In re Credit Suisse First Boston Corp.

Decision Date12 December 2005
Docket NumberNo. 05-1646.,05-1646.
Citation431 F.3d 36
PartiesIN RE CREDIT SUISSE FIRST BOSTON CORP. (Agilent Technologies, Inc.) Analyst Reports Securities Litigation. Richard Brown et al., Plaintiffs, Appellants, v. Credit Suisse First Boston LLC et al., Defendants, Appellees.
CourtU.S. Court of Appeals — First Circuit

Brian P. Murray, with whom Murray, Frank & Sailler LLP, Marc I. Gross, Pomerantz Haudek Block Grossman & Gross LLP, David Pastor, and Gilman and Pastor LLP were on brief, for appellants.

Lawrence Portnoy, with whom Davis Polk & Wardwell, Robert A. Buhlman, Siobhan E. Mee, and Bingham McCutcheon LLP were on brief, for appellee Credit Suisse First Boston LLC.

Warren Feldman, Jeff E. Butler and Clifford Chance LLP on brief for appellee Rogers.

Jeffrey B. Rudman, with whom Stephen A. Jonas, Jonathan A. Shapiro, Matthew A. Stowe, Wilmer Cutler Pickering Hale and Dorr LLP, Kenneth G. Hausman, Barbara A. Winters, Mark A. Sheft, and Howard Rice Nemerovski Canady Falk & Rabkin were on brief, for appellee Quattrone.

Before SELYA and LYNCH, Circuit Judges, and SMITH,* District Judge.

SELYA, Circuit Judge.

Following a flurry of investigations into the propriety of a single firm providing investment banking services to a publicly held corporation while at the same time opining as to the prospects of the corporation's stock, the plaintiffs in this case sued one such firm, defendant-appellee Credit Suisse First Boston Corp. (CSFB). They alleged that they had sustained losses resulting from false and misleading statements made by CSFB's analysts with respect to the stock of Agilent Technologies, Inc. (Agilent). The district court, in a lengthy unpublished opinion, dismissed the plaintiffs' consolidated and amended class action complaint after concluding that the plaintiffs had not met the pleading standards required for such claims. See In re CSFB Corp. (Agilent Techs., Inc.) Analyst Reports Sec. Litig., No. 02-12056, slip op. at 19 (D.Mass. Mar. 31, 2005) (D.Ct.Op.). Although the question is close — there is very little authority dealing with the requirements for pleading subjective falsity in a misstatement of opinion case — we conclude that the plaintiffs' allegations are insufficient to show that CSFB's analyst reports concerning Agilent (its quondam investment banking client) were at odds with the analysts' privately held beliefs. Consequently, we affirm the judgment below.


In reviewing the dismissal of a civil action under Rule 12(b)(6), we accept the factual averments of the plaintiffs' complaint. See Redondo-Borges v. U.S. Dep't of Hous. & Urban Dev., 421 F.3d 1, 5 (1st Cir.2005). We follow that praxis here.

A. Overview.

Agilent is a Hewlett-Packard "spin-off" that provides enabling solutions to markets within the communications, electronics, life sciences, and chemical industries. Its three primary lines of business include test and measurement, semiconductor products, and chemical analysis. The plaintiffs, appellants here, are members of a putative class of persons who acquired Agilent stock at various times from December 13, 1999 through February 20, 2001 (the class period). The gist of their complaint is that analysts at CSFB, led by defendant-appellee Elliot Rogers, issued reports recommending the purchase of Agilent stock despite their lack of faith in the rosy picture they were painting. These bullish reports were issued, the plaintiffs say, in an effort to curry favor with Agilent and thereby secure future investment banking business. A side effect, however, was an artificial inflation of the price of the stock resulting in a wide disparity between cost and true value. Unaware of that disparity, the plaintiffs acquired Agilent securities at sky-high prices and suffered losses when the stock plummeted.

B. CSFB's Overarching Fraudulent Culture.

CSFB is a global financial services firm, dealing, among other things, in investment banking and investment research. At all times material hereto, defendant-appellee Frank P. Quattrone served as the head of CSFB's global technology group (the Tech Group). Although Quattrone was an investment banker, he had complete control over the Tech Group's research activities. In that capacity, he helped to determine the analysts' compensation and had the power to terminate their employment.

Quattrone's omnipotence within the Tech Group allowed him free rein to set up a system in which the analysts were pressured, from time to time, to issue unduly positive ratings on certain stocks in order to improve the chances of garnering investment banking business for CSFB. Quattrone promised potential clients favorable analyst reports and then used a carrot-and-stick technique with his analysts to redeem those promises. During Quattrone's reign, an analyst's bonus (which comprised a major portion of his or her remuneration) was likely to correlate positively to that analyst's support of the Tech Group's investment banking activity. Conversely, analysts who issued negative reports risked being reprimanded and passed over for choice assignments.

CSFB tied its analyst reports to a four-tiered ranking format, composed of "strong buy," "buy," "hold," and "sell" ratings. The plaintiffs, based on information gleaned from a former CSFB employee, averred that the format was effectively condensed into three tiers (dropping out the "sell" rating) and was jiggled for the benefit of investment banking clients. Allegedly, common practices included issuing a "hold" rating if the analyst actually believed stockholders should sell, affording a "buy" rating to virtually all investment banking clients or prospective clients, and using the "strong buy" rating only when the analyst actually believed that investors should purchase the stock.

The analysts attached to the Tech Group sometimes attended investment banking sales presentations, at which they would distribute sample reports (invariably portraying the potential investment banking client in an attractive light). This participation was intended to assure prospective clients that they would receive the benefit of positive reinforcement from the analysts should they choose to retain CSFB for their investment banking needs.

Quattrone's system initially proved to be a howling success; in 1999, for example, CSFB managed more initial public offerings (IPOs) in the United States than any other investment banking house. In the year 2000, the Tech Group accounted for almost half of CSFB's revenue from equity investment banking in the United States. Shortly thereafter, Quattrone's persistent dismantling of the compulsory "Chinese Wall" between banking and research, required by the National Association of Securities Dealers (NASD), inspired a series of governmental and regulatory investigations. In a single six-month period, from the fall of 2002 through the following spring, Massachusetts state securities regulators, the New York Attorney General, the NASD, and the Securities and Exchange Commission all initiated proceedings against CSFB related to the internal conflicts of interest that allegedly had caused CSFB's analysts to view the stock of CSFB's present and potential investment banking clients through rose-colored glasses.

C. CSFB's Involvement with Agilent.

CSFB's relationship with Agilent began when the Tech Group, assisted by Rogers, made a sales pitch to Agilent's top brass with an eye toward managing that company's forthcoming IPO. Agilent was impressed, and CSFB helped to take the company public on November 18, 1999. The stock, initially priced at $30 per share, closed at $44 after its first day of trading.

On December 13, 1999 — the first day of the class period — CSFB initiated its analyst coverage of Agilent stock with a "buy" rating contained in a report authored by Rogers and two of his confreres. The report set a twelve-month target price for the stock of $55 per share. That day, the stock closed at $45.50 per share, up $0.75 from the previous day's close.

CSFB published a second report, authored by the same trio of analysts, on February 18, 2000. This report reiterated the earlier "buy" recommendation and explained that Agilent's growth was spurred by "strong" orders for semiconductor products (up twenty-seven percent) and "reasonable gains in Test & Measurement." It discussed Agilent's six percent increase in test and measurement (T & M) orders under the heading "Good Orders, but Not Explosive." That day, the stock closed at $93.75 per share, down $3.25 from the previous day's close.

Four days after issuing this "buy" recommendation, Rogers sent the following e-mail to Agilent's Director of Investor Relations:

TMO order growth was 6%. Communications test and semi test were highlighted as key growth drivers. One would expect communications test growth to top 10% (vs.Q4:99). Growth in Teradyne's Q4:99 orders was above 40% sequentially, Credence's Jan:01 orders were up over that amount. Yet Agilent's TMO business only grew 6% despite two seemingly hot markets. What retarded your growth, or were Communications and Semi test less hot than you let on?

On March 6, 2000, Agilent stock closed at its class period high of $159 per share. Although the stock price tumbled thereafter, CSFB analysts maintained a "buy" rating in their third report (issued on May 19, 2000). That day the stock closed at $66.62 per share, down $4.38 from the previous day's close.

On July 20, 2000, Agilent released a statement indicating that third quarter earnings were expected to fall short of forecasts as a result of manufacturing constraints, component shortages, and sluggish sales attributable to two divisions. This press release came as a surprise to the market as a whole. The following day, the CSFB analysts issued their fourth report. The report maintained the stock's "buy" rating but...

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