Suna v. Bailey Corp.

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 96-1138

VICKI MATCH SUNA AND LORI ROSEN,

Plaintiffs - Appellants,

v.

BAILEY CORPORATION, ET AL.,

Defendants - Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE

[Hon. Steven J. McAuliffe, U.S. District Judge]

Before

Torruella, Chief Judge,

Boudin, Circuit Judge,

and Lisi,* District Judge.

Jules Brody, with whom Stull, Stull & Brody, Backus, Meyer,

Solomon & Rood and Weiss & Yourman were on brief for appellants.

Sydelle Pittas, with whom Law Offices of Sydelle Pittas was

on brief for appellee Bailey Corporation.

February 26, 1997

* Of the District of Rhode Island, sitting by designation.

TORRUELLA, Chief Judge. On May 26, 1994, Plaintiffs-
TORRUELLA, Chief Judge.

Appellants Vicki Match Suna ("Suna") and Lori Rosen ("Rosen")
1 The officers included William A. Taylor, who served as a
(collectively "plaintiffs" or "appellants") brought this class
consultant and as a Bailey director at all relevant times; Roger
R. Phillips, who served as Chairman of the Board, President,
action suit against Bailey Corporation ("Bailey") and individual
Chief Executive Officer and Secretary of Bailey during the class
period; Leonard Heilman, who served as Senior Vice President --
officers1 of the corporation (collectively "defendants" or
Finance and Administration, Chief Financial Officer, Treasurer,
and Assistant Secretary of Bailey during the class period; E.
"appellees") on behalf of all persons who purchased Bailey's
Gordon Young, who served as a director of Bailey and as Executive
Vice President at all relevant times; and John G. Owens, who
common stock during the class period. The suit alleges that
served in various management capacities and as a director of
Bailey during the class period.
appellees violated Section 12 of the Securities Act2 of 1933 and
2 Any person who --
Sections 10(b)3 and 20(a)4 of the Securities Exchange Act of
(1) offers or sells 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 . . . , and
who shall not sustain the burden of proof
that he did not know, and in the exercise of
reasonable care could not have known, of such
untruth or omission,

shall be liable to the person purchasing such security from him
. . . .

15 U.S.C. 771 (1976).

3 Section 10(b) provides:

It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality
of interstate commerce or of the mails, or of any
facility of any national securities exchange --

* * *

(b) To use or employ, in connection with
the purchase or sale of any security
registered on a national securities exchange
or any security not so registered, any
manipulative or deceptive device or
contrivance in contravention of such rules
and regulations as the Commission may
prescribe as necessary or appropriate in the
public interest or for the protection of

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1934, as well as Rule 10b-55 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'

investors.

15 U.S.C. 78j(b) (1981).

4 Section 20(a) provides, in part:

Every person who, directly or indirectly,
controls any person liable under any
provision of this chapter or of any rule or
regulation thereunder shall also be liable
jointly and severally with and to the same
extent as such controlled person to any
person to whom such controlled person is
liable . . . .

15 U.S.C. 78t (1981).

5 Rule 10b-5 provides:

It shall be unlawful for any person, directly
or indirectly, by the use of any means or
instrumentality of interstate commerce, or of
the mails or of any facility of any national
securities exchange,
(a) To employ any device, scheme, or
artifice to defraud,
(b) To make any untrue statement of a
material fact or to omit 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, or
(c) To engage in any act, practice, or
court of business which operates or would
operate as a fraud or deceit upon any person,
in connection with the purchase or sale of
any security.

17 C.F.R. 240.10b-5 (1996).

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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
BACKGROUND

We accept as true all facts alleged in appellants'

Second Amended Complaint. Shields v. Citytrust Bancorp, Inc., 25

F.3d 1124, 1125 (1st 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.

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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.

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

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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

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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 "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.

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.

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DISCUSSION
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 (1st 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)).

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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.2d 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 strike suits intended to increase the amount of

settlement awards rather than set forth a legitimate claim. See

New England Data Servs., Inc. v. Becher, 829 F.2d 286, 289 (1st

Cir. 1987).

"First, [p]laintiffs must plead more
than that defendants acted irresponsibly
and unwisely, but that they were aware
that 'mismanagement had occurred and made
a material public statement about the
state of corporate affairs inconsistent
with the existence of the
mismanagement.'"

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"Second, defendants may not be held
liable under the securities laws for
accurate reports of past successes, even
if present circumstances are less rosy, .
. . and optimistic predictions about the
future that prove to be off the mark
likewise are immunized unless plaintiffs
meet their burden of demonstrating
intentional deception . . . ."

"Third, and finally, general averments
of the defendants' knowledge of material
falsity will not suffice. Consistent
with Fed. R. Civ. P. 9(b), the complaint
must set forth 'specific facts that make
it reasonable to believe that
defendant[s] knew that a statement was
materially false or misleading.' Id.

The rule requires that the particular
'"times, dates, places or other details
of [the] alleged fraudulent involvement"'
of the actors be alleged."

Serabian, 24 F.3d at 361. In order to succeed on their claim,

appellants must have complied with these pleading requirements by

showing that the statements presented to the public were false or

misleading at the time they were made and showing that it is

reasonable to believe that the defendants knew they were false or

misleading. In addition, appellants must show that statements

made were more than tempered predictions about the future that

later proved incorrect. See id. at 366 ("It is well established

that plaintiffs in a securities action have not alleged

actionable fraud if their claim rests on the assumption that the

defendants must have known of the severity of their problems

earlier because conditions became so bad later on."). We turn to

appellants' Second Amended Complaint.

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I. STATEMENTS IN BAILEY'S PROSPECTUS
I. STATEMENTS IN BAILEY'S PROSPECTUS

A. Section 10(b) & Rule 10b-5 Claims
A. Section 10(b) & Rule 10b-5 Claims

The complaint quotes extensively from various Bailey

corporate documents, alleging that these quotes were materially

false and misleading. These statements tend to fall into two

categories: (1) statements about past performance of the

company; and (2) statements about future performance. The

district court succinctly and accurately summarized the alleged

false representations made by Bailey:

1. The Company falsely stated that it would
achieve increased profits by moving
production from its plant in Seabrook,
New Hampshire, to newly acquired
factories in Michigan. Complaint, 2.

2. The Company knowingly issued false
predictions regarding future earnings
prospects during pre-offering road
shows. Complaint, 5.

3. When the Company made the public
offering it knew but failed to disclose
that its profitability would decline
sharply because of a much less
profitable mix of parts to be supplied
to Ford. Complaint, 8.

4. The Company failed to disclose to the
public "severe" problems it began
experiencing at its Contour facility
beginning in February, 1994 (i.e., 6
months after the first day of the public
offering and after issuance of all but
one of the public documents of which
plaintiffs complain). Complaint, 13.

Order of December 29, 1995, at 6. Paragraph 62 of the Second

Amended Complaint attempts to describe why these statements were

false and misleading: "Bailey's earnings would not continue to

grow, they would decline materially due to a massive shift of

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Bailey's production to a much less profitable product mix."

Second Amended Complaint at 62(a).

Regarding statements about past performance, appellants

present no argument that such statements were false or

inaccurate. At most, appellants suggest that Bailey's

presentation of figures indicating past performance somehow imply

that the company would attain the same level of profitability in

the future. In presenting figures of past performance, Bailey's

prospectus does not in any way project future earnings.

Instead, the contention here is that the company's

predictions would prove to be false and that earnings would not

continue to grow. Appellants contend that Bailey's Prospectus

promised increased revenue. See Second Amended Complaint, 54,

55, 57, 61. The statements cited by appellants, however, make no

such representations and, in fact, are tempered with cautionary

language. For example, appellants cite the following sentence to

support its contention that Bailey's prospectus indicated that

revenues would continue to grow rapidly: "While the Company

expects continued revenue growth, revenue may or may not increase

at the same rate as the number of components in the Company's

product line." This statement is certainly not a promise of

future profitability and contains language indicating uncertainty

as to future revenues. Appellants cite the following statement

as indicating that Bailey would become "even more profitable":

"The Company intends to transfer certain labor intensive

operations from Seabrook to Hillsdale and Madison to take

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advantage of lower average labor cost and more fully utilize

existing capacity." Again, there is no suggestion or promise of

increased profits in this statement. Finally, the following is

quoted in support of the contention that the company had secured

supply agreements that would make up for the loss of certain

discontinued products: "[T]he Company believes that these

components in aggregate, will provide the Company with

opportunities comparable to those that have been provided by the

Taurus/Sable and Tempo/Topaz models." While the company states

that it believes the opportunities will be comparable, the

statement contains no promise to that effect.

Bailey's 1993 Annual Report to Shareholders, registered

with the SEC on October 28, 1993, indicated that Bailey "expected

[certain accomplishments of 1993] to help to sustain growth and

strengthen our competitive position in future years." That same

document labels Bailey's mid-western plants as "cost-efficient."

Additionally, an annual report filed on a Form 10-K for fiscal

year 1993 stated that the acquisition of the mid-western plants

provided the company with "additional manufacturing capacity at

lower average labor costs than prevail at the Company's

Seabrook[, New Hampshire] facility." Appellants contend that

these statements were misleading because Bailey failed to

disclose that the shift in production would "materially reduce

the Company's revenue and earnings," Complaint, 74, and because

the mid-western plants were not cost efficient. No facts have

been provided in support of the contention that Bailey had reason

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to know that the production shift would be less profitable, nor

do appellants indicate why Bailey should have known, prior to

operating a plant with lower labor costs, that the plant would be

less cost efficient than the Seabrook plant, at which labor costs

were higher.

"Certainly, predictions 'are not exempt' from the

securities laws . . . but they are actionable only if the

forecast might affect a 'reasonable investor' in contemplating

the value of a corporation's stock." Colby v. Hologic, Inc., 817

F. Supp. 204, 211 (D. Mass. 1993) (citation omitted). While

these statements may convey the company's desire for profitable

performance in the future, they do not convey any promises about

future performance and do not project specific numbers that the

company will certainly attain. No reasonable investor would have

read these statements, especially as they are accompanied by

cautionary language, as promises or guarantees of future

performance.

The statements above, standing alone, are not false or

misleading. Had the appellants presented facts known by Bailey,

and contemporaneous with the statements above, that would show

that Bailey's anticipated success was unlikely, such facts would

have adequately alleged a claim of securities fraud. Instead,

all appellants present as factual support is the receipt by

Bailey of 26-week forecasts from Ford, with no indication from

appellants as to what information contained within those reports

contradicts Bailey's projections, other than a vague reference in

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paragraph 67 of the complaint that, "[a]s [will be] set forth

below, Ford's demand for certain parts supplied by Bailey was

lower in the Company's first calendar quarter of 1994 and Bailey

knew that would be so as of the day [of] the Offering." The only

information "set forth below" regarding a decrease in Ford's

demand for parts was discussed in a Hancock analyst's report

publicly disseminated on June 8, 1994. The comments regarding

Ford in this document suggest that, at the time the report was

prepared, nearly a year after the Prospectus, Annual Report and

Form 10-K were issued, Ford was scaling back production plans.

This hardly amounts to a contemporaneous factual allegation

indicating that statements made by Bailey in August of 1993

regarding future prospects were false or misleading, or that it

was unreasonable for Bailey to make such statements about future

profitability.

In addition, appellants state that "Bailey's earnings

. . . would decline materially due to a massive shift of Bailey's

production to a much less profitable product mix." Appellants

allege no facts to indicate that Bailey had any reason to suspect

at the time the statements were made that the product mix would

prove to be less profitable.

Although appellants specify statements that they

contend were fraudulent, identify the speaker, and state where

and when the statements were made, they fail, on every allegation

of fraud, to explain why the statements were fraudulent.

Appellants offer no factual support for their conclusory

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allegations that Bailey knew that a product mix would become

unprofitable or that production problems would arise at a plant

it was not even operating at the time the Prospectus was issued.

Thus, there is no factual support that Bailey made materially

false or misleading statements when it presented positive future

expectations. Appellants repeatedly recite their contention that

the "26-week forecasts" received from Ford indicated to Bailey

Ford's projected supply requirements through the company's

"fiscal third quarter," the time at which the actual requirements

allegedly diminished, causing the decline in Bailey's earnings

per share. Appellants fail, however, to identify information in

the forecasts that would have put Bailey on notice that supply

requirements would decline. That Ford presented forecasts of its

requirements does not guarantee that forecasts presented to

Bailey 26 weeks prior to the third quarter, and perhaps

contemporaneously with the dissemination of the Bailey

Prospectus, accurately identified the actual requirements of the

third quarter. Those requirements may have changed dramatically

after Ford presented Bailey with its forecasts for that third

quarter. Because appellants fail to cite with specificity

anything in the 26-week forecasts that would have put Bailey on

notice of a decline in products to be supplied, they have not

shown that Bailey's expectations were unreasonable or

fraudulently presented. That Bailey may have been mistaken in

its projections, which were apparently based on facts that

appellants do not contend were false, is not enough.

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"[Appellants] record[] statements by
defendants predicting a prosperous future
and hold[] them up against the backdrop
of what actually transpired. . . . This
technique is sufficient to allege that
the defendants were wrong; but misguided
optimism is not a cause of action, and
does not support an inference of fraud.
We have rejected the legitimacy of
'alleging fraud by "hindsight."'"

Shields, 25 F.3d at 1129. "Because all of plaintiffs' 10(b)

claims rely fundamentally on such unsupported allegations, the

district court properly dismissed these claims for failure to

meet Rule 9(b)." Lucia, 36 F.3d at 174.

B. Sections 12(2) and 20(a)
B. Sections 12(2) and 20(a)

Appellants contend that the district court improperly

dismissed their claims arising under Section 12(2) of the

Securities Act of 1933 and Section 20(a) of the Securities and

Exchange Act of 1934. They argue that the district court's

dismissal of their complaint was pursuant to Rule 9(b). As

appellants correctly note, neither of these claims contain an

element of fraud and Rule 9(b)'s pleading with particularity

requirements do not apply. Nevertheless, the district court

properly dismissed these claims as well.

1. Section 12(2)
1. Section 12(2)

First, for a violation of Section 12(2), the plaintiff

must show that the defendant made an untrue statement of a

material fact or omitted such material fact. Appellants contend

that Rule 9(b)'s pleading requirements do not apply to claims

under Section 12(2), claiming that Section 12 does not contain an

element of fraud. As we find that appellants have failed to even

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meet the minimal requirements of a Section 12(2) claims, we need

not decide whether their Section 12(2) claim sufficiently sounds

in fraud such that Rule 9(b)'s pleading requirements apply.

Appellants have failed to point us to any untrue

statements of material fact, nor have they identified material

facts whose omission would render a previous statement

misleading. "[I]nformation is 'material' only if the disclosure

would alter the 'total mix' of facts available to the investor

and 'if there is a substantial likelihood that a reasonable

shareholder would consider it important' to the investment

decision." Milton v. Van Dorn Co., 961 F.2d 965, 969 (1st Cir.

1992) (quoting Basic, Inc. v. Levinson, 485 U.S. 224, 231-32

(1988)). The statements that appellants challenge were either

true at the time they were made and continued to be so, or

consisted of future predictions that later proved to be

incorrect. These predictions were not of the sort that would

need to be corrected by a later statement. The statements

addressed by appellants indicate that Bailey projected positive

future earnings, but these statements were tempered with language

indicating that Bailey did not, and could not, guarantee the

future profitability of the company. "'Soft,' 'puffing'

statements such as these generally lack materiality because the

market price of a share is not inflated by vague statements

predicting growth." Raab v. General Physics Corp., 4 F.3d 286,

289 (4th Cir. 1993).

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Appellants' complaint contends that the market's

reliance on statement by Bailey artificially inflated the

company's price per share. We find, however, that "[n]o

reasonable 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 determining

the value of a security, not mere expressions of optimism from

company spokesmen." Id. at 290. A reasonable purchaser would

know that these statements consisted of optimistic predictions of

future potential and would not have been misled by them.

Therefore, the district court properly dismissed appellant's

Section 12(2) claims.

2. Section 20(a)
2. Section 20(a)

Finally, regarding the Section 20(a) claim, which

attempts to attribute joint and several liability to the

individual defendants as "control persons," appellants have

failed to allege an underlying violation of the securities acts.

The district court properly dismissed appellants' Section 20(a)

claims.

II. REPORTS OF SECURITIES ANALYSTS
II. REPORTS OF SECURITIES ANALYSTS

Appellants also allege that Bailey should be held

liable for false and misleading statements made by analysts in

independent reports disseminated to the public. The first of

these reports was disseminated to the public by McDonald.

Appellants allege that the analyst who prepared that report,

David Garrity, spoke with Leonard Heilman, an officer of the

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company, in preparing the report. Garrity reviewed with Heilman

his earnings estimates and the methodology and/or assumptions of

those estimates. Thereafter, McDonald disseminated a report

giving Bailey an "aggressive buy rating." The report stated that

it expected Bailey to earn $1.15 per share in fiscal 1994 and

$1.60 per share in fiscal 1995. Finally, the report stated that

it estimated that the price of Bailey stock would reach $20 per

share, with a down-side risk to the $10 level.

The second report, prepared by Hancock analyst Jane

Gilday, was reviewed with Heilman on or about December 20, 1993.

Gilday informed Heilman of her revenue and earnings per share

estimates and the methodology and assumptions used in reaching

those estimates. She also indicated to Heilman her opinion of

Bailey's financial prospects. Hancock's report, publicly

disseminated on December 21, 1993, projected Bailey's earnings

per share at $1.05 for fiscal 1994 and $1.25 for fiscal 1995.

The report goes on to make predictions regarding Bailey's

profitability in the coming year based on growth in its parts

business and the company's shift of manufacturing to the mid-

western plants.

A third report, disseminated to the public by McDonald

on March 18, 1994, indicated that McDonald had concerns about

Bailey's product mix shift and lowered its earnings per share

forecasts slightly. The report still gave Bailey an "Aggressive

Buy" rating.

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After Bailey disclosed that its earnings for the third

quarter of fiscal 1994 were only $0.16, Hancock lowered Bailey's

investment rating from buy to sell, based in part on the "serious

credibility problem" of Bailey management. Hancock called

Bailey's third quarter earnings "a major negative surprise."

In support of their argument that Bailey should be held

liable for alleged misstatements in these analysts' reports,

appellants cite cases in which courts have held that a defendant

company may be held liable for any false or misleading statements

contained in analysts' reports. See, e.g., Elkind v. Liggett &

Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980) (holding that a

company may sufficiently entangle itself with analysts' forecasts

to render the predictions attributable to the company, but

finding no such liability); In re RasterOps Corp. Sec. Litig.,

No. C-93-20349, 1994 WL 618970, at *3 (N.D. Cal. Oct. 31, 1994)

(finding that "[a] company may be liable for analyst reports

which it fostered and reviewed but failed to correct if it

expressly or impliedly represented that the information was

accurate or reflected the view of the company"); Alfus v. Pyramid

Technology Corp., 764 F. Supp. 598, 603 (N.D. Cal. 1991) (finding

that a company may be liable for not correcting analysts'

forecasts where it undertakes to provide information regarding

and pass on the analysts' forecasts, but finding no liability

where a company officer merely examines and comments upon an

analyst's report); In re Aldus Sec. Litig., [1992-1993 Transfer

Binder] Fed. Sec. L. Rep. (CCH 97,376 at 95,984-85 (W.D. Wash.

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1993) (finding plaintiffs' claim sufficiently alleged that

defendants placed their imprimatur on analysts' reports, but

employing a lower Rule 9(b) pleading requirement than is applied

in this circuit); In re Cypress Semiconductor Sec. Litig., [1993

Transfer Binder] Fed. Sec. L. Rep. (CCH) 97,060 at 94,698 (N.D.

Cal. 1992) (holding that plaintiffs need only allege "that

defendants provided information to the securities analysts upon

which the reports were based").

Appellants argue that we should adopt the more liberal

approach adopted by these courts, rather than the "restrictive

approach," Appellant's Brief at 35, employed by the court below.

Appellant's arguments are unpersuasive. Our review of the cases

appellant cites indicates that the law applied by those courts is

similar to, if not the same as, that applied by the court below.

Where the cases may differ is in the pleadings each court

requires in order to sufficiently allege that the analysts'

reports are attributable to the defendant. We have repeatedly

emphasized Rule 9(b)'s heightened pleading requirements because

of our concern that plaintiffs will bring baseless strike suits

against securities defendants in order to increase settlement

amounts or to engage in a fishing expedition for evidence on

which to base its claim. See Lucia, 36 F.3d at 174 (noting that

we have been especially rigorous in applying Rule 9(b) to

securities claims because of these concerns); Romani, 929 F.2d at

878 (same). We find, however, that the cases cited by appellants

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do not differ substantially from the law applied by the court

below.

This circuit has not yet decided whether statements in

an analyst's report may be attributable to a defendant company.

As appellants claim that Bailey fraudulently misled the analysts

who prepared these reports, Rule 9(b)'s heightened pleading

requirements apply. Assuming arguendo that a company may be held

liable for false or misleading statements in an analysts' report

where that company has adopted, endorsed, or sufficiently

entangled itself with the analysts' reports, see Elkind, 635 F.2d

at 163, we find that appellants have failed to meet Rule 9(b)'s

pleading requirements and their claim must fail. As we noted

above, Rule 9(b) requires that plaintiffs "'(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. The district court pointed out to

appellants that their earlier complaints failed to meet Rule

9(b)'s requirements. Order of July 31, 1995 at 2; Order of Nov.

10, 1994 at 13. In an apparent attempt to cure these defects, in

their Second Amended Complaint, appellants alleged the following:

[I]t was the Company's practice to have
top managers, namely, Chief Financial
Officer Heilman, communicate regularly
with securities analysts . . . to
discuss, among other things, the
Company's earnings prospects, its
products, the efficiency of the Company's
manufacturing plants, anticipated
financial performance, and to provide
detailed 'guidance' to these analysts

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with respect to the Company's business,
including projected revenues, earnings,
and of particular importance to analysts,
earnings per share.

In its order dismissing the Second Amended Complaint, the

district court found that appellants' attempts to satisfy the

requirements of Rule 9(b) were insufficient because appellants

failed to identify the statements made by Heilman or describe how

those statements were false or misleading. Order of Dec. 29,

1995. We agree with the district court that appellants have

failed to allege with particularity the false or misleading

statements made by Heilman, or any other defendant, that would

have induced analysts' to publicly disseminate misleading

forecasts.

We also find that appellants have failed to direct us

to any facts to support their conclusory allegation that Bailey

"endorsed the contents of those reports, adopted them as its own,

and placed its imprimatur on them." Second Amended Complaint,

36. As presented by the appellants, the reports do not appear

to quote any Bailey officer or employee, nor do they imply that

the forecasts were supplied or confirmed by any Bailey officer or

employee. Appellants' allegations regarding analysts' reports

fail to meet the pleading requirements of Rule 9(b) and the

district court properly dismissed this count of the complaint.

CONCLUSION
CONCLUSION

For the foregoing reasons, the decision below is

affirmed.
affirmed

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