In re Pec Solutions, Inc. Securities Litigation
| Decision Date | 18 March 2005 |
| Docket Number | No. 04-1257.,04-1257. |
| Citation | 418 F.3d 379 |
| Parties | In re PEC SOLUTIONS, INCORPORATED SECURITIES LITIGATION Matthew J. Ganey; Michael Ganz; Steven Riesselman; Patrick Sweeney, Plaintiffs-Appellants, and Jason Adelman, Individually and on behalf of all others similarly situated; John L. Walters, On behalf of himself and all others similarly situated; Barrett Windish, On behalf of himself and all others similarly situated; Ray Janisch, Individually and on behalf of all others similarly situated; Diane A. Lindell, Individually and on behalf of all others similarly situated; Stephen Govenar, Individually and on behalf of all others similarly situated; Ernest Gottdiener, Individually and on behalf of all others similarly situated, Plaintiffs, v. PEC Solutions, Incorporated; Paul Rice; Stuart Lloyd; David Karlgaard; Alan H. Harbitter, Defendants-Appellees, and Christos Bratiotis, Defendant. |
| Court | U.S. Court of Appeals — Fourth Circuit |
ARGUED: Samuel Howard Rudman, Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, L.L.P., Melville, New York, for Appellants. Lyle Roberts, Wilson, Sonsini, Goodrich & Rosati, Reston, Virginia, for Appellees. ON BRIEF: Donald J. Enright, Finkelstein, Thompson & Loughran, Washington, D.C.; Gregory M. Nespole, David L. Wales, Wolf, Haldenstein, Adler, Freeman & Herz, L.L.P., New York, New York; David A. Rosenfeld, Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, L.L.P., Melville, New York; Gregory M. Castaldo, Schiffrin & Barroway, L.L.P., Bala Cynwyd, Pennsylvania, for Appellants. Bruce G. Vanyo, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, California; Nicholas I. Porritt, Gregory A. Harris, Wilson, Sonsini, Goodrich & Rosati, Reston, Virginia, for Appellees.
Before WIDENER, NIEMEYER, and GREGORY, Circuit Judges.
Affirmed by published opinion. Judge GREGORY wrote the opinion, in which Judge WIDENER and Judge NIEMEYER joined.
In the wake of the terrorist attacks of September 11, 2001, the Transportation Security Administration ("TSA") was charged with securing the nation's 429 commercial airports. In early 2002, TSA contracted with Pearson Government Solutions, Inc. ("Pearson") to recruit, evaluate, and hire a federal security workforce to screen air travel passengers. Pearson, in turn, hired a number of subcontractors. It delegated to PEC Solutions, Inc. ("PEC") the task of electronically capturing and transferring to the appropriate authorities the applicants' fingerprints and biographical information. The Pearson subcontract was significant to PEC: it generated $23.7 million, or thirteen percent of PEC's Fiscal Year 2002 revenues, making it PEC's second-largest contract at the time. PEC's work on the Pearson subcontract was largely finished by September 30, 2002.
The administration of the TSA-Pearson contract became of concern to the government; originally priced at $104 million, it somehow ballooned to over $700 million. The reason for the increase is disputed,1 but it is clear that at some point TSA audited Pearson and, as a result, Pearson ultimately lost the contract.
A class of persons who bought PEC stock between October 23, 2002 and March 14, 2003 ("Appellants" or "the class") allege that PEC, along with David Karlgaard, Paul Rice, Stuart Lloyd, and Alan Harbitter, all officers and directors of PEC ("Individual Appellees," collectively with PEC, "Appellees"), fraudulently failed to disclose material information about the Pearson subcontract in violation of Sections 10(b) and 20(a) of the Securities and Exchange Commission Act of 1934 and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. The district court dismissed the suit on the Appellee's Fed.R.Civ.P. 12(b)(6) motion. For the following reasons, we affirm.
The claim of the class centers around public statements Appellees made on October 22, 2002, November 14, 2002, and February 21, 2003. We review the statements in this order, assuming Appellants' pleadings as true.
After trading ended on October 22, 2002, PEC issued a press release announcing its results for the third quarter of 2002 (ending September 30, 2002) and held a conference call. PEC reported earnings of $0.25 per share, exceeding analysts' estimates of $0.17. Appellee Lloyd, PEC's Chief Financial Officer:
• predicted that PEC's revenues would grow to between $50 and $52 million in the fourth quarter of 2002, and between $240 and $260 million in fiscal year 2003, which constituted a 30-40% increase over the current year. J.A. 53.
• announced that PEC's "DSOs [Day Sales Outstanding] for the quarter were 88 days, down from the last quarter's 91 days." Id. at 55.
Appellee Rice, PEC's Chief Operating Officer, noted that:
• "PEC experienced significant acceleration in certain engagements related to the federal government's homeland security mission," id.;
• "significant incremental orders were received for PEC's transportable automated fingerprint capture and biometric identification (called PACIS)[,]" id. at 54; and
• Congress had not yet approved the Department of Homeland Security bill but stated that he did not expect PEC to be affected negatively by this governmental environment. Id. at 55.
• PEC's "pipeline," or future business demand, was estimated at $60 million ("unfactored") and $53 million ("factored") for the fourth quarter of 2002 and $317 million ("unfactored") and $190 million ("factored") for the full year 2003. Id. at 56.
Appellee Karlgaard, PEC's Chief Executive Officer, recited favorable financial information including that:
• "this was truly an exceptional quarter ... partly because of quick response orders for mobile biometric solutions relating to homeland security[,]" id.;
• PEC's year-to-year net income increased by nearly 100 percent, id. at 56-57;
• this growth positioned PEC to meet its revenue objectives for the year and increase future earnings guidance, id.; and
• PEC experienced "solid fundamental performance throughout our company." Id. at 56.
These were not the only relevant statements made by Appellees. At the beginning of the conference call John McNeilly, PEC's Manager of Media and Investor Relations, warned that,
we may make forward-looking statements that involve risks and uncertainties. These risks and uncertainties could cause PEC Solutions' results to differ materially from management's current expectations and adversely affect the financial condition of the Company.
J.A. 244. PEC's 2001 10-K annual report (dated March 29, 2002), which McNeilly incorporated by reference, see id. at 244, included a long list of risk factors written in plain English. See id. at 282-89. Included in this discussion were the facts that any weakened relationships with the federal government or prime contractors could harm PEC's business, Id. at 282, 284, and that PEC's revenues could be negatively affected by government contract audits, which were routine. Id. at 286. Additionally, an unidentified company representative also specifically hedged predictions for future revenues based on the Pearson subcontract, explaining that, because the contract was largely complete, "we have to start speculating more as we talk about the future and what other elements of it they're going to engage us on." Id. at 263. The next day PEC's stock price rose to $31.11 from $26.83 per share.
PEC filed its form 10-Q for the third quarter of 2002 on November 14, 2002. The report reiterated the Company's earnings as released on October 22, noted that "[p]ayments to the Company on contracts with agencies and departments of the U.S. Government are subject to adjustment upon audit by the U.S. Government[,]" J.A. 58. It also stated that "management believes the effect of audit adjustments, if any, on periods not yet audited, will not have a material effect on the financial statements." Id. The report explained, inter alia, that, "[i]n the opinion of management, all adjustments consisting of normally recurring accruals, considered necessary for a fair presentation, have been included." Id.
On February 11, 2003, PEC announced its results for the fourth quarter and fiscal year 2002 through a press release and a conference call. Appellee Karlgaard stated that 2002 was "a record year in growth and profitability for the company" and that PEC J.A. 59. Annual earnings-per-share were announced at 20 cents, which was at the top of the predicted range of 18 to 20 cents, and total fiscal year 2002 revenues were $48.3 million, just missing the projected range of $50 to $52 million. Id. Appellee Lloyd slightly lowered PEC's guidance for fiscal year 2003's annual revenue from $240-260 million to $240-255 million, which still constituted a 30-40% rate of growth in revenue. Id. at 60.
PEC also stated that there was a "temporary discontinuity" in the Pearson subcontract.2 Id. Appellee Rice noted that:
• the contract was largely completed and that PEC's revenue shortfall was "largely related to [our] biometrics program and sort of spinning one phase of that effort down and not spinning up the next phase of that effort in the manner that we expected." Id.
• PEC believed its homeland security and public safety technology assistance programs had a "strong possibility of contributing substantial sort of [sic] growth revenue" and could "ramp quickly." Id. at 60.
• PEC was adversely affected by the delay in passing the 2003 federal budget, but that "we're being pretty conservative with our expectations regarding the budget." Id.
An unidentified PEC representative also said that the first phase of the biometrics contract was largely complete and that the contract's "continuing resolution" was the "fundamental reason it's not...
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