Four, Inc., 93 F.3d 987, 996 (1st Cir.1996) (plaintiffs failed to "allege[] the amount of the putative overstatement or the net effect it had on the company's earnin......
  • In re Milestone Scientific Securities Litigation
    • United States
    • New Jersey Supreme Court
    • May 31, 2000
    ...earnings is not a sufficiently particular claim of misrepresentation." FTP Software, 194 F.3d at 203 (quoting Gross v. Summa Four, Inc., 93 F.3d 987, 996 (1st Cir.1996) (internal punctuation At issue in FTP Software, was whether the allegations of the plaintiff regarding alleged violations ......
  • In re Enron Corp..Sec., Derivative & Erisa Lit.
    • United States
    • U.S. District Court — Southern District of Texas
    • March 12, 2003
    ...108 S.Ct. 978, 99 L.Ed.2d 194 (1988)("Silence, absent a duty to disclose, is not misleading under Rule 10b-5."); Gross v. Summa Four, Inc., 93 F.3d 987, 992 (1st Cir.1996); Starkman v. Marathon Oil Co., 772 F.2d 231, 238 (6th Cir. 1985)("[T]he established view is that a `duty to speak' must......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT