UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
THE MARSH GROUP,
Plaintiff-Appellant,
and
DAVID GRAFF, Individually and on
behalf of all others similarly
situated; IRWIN J. BERLIN, on behalf
of himself and all others similarly
situated; ROBERT CORWIN,
Individually and on behalf of all
others similarly situated; CARL
GOLDMAN, Individually and on
behalf of all others similarly
situated; LOUIS CAROLA, on behalf of
himself and all others similarly
situated; JERRY TOWBIN, individually No. 01-2500
and on behalf of all other similarly
situated; SUSAN TOWBIN, individually
and on behalf of all others similarly
situated; THEODORE ROLE, Trustee,
individually and on behalf of all
other similarly situated,
Plaintiffs,
v.
PRIME RETAIL, INCORPORATED;
WILLIAM H. CARPENTER; ABRAHAM
ROSENTHAL; MICHAEL W. RESHKE;
ROBERT P. MULREANEY; GLENN D.
RESCHKE,
Defendants-Appellees.
2 MARSH GROUP v. PRIME RETAIL
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
J. Frederick Motz, District Judge.
(CA-00-3080-JFM, CA-00-3179-JFM, CA-00-3212-JFM,
CA-00-3253-JFM, CA-00-3305-JFM, CA-00-3571-JFM, CA-00-
3629-JFM)
Argued: June 4, 2002
Decided: August 30, 2002
Before KING and GREGORY, Circuit Judges, and
Robert R. BEEZER, Senior Circuit Judge of the
United States Court of Appeals for the Ninth Circuit,
sitting by designation.
Affirmed by unpublished per curiam opinion.
COUNSEL
ARGUED: Seth David Rigrodsky, MILBERG, WEISS, BERSHAD,
HYNES & LERACH, L.L.P., New York, New York, for Appellant.
Laurie Beth Smilan, WILSON, SONSINI, GOODRICH & ROSATI,
McLean, Virginia, for Appellees. ON BRIEF: Michael C. Spencer,
MILBERG, WEISS, BERSHAD, HYNES & LERACH, L.L.P., New
York, New York; John B. Isbister, James J. O’Neill, III, TYDINGS
& ROSENBERG, Baltimore, Maryland, for Appellant. Lyle Roberts,
J. Christian Word, WILSON, SONSINI, GOODRICH & ROSATI,
McLean, Virginia; Bruce G. Vanyo, WILSON, SONSINI, GOOD-
RICH & ROSATI, Palo Alto, California; David Clarke, Jr., PIPER
RUDNICK, L.L.P., Washington, D.C., for Appellees.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
MARSH GROUP v. PRIME RETAIL 3
OPINION
PER CURIAM:
The Marsh Group appeals the district court’s dismissal, pursuant to
Federal Rule of Civil Procedure 12(b)(6) and the Private Securities
Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4, et seq., of its
securities fraud class action claims against Prime Retail, Inc., and sev-
eral of Prime Retail’s senior officers and directors. For reasons that
follow, we affirm.
I.
Prime Retail is a Real Estate Investment Trust (REIT) that owns,
constructs, leases, markets, and manages outlet centers throughout the
nation. Between 1994—the year of Prime Retail’s first public offering
of securities—and 1998, the company experienced explosive growth,
with its annual funds from operations (FFO), a common indicator of
REIT financial health, jumping from $25.8 million to $89 million.
Prime Retail earns revenues mostly from percentage lease arrange-
ments with retailers in its outlets. As a REIT, it does not pay federal
income tax, but it is required to distribute 95% of its income to share-
holders as dividends. Up until the fourth quarter of 1999, the com-
pany was paying quarterly dividends in amounts representing
approximately 15% growth over the same quarter in the prior year.
In 1998, Prime Retail announced two important developments:
First, that it was acquiring Horizon Group Inc., another outlet center
owner; and second, that it was embarking on international operations
by developing an outlet center in Puerto Rico. As a result of the Hori-
zon acquisition, consummated in June 1998, the company doubled its
size and became the nation’s largest outlet center owner, with 51
malls in 26 states.
The Appellants* allege that various company insiders were aware
*Appellant Marsh Group, an investor group, was appointed Lead
Plaintiff pursuant to the Private Securities Litigation Reform Act, 15
U.S.C. § 78u-4(a).
4 MARSH GROUP v. PRIME RETAIL
that the company was deteriorating during this time period. According
to the Appellants, by spring 1999, it was apparent to the company’s
senior management that the Horizon properties needed significant
improvement funds, additional personnel, and improved management
expertise. Internal company reports allegedly showed that vacancies
were rising, and revenues were falling. The Puerto Rico project ran
into immediate problems because the company could not obtain a
construction loan and had to develop the property using internal
funds.
According to the Appellants, despite management’s awareness of
these problems, Prime Retail remained very optimistic in publicly
describing the company’s financial results and prospects. The focus
of this appeal is on statements made to securities analysts, primarily
David Fick of Legg Mason Wood Walker, Inc. The allegedly false
statements were made in the second half of 1999 and during January
of 2000, and related to the company’s financial results and dividends
for the second, third, and fourth quarters of 1999.
On August 12, 1999, Prime Retail reported that its FFO for the sec-
ond quarter of 1999 had increased by 52% ($9 million) and that its
FFO for the first six months of 1999 had increased 61%, when com-
pared to the same periods in 1998. On the strength of these results,
Prime Retail declared a quarterly cash dividend on its common stock
for the second quarter in the amount of $0.295 per share.
David Fick’s first report was issued on August 13, 1999, the day
after the company’s second quarter earnings press release. Fick reaf-
firmed his "Buy" recommendation, stating:
Management has assured the investment community repeat-
edly that Prime’s current dividend is sacred. As noted in our
previous wires, a cut in the dividend is unlikely unless the
debt maturities and other capital requirements are not
funded; the company has good coverage based on current
and projected funds from operations.
Consol. Am. Compl. ¶ 51. In a brief report on October 1, 1999, Fick
reaffirmed his "Buy" recommendation, stating: "Importantly, manage-
MARSH GROUP v. PRIME RETAIL 5
ment stated to us this week that continued payment of the common
dividend remains ‘sacrosanct.’" Id. ¶ 52.
In addition to the Fick reports, the Appellants allege that during a
meeting with analysts from Friedman Billings Ramsey, Inc. on Octo-
ber 15, 1999, defendants Rosenthal and Mulreany "stated very clearly
that [Prime Retail] is committed to the current dividend." Id. ¶ 53.
Prime Retail announced its third quarter results and dividend on
November 8, 1999. The company issued a press release, stating: "For
the three and nine months ended September 30, 1999, FFO per diluted
share increased 2.7% and 13.0%, respectively, compared to the same
1998 periods." Again, Prime Retail declared a quarterly cash dividend
of $0.295 per share.
On November 9, 1999, Fick issued another analyst report, lowering
his rating of Prime Retail to "Market Performance" (i.e., performance
in line with the market generally). Under the heading "Valuation,"
Fick wrote:
Our thesis for the stock over the past year has been predi-
cated on dividend safety. Management has repeatedly
expressed confidence that there are no circumstances under
which the dividend would be cut, short of the unlikely event
of substantial tenant foreclosures. However, the company
found itself in a position this quarter whereby it had not
completed refinancing of a major debt maturity coming due
October 31. The unsettled outcome of the maturity and man-
agement’s resulting inability to put the dividend declaration
before the board places enough evidence in front of us that
the dividend is more at risk than previously acknowledged.
Id. ¶ 56; J.A. 132. On November 17, 1999, during the regular quar-
terly conference call with analysts and interested investors, Prime
Retail’s management reiterated their commitment to continuing to pay
dividends. A J.P. Morgan analyst report dated November 18, 1999,
summarized the conference call as follows:
Management is fully committed to $1.18 dividend. There
were a number of questions on the conference call related
6 MARSH GROUP v. PRIME RETAIL
to whether PRT would consider cutting its common divi-
dend to help fund a share buyback . . . . Management said
that this is not an option because they feel a "contractual
obligation" to their shareholders. This position is in line
with previous statements on dividends and should be reas-
suring to investors who are attracted to PRT’s high yield.
Consol. Am. Compl. ¶ 57. On December 10, 1999, an update report
by Fick, which retained his current rating for Prime Retail, noted that
"PRT’s management repeatedly has stated its commitment to paying
its common dividend. However we wonder whether PRT will have
the necessary funds to pay the dividend going forward . . . ." Id. ¶ 58;
J.A. 134.
According to the Appellants, investors began to learn the truth
about Prime Retail in mid-January 2000. On January 14, Fick issued
a report stating that "even we are surprised" by the results of a Legg
Mason "inspection" at some of the company’s lower-performing out-
let centers, which showed "eroding fundamentals." Consol. Am.
Compl. ¶ 62. The report also noted that defendant Michael Reschke
(Prime Retail’s board chairman) had known about these matters at
least since late 1999 from an industry association’s letter to him on
behalf of tenants complaining about deteriorating conditions at the
outlet centers. Id. With respect to the dividend, Fick reported that two
factors—sufficient cash flow and "management’s absolute commit-
ment to fully fund its existing dividend"—supported the market’s
confidence in ongoing dividend payments. "On several occasions
management unequivocally stated that it staked its reputation on its
commitment to continue to pay the company’s dividend." Id.
Fick’s report of January 14, 2000, had an immediate negative effect
on the market price of Prime Retail’s stock. On that day (a Friday),
the market price dropped from $5.50 to $4.125 per share, a 25%
decline, with a trading volume 18 times higher than the company’s
three-month average. The drop, however, was tempered by the com-
pany’s strong affirmation that it was properly maintaining its proper-
ties, and that it would "decide the fate of the dividend later this
month." Id. ¶ 63. On the next trading day, January 18, 2000 (a Tues-
day after a holiday weekend), Prime Retail announced that it would
not pay a dividend for the fourth quarter of 1999. As Prime Retail
MARSH GROUP v. PRIME RETAIL 7
would report in its annual report on Form 10-K for 1999, revenues for
the fourth quarter of 1999 were only slightly lower than revenues for
each of the three previous quarters of 1999. However, FFO and net
income were substantially below the earlier quarters’ results due to
non-recurring charges and expenses of $36,359,000, as well as a loss
of $15,153,000 on the sale of real estate.
Prime Retail further advised investors that it believed the compa-
ny’s FFO for the year 2000 would be lower than originally projected,
due to "an anticipated decline in occupancy and property level net
operating income at a limited number of the Company’s outlet centers
in the bottom quartile of its portfolio." The market price of the com-
pany’s shares dropped another 37%, to close at $2.625. Id. ¶ 64.
Later in the year, most of the company’s officers left or were termi-
nated by the board, including defendants Rosenthal, Reschke and
Mulreany. Id. ¶¶ 66, 67. By May 2001, the common stock’s market
price was only $0.36 per share. Id. ¶ 68. Prime Retail’s stock was del-
isted from the New York Stock Exchange in September 2001, and
Prime Retail did not pay any dividends in 2000 or 2001.
The Appellants filed a class action suit in the District of Maryland,
alleging violations of Sections 10(b) and 20 of the Securities
Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t, and Securities and
Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b5, on behalf
of purchasers of Prime Retail’s stock between May 28, 1999, and Jan-
uary 18, 2000. The Appellees moved to dismiss pursuant to Rule
12(b)(6) and the heightened pleading standards of the PSLRA, 15
U.S.C. §§ 78u-4(a)-(c). The district court granted the motion. This
appeal followed.
II.
We review dismissals pursuant to Fed. R. Civ. P. 12(b)(6) de novo.
Mylan Labs, Inc. v. Markari, 7 F.3d 1130, 1134 (4th Cir. 1993). The
Court presumes that the allegations in the complaint are true, and
gives the plaintiff the benefit of every favorable inference that can be
drawn from the allegations. Id. It is well settled that "a complaint
should not be dismissed for failure to state a claim unless it appears
beyond doubt that the plaintiff can prove no set of facts in support of
8 MARSH GROUP v. PRIME RETAIL
[the plaintiff’s] claim which would entitle [the plaintiff] to relief."
Conley v. Gibson, 355 U.S. 41, 45-46 (1957) (footnote omitted).
Claims brought pursuant to § 10b and Rule 10b-5 are subject to the
heightened pleading standards of the PSLRA. The PSLRA requires,
inter alia, that each statement alleged to have been misleading be
identified in the complaint, 15 U.S.C. § 78u-4(b)(1), and that the com-
plaint plead scienter with particularity, id. § 78u-4(b)(2).
III.
The Appellants make two arguments on appeal. First, they argue
that the district court erred in finding the alleged misstatements imma-
terial as a matter of law. Second, the Appellants’ argue that the dis-
trict court erred when it held that Prime Retail cannot be held liable
for fraudulent statements made to analysts the company did not con-
trol. We find that binding circuit precedent requires us to hold that the
alleged misstatements were immaterial. We decline to reach the
Appellants’ second argument.
The materiality standard for an alleged misrepresentation under
§ 10(b) "is an objective one," and the issue generally presents a ques-
tion of fact involving "the significance of an omitted or misrepre-
sented fact to a reasonable investor." Gasner v. Bd. of Supervisors,
103 F.3d 351, 356 (4th Cir. 1996). In Basic v. Levinson, 485 U.S. 224
(1988), the Supreme Court set forth the standard for materiality: In
the § 10b context, an omitted fact is material if there is "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." Id. at 231-32 (quoting
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
The district court found that the alleged misstatements made by
Prime Retail did not meet this standard of materiality, based on the
line of circuit precedent starting with Raab v. General Physics Corp.,
4 F.3d 286 (4th Cir. 1993). In Raab, General Physics, a provider of
personnel training and technical support services to the domestic
nuclear power industry, made the following statement in its annual
report:
Regulatory changes resulting from [accidents at Three Mile
Island and Chernobyl], combined with the rising importance
MARSH GROUP v. PRIME RETAIL 9
of environmental restoration and waste management, have
created a marketplace for the DOE Services Group with an
expected annual growth rate of 10% to 30% over the next
several years . . . . [T]he DOE Services Group is poised to
carry the growth and success of 1991 well into the future.
Id. at 289. In a press release that same day, General Physics
announced that first quarter earnings for 1992 were likely to be half
of analysts’ estimates, and also stated that "conditions in the 1st quar-
ter are temporary and that results during the remainder of the 1992
[sic] should be in line with analysts’ current projections." Id. at 288.
Regarding the alleged misstatements in the annual report, we held:
"Soft," "puffing" statements such as these generally lack
materiality because the market price of a share is not
inflated by vague statements predicting growth . . . . The
whole discussion of growth is plainly by way of loose pre-
diction, and both the range of rates cited, as well as the time
for their achievement, are anything but definite. No reason-
able investor would rely on these statements, and they are
certainly not specific enough to perpetrate a fraud on the
market. Analysts and arbitrageurs rely on facts in determin-
ing the value of a security, not mere expressions of opti-
mism from company spokesmen. The market gives the most
credence to those predictions supported by specific state-
ments of fact, and those statements are, of course, actionable
if false or misleading. However, "projections of future per-
formance not worded as guarantees are generally not action-
able under the federal securities laws." Krim v. Banctexas
Group, Inc., 989 F.2d 1435, 1446 (5th Cir. 1993) (citing
Friedman v. Mohasco Corp., 929 F.2d 77 (2d Cir. 1991)).
Statements such as "the DOE Services Group is poised to
carry the growth and success of 1991 well into the future"
hardly constitute a guarantee.
Id. at 290. And we further held that the statement that future results
"should be in line with analysts’ current projections . . .[,]" did not
"constitute[ ] a guarantee that earnings would be forthcoming in par-
ticular amounts . . . ." Id. at 291. We rested our decision in Raab on
10 MARSH GROUP v. PRIME RETAIL
the difference between statements of current facts and forward-
looking statements, explaining our view as follows:
Predictions of future growth stand on a different footing,
however, because they will almost always prove to be
wrong in hindsight. If a company predicts twenty-five per-
cent growth, that is simply the company’s best guess as to
how the future will play out. As a statistical matter, twenty
percent and thirty percent growth are both nearly as likely
as twenty-five. If growth proves less than predicted, buyers
will sue; if growth proves greater, sellers will sue. Imposing
liability would put companies in a whipsaw, with a lawsuit
almost a certainty. Such liability would deter companies
from discussing their prospects, and the securities markets
would be deprived of the information those predictions
offer. We believe that this is contrary to the goal of full dis-
closure underlying the securities laws, and we decline to
endorse it.
Id. at 290.
We reaffirmed the reasoning of Raab in Malone v. Microdyne
Corp., 26 F.3d 471 (4th Cir. 1994), and Hillson Partners Ltd. P’ship
v. Adage Inc., 42 F.3d 204 (4th Cir. 1994). In Malone, we held that
a statement of "comfort" with an analyst’s earnings estimate was
immaterial as a matter of law, stating: "Misstatements or omissions
regarding actual past or present facts are far more likely to be action-
able than statements regarding projections of future performance.
Generally, the latter will be deemed actionable . . . only if they are
supported by specific statements of fact or are worded as guarantees."
Id. at 479-80. And in Hillson, we again applied Raab in rejecting as
immaterial claims based on a number of forward-looking statements
not worded as guarantees or supported by specific facts. 42 F.3d at
21-16 (statements, inter alia, that company was "on target toward
achieving the most profitable year in its history," that "significant
sales gains should be seen as the year progresses," and that a project
was "on schedule" were "not material as a matter of law").
Given the background of Raab and its progeny, we are constrained
to find that the alleged misstatements in this case are immaterial and
hence not actionable. The allegedly false forward-looking statements
in this case were various permutations of management’s expression
MARSH GROUP v. PRIME RETAIL 11
of "commitment" to paying the quarterly dividend. Management alter-
nately stated that the dividend was "sacred" or "sacrosanct" or that it
"staked its reputation on its commitment to continue to pay the com-
pany’s dividend." Finally, in response to an analyst’s question regard-
ing the possibility of a share buyback, management stated that such
a buyback was not an option because its feeling of a "contractual obli-
gation" to continue to pay the current dividend. These projections of
future performance are indistinguishable from the statements we held
were non-actionable in Raab, Malone, and Hillson. Like the state-
ments alleged to be false in those cases, the statements made by the
Appellees are not guarantees and lack the factual specificity necessary
to make them actionable in this circuit. Therefore, the statements are
immaterial as a matter of law.
We also reject the Appellants’ attempt to distinguish Raab,
Malone, and Hillson by arguing that Prime Retail’s allegedly false
statements were statements of present intention to pay dividends,
rather than forward-looking projections of future dividends. All pro-
jections can be characterized as presently held beliefs. The statements
are forward-looking because they relate to "future economic perfor-
mance." 15 U.S.C. § 78u-5(i)(1)(C). The PSLRA explicitly defines
forward-looking statements as including "a projection of . . . divi-
dends," id. § 78u-5(i)(1)(A), and any statement relating to such a pro-
jection, id. § 78u-5(i)(1)(D). Finally, many of the statements in our
prior cases could have been characterized as statements of present
belief regarding future events. See, e.g., Hillson, 42 F.3d at 213-15
(statements that project was "on schedule" and company was "on
track" for increased earnings were forward-looking); Malone, 26 F.3d
at 479-80 (statement of "comfort" with analysts’ earnings estimate
was forward-looking). Accordingly, our holdings in Raab, Malone,
and Hillson are fully applicable in this case. Those cases dictate that
the allegedly false statements made by Prime Retail are immaterial as
a matter of law.
IV.
For the above stated reasons, we affirm the district court’s dis-
missal of the Appellants’ claims.
AFFIRMED