Geffon v. Micrion Corporation

United States Court of Appeals
For the First Circuit
No. 00-1199

JOSHUA GEFFON, EDWARD R. JASLOW,
IRVING BERGER AND RICHARD ANTHONY PHILLIPON,
INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED,

Plaintiffs, Appellants,

v.

MICRION CORPORATION, NICHOLAS P. ECONOMOU,
ROBERT K. MCMENAMIN AND DAVID M. HUNTER,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Robert E. Keeton, U.S. District Judge]

Before

Torruella, Chief Judge,

Cyr, Senior Circuit Judge,

and Stahl, Senior Circuit Judge.

Thomas G. Shapiro, with whom Thomas V. Urmy, Jr., Michelle
Blauner, Shapiro Haber & Urmy, LLP, Kenneth J. Vianale, Milberg Weiss
Bershad Hynes & Lerach, LLP and Jay S. Cohen, were on brief, for
appellants.
Mitchell H. Kaplan, with whom John R. Baraniak, Jr., Keith A.
Custis and Choate, Hall & Stewart, were on brief, for appellees.
May 10, 2001

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 TORRUELLA, Chief Judge. Appellants are class representatives

of all persons who purchased stock in Micrion Corporation ("Micrion")

between April 26 and June 24, 1996. They allege that defendants

Micrion, Nicholas Economou, Robert McMenamin and David Hunter1 were

responsible for statements or omissions in violation of §§ 10(b) and

20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and

78t(a), and in violation of Securities and Exchange Commission Rule

10b-5, 17 C.F.R. § 240.10b-5. The district court found that there was

no genuine dispute of material fact as to whether the statements in

question were misleading or fraudulent, and granted summary judgment to

defendants. Geffon v. Micrion Corp., 76 F. Supp. 2d 134, 148 (D. Mass.

1999). This appeal followed. For the reasons explained herein, we

affirm the grant of summary judgment, albeit based on different

reasoning than that used by the district court, namely that appellants

adduced insufficient evidence of defendants' scienter.

BACKGROUND

The district court presented the factual background at length

in its grant of summary judgment. Id. at 136-140. To the extent

necessary, we revisit it here. The relevant facts are undisputed.

A. The Agreement Between Micrion and Read-Rite

1 Economou was the President and Chief Executive Officer of Micrion,
McMenamin was Vice President of Sales, and Hunter was the Chief
Financial Officer during the period at issue.

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 Micrion designs and manufacturers focused-ion-beam (FIB)

systems. Prior to 1996, Micrion typically sold FIB systems in small

batches of one to two machines per customer. In early 1996, Micrion

negotiated a large-scale sale of FIB systems to Read-Rite Corporation

("Read-Rite"). Under the terms of an Equipment Purchase Agreement

dated February 9, 1996 (the "Agreement"),2 Read-Rite ordered twenty-five

FIB systems to be delivered between March 31 and September 30, 1996.

Micrion also agreed to sell up to fifty additional units upon the

issuance of "written releases" from Read-Rite.3 Read-Rite retained the

ability to "cancel in whole or part any purchase order" with written

notice. Moreover, Read-Rite was in no way obligated to purchase any

units for which it had not issued a written release.

B. The Press Releases and the Conference Call

2 The Agreement was not executed until March 18, 1996.
3 An attachment to the Agreement provided the price schedule for all
seventy-five units and a delivery schedule for the first twenty-five
units.

The attachment also provided that:

This Agreement shall further constitute a non-binding
"blanket order" for an additional fifty (50) units, for a
total of seventy-five (75) units. Buyer shall have no
obligation, however, to purchase any of said additional
fifty (50) units except pursuant to written releases of same
issued to, and accepted by, Seller, which releases must
precede the delivery date(s) by not less than six (6)
calendar months.

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 On March 18, 1996, Micrion issued a press release (the "March

18 Release") reporting that it had "completed negotiation of a

multiple-system purchase agreement valued at over $50 million," and

that when combined with a previous agreement with the same customer,

the total order was "valued at over $60 million."4 The March 18 Release

also warned that the press release "include[d] forward looking

statements . . . subject to risks and uncertainties that could cause

the Company's actual results to vary materially." It referred readers

to a Form 8-K (the "8-K") filed with the Securities and Exchange

Commission on the same day. The 8-K identified a number of potential

risks relevant to the Agreement, including "the exercise of

cancellation or termination provisions . . . , including provisions

that entitle the customer to cancel issued purchase orders or to

terminate the agreement for convenience."

On April 25, 1996, Micrion issued a press release (the

"April 25 Release") announcing "record revenues" for its third quarter

ending March 31, 1996. In the April 25 Release, Economou stated that:

[Micrion] booked an order worth over $50 million
for Micrion FIB systems to be used in a new
production application. This order is an
extension of the $10 million order announced by
Micrion in October. The total order is now
valued at over $60 million, the largest order
ever placed for FIB equipment.

4 If all 75 units were indeed purchased according to the attached price
schedule, the total price would be $65,113,950.

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A note attached to the release referred investors to the 8-K for

information on risks and uncertainties associated with forward looking

statements contained therein.

Also on April 25, Economou and Hunter held a conference call

with securities brokers and analysts (the "Conference Call"). During

the call, Hunter stated that Micrion's "actual backlog" totaled $72.9

million as of the end of March, 1996. Economou then had the following

exchange with financial analyst Mark Fitzgerald to explain further what

Micrion meant by "backlog":

Fitzgerald: [I]n terms of the timing on [the
backlog], this is all within 12 months, that 72
million, is that how you are defining your
backlog?

Economou: That's correct.

Fitzgerald: And when you said it was
concentrated in the first two quarters, are we
talking 50, 60, 90 percent of it in the first two
quarters of '97?

Economou: No, I didn't mean to say quite that.
I think what I said was that the significant
shipments would start in the second half of the
calendar year. I wouldn't necessarily say that
the rest of the order or whatever is left of the
order would be in the first six months of our
fiscal year. I think it will be a little more
evenly distributed than that. But it will
certainly be within the twelve months starting
from now.

During the Conference Call, Micrion Director of Corporate Relations

Bill Monigle again referred to the 8-K, noting that "there are

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important factors that might cause [Micrion's] performance to vary from

that projected in the [Conference Call and that] current cautionary

information identifying these factors [could] be found in the form 8K."

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C. Subsequent Events

On April 26, 1996, investment bank Hambrecht and Quist issued

a strong-buy recommendation for Micrion stock, resulting in a $5

increase in the share price. A May 2, 1996 press release, while not

identifying Read-Rite as Micrion's major customer, noted that the

"large order we recently booked makes up a major portion of the current

backlog." The May 2 release again warned investors of the risks that

the Agreement might be cancelled or terminated. On June 12, 1996,

Micrion's stock price fell sharply, apparently in response to a Dow

Jones report that weakness in the disk-drive industry might hurt Read-

Rite and soften its demand for Micrion products. On June 21, 1996,

Read-Rite cancelled some of its firm order (reducing the stock ordered

to 21 units) and indicated that it would not be placing orders for any

of the 50 units covered by the "non-binding blanket order" section of

the Agreement. Micrion announced the cancellation in a press release

dated June 24, 1996.

D. The Allegedly Misleading Material Statements and the Alleged
Material Omission

Although appellants made numerous claims of false and

misleading statements by Micrion in their original complaint, by the

time of summary judgment (and for purposes of this appeal), they

pinpoint three particular statements and one alleged material omission.

First, they claim that Economou's statement in the April 25 Release

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that Micrion had "booked an order worth over $50 million" was false and

misleading because the term "book an order" refers only to orders where

the customer was committed to purchasing the product ordered, i.e.,

"firm" orders. At the time that Micrion issued the press release,

Read-Rite had only placed a firm order for 28 machines. The remainder

of the machines were covered under a "non-binding blanket order" under

which Micrion was obligated to sell up to 75 machines, but Read-Rite

was not obligated to buy any for which it had not yet filed a written

release. Under appellants' interpretation of "book an order," Micrion

had booked an order for under $30 million, not $60 million.

Second, appellants claim that Economou's inclusion of the

entire Read-Rite order in "actual backlog" in the Conference Call was

false and misleading because "backlog" only includes items for which a

firm order had been placed, and not items covered under the "non-

binding blanket order." Under this interpretation, Micrion's backlog

as of April 25, 1996 would have been approximately $40 million, rather

than the $72 million stated in the Conference Call.

Third, appellants claim that Economou's statement that "the

rest of the order" would "certainly" be shipped "within twelve months"

of the Conference Call was false and misleading given that no specific

delivery dates had been set for items under the non-binding blanket

order, and that delivery for those items might never occur absent

written purchase orders from Read-Rite.

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 Finally, even if none of these specific statements was false

and misleading, appellants claim that Micrion's failure to disclose

that Read-Rite had no obligation to purchase a majority of the

equipment covered by the Agreement was a material omission actionable

under Rule 10b-5. See, e.g., Roeder v. Alpha Indus., 814 F.2d 22, 26

(1st Cir. 1987) (citing SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833,

860-61 (2d Cir.1968)) ("When a corporation does make a disclosure

. . . there is a duty to make it complete and accurate.").

E. The Two Summary Judgment Opinions

The district court originally denied defendant's motion for

summary judgment. Geffon v. Micrion Corp., No. 96-11596-REK (D. Mass.

Sept. 24, 1998) (memorandum and order) [hereinafter Geffon, First

Summary Judgment Opinion]. The court held that there were multiple

plausible interpretations of the statements at issue, and that a

reasonable jury could find that any of the three statements was

misleading in context. See id. at 6-8. The court also found that

"genuine dispute[s] of fact" existed as to whether the statements were

material. Id. at 9. Most notably for our purposes, the court noted

that the question of scienter "should ordinarily be left to the trier

of fact," id. at 10 (quoting In re Apple Computer Sec. Litig., 886 F.2d

1109, 1113 (9th Cir. 1989)), and concluded that because "evidence has

been proffered . . . that defendants knew that Read-Rite had not

committed itself to purchasing the 50 machines from Micrion," a genuine

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dispute of fact existed as to the question of scienter, id. at 10-11.

Although the district court refused to grant summary judgment for

defendants, it explicitly noted that it would "not allow this case to

proceed to a jury trial until plaintiffs have identified factual issues

for submission to the jury," and it reserved the option of

reconsidering its summary judgment ruling should it not be persuaded

that a material fact was genuinely in dispute. Id. at 13.

After accepting proposed jury questions and limited

additional evidence (immaterial for the purposes of this appeal), the

court revisited its summary judgment opinion. It determined that the

evidence proffered by appellants was insufficient to show a genuine

dispute of material fact. Geffon, 76 F. Supp. 2d at 148. It based

this determination on its conclusion that, as a matter of law, the

Agreement constituted a "firm order" for 25 units and a "blanket order"

for 50 units. Id. As a result of this legal conclusion, the court

determined that no reasonable jury could find Micrion's use of the word

"order" to be false and misleading in the respect alleged by

plaintiffs, and thus no actionable misrepresentations had been made by

Micrion or Micrion officers.5 To the extent the court addressed the

5 Two of the allegedly actionable statements did not expressly include
the term "order," although their interpretation may have been
necessarily premised on the meaning of the term "order." Because we
find that plaintiffs fail to meet their burden in proving scienter, we
need not address this possible inconsistency on the part of the
district court.

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question of scienter, it noted that its conclusion that defendants were

entitled to summary judgment was "reenforced by consideration of

Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999)," which had

required heightened pleading requirements with respect to scienter

after passage of the Private Securities Litigation Reform Act (the

"PSLRA").

DISCUSSION

The district court's grant of summary judgment is subject to

plenary review, with all inferences indulged in favor of the non-moving

party. Lucia v. Prospect St. High Income Portfolio, Inc., 36 F.3d 170,

174 (1st Cir. 1994). Summary judgment is appropriate if the record

indicates no genuine issue as to any material fact and the moving party

is entitled to judgment as a matter of law. Id. (citing Fed. R. Civ.

P. 56(c)). The non-movant may not rely on allegations in its

pleadings, but must set forth specific facts indicating a genuine issue

for trial. Id. (citing Fed. R. Civ. P. 56(e)).

In order to prove a 10b-5 claim, plaintiffs must demonstrate:

(1) that defendants made a materially false or misleading statement or

omitted to state a material fact necessary to make a statement not

misleading; (2) that defendants acted with scienter; (3) that either

plaintiffs or the market relied on the misrepresentation or omission;

and (4) resultant injury. Shaw v. Digital Equip. Corp., 82 F.3d 1194,

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1216-17 (1st Cir. 1996). For purposes of this opinion, we need only

discuss the first factor, on which the district court premised its

opinion, and the second factor, on which we focus our energies.

A. The Statements at Issue Revisited

The district court ultimately concluded either that the

statements at issue were not misleading as a matter of law, or that no

reasonable jury could have found that they were misleading. Appellants

argue that this conclusion was in error, and that they proffered

sufficient evidence to make it a question for the trier of fact whether

the statements were misleading or not.6 In short, appellants claim that

under one plausible interpretation of the statements in question,

Economou represented that Read-Rite was obligated to purchase all

seventy-five units. In other words, appellants suggest that a

reasonable jury could have found any of the following: (i) that the

statement that Micrion had "booked an order" for $60 million was false

or misleading because it indicated, wrongly, that Micrion had received

a firm order for $60 million worth of equipment; (ii) that the

statement that Micrion's "backlog" was $72 million was false or

6 It is ultimately a question for the trier of fact, here the jury,
whether statements are false or misleading so as to be actionable under
10b-5. See, e.g., Isquith v. Middle S. Utils., Inc., 847 F.2d 186, 208
(5th Cir. 1988); Durning v. First Boston Corp., 815 F.2d 1265, 1268
(9th Cir. 1987). It is up to the court, however, to determine whether
the evidence is such so that no reasonable jury could conclude that
statements are false and misleading, and, if so, to grant summary
judgment. Isquith, 847 F.2d at 208; Durning, 815 F.2d at 1268.

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misleading because the term "backlog" only included equipment which a

customer was obligated to buy, which only totaled approximately $40

million at the time of the statement; or (iii) that Economou's

statement that all seventy-five units would "certainly" be delivered

within the next twelve months was false or misleading because Read-Rite

had only committed to purchase twenty-eight units. Alternatively,

appellants argue that the failure to disclose that Read-Rite had no

obligation to buy forty-seven units was a material omission, viewed in

the context of the information provided in the Agreement.

For purposes of this appeal, we assume that there were

triable issues of fact as to the falsity or misleading nature of these

statements. As we explain below, however, we affirm the grant of

summary judgment on the separate ground that appellants introduced

insufficient evidence of scienter. Burns v. State Police Ass'n of

Mass., 230 F.3d 8, 9 (1st Cir. 2000) (court of appeals may affirm a

grant of summary judgment on any ground supported by the record).

B. Scienter

In order to prevail in a 10b-5 action, a plaintiff must show

that defendants had the requisite scienter, namely, the "intent to

deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425

U.S. 185, 193 (1976). Scienter may be established by proving knowing

conduct on the part of defendants, SEC v. MacDonald, 699 F.2d 47, 50

(1st Cir. 1983), which entails more than mere proof that the defendants

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knowingly made a particular statement. The plaintiff must prove that

defendants knew (i) that the statement was false or misleading, and

(ii) that it was made in reference to a matter of material interest to

investors. Cf. id. at 50-51 (requiring "knowledge 'that non-disclosure

posed a risk of misleading investors'"); see also SEC v. World Radio

Mission, Inc., 544 F.2d 535, 540 (1st Cir. 1976) ("Intent to deceive

means intent to say something . . . that is not believed to be true,

or, if strictly true, is hoped will be understood in an untruthful

sense.").

Alternatively, we have indicated that in the absence of

knowing conduct, reckless statements of misleading facts may be

actionable under 10b-5; however, recklessness in this sense is more

than mere negligence. Greebel, 194 F.3d at 198-99 (recklessness in

this context "comes closer to being a lesser form of intent") (quoting

Hoffman v. Estabrook & Co., 587 F.2d 509, 515-16 (1st Cir. 1978)); see

also id. at 198 (recklessness means "a highly unreasonable omission,

involving not merely simple, or even inexcusable, negligence, but an

extreme departure from the standards of ordinary care, and which

presents a danger of misleading buyers or sellers that is either known

to the defendant or is so obvious the actor must have been aware of

it") (quoting Sundstrand Corp. v. Sun Chem Corp., 553 F.2d 1033, 1045

(7th Cir. 1977)).

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 In Greebel, we revisited the substantive evidentiary

requirements for an inference of scienter, albeit in the context of the

allegations required to survive a motion to dismiss after the passage

of the PSLRA. We noted that this Court does not "categoriz[e] patterns

of facts as acceptable or unacceptable to prove scienter," but instead

"analyze[s] the particular facts alleged in each individual case to

determine whether the allegations [are] sufficient to prove scienter."

194 F.3d at 196. At the pleading stage, an allegation that defendants

had the motive and opportunity to make false or misleading statements

is insufficient to support the "strong inference" of scienter required

after the PSLRA. Id. at 197 (citing Maldonado v. Domínguez, 137 F.3d

1, 10 n.6 (1st Cir. 1998)).7 In other words, a plaintiff must allege

some additional misconduct from which a jury can draw a reasonable

inference of intentional deception. Evidence we have found relevant to

the scienter issue includes: insider trading in conjunction with false

or misleading statements; a divergence between internal reports and

public statements; disclosure of inconsistent information shortly after

the making of a fraudulent statement or omission; bribery by top

company officials; evidence of an ancillary lawsuit, charging fraud,

which was quickly settled; disregard of current factual information

7 Other circuits have held that motive and opportunity alone may be
sufficient to support a strong inference of scienter, even after
passage of the PSLRA. See, e.g., Gaurino v. Citizens Utils. Co., 228
F.3d 154, 169-70 (2d Cir. 2000).

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acquired prior to the statement at issue; accounting shenanigans; and

evidence of actions taken solely out of self-interest. Id. at 196

(compiling First Circuit cases).

Although Greebel dealt with how much evidence of scienter is

necessary to prevail at the pleading stage, we agree with the district

court that "[t]he judicial reasoning applicable to imposing heightened

pleading requirements is at least as forceful, if not more so, with

regard to proof requirements that a trial judge must consider in

deciding whether to allow a motion for summary judgment." Geffon, 76

F. Supp. 2d at 149. If allegations of motive and opportunity are not

sufficient at the pleading stage, clearly evidence of mere motive and

opportunity cannot suffice against a motion for summary judgment on the

issue of scienter. Here, appellants proffered no evidence which would

enable a reasonable jury to infer scienter. Even if the statements at

issue were material and false or misleading, the evidence does not

support a finding that defendants knew the statements would materially

mislead the investing public.8 Moreover, although appellants suggest

that internal Micrion documents defined "book an order" and "backlog"

differently than how those terms were used in the challenged

8 To the extent appellants rely on the opinions of experts as to the
"correct" meaning of the relevant terms, such opinions are inadequate
evidence of scienter because they only establish (at best) that
defendants should have known that they were making misleading
statements. Maldonado, 137 F.3d at 11 (citing Greenstone v. Cambex
Corp., 975 F.2d 22, 26 (1st Cir. 1992)).

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statements, no such documents are in the record. Cf. Gelfer v.

Pegasystems, Inc., 96 F. Supp. 2d 10, 17-18 (D. Mass. 2000) (evidence

of specific internal standards adopted by defendant company supports

inference of scienter).

Lacking such internal documents, appellants rely on evidence

gleaned from defendant Hunter's deposition testimony. In that

testimony, Hunter explained that Micrion "book[ed] an order" after it

"had received a purchase order from a customer." He also testified

that it was Micrion's practice that to place an order in backlog,

Micrion had to receive a signed purchase order with either a delivery

date or understood delivery terms. Finally, when asked whether Micrion

"require[d] something in writing from the customer that committed the

customer to purchasing the product," Hunter responded that "a purchase

order" was required. Based on this testimony, appellants conclude that

Micrion's own definitions of relevant terminology conflicted with the

definitions used in the press releases and the conference call:

according to Hunter, in order to "book an order" or place an order in

"backlog," Micrion required a signed "purchase order," i.e., an order

that committed the customer to purchasing the product. Read-Rite had

made no such commitment at the time of the challenged statements, and

appellants have introduced ample evidence that Micrion officers were

aware of that fact.

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 Although it is possible that a jury, relying on Hunter's

testimony, might conclude that the statements at issue were misleading,

after conducting the fact-specific analysis called for by Greebel, we

cannot agree that these statements constitute sufficient evidence from

which a jury could find scienter. At most, this evidence tends to show

(i) that one Micrion officer may have had a different interpretation of

certain purchasing and accounting terminology than that used in the

challenged statements, and (ii) that defendants had the opportunity to

deceive investors. This is not enough. Our cases simply require more

evidence to support a finding of scienter. See Greebel, 194 F.3d at

196.

In addition, the evidence indicates that Micrion sought to

provide investors with adequate warnings of the possibility that not

all seventy-five units would be purchased. In the press releases and

conference call at issue, Micrion referred repeatedly to the risk

factor stated in the 8-K, which warned that the Read-Rite order could

be cancelled or terminated at any time. Cf. In re Polaroid Corp. Sec.

Litig., 2001 WL 311224, at *8 (D. Mass. Mar. 21, 2001) ("[A]ny

indication of scienter [drawn from] overly optimistic

statements . . . is offset by the Company's cautionary admissions.").

Perhaps Micrion could have provided still more information about the

specifics of its contract with Read-Rite; however, absent the type of

evidence we have previously found probative of scienter, its failure to

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do so does not mean that the omission was purposely deceptive in a

manner actionable under Rule 10b-5. Cf. Capri Optics Profit Sharing v.

Digital Equip. Corp., 950 F.2d 5, 7-8 (1st Cir. 1991) (citing Backman

v. Polaroid Corp., 910 F.2d 10 (1st Cir. 1990)).

There is also insufficient evidence that defendants acted

recklessly in making the statements in question. At best, a jury might

find that the statements were misleading because Micrion used the terms

differently in the challenged statements than in its normal practice,

at least according to one corporate officer. If the statements were

false and misleading in this sense, Micrion may have been negligent for

not being more careful with language that had the potential to be

misinterpreted. But such negligence would not be "an extreme departure

from the standards of ordinary care, . . . which presents a danger of

misleading buyers or sellers that is either known to the defendant or

is so obvious the actor must have been aware of it." Greebel, 194 F.3d

at 198 (quoting Sundstrand, 553 F.2d at 1045). Even if it was

negligent not to explain in greater detail the nuances of potential

cancellation or termination, such negligence was not "so obvious" as to

constitute the recklessness necessary for a finding of scienter. This

is especially true given Micrion's filing of an 8-K explicitly warning

that cancellation or termination of the Agreement was a risk factor.

C. Reconsideration

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 Appellants also argue that the district court abused its

discretion by reconsidering its first summary judgment opinion despite

the lack of new evidence or intervening changes in the law during the

interim period. However, this Court has indicated that "interlocutory

orders . . . remain open to trial court reconsideration." Pérez-Ruiz

v. Crespo-Guillén, 25 F.3d 40, 42 (1st Cir. 1994). The district court

has discretion to reconsider previous rulings. Bethlehem Steel Exp.

Corp. v. Redondo Constr. Corp., 140 F.3d 319, 321 (1st Cir. 1998).

Given that the district court explicitly noted that it would reconsider

its first denial of summary judgment, Geffon, First Summary Judgment

Opinion at 13, and that its decision to grant summary judgment is

supported by the record, we find no abuse of discretion in its decision

to reconsider its previous opinion.

CONCLUSION

For the reasons stated herein, the grant of summary judgment

is affirmed.

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