Brown v. Credit Suisse First Boston LLC

United States Court of Appeals
For the First Circuit

No. 05-1646

IN RE CREDIT SUISSE FIRST BOSTON CORP.
(AGILENT TECHNOLOGIES, INC.)
ANALYST REPORTS SECURITIES LITIGATION.

__________________

RICHARD BROWN ET AL.,

Plaintiffs, Appellants,

CREDIT SUISSE FIRST BOSTON LLC ET AL.,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. George A. O'Toole, Jr., U.S. District Judge]

Before

Selya and Lynch, Circuit Judges,

and Smith,* District Judge.

Brian P. Murray, with whom Murray, Frank & Sailler LLP, Marc
I. Gross, Pomerantz Haudek Block Grossman & Gross LLP, David
Pastor, and Gilman and Pastor LLP were on brief, for appellants.
Lawrence Portnoy, with whom Davis Polk & Wardwell, Robert A.
Buhlman, Siobhan E. Mee, and Bingham McCutcheon LLP were on brief,
for appellee Credit Suisse First Boston LLC.

__________
*Of the District of Rhode Island, sitting by designation.
Warren Feldman, Jeff E. Butler and Clifford Chance LLP on
brief for appellee Rogers.
Jeffrey B. Rudman, with whom Stephen A. Jonas, Jonathan A.
Shapiro, Matthew A. Stowe, Wilmer Cutler Pickering Hale and Dorr
LLP, Kenneth G. Hausman, Barbara A. Winters, Mark A. Sheft, and
Howard Rice Nemerovski Canady Falk & Rabkin were on brief, for
appellee Quattrone.

December 12, 2005
SELYA, Circuit Judge. Following a flurry of

investigations into the propriety of a single firm providing

investment banking services to a publicly held corporation while at

the same time opining as to the prospects of the corporation's

stock, the plaintiffs in this case sued one such firm, defendant-

appellee Credit Suisse First Boston Corp. (CSFB). They alleged

that they had sustained losses resulting from false and misleading

statements made by CSFB's analysts with respect to the stock of

Agilent Technologies, Inc. (Agilent). The district court, in a

lengthy unpublished opinion, dismissed the plaintiffs' consolidated

and amended class action complaint after concluding that the

plaintiffs had not met the pleading standards required for such

claims. See In re CSFB Corp. (Agilent Techs., Inc.) Analyst

Reports Sec. Litig., No. 02-12056, slip op. at 19 (D. Mass. Mar.

31, 2005) (D. Ct. Op.). Although the question is close — there is

very little authority dealing with the requirements for pleading

subjective falsity in a misstatement of opinion case — we conclude

that the plaintiffs' allegations are insufficient to show that

CSFB's analyst reports concerning Agilent (its quondam investment

banking client) were at odds with the analysts' privately held

beliefs. Consequently, we affirm the judgment below.

I. BACKGROUND

In reviewing the dismissal of a civil action under Rule

12(b)(6), we accept the factual averments of the plaintiffs'

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complaint. See Redondo-Borges v. U.S. Dep't of Hous. & Urban Dev.,

421 F.3d 1, 5 (1st Cir. 2005). We follow that praxis here.

A. Overview.

Agilent is a Hewlett-Packard "spin-off" that provides

enabling solutions to markets within the communications,

electronics, life sciences, and chemical industries. Its three

primary lines of business include test and measurement,

semiconductor products, and chemical analysis. The plaintiffs,

appellants here, are members of a putative class of persons who

acquired Agilent stock at various times from December 13, 1999

through February 20, 2001 (the class period). The gist of their

complaint is that analysts at CSFB, led by defendant-appellee

Elliot Rogers, issued reports recommending the purchase of Agilent

stock despite their lack of faith in the rosy picture they were

painting. These bullish reports were issued, the plaintiffs say,

in an effort to curry favor with Agilent and thereby secure future

investment banking business. A side effect, however, was an

artificial inflation of the price of the stock resulting in a wide

disparity between cost and true value. Unaware of that disparity,

the plaintiffs acquired Agilent securities at sky-high prices and

suffered losses when the stock plummeted.

B. CSFB's Overarching Fraudulent Culture.

CSFB is a global financial services firm, dealing, among

other things, in investment banking and investment research. At

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all times material hereto, defendant-appellee Frank P. Quattrone

served as the head of CSFB's global technology group (the Tech

Group). Although Quattrone was an investment banker, he had

complete control over the Tech Group's research activities. In

that capacity, he helped to determine the analysts' compensation

and had the power to terminate their employment.

Quattrone's omnipotence within the Tech Group allowed him

free rein to set up a system in which the analysts were pressured,

from time to time, to issue unduly positive ratings on certain

stocks in order to improve the chances of garnering investment

banking business for CSFB. Quattrone promised potential clients

favorable analyst reports and then used a carrot-and-stick

technique with his analysts to redeem those promises. During

Quattrone's reign, an analyst's bonus (which comprised a major

portion of his or her remuneration) was likely to correlate

positively to that analyst's support of the Tech Group's investment

banking activity. Conversely, analysts who issued negative reports

risked being reprimanded and passed over for choice assignments.

CSFB tied its analyst reports to a four-tiered ranking

format, composed of "strong buy," "buy," "hold," and "sell"

ratings. The plaintiffs, based on information gleaned from a

former CSFB employee, averred that the format was effectively

condensed into three tiers (dropping out the "sell" rating) and was

jiggled for the benefit of investment banking clients. Allegedly,

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common practices included issuing a "hold" rating if the analyst

actually believed stockholders should sell, affording a "buy"

rating to virtually all investment banking clients or prospective

clients, and using the "strong buy" rating only when the analyst

actually believed that investors should purchase the stock.

The analysts attached to the Tech Group sometimes

attended investment banking sales presentations, at which they

would distribute sample reports (invariably portraying the

potential investment banking client in an attractive light). This

participation was intended to assure prospective clients that they

would receive the benefit of positive reinforcement from the

analysts should they choose to retain CSFB for their investment

banking needs.

Quattrone's system initially proved to be a howling

success; in 1999, for example, CSFB managed more initial public

offerings (IPOs) in the United States than any other investment

banking house. In the year 2000, the Tech Group accounted for

almost half of CSFB's revenue from equity investment banking in the

United States. Shortly thereafter, Quattrone's persistent

dismantling of the compulsory "Chinese Wall" between banking and

research, required by the National Association of Securities

Dealers (NASD), inspired a series of governmental and regulatory

investigations. In a single six-month period, from the fall of

2002 through the following spring, Massachusetts state securities

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regulators, the New York Attorney General, the NASD, and the

Securities and Exchange Commission all initiated proceedings

against CSFB related to the internal conflicts of interest that

allegedly had caused CSFB's analysts to view the stock of CSFB's

present and potential investment banking clients through rose-

colored glasses.

C. CSFB's Involvement with Agilent.

CSFB's relationship with Agilent began when the Tech

Group, assisted by Rogers, made a sales pitch to Agilent's top

brass with an eye toward managing that company's forthcoming IPO.

Agilent was impressed, and CSFB helped to take the company public

on November 18, 1999. The stock, initially priced at $30 per

share, closed at $44 after its first day of trading.

On December 13, 1999 — the first day of the class period

— CSFB initiated its analyst coverage of Agilent stock with a "buy"

rating contained in a report authored by Rogers and two of his

confreres. The report set a twelve-month target price for the

stock of $55 per share. That day, the stock closed at $45.50 per

share, up $0.75 from the previous day's close.

CSFB published a second report, authored by the same trio

of analysts, on February 18, 2000. This report reiterated the

earlier "buy" recommendation and explained that Agilent's growth

was spurred by "strong" orders for semiconductor products (up

twenty-seven percent) and "reasonable gains in Test & Measurement."

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It discussed Agilent's six percent increase in test and measurement

(T&M) orders under the heading "Good Orders, but Not Explosive."

That day, the stock closed at $93.75 per share, down $3.25 from the

previous day's close.

Four days after issuing this "buy" recommendation, Rogers

sent the following e-mail to Agilent's Director of Investor

Relations:

TMO order growth was 6%. Communications test
and semi test were highlighted as key growth
drivers. One would expect communications test
growth to top 10% (vs. Q4:99). Growth in
Teradyne's Q4:99 orders was above 40%
sequentially, Credence's Jan:01 orders were up
over that amount. Yet Agilent's TMO business
only grew 6% despite two seemingly hot
markets. What retarded your growth, or were
Communications and Semi test less hot than you
let on?

On March 6, 2000, Agilent stock closed at its class

period high of $159 per share. Although the stock price tumbled

thereafter, CSFB analysts maintained a "buy" rating in their third

report (issued on May 19, 2000). That day the stock closed at

$66.62 per share, down $4.38 from the previous day's close.

On July 20, 2000, Agilent released a statement indicating

that third quarter earnings were expected to fall short of

forecasts as a result of manufacturing constraints, component

shortages, and sluggish sales attributable to two divisions. This

press release came as a surprise to the market as a whole. The

following day, the CSFB analysts issued their fourth report. The

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report maintained the stock's "buy" rating but flagged the surprise

announcement and cautioned that Agilent was rated a "buy" only "in

the most generous sense." The stock closed that day at $48.06 per

share, down $5.94 from the previous day's close.

On Saturday, August 12, 2000, Rogers received an e-mail

from a CSFB customer inquiring as to his outlook on Agilent stock.

Rogers replied: "Let's see what they announce thurs pm. Hopefully

some meaningful restructuring of the two problem divisions. Absent

that would not be aggressive despite the price pullback."

After the market closed on August 17, Agilent reported

that its third quarter earnings were better than anticipated. The

following day, the CSFB analysts issued their fifth report (which

was the last report authored in whole or in part by Rogers). This

document cited the upbeat announcement and reiterated the familiar

"buy" rating. That day, the stock closed at $56.38 per share, up

$9.88 from the previous day's close.

On October 12, 2000, a Tech Group analyst, Tim Mahon,

sent an e-mail to a fellow CSFB employee in response to a general

question about how to rate a struggling stock when investment

banking sensitivities existed. The e-mail read: "Suggest you ask

Elliot [Rogers] about the 'Agilent Two-Step'. That's where in

writing you have a buy rating . . . but verbally everyone knows

your position." Neither Mahon nor the analyst whom he advised was

ever involved in reporting on Agilent securities.

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In a November 8, 2000 e-mail to all Tech Group analysts,

Rogers used Agilent as an example of how to draft analyst reports.

Under the heading "Wordsmithing," Rogers wrote:

Verbally, you can say a lot more than what you
put into print without it coming back to haunt
you (he said, she said). That does not
preclude you from making your point, subtly.
For example: . . .
Agilent: money-losing operations supposedly
fixed in our quarter. Ha!! Fat Chance!!
"While management plans on turning the
operation around next quarter, we have chosen
to give them more breathing room to allow for
any slippage. As a result, our estimates are
more conservative than management's guidance,
but allow for upside to our EPS projections if
they achieve their bogey on the stated
timeline."

Other CSFB analysts issued Agilent reports on September

29, November 21, and December 6, 2000. Each report reaffirmed the

"buy" rating. The per share stock price rose on the dates of the

September and November reports (up $0.99 to $48.94 and up $4 to

$48.62, respectively), but fell following the December report (down

$3.06 to $52).

On February 21, 2001 — the last day of the class period

— Agilent announced that it was trimming back its forecast of

second quarter profits. That day, CSFB issued a report downgrading

Agilent stock from "buy" to "hold." The stock sagged to $40.20 per

share, down $3.80 from the previous day's close.

Throughout the class period, members of the Tech Group's

investment banking team maintained contact with Agilent executives

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regarding potential investment banking business. None

materialized.

D. Proceedings Below.

Against this factual backdrop, the plaintiffs sued CSFB

and Rogers, claiming that the analyst reports constituted false and

misleading statements actionable under section 10(b) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5

promulgated thereunder, 17 C.F.R. § 240.10b-5. In addition, they

brought section 20(a) "control person" claims against CSFB and

Quattrone for allowing and condoning such behavior. See 15 U.S.C.

§ 78t(a). Certain procedural skirmishing followed, none of which

is relevant here.

After the plaintiffs filed a consolidated and amended

class action complaint, the district court, on motions brought

pursuant to Fed. R. Civ. P. 12(b)(6), found the complaint's

allegations insufficient. Specifically, the court dismissed the

section 10(b) and Rule 10b-5 claims1 for failure adequately to

plead (i) any false or misleading statement, (ii) scienter, or

(iii) loss causation. D. Ct. Op. at 14, 17. It simultaneously

dismissed the section 20(a) claims as derivative of (and, thus,

sharing the frailty of) the underlying section 10(b) claims. Id.

at 17. This timely appeal ensued.

1
For simplicity's sake, we refer hereafter only to section
10(b) claims. Those references encompass Rule 10b-5 claims
wherever the context permits.

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II. ANALYSIS

In considering a motion to dismiss, the district court is

bound to "assume the truth of all well-pleaded facts and indulge

all reasonable inferences that fit the plaintiff's stated theory of

liability." In re Colonial Mortg. Bankers Corp., 324 F.3d 12, 15

(1st Cir. 2003). The court is free, however, to disregard bald

assertions, unsupportable conclusions, and opprobrious epithets.

Chongris v. Bd. of Appeals, 811 F.2d 36, 37 (1st Cir. 1987). We

review appeals from the grant or denial of Rule 12(b)(6) motions de

novo, using the same set of criteria that guided the district

court. See Redondo-Borges, 421 F.3d at 5.

The usual elements of a section 10(b) claim are that the

defendant (i) made a material misrepresentation, (ii) with

scienter, (iii) in connection with the purchase or sale of a

security, (iv) on which the plaintiff relied, (v) to his or her

detriment. Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627, 1631

(2005). To satisfy the final "loss" element, a plaintiff must show

both economic or transactional loss and loss causation. See id.

In cases involving publicly traded stock, the Private

Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4, makes

these elements important not only as a matter of proof but also as

a matter of pleading. In order to survive a motion to dismiss in

such a case, a section 10(b) claimant cannot take refuge in the

generous notice pleading formulation of Fed. R. Civ. P. 8(a)(2).

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Rather, he or she must satisfy the more stringent guidelines of the

PSLRA. With this in mind, we turn to that special set of pleading

requirements as they pertain to this case.

As a condition precedent to pleading the first element of

a section 10(b) claim, the PSLRA demands that a complaint "specify

each statement alleged to have been misleading, the reason or

reasons why the statement is misleading, and, if an allegation

regarding the statement . . . is made on information and belief,

the complaint shall state with particularity all facts on which

that belief is formed." 15 U.S.C. § 78u-4(b)(1). To achieve this

benchmark, a complaint "must provide factual support for the claim

that the statements . . . were fraudulent, that is, facts that show

exactly why the statements . . . were misleading." Aldridge v.

A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir. 2002). This support

typically will include particularized allegations regarding "the

time, place, and content of the alleged misrepresentations."

Greebel v. FTP Software, Inc., 194 F.3d 185, 193 (1st Cir. 1999).

Despite these strictures, however, a pleading setting forth a

section 10(b) claim need not be precise to the point of pedantry;

although it must set forth the supporting facts with particularity,

it need not elaborate upon every jot and tittle of evidentiary

detail. In re Stone & Webster, Inc. Sec. Litig., 414 F.3d 187,

194-95 (1st Cir. 2005).

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Circumstances differ from case to case, and we have shied

away from attempting to compile a mechanical checklist of the type

and kind of allegations that are essential to satisfy the PSLRA

pleading requirements. See In re Cabletron Sys., Inc., 311 F.3d

11, 32 (1st Cir. 2002) (explaining that "there is no one-size-fits-

all template" for analyzing securities cases). Rather, we have

instructed district courts to make an individualized assessment

that sweeps before it the totality of the facts in a given case.

See id.

The allegations at hand give an idiosyncratic twist to

this general guidance. The plaintiffs contend that their complaint

adequately identifies nine false or misleading statements. Eight

of these are of a piece: the plaintiffs claim that the "buy"

ratings in the eight analyst reports issued during the class period

qualify as specific misrepresentations because the defendants

employed that taxonomy even though they actually believed that wise

investors should not purchase Agilent securities. The ninth

instance is related: the plaintiffs contend that the statement in

the February 2000 analyst report describing Agilent's T&M order

growth as "reasonable" was false and misleading because this

description contradicted Rogers' actual view.

To put these claims in perspective, we must understand

the vocabulary that the analysts were using. CSFB's standard stock

ratings — "strong buy," "buy," "hold," and "sell" — are designed to

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reflect its analysts' predictions anent the likely future

performance of the securities in question.2 Although these ratings

are based to some degree on objective facts, they ultimately convey

an opinion about a stock's prospects and, perhaps, about the likely

proclivities of the stock market over a given period. Armed with

the same background facts, two knowledgeable analysts, each acting

in the utmost good faith, could well assign different ratings to

the same stock. Moreover, ratings are unlike the statements sued

upon in an archetypical section 10(b) action because they rest upon

outsiders' views about a corporation rather than upon a corporate

insider's factual assertions regarding his or her own company.

2
At the time, CSFB defined these ratings as follows:

"SB" (strong buy) — Stock is expected to outperform the
market significantly over the next 6-12 months and should
be bought today.

"B" (buy) — A good "story"; needs some time to develop
but should outperform. Those institutions that require
time to build a position should buy the stock today.

"H" (hold) — Would not buy the stock. Events may not yet
be apparent that would make it either a Buy or a Sell.

"S" (sell) — Would not buy if not owned and would use as
a source of funds if owned; there is nothing to make the
stock outperform. If an institution wanted to stay in
the same industry group, it would swap out of the stock.
Potential negatives are not yet reflected in the stock —
if you own it, sell it.

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Most ratings are, therefore, best understood as statements of

opinion, not as unadulterated statements of objective fact.3

Classifying ratings as opinions does not automatically

shield them from liability under the securities laws. See Virginia

Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1095 (1991). While

Virginia Bankshares specifically addressed a claim under section

14(a) of the Securities Exchange Act, other courts have applied its

reasoning to section 10(b) claims alleging false or misleading

opinions. See, e.g., City of Monroe Employees Ret. Sys. v.

Bridgestone Corp., 399 F.3d 651, 674 n.20 (6th Cir. 2005); In re

Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 372 n.14 (3d Cir.

1993). This transplantation makes sense; even though section

10(b), in terms, deals with statements of fact, a statement of

opinion may be considered factual in at least two respects: as a

statement that the speaker actually holds the opinion expressed and

as a statement about the subject matter underlying the opinion.

See Virginia Bankshares, 501 U.S. at 1092. On that logic, ratings

— and the bullish or bearish statements that accompany them — may

in some circumstances qualify as false or misleading statements of

fact. See, e.g., DeMarco v. Lehman Bros., Inc., 309 F. Supp. 2d

631, 634 (S.D.N.Y. 2004).

3
We say "most" because we recognize that some ratings, such as
those mechanically derived through input data, would be subject to
a different taxonomy. For purposes of this opinion, our references
to ratings only encompass those reports in which an analyst
exercises some degree of personal discretion.

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A plaintiff can challenge a statement of opinion by

pleading facts sufficient to indicate that the speaker did not

actually hold the opinion expressed (throughout this opinion, we

refer to such allegations as claims of "subjective falsity").

Because the plaintiffs cannot clear the subjective falsity hurdle,

we need not answer the thornier question of whether a plaintiff who

challenges a statement of opinion also must plead facts sufficient

to show, from an objective standpoint, that the statement either

expressly or by fair implication contained a false or misleading

assertion about its subject matter.

As to subjective falsity, the plaintiffs argue that the

CSFB analysts issued "buy" ratings when they did not truly believe

that wise investors should purchase Agilent stock. Although the

plaintiffs' arguments in support of this claim are not without some

force, we conclude that their complaint, which as we have said is

premised on misstatements of opinion, fails to satisfy the PSLRA's

heightened pleading standard.

Although a speaker's confession that his or her opinion

was false when made would suffice, on its own, to show subjective

falsity, that species of frank admission is unlikely to

materialize. In the usual case, therefore, plaintiffs will need to

rely on a more indirect form of evidence to meet their pleading

burden. See Virginia Bankshares, 501 U.S. at 1096. In the case at

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hand, there is no smoking gun, so the case falls into this latter

category.

Before we scrutinize the specifics of the complaint in

search of evidence of subjective falsity, we pause to discuss a

unique facet of the PSLRA's pleading requirements when applied to

misstatements of opinion. In the typical section 10(b) case, the

falsity and scienter elements do not overlap and, thus, necessitate

separate inquiries. See, e.g., Podany v. Robertson Stephens, Inc.,

318 F. Supp. 2d 146, 154 (S.D.N.Y. 2004). In those cases, the

falsity element addresses objective truth, whereas the scienter

element focuses on the speaker's subjective intent. In cases

premised on misstatements of opinion, however, the falsity element,

at a minimum, entails an inquiry into whether the statement was

subjectively false (whether it also entails an inquiry into

objective falsity is a matter on which we take no view).

Accordingly, the subjective aspect of the falsity requirement and

the scienter requirement essentially merge; the scienter analysis

is subsumed by the analysis of subjective falsity. See In re

Salomon Analyst Level 3 Litig., 350 F. Supp. 2d 477, 490 (S.D.N.Y.

2004). We think it follows that if a plaintiff adequately pleads

that a statement of opinion was subjectively false when made, the

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complaint will, ex proprio vigure, satisfy the pleading

requirements of the PSLRA relative to scienter.4

There is a relative dearth of authority speaking to the

topic of whether a plaintiff has adequately pleaded subjective

falsity in a false opinion case. Because subjective falsity is so

intricately tied to scienter in false opinion cases, the

authorities relative to pleading scienter are instructive (although

not necessarily controlling) when determining whether a plaintiff

has satisfied his or her pleading burden with respect to the

subjective aspect of the falsity claim.5 See Podany, 318 F. Supp.

2d at 156 n.4. Focusing directly on scienter, the PSLRA enunciates

a strict standard for pleading the second element of a section

10(b) claim. See 15 U.S.C. § 78u-4(b)(2); see also Greebel, 194

F.3d at 188. To plead scienter adequately, a complaint must, with

regard to each challenged act, "state with particularity facts

giving rise to a strong inference that the defendant acted with the

required state of mind." 15 U.S.C. § 78u-4(b)(2). That the

4
We need not explore the other side of the coin. If a
complaint does not successfully plead subjective falsity, it fails
to pass muster under the PSLRA. See In re Salomon, 350 F. Supp. 2d
at 493. That, in turn, negates any need for a separate scienter
inquiry.
5
Scienter, in its most abecedarian form, is "a mental state
embracing intent to deceive, manipulate, or defraud." Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). To establish
this mental state, a plaintiff must show that the defendant's
conduct evinced either a conscious intent to commit the alleged
fraud or a high degree of recklessness in connection with the
fraud. See Greebel, 194 F.3d at 198-201.

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statute, by its terms, requires a "strong," rather than merely a

"reasonable," inference that the defendant acted with scienter is

more than an odd linguistic quirk.

Commenting upon this distinction, we have suggested that

a plaintiff's allegations must show a high likelihood of scienter

in order to satisfy the PSLRA standard. Aldridge, 284 F.3d at 82.

Although the inference need not be ironclad, it must be persuasive.

Greebel, 194 F.3d at 203. Scienter allegations do not pass the

"strong inference" test when, viewed in light of the complaint as

a whole, there are legitimate explanations for the behavior that

are equally convincing. See id.

By analogy, these authorities indicate that conclusory

allegations regarding an analyst's hidden beliefs are not

sufficient to ground an assertion of subjective falsity. See

Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 361 (1st Cir.

1994) ("[G]eneral averments of the defendants' knowledge of

material falsity will not suffice, [rather] the complaint must set

forth specific facts that make it reasonable to believe that

defendant[s] knew that a statement was false or misleading")

(citation and internal quotation marks omitted). The plaintiff

must instead point to provable facts that strongly suggest knowing

falsity. See Podany, 318 F. Supp. 2d at 158.

As one contemplates the inner workings of an analyst's

mind, the line separating fact from conclusion often may seem

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blurred. In the end, it is only when "conclusions are logically

compelled, or at least supported, by the stated facts [to] an

acceptable level of probability, that 'conclusions' become 'facts'

for pleading purposes." Dartmouth Rev. v. Dartmouth Coll., 889

F.2d 13, 16 (1st Cir. 1989).

The sufficiency of a subjective falsity allegation must

be determined through a statement-by-statement analysis based on

the state of affairs extant at the time the opinion was rendered.

See In re Boston Tech., Inc. Sec. Litig., 8 F. Supp. 2d 43, 55 (D.

Mass. 1998); see also In re Salomon, 350 F. Supp. 2d at 493. The

fact that a speaker changes his or her mind and decides after the

fact that an earlier opinion was ill-advised is insufficient to

support an averment of subjective falsity. See In re Cabletron,

311 F.3d at 36-37. Furthermore, the fact-specific nature of the

falsity analysis compels a conclusion that a plaintiff cannot

succeed in pleading subjective falsity merely by identifying an

overarching fraudulent scheme or corrupt environment. See In re

Salomon, 350 F. Supp. 2d at 493. Rather, the plaintiff must, for

each allegedly false opinion, plead provable facts strongly

suggesting that the speaker did not believe that particular opinion

to be true when uttered. See id. at 493-94; see also Lentell v.

Merrill Lynch & Co., 396 F.3d 161, 171 (2d Cir. 2005) (suggesting,

in dictum, that evidence of false opinions in analyst reports

issued on one company would not suffice to meet the PSLRA pleading

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standard in a case alleging false opinions contained in reports

regarding a different company).6 Thus, when alleging that an

analyst's opinions are false or misleading, a plaintiff must plead

facts that directly implicate both the rated stock and the

questioned report. See Podany, 318 F. Supp. 2d at 158.

The bottom line, then, is that while the plaintiffs'

allegations regarding the obvious conflicts of interest and general

state of corruption within CSFB's analyst ranks may be enough to

turn the stomach of an ethically sensitive observer, they are

insufficient, on their own, to support a fraud pleading with

respect to the subjective falsity of the eight "buy"

recommendations issued on Agilent stock. See In re Salomon, 350 F.

Supp. 2d at 492 (finding that allegations of "conflicts of

interest, incentives to increase compensation, or internal pressure

on analysts that is not tied to the particular stock at issue are

not sufficient, standing alone, to satisfy the particularity

requirements"); see also Lentell, 396 F.3d at 171 (suggesting that

although conflicts of interest present opportunities for fraud,

they cannot, without more, furnish the basis of a fraud complaint).

Such allegations are tantamount to pleading conclusory statements

6
This is not to say that the same provable fact may not be
used to plead more than one allegedly false opinion. For example,
if an analyst sent out an e-mail explicitly stating that he had
always considered a certain stock to be a dog, that e-mail might
well be used to plead the subjective falsity of every previous
"buy" recommendation that the analyst had made with respect to that
stock.

-22-
regarding motive and opportunity — and we have made it pellucid

that such gauzy generalities, without more, are insufficient to

plead scienter in a PSLRA case. See, e.g., Greebel, 194 F.3d at

197. Since they are not tied to a specific statement, we find them

equally wanting as a basis for pleading subjective falsity.

In an effort to plead the "something more" needed to

bolster their general allegations, the plaintiffs mention four

events, each occurring in the year 2000, that are arguably

connected to the Agilent "buy" ratings. Upon close perscrutation,

and viewed against the backdrop of CSFB's overarching fraudulent

scheme, none of these events gives rise to the necessary inference

that the analysts believed the ratings to be false when made. We

explain briefly.

The first event is the e-mail referencing the "Agilent

Two-Step." The plaintiffs hawk this e-mail as supportive of their

theory that Rogers took his Agilent "buy" ratings with several

grains of salt. They argue that this e-mail indicates that Rogers

speciously rated the stock a "buy" while simultaneously telling a

select few his "true, negative, opinion." Appellants' Br. at 18.

To be sure, this e-mail mentions Agilent and, thus,

satisfies the company-specific component of the subjective falsity

inquiry. It fails, however, to satisfy the transaction-specific

component. The language of the e-mail is patently insufficient to

support an inference that Rogers misstated his true opinion every

-23-
time he settled upon a "buy" rating for Agilent stock. Moreover,

as the district court observed, the plaintiffs have not alleged

that Rogers, or any other CSFB analyst for that matter, performed

the "Two Step" with respect to any of the reports at issue. See D.

Ct. Op. at 11. When all is said and done, the e-mail, though

suggestive of sharp practice, is too general to satisfy the PSLRA's

rigorous particularity requirements. See Greebel, 194 F.3d at 193.

The PSLRA requires plaintiffs to specify the reason or reasons why

a particular statement is false or misleading; it is not enough to

give a reason suggesting that the defendant was perfectly willing

to shade the truth or that some unidentified statement or

statements suffer from that shortcoming. See 15 U.S.C. § 78u-

4(b)(1).

The plaintiffs next point to the February 22 e-mail from

Rogers to an Agilent executive, written four days after Rogers

issued a report that described Agilent's T&M order growth as

"reasonable" and gave the company a "buy" rating. They suggest

that Rogers' inquiry as to why Agilent's T&M order growth was less

robust than some of its competitors demonstrates a disconnect

between his privately held and publicly expressed opinions because

it evinces his personal belief that the growth was not "reasonable"

and that investors should refrain from purchasing the stock. This

suggestion requires an inferential leap that the facts do not

support.

-24-
As an initial matter, past performance is not necessarily

indicative of future stock prices. The market often anticipates

both favorable and unfavorable information. Moreover, it sometimes

is said that a rising tide lifts all boats, and Rogers might have

rated the competitors as "strong buys" (based on their "strong"

growth) when he gave Agilent a less aggressive, though still

positive, "buy" rating (based on its "reasonable" growth). The

complaint leaves these and a myriad of other possibilities wide

open.

We acknowledge that, on a Rule 12(b)(6) motion, a court

must view the stated facts in the light most favorable to the

pleader. See Redondo-Borges, 421 F.3d at 5. This approach,

however, does not require the court, in a PSLRA case, to turn a

blind eye to the universe of possible conclusions stemming from a

given fact or set of facts. See Greebel, 194 F.3d at 203 (finding

scienter allegations inadequate to satisfy PSLRA pleading standards

when there may have been "any number of legitimate reasons" for the

described behavior). In this instance, the plaintiffs' suggested

inference simply does not achieve the level of strong probability

needed to satisfy the PSLRA's pleading requirements.

The plaintiffs' reliance on the August 12 e-mail from

Rogers to a CSFB client, suggesting that he would not be

"aggressive" on Agilent stock absent some "meaningful restructuring

of the two problem divisions," exhibits a similar flaw. Once

-25-
again, the desired inference — that Rogers' "buy" rating of August

18 misstated his privately held view because Agilent had not

undertaken the restructuring — is only one of a number of

possibilities, several just as likely as the inference plaintiffs

desire. This is insufficient to carry the plaintiffs' pleading

burden, even when viewed in light of the other pleaded facts. The

plaintiffs' failure to do more to bring their desired inference to

an acceptable level of probability renders this e-mail insufficient

to meet their pleading burden. See id.

None of this is to say that analyst e-mails that reveal

negative feelings about certain stocks, coupled with sufficiently

contemporaneous "buy" ratings, can never satisfy the PSLRA's

particularity requirement for pleading subjective falsity. Such

cases do exist. See, e.g., In re Salomon, 350 F. Supp. 2d at 493

(finding pleading standard met for "buy" ratings issued after

analyst sent internal e-mail stating that the stocks "must not

remain buys"); DeMarco, 309 F. Supp. 2d at 634 (finding pleading

standard met when analyst gave stock the highest possible "buy"

rating after sending e-mails to institutional investors instructing

them to sell it short). In those cases, the disconnect between the

opinion expressed in the e-mail and the opinion implicit in the

rating was stark and unambiguous. In contrast, there is no

necessary inconsistency between the statement "I would not be

aggressive" and an expressed belief that Agilent stock nonetheless

-26-
qualified for CSFB's "buy" rating. See supra note 2 (setting

parameters of "buy" ratings in CSFB's standard lexicon). Given

CSFB's four-tiered rating system, it is entirely possible that

Rogers equated aggressive behavior with a "strong buy" rating. In

all events, the pleadings do not negate such a possibility — and

the plaintiffs cannot hinge their subjective falsity claim solely

on their unsubstantiated interpretation of Rogers' ambiguous word

choice. See Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061, 1069 (5th

Cir. 1994) (concluding, in a section 10(b) case, that the defendant

was not obliged to employ the adjectival characterization that the

plaintiffs thought to be most accurate).

Here, moreover, a significant intervening event

transpired between the date of the e-mail and the date of the

interdicted report. On August 17 — five days after the e-mail and

one day before the report issued — Agilent made a surprise

announcement that its third quarter earnings were better than

expected. Even if Rogers had been wary of the stock's prospects on

August 12, the surprise announcement easily could have changed the

decisional calculus. The fact that the very first line of the

August 18 report notes that Agilent's third quarter was "not as bad

as forecast" bolsters this inference.

The last "event" is the November 8 e-mail from Rogers to

his fellow analysts. In that e-mail, Rogers used Agilent's

unexpected negative forecast (announced on July 20, 2000) and his

-27-
subsequent "buy" rating (contained in a report issued the next day)

to demonstrate the art of "wordsmithing." This rodomontade put

Rogers in a bad light, but it fails to support a reasonable

inference that Rogers actually misstated a privately held opinion.

While isolated statements in this e-mail might well be considered

indicative of an appetite for sleazy practice, those statements

cannot be wrested from their contextual moorings when determining

whether the plaintiffs have satisfied the PSLRA pleading standard.

See Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir.

1996). In this instance, the statement immediately preceding

Rogers' list of examples notes that the illustrations are intended

to show how to "mak[e a] point, subtly." It is too much of a

stretch to read this statement as an admission by Rogers that he

had issued false opinions.

One more possibility warrants our attention. Even though

there is a gray area within which reasonable analysts legitimately

may issue differing recommendations, it is unlikely that a trained

analyst would actually believe in the truth of a recommendation

that, from an objective standpoint, was totally unfounded. One can

imagine cases in which the facts so strongly suggest that an

opinion was objectively false when made that an inference of

subjective falsity may be drawn. See, e.g., Serabian, 24 F.3d at

368 (finding strong evidence of objective falsity sufficient to

satisfy scienter pleading requirement). Here, however, the pleaded

-28-
facts are too problematic to show objective falsity (and, thus, to

prop up an otherwise deficient showing of subjective falsity).

The short of it is that the plaintiffs have pleaded no

contemporaneous facts that debunk the legitimacy of the "buy"

ratings when made. Their main refrain is that they have set forth

facts showing that the majority of the challenged "buy" ratings

turned out to be dead wrong: after hitting an all-time high in

March of 2000, Agilent's stock price dropped like a stone

throughout much of the remaining class period. From this

historical record, the plaintiffs seek to have us infer that the

ratings must have been objectively false because the stock "should

not have been 'bought' by a rational investor who wished to

increase, rather than decrease, his capital." Appellants' Reply

Br. at 7. This is whistling past the graveyard.

Ratings, like other forecasts, cannot be found to be

false — objectively or subjectively — simply because they turn out

to be inaccurate. See Glassman v. Computervision Corp., 90 F.3d

617, 626 (1st Cir. 1996); see also Shaw, 82 F.3d at 1223 (warning

against attempts to plead fraud by hindsight). To ground an

inference of objective falsity, the facts must suggest that a

particular rating was not plausibly premised on, or was

inconsistent with, the information available to the analyst at that

time. Glassman, 90 F.3d at 627. To hold otherwise would run an

unacceptable risk of subjecting conscientious analysts to liability

-29-
if, after the fact, external events or corporate mismanagement

adversely impacted a stock that was a legitimate "buy" when it was

rated.

By the same token, the plaintiffs have failed adequately

to plead facts indicating the objective falsity of the statement in

the February 18, 2000 report describing order growth in one segment

of Agilent's business as "reasonable." To support their assertion

that this characterization is objectively false, the plaintiffs

point to the e-mail sent four days later by Rogers to an Agilent

executive inquiring why Agilent's order growth was less robust than

that of its chief competitors. This places more weight on the e-

mail than it can bear.

The February 18 report did not characterize Agilent as a

leader in order growth, so the e-mail does not suggest a necessary

inconsistency between the analysts' description and the true state

of affairs. Cf. Virginia Bankshares, 501 U.S. at 1094 (finding

description of a $42 per share merger price as "high" and "fair"

objectively false in the face of evidence that the bank's "going

concern" value at the time the statements were made exceeded $60

per share).

Especially when considered in context — the analysts'

description was given under the heading "Good Orders, but Not

Explosive" — the e-mail, standing alone, is insufficient to show

objective falsity. The plaintiffs do not challenge the accuracy of

-30-
the rate of growth specified in the report (six percent) and the

report clearly stated that Agilent's competitors enjoyed more

appreciable order growth. Under these circumstances, the adjective

"reasonable" cannot be said to have been objectively false.

To summarize, the plaintiffs do not meet the PSLRA

requirement for pleading a misstatement of opinion. Their general

allegations, Agilent-specific allegations, and transaction-specific

allegations, whether viewed separately or in the ensemble, do not

support the necessary inference that the ratings were subjectively

false. As an aside, the plaintiffs' failure satisfactorily to

plead subjective falsity also supplies a solid basis for a finding

that they have failed to satisfy the PSLRA standard for pleading

scienter.

This conclusion effectively ends our consideration of the

section 10(b) claims. Because the plaintiffs have failed to meet

these PSLRA pleading requirements in regard to subjective falsity

and scienter, we need not address other issues, such as the need to

plead objective falsity in a misstatement of opinion case, the

materiality of the allegedly false statements, or the district

court's alternate holding in this case that the plaintiffs failed

adequately to plead loss causation. See D. Ct. Op. at 17.

This pleading failure also provides a sufficient basis

upon which to affirm the district court's dismissal of the

plaintiffs' section 20(a) claims. Section 20(a) creates derivative

-31-
liability for those that directly or indirectly control a person or

firm found liable under a provision of the Securities Exchange Act.

See 15 U.S.C. § 78t(a). Thus, our rejection of the underlying

section 10(b) violations dooms the plaintiffs' claims against CSFB

and Quattrone under section 20(a). See Greebel, 194 F.3d at 207;

Brown v. Credit Suisse First Boston LLC

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