In re Cerner Corp. Securities Litigation, 04-2662.

• Decision Date: 06 October 2005
• Docket Number: No. 04-2662.,04-2662.
• Citation: 425 F.3d 1079
• Parties: In re: CERNER CORP. SECURITIES LITIGATION. John A. Campagnuola, Individually and on Behalf of All Other Similarly Situated, Plaintiff, Phil Crabtree, Plaintiff/Appellant, v. Cerner Corporation; Neal Patterson; Mark Naulten; Paul Black; Clifford W. Illig; Earl H. Devanny, III; Glenn P. Tobin, Defendants/Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1079

425 F.3d 1079

In re: CERNER CORP. SECURITIES LITIGATION.

John A. Campagnuola, Individually and on Behalf of All Other Similarly Situated, Plaintiff, Phil Crabtree, Plaintiff/Appellant, v. Cerner Corporation; Neal Patterson; Mark Naulten; Paul Black; Clifford W. Illig; Earl H. Devanny, III; Glenn P. Tobin, Defendants/Appellees.

No. 04-2662.

United States Court of Appeals, Eighth Circuit.

Submitted: January 13, 2005.

Filed: October 6, 2005.

COPYRIGHT MATERIAL OMITTED

Stuart J. Guber, argued, Atlanta, GA (Edward H. Nicholson, Jr., James M. Evagelista, and Angela K. Drake, on the brief), appellant.

David H. Kistenbroker, argued, Chicago, IL (Pamela G. Smith, Theresa L. Davis, and J. Emmett Logan, on the brief), for appellee.

Before WOLLMAN, MURPHY, and BYE, Circuit Judges.

WOLLMAN, Circuit Judge.

Phil Crabtree, the lead plaintiff in a securities fraud class action against Cerner Corporation (Cerner) and several individual defendants, appeals from the district court's¹ dismissal of the consolidated class complaint, as well as the district court's denial of leave to amend the complaint. We affirm.

I.

Because Crabtree's appeal arises from the district court's grant of a motion to dismiss, we draw the relevant facts from the class complaint. See Fla. State Bd. of Admin. v. Green Tree Fin'l Corp., 270 F.3d 645, 648 (8th Cir.2001). Cerner sells clinical and management information systems to healthcare providers. Cerner also provides services and personnel to install, support, and implement its products. On April 3, 2003, after enjoying a span of thirteen consecutive quarters in which its reported earnings either met or exceeded estimates, Cerner announced that it would not meet its revenue and earnings projections for the first quarter of 2003 because of "a lower level of new business bookings in the quarter." Cerner attributed the shortfall to a variety of factors, including "a change in the competitive environment," "more challenging economics for health care provider organizations," and the company's "move to a more client-centric organizational structure," all of which affected Cerner's ability to replace deals that it had lost or "pushed with new business." In response to this announcement, Cerner's stock quickly lost approximately 45% of its value.

Shortly after the April 3 announcement, several securities fraud class actions were filed against Cerner and some of its officers and directors (collectively, the Individual Defendants). The district court consolidated those actions and appointed Crabtree to act as lead plaintiff on behalf of a class consisting of all persons who purchased or otherwise acquired Cerner securities between July 17, 2002, and April 2, 2003, inclusive (the class period). Crabtree subsequently filed a consolidated class action complaint, and he now alleges that Cerner and the Individual Defendants issued a series of statements during the class period that were materially false or misleading in violation of SEC Rule 10b-5. 17 C.F.R. § 240.10b-5. Crabtree also asserts that the Individual Defendants are jointly and severally liable for the alleged misstatements by virtue of their status as "controlling persons" of Cerner. See 15 U.S.C. § 78t(a).

Crabtree's claims encompass two groups of alleged misstatements. The first group concerns Cerner's future earnings projections. Crabtree argues that the Individual Defendants made favorable statements throughout the class period about Cerner's growth, the demand for its products, and Cerner's opinions on future earnings forecasts—specifically, that the demand for Cerner's products was "strong," that the company saw "substantial opportunities" in the future, and that the company was "comfortable" with certain earnings and performance estimates—while at the same time failing to disclose that: (1) Cerner was experiencing an increased level of competition and losing a material amount of sales as competitors slashed prices in order to take business from Cerner; (2) Cerner was offering substantial product and service discounts in order to close deals before the end of a given quarter; (3) to a material extent, clients were delaying or deferring purchases of Cerner's products, or deciding not to proceed with those purchases at all, due to general economic factors and to dissatisfaction with Cerner's performance; (4) Cerner had engaged in an aggressive revenue recognition policy, allowing the company to "pull in" revenue projected to be recognized in future quarters; (5) Cerner had reorganized its sales force, which negatively impacted the ability of the company to close certain deals; and (6) Cerner was increasingly focused on closing a small number of large deals under circumstances in which Cerner's bottom line was unusually sensitive to losing such deals. J.A. at 0052-0061. Crabtree claims that the omission of these facts rendered the favorable statements materially false and misleading.

The second group of disputed statements primarily addresses the underlying reasons for Cerner's repeated earnings successes. The Individual Defendants represented that such earnings successes were attributable to Cerner's "leadership position," "consistent execution," and "experience" in the industry. Id. Crabtree claims that these statements were materially misleading because the Individual Defendants failed to mention that Cerner had only attained its earnings numbers by pulling in sales revenues that were projected to be recognized in future quarters. Crabtree contends that this alleged failure to disclose the true reasons for Cerner's historical earnings successes made the company's statements about its historical results materially false and misleading.

After the consolidated class complaint was filed, Cerner and the Individual Defendants filed a motion to dismiss. The district court granted the motion to dismiss, holding that the complaint did not meet the heightened pleading standards for falsity and scienter required by the Private Securities Litigation Reform Act of 1995 (Reform Act). See 15 U.S.C. § 78u-4(b). The district court further found that amending the complaint would be futile, and thus denied Crabtree leave to amend.

II.

We review de novo the district court's grant of a motion to dismiss a securities fraud complaint. Fields v. AMDOCS Ltd. (In re AMDOCS Ltd. Sec. Litig.), 390 F.3d 542, 547 (8th Cir.2004). The district court's decision may only be affirmed if the plaintiffs can prove no set of facts which would entitle them to the relief requested. Migliaccio v. K-tel Int'l, Inc. (In re K-tel Int'l, Inc. Sec. Litig.), 300 F.3d 881, 888-89 (8th Cir.2002) We construe the complaint liberally and accept all facts pleaded therein as true, but reject conclusory or catch-all assertions of law and unwarranted inferences. Id. at 889.

The Reform Act provides that, to survive a motion to dismiss, a securities plaintiff must satisfy two heightened pleading standards. 15 U.S.C. § 78u-4(b)(3). First, the plaintiff must plead falsity by specifying each allegedly misleading statement and the reasons why each statement is misleading. 15 U.S.C. § 78u-4(b)(1). If falsity is alleged based upon information and belief, the complaint must state with particularity all facts on which the belief is formed. Id. In addition, the plaintiff must plead scienter by "stat[ing] with particularity facts giving rise to a strong inference that the defendants acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Crabtree's complaint meets neither standard.

A.

In order to satisfy the Reform Act's falsity pleading standard, a complaint may not rest on mere allegations that fraud has occurred. Chen v. Navarre Corp. (In re Navarre Corp. Sec. Litig.), 299 F.3d 735, 742 (8th Cir.2002). Instead, the complaint must indicate why the alleged misstatements "would have been false or misleading at the several points in time in which it is alleged they were made." Id. at 743. In other words, the complaint's facts must necessarily show that the defendants' statements were misleading. Fields, 390 F.3d at 549 (Wollman, J., concurring).

Crabtree's complaint alleges that Cerner's statements regarding future earnings were materially false and misleading because Cerner was losing deals due to increased competition, dissatisfied customers, a general economic downturn, an inexperienced sales force, and a neglect of smaller deals. The complaint is devoid, however, of any indication that this alleged loss of deals, even if "material," is necessarily inconsistent with Cerner's statements that its demand was "strong." A company could conceivably lose a material number of deals it had pursued, and yet continue to see a strong demand for its products and substantial future opportunities. Furthermore, there is no indication on the face of the complaint that even a material loss of deals necessarily rendered Cerner unable to achieve its projected earnings. Finally, and perhaps most importantly, the complaint does not identify a single specific deal that was lost due to alleged changes in Cerner's corporate structure and strategies. Without any indication that an undefined loss of sales necessarily would affect the company's overall demand or its ability to meet its future earnings projections, these allegations cannot survive the Reform Act's falsity standard.² Id. at 549-50.

The complaint's allegations regarding the alleged pulling in are similarly deficient. Although Crabtree is not required to describe in detail the circumstances of Cerner's pulling in activities, he is required to plead with particularity the "who, what, when, where, and how" of the pulling in.³ Navarre, 299 F.3d at 744-45. Here, Crabtree's complaint alleges that the pulling in took place and caused an overstatement in Cerner's earnings during each quarter in the class period and an impairment in Cerner's ability to meet future earnings guidance. The complaint fails, however, to allege the amount of any...