Sinay v. Lamson & Sessions Co.

• Decision Date: 07 November 1991
• Docket Number: Nos. 90-4075,91-3051,s. 90-4075
• Citation: 948 F.2d 1037
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: , Fed. Sec. L. Rep. P 96,298 Lynn SINAY, David Rosenberg (90-4075); and Aline Halye (91-3051), Plaintiffs-Appellants, v. The LAMSON & SESSIONS COMPANY; Russell Every; John Schulze; and Gene Budd, Defendants-Appellees.

Page 1037

948 F.2d 1037

60 USLW 2388, Fed. Sec. L. Rep. P 96,298

Lynn SINAY, David Rosenberg (90-4075); and Aline Halye (91-3051), Plaintiffs-Appellants, v. The LAMSON & SESSIONS COMPANY; Russell Every; John Schulze; and Gene Budd, Defendants-Appellees.

Nos. 90-4075, 91-3051.

United States Court of Appeals Sixth Circuit.

Argued Sept. 10, 1991.

Decided Nov. 7, 1991.

Richard S. Wayne (Argued and Briefed), William K. Flynn, Strauss & Troy, Cincinnati, Ohio, Alan L. Melamed, Dinn, Hochman, King & Melamed, Mayfield Heights, Ohio, for Lynn Sinay.

Alan L. Melamed, Dinn, Hochman, King & Melamed, Mayfield Heights, Ohio, for David Rosenberg.

John W. Edwards, II and Mark Herrmann (argued and briefed), Jones, Day, Reavis & Pogue, Cleveland, Ohio, for The Lamson & Sessions Co., John B. Schulze, Russell B. Every and Gene F. Budd.

James F. Koehler (argued and briefed), John F. Hill, Gallagher, Sharp, Fulton & Norman, Cleveland, Ohio, for Aline Halye.

Before GUY and SILER ^*, Circuit Judges, PECK, Senior Circuit Judge.

SILER, Circuit Judge.

The plaintiffs-appellants [hereinafter "plaintiffs"] in these two securities fraud actions appeal the district court's order granting the motion by the defendants-appellees to dismiss under Federal Rule of Civil Procedure 12(b)(6). ¹ For the following reasons, we affirm the district court's decisions.

The class plaintiffs purchased Lamson common stock sometime between October 24, 1988, and June of 1989. ² The named plaintiffs purchased their shares on November 1, 1988 (Rosenberg); March 6, 1989 (Sinay); and June 16, 1989 (Halye). In their complaints, the plaintiffs allege securities fraud pursuant to section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) and the Securities and Exchange Commission's Rule 10b-5, 17 C.F.R. § 240.10B-5. Plaintiffs do not assert there was fraud individually upon them because they relied upon statements by defendants when they purchased their shares. Instead, they contend that Lamson and the other defendants engaged in a course of conduct which artificially inflated the common stock's market price (i.e., the plaintiffs assert a "fraud on the market" theory).

Lamson, whose stock is traded on the New York Stock Exchange, manufactures construction and transportation equipment products. In November 1986, Lamson acquired substantially all of the assets and liabilities of the Carlon division of TBG, Inc. [hereinafter "Carlon"], ³ all of the outstanding shares of Thyrocon Controls, and substantially all of the assets and liabilities of Thyrocon Controls' Canadian division. This transaction also apparently included Lamson's acquisition of Midland Steel Products [hereinafter "Midland"], a division of Carlon. Following the November 1986 acquisitions, Lamson's earnings dramatically increased.

On October 24, 1988, Lamson publicly disclosed that its performance during the first three quarters was "gratifying," although it was experiencing a "normal seasonal decline" in its commercial and residential markets which would last "into the first quarter of 1989." ⁴ On December 23, 1988, Lamson reported that it was having a "tremendous year." On February 21, 1988, Lamson stated that it was pleased with the 1988 results and that it planned to continue to develop its position in the domestic and worldwide transportation markets. In an April 1989 interview with the Dow Jones News Service, Schulze stated that Lamson "does not quarrel with analysts' earnings estimates for 1989 in the area of $1.50 to $1.60...." Schulze further stated that Lamson was "counting on new products to offset a weaker construction market for 1989."

Notwithstanding the positive forecasts, Lamson's financial condition began to erode in 1989. Due to prolonged higher interest rates, the construction market failed to rebound after the winter slowdown. Moreover, Lamson experienced severe labor problems at its Midland plant. The plaintiffs assert that the defendants knew or should have known that the construction market's decline would be long-term and that a major and devastating strike would occur. Therefore, according to the plaintiffs, the defendants deceived the market by failing to issue sufficient cautionary statements concerning Lamson's future.

I.

Whether the district court properly dismissed the complaint pursuant to Fed.R.Civ.P. 12(b)(6) is a question of law subject to de novo review. Craighead v. E.F. Hutton & Co., 899 F.2d 485, 489 (6th Cir.1990). All factual allegations are deemed admitted, Jenkins v. McKeithen, 395 U.S. 411, 421-22, 89 S.Ct. 1843, 1848-49, 23 L.Ed.2d 404 (1969), and when an allegation is capable of more than one inference, it must be construed in the plaintiff's favor. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974).

District Judge Ann Aldrich dismissed the cases because:

1. In Rosenberg's case (No. 90-4075), he failed to offer any factual allegation to show that the statements by Lamson and Every on October 24, 1988, were not made in good faith.

2. In Sinay's case (No. 90-4075), although he additionally asserted fraud through a statement by Schulze in the Wall Street Journal on February 21, 1989, after Lamson's yearly sales and earnings for 1988 were announced, he failed to show how the statement was misleading as the court found the statements to be true.

3. In Halye's case (No. 91-3051), when she claimed fraud through the Dow Jones News Wire of the interview with Schulze in April 1989, the statement was only an optimistic prediction which "bespoke caution."

Economic projections are not actionable if they bespeak caution. Polin v. Conductron Corp., 552 F.2d 797, 806 n. 28 (8th Cir.), cert. denied, 434 U.S. 857, 98 S.Ct. 178, 54 L.Ed.2d 129 (1977). When a corporation, through its officers or otherwise, states an honestly held view based on the information currently before it, neither it nor its officers may be held liable pursuant to section 10(b) or Rule 10(b)(5). See Schwartz v. Novo Industri, A/S, 658 F.Supp. 795, 799 (S.D.N.Y.1987) (holding corporation or officers liable would constitute action for "fraud by hindsight"). In determining whether the statements are actionable, the court must scrutinize the nature of the statement to determine whether the statement was false when made. See Isquith v. Middle South Utils., Inc., 847 F.2d 186, 204 (5th Cir.), cert. denied, 488 U.S. 926, 109 S.Ct. 310, 102 L.Ed.2d 329 (1988). While analyzing the nature of the statement, the court must emphasize whether the "prediction suggested reliability, bespoke caution, was made in good faith, or had a sound factual or historical basis." Id.

The questioned statements herein were phrased in sufficient cautionary language. Schulze's statement in the Wall Street Journal was couched in cautionary language. Schulze stated that there was a lower demand for construction products due to higher interest rates. Schulze further stated that plastic resin prices might weaken if interest rates did not decline, which would reduce Lamson's dollar volume even if unit volume held even with a year ago. In light of the cautionary language, Schulze's statement that Lamson did not disagree with analysts' earnings estimates is hardly the type of statement that would mislead a reasonable investor.

The statement that Lamson's performance during the third quarter in nine months of 1988 was gratifying is also accompanied by cautionary language. Every stated that Lamson was experiencing some slowdown in the construction markets which was expected to continue into the first quarter of 1988.

In addition, the plaintiffs did not offer any objective evidence that the statements were anything other than honestly held convictions based on the historical information which Lamson possessed. The December 23, 1988, New York Times article stating that Lamson "has been having a tremendous year" was a statement of historical fact known to the public. The February 21, 1989, statement that Lamson was pleased with the results in 1988 was a historical fact supplemented with cautionary language. The report states that Lamson "made excellent progress during 1988 in expanding into the electrical, industrial, utility and consumer markets" and the company plan "calls for continued development" in these markets. This language would alert a reasonable investor that Lamson's future was uncertain.

In the Sinay/Rosenberg case, the labor issue was raised in the original complaint, but was not addressed by Judge Aldrich. In Halye's case, it was not raised except in the motion to amend after dismissal. With respect to the possible labor strike, Lamson was not in any better position to predict its occurrence than was the public. ⁵

News of the labor problems was widely disseminated in the media, locally in the Cleveland Plain Dealer and nationally in the Wall Street Journal. There was no duty to divulge anything more for the public about the labor difficulties. The district court should probably have discussed this issue, but no benefit could be derived by remanding this for such an issue to be resolved, as this court finds it does not state a claim upon which relief could be granted.

Lamson and its officers made cautionary predictions based on the limited information available to them. Although certain predictions may be actionable, see Goldman v. Belden, 754 F.2d 1059 (2d Cir.1985), to impose liability in this situation would unduly restrain management from disseminating useful information to the market. Such a result would not protect investors, but rather would be deleterious to investors because it would prevent the freeflow of information.

It would have been easier for this court had the district court converted the motions to dismiss to motions for summary judgment under Fed.R.Civ.P. 56, so that the plaintiffs could have filed additional materials in the record to counter the many news clippings added to the record by the defendants. However, Rule 56(c) only speaks of...