VeriFone Securities Litigation, In re

• Decision Date: 17 November 1993
• Docket Number: Nos. 92-15156,92-15378,s. 92-15156
• Citation: 11 F.3d 865
• Parties: , Fed. Sec. L. Rep. P 97,820 In re VERIFONE SECURITIES LITIGATION. Martin HALKIN; Michael Minichino; Lois Steen; Richard Marchesi; David J. Steinberg; Chaille Steinberg, Plaintiffs-Appellants, v. VERIFONE INC.; Robertson Stephens, Robertson Stephens and Company, Defendants-Appellees. Martin HALKIN; Michael Minichino; Lois Steen; Richard Marchesi; David J. Steinberg; Chaille Steinberg, Plaintiffs-Appellants, v. VERIFONE INC.; William F. Gorog; John R.C. Porter; Keith B. Greeslin; H.H. Haight, IV; William N. Melton; Frank J. Caufield; Hatim A. Tyabji; Morgan Stanley & Co.; Robertson Stephens; Dean Witter Reynolds Incorporated; Burton McMurtry, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 865

11 F.3d 865

62 USLW 2372, Fed. Sec. L. Rep. P 97,820

In re VERIFONE SECURITIES LITIGATION.

Martin HALKIN; Michael Minichino; Lois Steen; Richard

Marchesi; David J. Steinberg; Chaille Steinberg, Plaintiffs-Appellants, v. VERIFONE INC.; Robertson Stephens, Robertson Stephens and Company, Defendants-Appellees.

Martin HALKIN; Michael Minichino; Lois Steen; Richard

Marchesi; David J. Steinberg; Chaille Steinberg, Plaintiffs-Appellants, v. VERIFONE INC.; William F. Gorog; John R.C. Porter; Keith

B. Greeslin; H.H. Haight, IV; William N. Melton; Frank J.

Caufield; Hatim A. Tyabji; Morgan Stanley & Co.;

Robertson Stephens; Dean Witter Reynolds Incorporated;

Burton McMurtry, Defendants-Appellees.

Nos. 92-15156, 92-15378.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 10, 1993.

Decided Nov. 17, 1993.

Solomon B. Cera, David B. Gold, A Professional Law Corp., San Francisco, CA, for plaintiffs-appellants.

John N. Hauser, McCutchen, Doyle, Brown & Enersen, San Francisco, CA, for defendants-appellees Morgan Stanley & Co Inc., Robertson, Stephens & Co., and Dean Witter Reynolds Inc.

Melvin R. Goldman, Paul T. Friedman, Jordan Eth, Morrison & Foerster, San Francisco, CA, for defendants-appellees VeriFone, Inc., et al.

Appeal from the United States District Court for the Northern District of California.

Before: REINHARDT, TROTT, and RYMER, Circuit Judges.

RYMER, Circuit Judge:

Purchasers of allegedly overpriced shares of VeriFone, Inc. common stock ("shareholders") appeal the district court's dismissal of their securities fraud class action with prejudice pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). In re VeriFone Sec. Litig., 784 F.Supp. 1471 (N.D.Cal.1992). After a drop in the trading price of VeriFone stock, shareholders brought suit against VeriFone, certain of VeriFone's senior officers and directors (collectively "VeriFone"), and Morgan Stanley & Co., Robertson, Stephens & Co., Dean Witter Reynolds, Inc., and other underwriters of the March 13, 1990 initial public offering of VeriFone common stock (collectively the "Underwriters"). Shareholders generally allege that VeriFone and its Underwriters failed to disclose projected or potential changes in VeriFone's product market in the prospectus and registration statement, subsequent SEC filings, news releases, and stock analysts' reports issued by Morgan Stanley and Dean Witter. We conclude that the allegations made in this case amount to no more than a failure to disclose forecasts, and as such, are not actionable. We have jurisdiction under 28 U.S.C. Sec. 1291, and we affirm.

I

VeriFone, Inc. is a supplier of transaction automation systems, used to automate a variety of payment and benefits transfer transactions. On March 13, 1990, VeriFone filed with the SEC a registration statement and prospectus for an initial public offering ("IPO") of 3,900,000 shares of common stock priced at $16.00 per share. Morgan Stanley, Dean Witter, and Robertson, Stephens served as co-lead underwriters for the IPO.

The price of VeriFone's common stock increased on the first day of public trading, closing at $19 1/4. The stock price continued to rise through the beginning of July 1990, reaching a high of $25 1/4 on July 11. However, during August and September, the stock price began to decline; VeriFone's stock closed at $14 7/8 on Friday, September 14, 1990.

On Monday, September 17, 1990, VeriFone CEO Hatim Tyabji issued a press release announcing that:

Business in our core financial markets and in our rapidly expanding international markets continues to exceed our expectations, but not sufficiently to offset shortfalls in other areas. The Petroleum business unit, as well as the emerging businesses of our North American division, including Electronic Benefits Transfer and Multi-Lane Retail, as well as Petroleum are behind plan.

VeriFone also revealed that slow growth had caused it to implement "cost containment measures and expansion controls" to minimize sharply increasing expenditures.

Immediately following VeriFone's September 17 disclosure, the market price of VeriFone stock fell 13.4% to close at $12 7/8. The next day, September 18, 1990, VeriFone stock dropped further, to $7 5/8. On September 20, 1990, a class action lawsuit was initiated on behalf of VeriFone shareholders by named plaintiffs Minichino, Steen, Marchesi, and the Steinbergs. A similar class action complaint was soon filed by Halkin. The two actions were consolidated, and a First Amended Complaint ("Amended Complaint") was filed on March 22, 1991 on behalf of a class composed of those persons who purchased VeriFone common stock in VeriFone's IPO through September 18, 1990, the day following the press release by VeriFone which precipitated the trading price decline. ¹

Shareholders allege seven causes of action under Secs. 11 and 12(2) of the Securities Act of 1933, 15 U.S.C. Secs. 77k and 77l ; Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and the SEC's Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 promulgated thereunder; Sec. 20A of the Exchange Act as amended, 15 U.S.C. Sec. 78t-1; California Corporations Code Sec. 1507; and state law torts of fraud and negligent misrepresentation. The securities fraud claims against VeriFone and the Underwriters are based on alleged material misstatements in, and omissions from: (1) VeriFone's March 13, 1990 registration statement and prospectus; (2) VeriFone's Forms 10-Q for the first and second quarters of 1990, filed with the SEC in May and August 1990; (3) press releases issued by VeriFone in April and July 1990 announcing the company's first and second quarter 1990 earnings; and (4) stock analysts' reports issued by Dean Witter and Morgan Stanley in April, May, and July 1990.

II

We review a district court's dismissal pursuant to Fed.R.Civ.P. 12(b)(6) de novo. Oscar v. University Students Co-op. Ass'n, 965 F.2d 783, 785 (9th Cir.) (en banc), cert. denied, --- U.S. ----, 113 S.Ct. 655, 121 L.Ed.2d 581 (1992). Conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim. United States ex rel. Chunie v. Ringrose, 788 F.2d 638, 643 n. 2 (9th Cir.), cert. denied, 479 U.S. 1009, 107 S.Ct. 650, 93 L.Ed.2d 705 (1986). ²

III

A. VeriFone's IPO Documents, SEC Filings, and Press Releases

Each of the federal securities laws invoked by the shareholders requires a plaintiff to allege that the defendants were responsible for a misrepresentation in, or material omission from, a stock prospectus, registration statement, or other document. ³ In re Lyondell Petrochemical Co. Sec. Litig., 984 F.2d 1050, 1052 (9th Cir.1993). Section 10(b) prohibits any person from using or employing any "manipulative or deceptive device" in connection with the sale of a security. Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, promulgated under section 10(b), forbids the making of "any untrue statement of a material fact or [omitting] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading...." Section 11 provides that any signer, officer of the issuer, or underwriter may be held liable for a registration statement containing "an untrue statement of a material fact or omitt[ing] to state a material fact ... necessary to make the statements therein not misleading...." 15 U.S.C. Sec. 77k(a). Similarly, Sec. 12(2) establishes liability for those persons who sell a security "by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading...." 15 U.S.C. Sec. 77l.

Shareholders argue that the district court improperly "lumped" their claim under Sec. 11 of the '33 Act with their claims under Sec. 12(2) of the '33 Act and Sec. 10(b) of the '34 Act (and Rule 10b-5 thereunder). Citing Kronfeld v. Trans World Airlines, Inc., 832 F.2d 726, 730-31 n. 8 (2nd Cir.1987), cert. denied, 485 U.S. 1007, 108 S.Ct. 1470, 99 L.Ed.2d 700 (1988), they maintain that a "duty to disclose" analysis is irrelevant with respect to Sec. 11, and that alleging the "existence of a material omission is, by itself, sufficient to state a prima facie claim under section 11." Contrary to shareholders' characterization, we interpret the district court's discussion of a "duty to disclose" as bearing on whether they adequately allege a material misrepresentation or omission, a question common to all statutory provisions at issue in this case. Lyondell, 984 F.2d at 1052; accord Kronfeld, 832 F.2d at 730-31 n. 8 (reading the district court's opinion, speaking of "facts as to which there was a duty to disclose," as "finding the alleged omissions immaterial as a matter of law"). Accordingly, our central inquiry is whether a reasonable investor would have been misled about the nature of his investment in VeriFone stock. See Durning v. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir.), cert. denied, 484 U.S. 944, 108 S.Ct. 330, 98 L.Ed.2d 358 (1987).

Shareholders argue that VeriFone and the Underwriters concealed adverse facts in order to complete VeriFone's public offering. Their pleading, however, has to do with a failure to disclose a forecast of future sales and revenue.

Paragraph 21 sets out the undisclosed adverse facts and trends about which shareholders complain. ⁴ It avers that before the public offering, VeriFone and the Underwriters learned of "the following adverse material facts and trends, which were not publicly known":

p 21(a): "Sales growth to VeriFone's core market segment ... had slowed substantially ... to revenue growth rates projected to be less than 17-18% for fiscal year 1990."

p 21(b): "Unit sales ... had materially declined ... and [were] projected to show little, if any, growth for fiscal year 1990."

p 21(...