Romine v. Acxiom Corp.

Decision Date15 July 2002
Docket NumberNo. 01-2096.,01-2096.
Citation296 F.3d 701
PartiesLarry R. ROMINE, on behalf of himself and all others similarly situated, et al., Plaintiffs-Appellants, v. ACXIOM CORPORATION, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Eighth Circuit

Eric A. Isaacson, argued, San Diego, CA, for appellant.

Bruce G. Vanyo, argued, Palo Alto, CA, for appellee.

Before LOKEN and BYE, Circuit Judges, and BOGUE,** District Judge.

LOKEN, Circuit Judge.

On July 23, 1999, publicly held Acxiom Corporation and the Pritzker Foundation, a substantial Acxiom shareholder, sold 5,421,000 shares of Acxiom common stock in a secondary public offering at $27 per share. Prior to the offering, Acxiom filed a Registration Statement/Prospectus (the "Prospectus") with the Securities and Exchange Commission, as required by the Securities Act of 1933. See 15 U.S.C. § 77e(a). A narrative portion of the Prospectus entitled "Recent Developments" reported favorable results for Acxiom's fiscal quarter that ended June 30, 1999, including earnings per share of $0.18, in line with analysts' expectations. These quarterly results were echoed in a press release issued by Acxiom three days before the offering. Acxiom's stock rose to $28 1/16 on July 23, assuring a successful sale. But on August 30, an article in Barron's financial magazine expressed concern about some of Acxiom's accounting practices and increasing competition. See Barry Henderson, "Day of Reckoning for Acxiom? Critics Call its Accounting Too Frisky," Barron's, August 30, 1999. The next day, the stock tumbled to $17 3/16 on large volume, eventually falling to $16 1/8 on September 9.1

In April 2000, plaintiffs commenced this class action under § 11 of the Securities Act of 1933, 15 U.S.C. § 77k, alleging material misleading statements and omissions in the Prospectus. Defendants — Acxiom and individuals who signed the Prospectus — moved to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim. The district court2 granted the motion, and plaintiffs appeal. We review a Rule 12(b)(6) dismissal de novo under a stringent standard. "[A]s a practical matter, a dismissal under Rule 12(b)(6) is likely to be granted only in the unusual case in which a plaintiff includes allegations that show on the face of the complaint that there is some insuperable bar to relief." Fusco v. Xerox Corp., 676 F.2d 332, 334 (8th Cir.1982) (citation omitted). We conclude this is such a case and therefore affirm.

I.

Section 11 of the Securities Act of 1933 "allows purchasers of a registered security to sue certain enumerated parties in a registered offering when false or misleading information is included in a registration statement." Herman & MacLean v. Huddleston, 459 U.S. 375, 381, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). Section 11 imposes a stringent standard of liability to ensure that registration statements are prepared in compliance with the disclosure provisions of the Act. "To establish a prima facie § 11 claim, a plaintiff need show only that he bought the security and that there was a material misstatement or omission." In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 315 (8th Cir.1997), cert. denied, 524 U.S. 927, 118 S.Ct. 2321, 141 L.Ed.2d 696 (1988). The issuer's liability is "virtually absolute, even for innocent misstatements." Herman & MacLean, 459 U.S. at 382, 103 S.Ct. 683.

The district court dismissed plaintiffs' § 11 claims under Rule 12(b)(6) for failure to state a claim. A pleading issue that has divided federal courts is whether § 11 claims are "grounded in fraud" and therefore must be alleged with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. In NationsMart, 130 F.3d at 315-16, we held that § 11 claims do not require proof of fraud and therefore the notice pleading requirements of Rule 8(a) apply, not the particularity requirements of Rule 9(b). At oral argument, Acxiom suggested that 15 U.S.C. § 78u-4(b), enacted as part of the Private Securities Litigation Reform Act of 1995, overruled NationsMart by imposing additional requirements for pleading § 11 claims. We disagree. The structure and legislative history of that Act persuade us that § 78u-4 applies only to fraud actions brought under the Securities Exchange Act of 1934. Compare Pub.L. 104-67 § 101(a), with § 101(b), 109 Stat. 737-49; see 1995-2 U.S.C.C.A.N. 679, 705, 740. Accordingly, NationsMart remains a controlling precedent, and plaintiffs' complaint need only comply with the short and plain statement requirements of Rule 8(a).

II.

As relevant to this appeal, plaintiffs alleged that the favorable quarterly financial information reported in the narrative section of the Prospectus was false and misleading in three material respects:

• Earnings were inflated $.02 per share by reversing $2,300,000 in employee benefit accruals, contrary to Generally Accepted Accounting Principles (GAAP).

• Earnings were inflated another $.01 per share by reducing Acxiom's allowance for doubtful accounts "even as total receivables skyrocketed."

• Acxiom failed to disclose that a new five-year contract with its largest customer, Allstate Insurance, would result in lower pricing for Acxiom services and reflected the company's "adverse competitive environment."

In its order granting defendants' motion to dismiss, the district court separately analyzed these three alleged misstatements and concluded none was sufficient to state a § 11 claim. On appeal, the parties, too, have separately discussed whether each of the three was sufficient to support plaintiffs' § 11 claim that the Prospectus was materially misleading. We will address these disclosure issues seriatim, except to the extent their cumulative impact may become relevant.

A. The Employee Benefit Reserves Issue. Plaintiffs' complaint alleges that the recent quarterly earnings reported in the narrative section of the Prospectus were "materially misstated" and "presented in violation of" GAAP because, in calculating those earnings, Acxiom "improperly accounted for its reserve for employee benefits ... by reversing $2.3 million previously accrued." Broadly construed, this claim appears to assert two distinct theories that must be analyzed separately.

1. First, plaintiffs clearly allege that Acxiom's undisclosed decision to reverse $2.3 million in employee benefit reserves violated GAAP accounting principles. Acxiom counters that this alleged accounting impropriety is immaterial as a matter of law because SEC regulations do not require that a prospectus include financial statements for a recently completed fiscal quarter, and do not require that GAAP principles be followed when reporting financial information in the narrative section of a prospectus. While not disputing those assertions, plaintiffs properly respond that, if any financial information is voluntarily included in a narrative section of a prospectus, it may not be presented in a materially misleading manner. See, e.g., 17 C.F.R. §§ 210.10-01(5), 229.303(b).

The SEC regulations provide that financial statements are presumed misleading unless prepared in compliance with GAAP principles. See 17 C.F.R. § 210.4-01(a)(1). That means investors can reasonably expect that financial information a company voluntarily includes in a prospectus, including financial forecasts or unaudited recent financial results, was prepared in accordance with GAAP. Thus, a complaint that sufficiently alleges an undisclosed departure from GAAP affecting a material statement in a prospectus almost certainly states a § 11 claim, even if the material statement appeared in a narrative section of the prospectus.

However, in this case, after generally alleging that Acxiom's improper reserves were "presented in violation of" GAAP, plaintiffs more specifically alleged that Acxiom disclosed the $2.3 million reserve adjustment in its Form 10-Q for that quarter filed with the SEC on August 16, 1999, after the secondary offering. The Form 10-Q recited that it was prepared "pursuant to the rules and regulations of the Securities and Exchange Commission," and that "the disclosures contained herein are adequate to make the information presented not misleading." Thus, plaintiffs' own complaint discloses that the quarterly financial report, including the employee benefit reserves reversal, was prepared in accordance with GAAP principles; otherwise, it would not have been prepared "pursuant to" the SEC regulations. As plaintiffs do not challenge the Form 10-Q in this regard, their complaint does not state a § 11 claim based upon non-compliance with GAAP. "[W]hile notice pleading does not demand that a complaint expound the facts, a plaintiff who does so is bound by such exposition." Bender v. Suburban Hosp., Inc., 159 F.3d 186, 192 (4th Cir. 1998); see Hemenway v. Peabody Coal Co., 159 F.3d 255, 261 (7th Cir.1998) ("[p]laintiffs pleaded themselves out of court on the fraud theory").

2. Second, although not clearly stated in the rambling complaint, plaintiffs appear to allege that, even if consistent with GAAP principles, the reserves reversal was unwarranted in fact. Plaintiffs further allege that this accounting adjustment was material because it caused Acxiom's reported quarterly earnings, $0.18 per share, to be overstated by $0.02 per share and thus permitted Acxiom to meet analysts' quarterly earnings expectations by means of "accounting adjustments and manipulations." We disagree.

To satisfy the § 11 requirement that a misstatement be material, "there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976) (...

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