Parnes v. Gateway 2000, Inc.
| Citation | 122 F.3d 539 |
| Decision Date | 08 August 1997 |
| Docket Number | No. 96-1559,96-1559 |
| Parties | Fed. Sec. L. Rep. P 99,509, 38 Fed.R.Serv.3d 666 Ari PARNES; Deborah Slyne; Corey Emert; Faye Martin Anderson; Edward R. Pepper, on behalf of themselves and all others similarly situated, Appellants, v. GATEWAY 2000, INC.; Theodore W. Waitt; Richard D. Snyder; James Cravens; George H. Krauss; Douglas L. Lacey; Norman W. Waitt, Jr., Appellees. Faye Martin ANDERSON, on behalf of herself and all others similarly situated, Appellant, v. GATEWAY 2000, INC.; Theodore W. Waitt; Richard D. Snyder; James Cravens; George H. Krauss; Douglas L. Lacey, Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Reed R. Kathrein, San Francisco, CA, argued (Patrick T. Dougherty, William S. Lerach, Eric A. Isaacson, Randi D. Weinberger, Darren J. Robbins, and C. Benjamin Nutley, on the brief), for Appellants.
David C. Bohan, Chicago, IL, argued (Edwin E. Evans, Jerold S. Solovy and Lawrence S. Schaner, on the brief), for Appellees.
Before McMILLIAN and MAGILL, 1 Circuit Judges, and WEBBER, 2 District Judge.
The Plaintiffs are individual investors 3 who purchased Gateway 2000, Inc. (Gateway) stock soon after the stock was publicly offered. The stock subsequently decreased in value after Gateway revealed disappointing earnings, and the Plaintiffs brought this securities fraud suit against Gateway and Gateway's corporate officers, directors, and principal shareholders (Defendants). 4 The Plaintiffs allege that the Defendants violated securities laws by misrepresenting facts in Gateway's prospectus, registration statement, and other company communications and by committing fraud on the market. The district court 5 dismissed the Plaintiffs' complaint for failure to state a claim and for failure to plead fraud with sufficient particularity. After dismissal, the Plaintiffs sought leave to file an amended complaint, which the district court denied. The Plaintiffs now appeal, and we affirm.
Gateway, founded in 1985 by Theodore Waitt and Michael Hammond, is a South Dakota-based manufacturer and direct marketer of personal computers. Gateway was initially created as a Subchapter S corporation, and the bulk of Gateway's stock was held by Theodore Waite and his brother Norman. The company grew dramatically between 1985 and 1993, reaching sales of more than a billion dollars per year. 6 On December 7, 1993, Gateway became a public corporation and, pursuant to a registration statement and prospectus, offered stock to the public.
While expressing confidence in its likely continued growth, see Prospectus (Dec. 7, 1993) at 6, Gateway's prospectus contains a variety of warnings to prospective investors. The prospectus explains that,
[a]lthough the Company anticipates significant growth in the future, it does not expect its growth to continue at the rates previously experienced. The Company's operating results for the fourth quarter of 1993 are expected to reflect the growth historically experienced by the Company in its fourth quarters, although not necessarily at the rates previously experienced.
Prospectus at 3. In addition, the front cover of the prospectus contains, in bold type, a reference to "Risk Factors." The text of the prospectus includes a description of sixteen risk factors. These risk factors include:
Short Product Life Cycles
To maintain its competitive position in the PC industry, the Company must continue to introduce new products and features that address the needs and preferences of its target consumer markets. The PC industry is characterized by short product life cycles resulting from rapid changes in technology and consumer preference and declining product prices. In 1993, the Company has introduced numerous new products and features. There can be no assurance that these products or features will be successful, that the introduction of new products or features by the Company or its competitors will not materially and adversely affect the sale of the Company's existing products or that the Company will be able to adapt to future changes in the PC industry....
From its inception, the Company has experienced a rapid rate of growth. Although the Company attempts to forecast growth accurately, the Company has experienced, and may continue to experience, problems with respect to the size of its work force and production facilities and the adequacy of its management information systems and inventory controls. These problems can result in a high backlog of product orders and delays in customer service and support....
The PC industry generally has been subject to seasonality and to significant quarterly and annual fluctuations in operating results. The Company's operating results are also subject to such fluctuations. Fluctuations can result from a wide variety of factors affecting the Company and its competitors, including new product developments or introductions, availability of components, changes in product mix and pricing and product reviews and other media coverage....
The Company does not collect or remit sales and use taxes with respect to its sales in any state other than the State of South Dakota, where its physical plant and employees are located. It does not pay income taxes in any state (South Dakota currently has no corporate income tax) and pays franchise taxes only to Delaware and South Dakota. Taxing authorities in certain other states have solicited information from the Company to determine whether the Company has sufficient contacts with such states as would require payment of income taxes or collection of sales and use taxes from customers in those states. The Company has not paid any such income or sales and use taxes for any prior period, nor has it established any reserves for payment of such taxes. The Company believes that any amount it might ultimately be required to pay for prior periods would not have a material adverse impact on its results of operations or financial condition, but there can be no assurance that there would not be such an effect.
In the future, the Company may be required to collect sales and use taxes or to pay state income and franchise taxes in states other than South Dakota. Although any requirement to collect sales or use taxes in the future could negatively affect the Company's sales, the Company believes the collection of such taxes would not have a material adverse effect on the Company's results of operations or financial condition. However, there can be no assurance that there would not be such an effect....
There has been no public market for the Common Stock prior to the Offerings, and there can be no assurance that a significant public market for the Common Stock will develop or will continue after the Offerings. The market price for the Company's Common Stock may be highly volatile. The Company believes factors such as product announcements by the Company, or its competitors or suppliers, or quarterly variances in financial results could cause the market price of the Common Stock to fluctuate substantially....
Gateway offered 11.7 million shares of stock at a price of $15 per share. Roughly half of the income generated by the stock sales was distributed to the Waite brothers, in part to satisfy Gateway-related tax liabilities. In the months that followed, Gateway stock climbed to a high of $24-3/4 price per share.
The fourth quarter results of 1993, which were announced on February 10, 1994, showed $545.9 million in revenues, an increase of 36% over the third quarter of 1993 and 54% over the fourth quarter of 1992. The first quarter of 1994 showed $615.9 million in revenues, but a decline in per share earnings. Following the announcement of the decline in earnings, price per share of Gateway stock dropped from $20-7/16 to $15-1/2. The earnings per share dropped again during the second quarter of 1994, and the price of Gateway stock plummeted to $9-1/4 per share on June 23, 1994. The announced reasons for Gateway's reduced earnings included product transitions, unanticipated sales mix, and technical problems with a new line of portable computers. To address these problems, the company took cash reserves and wrote-down against inventory and accounts receivables of $20 million.
Between June 27, 1994, and July 1, 1994, the Plaintiffs filed three identical class-action complaints against the Defendants. The actions were consolidated in the district court, and the Plaintiffs were given leave to file an amended complaint. 7 In count I of the amended complaint, the Plaintiffs allege violations by the Defendants of Section 11 of the Securities Act of 1933, codified at 15 U.S.C. § 77k () (Section 11). In count II of the amended complaint, the Plaintiffs allege a violation by the Defendants of Section 12(2) of the Securities Act of 1933, codified at 15 U.S.C. § 77l () (Section 12(2)). In count III of the amended complaint, the Plaintiffs allege a violation by the Defendants of Section 15 of the Securities Act of 1933, codified at 15 U.S.C. § 77o () (Section 15). In count IV of the amended complaint, the Plaintiffs allege a violation by the Defendants of Section 10(b) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j, and SEC Rule 10b-5 (fraudulent security transaction) (Section 10(b) and Rule 10b-5). In count V of the amended complaint, the Plaintiffs allege a violation by the Defendants of Section 20(a) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78t () (Section 20(a)).
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