Suna v. Bailey Corp.

• Citation: 107 F.3d 64
• Decision Date: 29 July 1996
• Docket Number: No. 96-1138,96-1138
• Parties: Fed. Sec. L. Rep. P 99,421, 37 Fed.R.Serv.3d 239 Vicki Match SUNA and Lori Rosen, Plaintiffs--Appellants, v. BAILEY CORPORATION, et al., Defendants--Appellees. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 64

107 F.3d 64

Fed. Sec. L. Rep. P 99,421, 37 Fed.R.Serv.3d 239

Vicki Match SUNA and Lori Rosen, Plaintiffs--Appellants, v. BAILEY CORPORATION, et al., Defendants--Appellees.

No. 96-1138.

United States Court of Appeals First Circuit.

Heard July 29, 1996.

Decided Feb. 26, 1997.

Jules Brody, with whom Stull, Stull & Brody, Backus, Meyer, Solomon & Rood and Weiss & Yourman were on brief, New York City, for plaintiffs-appellants.

Sydelle Pittas, with whom Law Offices of Sydelle Pittas was on brief, Winchester, MA, for appellee Bailey Corporation.

Before TORRUELLA, Chief Judge, BOUDIN, Circuit Judge, and LISI, ^* District Judge.

TORRUELLA, Chief Judge.

On May 26, 1994, Plaintiffs-Appellants Vicki Match Suna ("Suna") and Lori Rosen ("Rosen") (collectively "plaintiffs" or "appellants") brought this class action suit against Bailey Corporation ("Bailey") and individual

officers ¹ of the corporation (collectively "defendants" or "appellees") on behalf of all persons who purchased Bailey's common stock during the class period. The suit alleges that appellees violated Section 12 of the Securities Act ² of 1933 and Sections 10(b) ³ and 20(a) ⁴ of the Securities Exchange Act of 1934, as well as Rule 10b-5 ⁵ promulgated by the Securities and Exchange Commission ("SEC"). Appellants allege that appellees made, or caused to be made, materially false and misleading statements either through Bailey's corporate documents or through analysts' reports disseminated to the public. On November 10, 1994, the District Court of New Hampshire granted appellees' motion to dismiss this complaint for failure to comply with the pleading requirements of Federal Rule of Civil Procedure 9(b). The district court then allowed appellants to amend their complaint, but rejected the first amended complaint appellants submitted. The district court "reluctantly grant[ed] plaintiffs leave to file a second amended complaint," Order of November 10, 1994, at 2, but cautioned that if "the second complaint fail[ed] to satisfy the pleading requirements, the action [would] then be dismissed with prejudice." Id. On September 1, 1995, appellants filed a Second Amended Complaint, which the district court ruled did not meet Rule 9(b)'s pleading requirements. Order of Dec. 29, 1995. The district court then dismissed the action with prejudice. Appellants now appeal the dismissal of the Second Amended Complaint.

BACKGROUND

We accept as true all facts alleged in appellants' Second Amended Complaint. Shields v. Citytrust Bancorp, Inc., 25 F.3d During the class period, the individual defendants signed various SEC filings. Each received or had access to non-public reports and documents depicting Bailey's financial condition and business prospects. Each participated in Bailey board meetings at which information about the company was discussed. A secondary public offering was held on August 18, 1993, during which Bailey and the individual defendants sold shares at $11 each.

1124, 1125 (2d Cir.1994). Bailey manufactures molded plastic exterior components and supplies them to North American original equipment manufacturers of cars, light trucks, sport utility vehicles and minivans. Bailey's primary customer is Ford Motor Company, which accounted for approximately ninety-three percent of Bailey's sales in the nine months ending April 25, 1993. Of the remaining sales, three percent were to General Motors Corporation and four percent to other customers.

On April 5, 1994, both Suna and Rosen purchased Bailey stock. During the class period, the stock reached a high of more than $18 per share.

The public documents issued by Bailey and alleged by appellants to contain materially false and misleading statements include Bailey's April 18, 1993, Prospectus and Registration Statement, its 1993 Annual Report, and 10-K, quarterly reports to shareholders, and press releases. In addition, appellants contend that reports published by analysts regarding Bailey's earnings prospects and its ability to continue to increase earnings per share are imputable to Bailey. Appellants contend that all of these documents artificially inflated the market price of Bailey common stock.

Large sections of appellants' brief and Second Amended Complaint are devoted to quoting at length from these documents. We will not reproduce all of these quotes, but will highlight relevant portions as becomes necessary throughout the opinion. Appellants contend that the statements at issue were false and misleading because Bailey's anticipated growth did not continue and its revenue declined. The decline in revenue led to a decrease in the value of Bailey's common stock to $6 1/8 per share. Appellants argue that the representations were "materially false and misleading because appellees knew, or recklessly disregarded, ... that Bailey's profitability would decline sharply because of a much less profitable mix of parts to be supplied to Ford." Appellant's Brief at 8. They claim that Bailey knew or should have known that there was no reason to expect sustained growth based on knowledge gathered from, "among other things, a '26-week forecasts [sic] of production requirements,' " id., supplied to Bailey by Ford. These forecasts allegedly indicated a shift in the product mix required by Ford. Appellants indicate that the product mix Ford was phasing out would prove more profitable than the product mix to which Bailey was shifting production. Appellants contend that Bailey should have disclosed that it was moving to a less profitable product mix.

In September 1993, the investment firm of McDonald & Company Securities, Inc. ("McDonald"), in a publicly disseminated report, gave Bailey an "aggressive buy rating." That report projected earnings per share for fiscal years 1994 and 1995 of $1.15 and $1.60 respectively. In December 1993, an analyst for Hancock Institutional Equity Services, an affiliate of Tucker Anthony, a co-lead underwriter of Bailey's secondary offering, reviewed with defendant-appellee Leonard Heilman a written research opinion regarding Bailey that Hancock was about to disseminate publicly. The Hancock analyst informed Heilman of her earnings per share estimates and her methodology and assumptions in reaching those estimates. She also informed Heilman of her view regarding Bailey's financial prospects. Following this conversation, Hancock publicly disseminated a very positive report on Bailey. Appellants contend that these reports contained materially false and misleading statements in the form of financial projections that were "wildly optimistic" and the result of "guidance" from Bailey.

In a report regarding Bailey's fiscal 1994 second quarter, ending January 31, 1994, Bailey claimed revenue and earnings increases, attributing the increases to "productivity improvements." Bailey failed to disclose On May 20, 1994, Bailey announced that it had earned $0.16 per share in its third quarter, in contrast to the projected $0.37 per share. This earnings shortfall was attributable to, among other things, a substantial change in product mix and production problems at Bailey's newly acquired mid-western plants. After this announcement, the market price of Bailey common stock fell to $6 1/8 per share.

"that it was experiencing severe production problems at newly acquired mid-western plants," which appellants contend could and did materially impact future earnings. Appellants acknowledge, however, that these production problems did not arise until February, 1994.

DISCUSSION

We review the dismissal of a complaint de novo. Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 361 (1st Cir.1994). "Generally, we will uphold a district court's dismissal of a claim only if it appears that the plaintiff can prove no set of facts upon which relief may be granted." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir.1994). Nevertheless, Federal Rule of Civil Procedure 9(b) imposes a heightened pleading requirement on plaintiffs alleging fraud. Lucia v. Prospect St. High Income Portfolio, Inc., 36 F.3d 170, 174 (1st Cir.1994). Rule 9(b) states: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally." Fed.R.Civ.P. 9(b). "[A] complaint making such allegations must '(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.' " Shields, 25 F.3d at 1127-28 (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.1993)).

The goals of Rule 9(b) are " 'to provide a defendant with fair notice of a plaintiff's claim, to safeguard a wrongdoing, and to protect a defendant against the institution of a strike suit.' " Id. at 1128 (quoting O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2d Cir.1991)). Rule 9(b)'s relaxation of the scienter requirement is not intended to allow plaintiffs to "base claims of fraud on speculation and conclusory allegations. Therefore, to serve the purposes of Rule 9(b), we require plaintiffs to allege facts that give rise to a strong inference of fraudulent intent." Id. (citations and internal quotations omitted). A securities plaintiff must allege " 'specific facts that make it reasonable to believe that defendant[s] knew that a statement was materially false or misleading.' " Serabian, 24 F.3d at 361 (quoting Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir.1992)). We impose this heightened requirement " 'even when the fraud relates to matters peculiarly within the knowledge of the opposing party.' " Lucia, 36 F.3d at 174 (quoting Romani, 929 F.2d at 878).

We recently set forth guidelines intended to strike a balance between the pleadings required of plaintiffs in securities fraud litigation and the concern that defendants not be subject to...