Gross v. Summa Four, Inc.

USCA1 Opinion












United States Court of Appeals United States Court of Appeals
For the First Circuit For the First Circuit
____________________

No. 96-1088

DAVID GROSS,

Plaintiff, Appellant,

v.

SUMMA FOUR, INC., BARRY R. GORSUN, JAMES J. FIEDLER,
JOHN A. SHANE, WILLIAM M. SCRANTON, AND ROBERT A. DEGAN,

Defendants, Appellees.

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE


[Hon. Paul J. Barbadoro, U.S. District Judge] ___________________

____________________

Before

Stahl, Circuit Judge, _____________
Campbell, Senior Circuit Judge, ____________________
and Lynch, Circuit Judge. _____________

____________________

Arthur R. Miller, with whom Lee S. Shalov, Milberg Weiss Bershad ________________ _____________ ______________________
Hynes & Lerach LLP, Jules Brody, Mark A. Levine, Stull Stull & Brody, __________________ ___________ _______________ ___________________
Edward L. Hann, McLane, Graf, Raulerson & Middleton, Joseph H. Weiss, ______________ ____________________________________ _______________
and Weiss & Yourman, were on brief for appellant. _______________
Peter J. Macdonald, with whom Donald J. Williamson and Hale and ___________________ _____________________ _________
Dorr, were on brief for appellees. ____

____________________

August 12, 1996
____________________

















STAHL, Circuit Judge. Investor David Gross appeals STAHL, Circuit Judge. _____________

from the district court's dismissal of his securities fraud

claim against Summa Four, Inc., its president, and other

Summa Four officers and directors.1 Gross claims that Summa

Four committed "fraud on the market" by making a series of

public statements from January to July 1994 that were either

materially misleading in and of themselves, or incomplete and

misleading due to the omission of materially relevant facts.

Gross further complains that Summa Four improperly overstated

its revenue during the same time period. After careful

review, we affirm the district court's dismissal of Gross's

claims.

I. I. __

Background Background __________

Summa Four is a Delaware corporation with its

principal place of business in Manchester, New Hampshire. It

develops and manufactures advanced-technology switching and

signaling systems for use in telecommunications networks,

which it markets and distributes to clients worldwide.

On September 23, 1993, Summa Four successfully

completed an initial public offering ("IPO") of its common

____________________

1. The individual defendants are Barry Gorsun, current
president, CEO and Chairman of the Board; James J. Fiedler,
president and director from July 1993 through July 1994; John
A. Shane, director since 1976; William M. Scranton, director
since 1976; and Robert A. Degan, director since 1984. Unless
otherwise indicated we will refer to all defendants
collectively as "Summa Four" or "the company."

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stock. The individual defendants sold a portion of their

shares into the IPO (at a price of $17 per share), but

remained significant shareholders following the offering. As

provided in a "lock-up" agreement with the underwriter, the

individual defendants were prohibited from selling any

retained shares in the company for 180 days following the

date of the offering. In late February 1994, however, the

individual defendants obtained special permission from the

underwriter to sell, and did sell, over 130,000 shares of

Summa Four stock at an average market price in excess of $38

per share.

Gross, who purports to sue on behalf of himself and

all other investors similarly situated, purchased 200 shares

of Summa Four stock in late May 1994 at a price of

approximately $27.50 per share. On July 5, 1994 (the closing

date of the class period),2 Summa Four's stock price fell

from $22.25 to $11.75 per share following the company's

announcement that its expected results for the first quarter

of fiscal year 1995 (ending June 30, 1994) would fall short

of earlier projections. Shortly thereafter, Summa Four

terminated defendant James Fiedler who had served as its

president throughout the class period.

A. Summa Four's Public Statements __________________________________

____________________

2. The purported "class period" extends from January 18,
1994, to July 5, 1994. The district court never certified
the class.

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From January to July 1994, Summa Four issued

several public statements touting the company's performance

and profitability. In the complaint, Gross relies on

excerpts from three such statements to establish his claims

of securities fraud. The first two excerpts are taken from

press releases dated January 18 and May 3, 1994, that

accompanied the release of Summa Four's results for the third

and fourth quarters of its 1994 fiscal year. The third

excerpt is taken from a June 29, 1994, letter to the

shareholders from Summa Four's then president James Fiedler.

The June 29 letter was sent in advance of the end of the

first quarter of Summa Four's 1995 fiscal year. The relevant

portions of the three statements are quoted below.

1. January 18, 1994, press release:

Competition at all levels and alternative
technologies caused by divestiture in the
U.S. and privatization in other markets
are fueling growth for new customized
services. We are also seeing increased _________
demand for our SDS distributed switch in ______ ___ ___ ___ ___________ ______
a number of international markets
including China, Chile and Columbia where
there is rapid development in
infrastructure. . . . The SDS
distributed switch is becoming the
platform of choice for rapidly developing
and deploying network-based enhanced
services worldwide.

2. May 3, 1994, press release:

In the fourth quarter [ending March 31,
1994], the Company received significant ________ ___________
orders from AT&T, McCaw, Sprint, GTE, ______
Unisys, and IBM to address a broad range
of applications . . . . These new orders


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were for both new and existing
applications, domestically and
internationally.

















































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3. June 29, 1994, letter to shareholders:

We are pleased to report to you that
fiscal year 1994, ended March 31, 1994,
was a watershed year in Summa Four's
history. It was a year in which we
strengthened our competitive position,
recorded our eighth consecutive increase
in quarterly revenues, and generated
record net income.

Our strong financial performance is ___ ______ _________ ___________
primarily the result of our initiatives
in the highly competitive long distance
market . . . . Summa Four is committed
to maintaining its worldwide leadership
position in the public network-based
distributed switch market. We have
preeminent customers worldwide, broad-
based strategic distribution channels,
public network-certified products, a _
strong financial position, and an ______ _________ ________
experienced management team.

Gross alleges that, during the class period, Summa

Four possessed internal reports, documents, and board meeting

minutes revealing that the company was experiencing declining

growth in revenue and earnings, delayed orders, significant

increases in expenses, and difficulties in its international

operations. Specifically, in order to support his claims

that the three public statements were materially false or

misleading, Gross relies on certain internal "Flash Reports"

and "Monthly Operating Reports" for the months of January

through April 1994, and recorded minutes from board and

internal operation meetings held in May and June 1994. As we

progress with our analysis, we will discuss in more detail

the content of these internal documents.



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B. The Present Lawsuit _______________________

On July 12, 1994, shortly after Summa Four's

announcement of its expected results for the first quarter of

fiscal year 1995 and the ensuing sudden decline in Summa

Four's stock price, Gross filed this securities fraud action

in the New Hampshire federal district court. Gross purported

to bring the complaint on behalf of all investors who

purchased Summa Four stock during the class period.

Following Summa Four's initial motion to dismiss, the

district court granted Gross limited discovery. Upon

completion of that discovery, Gross amended his complaint.

Subsequently, Summa Four moved to dismiss the

amended complaint. After briefing and oral argument, the

district court granted the motion, rejecting all of Gross's

claims. The court disagreed with Gross that the excerpted

portions of the statements could be viewed as affirmative

misrepresentations, stating that:

A reasonable person could not infer from
the pleaded acts that demand for [Summa
Four's products] was no longer growing,
that significant orders had not been
received from major corporations, or that
the company was not in a "strong
financial position" simply because it did
not meet its short-term budget
projections, its orders for one month
were lower than expected, and its
international operations were in a state
of disarray.

The court also rejected Gross's claim that the

statements were misleading by omission. The court noted


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that, while many of the facts Gross alleged to support that

allegation "might have been important to the reasonable

investor," they were not sufficient to indicate that the

challenged statements were so incomplete as to be misleading.

The court further rejected Gross's final claim that Summa

Four had overstated its revenue, reasoning that the

allegations on which Gross relied did not reasonably support

the claim. Gross now appeals.3

II. II. ___

Discussion Discussion __________

Gross contends that the district court erred in

dismissing his claims. He argues that the amended complaint

adequately alleged that Summa Four had a duty, which it

breached, to disclose material nonpublic information in its

possession necessary to make its public statements not

materially misleading. Gross also contends that Summa Four

improperly overstated its revenue and earnings during the

class period by not following generally accepted accounting

principles ("GAAP"). After discussing the standard of review

and the relevant securities law, we address each issue in

turn.




____________________

3. The amended complaint also included claims regarding
alleged misstatements of future performance and alleged
misstatements by third-party analysts. Gross has expressly
abandoned those claims on appeal.

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A. Standard of Review ______________________

We review the district court's dismissal of Gross's

amended complaint de novo, taking all well-pleaded __ ____

allegations as true and giving Gross the benefit of all

reasonable inferences. See Roeder v. Alpha Indus., Inc., 814 ___ ______ __________________

F.2d 22, 25 (1st Cir. 1987). Nonetheless, because Gross

alleges fraud, he is subject to the heightened pleading

requirements of Fed. R. Civ. P. 9(b), which provides that

"[i]n all averments of fraud or mistake, the circumstances

constituting the fraud or mistake shall be stated with

particularity."

Rule 9(b) sets a demanding standard in order to

"minimize the chance that a plaintiff with a largely

groundless claim will bring a suit and conduct extensive

discovery in the hopes of obtaining an increased settlement,

rather than in the hopes that the process will reveal

relevant evidence." Romani v. Shearson Lehman Hutton, 929 ______ _______________________

F.2d 875, 878 (1st Cir. 1991) (internal quotations and

citations omitted). We have been especially strict in

demanding adherence to Rule 9(b) in the securities context,

id., expressly stating that ___

"general averments of 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 the defendant[s] knew that a
statement was materially false or
misleading. The rule requires that the


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particular times, dates, places, or other
details of the alleged fraudulent
involvement of the actors be alleged."

Lucia v. Prospect St. High Income Fund, 36 F.3d 170, 174 (1st ______ _____________________________

Cir. 1994) (quoting Serabian v. Amoskeag Bank Shares, Inc., ________ ___________________________

24 F.3d 357, 361 (1st Cir. 1994)).

Furthermore, we have consistently held that a

securities plaintiff does not satisfy the requirements of

Rule 9(b) merely by pleading "`fraud by hindsight.'"

Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992) __________ _____________

(quoting Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978)). _____ ______

In other words, "a general averment that defendants `knew'

earlier what later turned out badly" does not convey the

necessary particularity that Rule 9(b) requires. Id. In ___

addition, the heightened pleading requirement of Rule 9(b)

applies even when the fraud relates to matters peculiarly

within the defendant's knowledge. Lucia, 36 F.3d at 174; _____

Romani, 929 F.2d at 878. ______

B. Requirements of a 10b-5 Claim _________________________________

Gross bases his fraud claims on alleged violations

of 10(b) of the Securities Exchange Act and the Securities

and Exchange Commission's Rule 10b-5 promulgated thereunder.

15 U.S.C. 78j(b); 17 C.F.R. 240.10b.5. Together these

provisions prohibit any person, directly or indirectly, from

committing fraud in connection with the purchase or sale of

securities. Id.; Shaw v. Digital Equip. Corp., 82 F.3d 1194, ___ ____ ____________________



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1217 (1st Cir. 1996). To state a cause of action under

10(b) and Rule 10(b)(5), a plaintiff must plead, with

sufficient particularity, that the defendant made a false

statement or omitted a material fact, with the requisite

scienter, and that the plaintiff's reliance on this statement

or omission caused the plaintiff's injury. Shaw, 82 F.3d at ____

1217; see also San Leandro Emergency Medical Group Profit ___ ____ _____________________________________________

Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir. ____________ __________________

1996). A misrepresented or omitted fact will be considered

material only if a reasonable investor would have viewed the

misrepresentation or omission as "having significantly

altered the total mix of information made available." Basic, ______

Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). ____ ________

By itself, however, Rule 10b-5, does not create an

affirmative duty of disclosure. Indeed, a corporation does

not commit securities fraud merely by failing to disclose all

nonpublic material information in its possession. Roeder, ______

814 F.2d at 26 (citing Chiarella v. United States, 445 U.S. _________ ______________

222, 235 (1980)); see also Shaw, 82 F.3d at 1202. The ___ ____ ____

corporation must first have a duty to disclose the nonpublic

material information before the potential for any liability

under the securities laws emerges. Roeder, 814 F.2d at 26. ______

Such a duty may arise if, inter alia, a corporation has _____ ____

previously made a statement of material fact that is either





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false, inaccurate, incomplete, or misleading in light of the

undisclosed information. See id. at 27.4 ___ ___

Thus, "[w]hen a corporation does make a disclosure-

-whether it be voluntary or required--there is a duty to make

it complete and accurate." Id. at 26. "This, however, does ___

not mean that by revealing one fact about a product, one must

reveal all others that, too, would be interesting, market-

wise, but means only such others, if any, that are needed so

that what was revealed would not be `so incomplete as to

mislead.'" Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st _______ ______________

Cir. 1990) (en banc) (quoting SEC v. Texas Gulf Sulphur Co., __ ____ ___ ______________________

401 F.2d 833, 862 (2d Cir. 1968) (en banc), cert. denied, 394 __ ____ _____ ______

U.S. 976 (1969)). Furthermore, the fact that a company has

reported accurately about past successes does not by itself

burden the company with a duty to inform the market that

present circumstances are less positive. Shaw, 82 F.3d at ____

1202; Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, ________ ___________________________

361 (1st Cir. 1994).

C. Analysis ____________

We turn first to Gross's claims that Summa Four's

various public statements during the class period were either


____________________

4. In Roeder, we also alluded to two other situations that ______
could give rise to a duty to disclose material facts: (1)
when an insider trades in the company's securities on the
basis of nonpublic material information; (2) when a statute
or regulation mandates disclosure. See Shaw, 82 F.3d at 1202 ___ ____
n.3 (discussing Roeder). ______

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false and misleading in and of themselves or false and

misleading by omission. We take the claims arising from the

June 29 letter first, and then address the claims arising

from the earlier January 18 and May 3 press releases.

Finally, we turn to Gross's claim that, by employing improper

accounting procedures, Summa Four overstated its revenue

during the class period.

1. June 29 Letter __________________

Gross complains that, given the letter's failure to

disclose Summa Four's impending poorer-than-expected results

for the first quarter of fiscal year 1995, its statements

that the company had experienced a "strong financial

performance" and was in "a strong financial position" are

either patently false or clearly misleading by omission.

Summa Four disputes this contention, arguing that both

statements are completely borne out by the facts alleged in

the amended complaint. Summa Four argues that the "strong

financial performance" statement is a backward-looking

statement referring to its record results in fiscal year

1994. Summa Four further adds that nothing in the amended

complaint, viz., allegations concerning its disappointing ____

first quarter 1995 results, supports the inference that the

company was not in a "strong financial position."

While the issues raised by the June 29 letter

represent, perhaps, Gross's strongest claims, we need not



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choose between the parties' contrary positions. Regardless

of the merits, because Gross purchased his stock on May 27,

1994, well before Summa Four issued the June 29 letter, he

has no standing to complain about the statements included in

the letter. See Shaw, 82 F.3d at 1222 (only individuals who ___ ____

purchased shares after allegedly misleading statement could _____

have suffered a cognizable injury); Roots Partnership v. _________________

Lands' End, Inc., 965 F.2d 1411, 1420 (7th Cir. 1992) _________________

(similar). In other words, because Summa Four issued the

letter after Gross had purchased his stock, the statements in

the letter could not possibly have inflated the market price

that he paid for those shares. Roots Partnership, 965 F.2d __________________

at 1420. Moreover, although Gross purports to bring a class

action on behalf of all individuals who purchased Summa Four

shares during the class period, he cannot maintain an action

on behalf of class members to redress an injury for which he

has no standing in his own right. Id. at 1420 n.6; see Britt ___ ___ _____

v. McKenny, 529 F.2d 44, 45 (1st Cir.) ("If none of the named _______

plaintiffs may maintain action on their own behalf, they may

not seek such relief on behalf of a class."), cert. denied, _____ ______

429 U.S. 854 (1976); see also Lewis v. Casey, 64 U.S.L.W. ___ ____ _____ _____

4587, 4590 (U.S. June 25, 1996).

2. January 18 Press Release: False _________________________________________

Statement of Current Facts __________________________





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Apart from the claims arising from the June 29

letter, Gross points to one statement excerpted from the

January 18, 1994, press release as constituting a false

statement of current facts. Gross contends that the amended

complaint sufficiently alleged that Summa Four's statement

that "We are seeing increased demand for our SDS distributed _________ ______

switch in a number of international markets including China,

Chile and Colombia" is patently false and a violation of Rule

10b-5. We disagree.

Though Gross adamantly contends that the statement

is false, the amended complaint provides little in the way of

specific facts to support this contention. See Greenstone, ___ __________

975 F.2d at 25 ("complaint must set forth specific facts that

make it reasonable to believe that the defendant knew that a

statement was materially false or misleading"); see also ___ ____

Glassman v. Computervision Corp., No. 95-2240, slip op. at ________ ____________________

31-34 (1st Cir. July 31, 1996) (complaint failed to allege

sufficient factual basis for claim that up-to-date

information was ignored in setting offering prices). Indeed,

when pressed by the district court on this very issue

following the limited discovery, Gross's counsel conceded

that the amended complaint failed to point to any "documents

that expressly say that on January 18th or thereabouts that

the [SDS] switch [was] experiencing declining orders." The

only document contemporaneous to the January 18 press release



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that Gross cites to support his claim, a January 20 "Flash

Report," made no comment on any product, or on any particular

international market. At best, the January 20 "Flash Report"

revealed that Summa Four had experienced some slight negative

variances from its overall budgeted revenues and costs for

the reporting period ending December 31, 1993. Such evidence

hardly supports the inference that the demand for the SDS

switch was not increasing in the named international markets.

Moreover, the additional statement in the January

20 "Flash Report" that Summa Four's "overall International

sales and marketing efforts are currently under review and

will be revised" provides little further support for Gross's

claim. That Summa Four was reviewing its overall

international marketing efforts does not contradict the

assertion in the January 18 press release that demand for the

SDS switch was increasing in certain areas. Neither do the

later reports and meeting minutes adverted to in the amended

complaint adequately support the inference that the excerpt

from the January 18 press release was false when made.5

____________________

5. Summa Four's January Monthly Operating Report, issued
February 25, 1994, states, inter alia, that _____ ____

[a] major reorganization of sales
responsibilities in [the company's
international operations] is planned to
take place during March. It is intended
to refocus that organization on European
opportunities and to emphasize the
development of distribution channels in
major marketplaces such as France and

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See, e.g., Shaw, 82 F.3d at 1223 (under Rule 9(b), a ___ ____ ____

plaintiff may not contrast a defendant's past optimism with

less favorable actual results, and then simply contend the

difference is fraud). None of these later reports or minutes

specifically reflect on demand for the SDS switch in the

China, Chile, or Colombia markets. More importantly,

although they arguably suggest that Summa Four was

experiencing growing difficulties in the management of its

international operations at the time those documents or

minutes were issued (in late February, April, and June), they

do not adequately support the inference that the company knew

of these difficulties (or that they even existed) when it

issued the January 18 press release.

3. May 3 Press Release: Misleading Omissions of ___________________________________________________

Current Facts _____________

Gross also contends that Summa Four made several

technically accurate statements about its receipt of orders

without disclosing facts known to the company that were

____________________

Germany.

The report further states that a "corporate reorganization of
Austrel's domestic and international marketing
responsibilities has slowed completion of the Australian
opportunities."
Summa Four's March Monthly Operating Report, issued
in April 1994, indicated that the company had replaced the
Managing Director of Summa Four's European operations along
with two other members of the international management team.
In addition, an excerpt from the minutes of a June 20, 1994,
meeting indicated that Summa Four was experiencing further
difficulties in its international operations.

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necessary to make the disclosed statements not misleading.

Gross points principally to an excerpt from the May 3 press

release, stating that "[i]n the fourth quarter [ending March

31, 1994], the Company [had] received significant orders from ________ ___________ ______

AT&T, McCaw, Sprint, GTE, Unisys, and IBM to address a broad

range of applications."6 Gross contends that this statement

was materially misleading because Summa Four did not also

tell investors that, at that time, it was experiencing delays

in consummating contracts for at least one of these orders,

in receiving other orders, and in shipping products. We find

Gross's arguments unavailing.7

First, assuming arguendo that Gross has alleged ________

sufficiently particular facts to support the inference that

the company knew about the purported delays at the time it

issued the May 3 press release, we do not believe that those

alleged delays make Summa Four's statement that it had

received "significant orders" in the prior quarter materially


____________________

6. In the amended complaint, Gross never quotes the portion
of the challenged statement that expressly indicates that it
refers to orders received "[i]n the fourth quarter."
Nevertheless, in reviewing a motion to dismiss, we may
consider in its entirety a relevant document explicitly
relied on by the plaintiff in the complaint. See Shaw, 82 ___ ____
F.3d at 1220; Philip Morris, 75 F.3d at 809. _____________

7. Gross also points to an excerpt from the January 18 press
release, which noted that Summa Four had received orders from
Unisys, Sprint, IBM, DEC, Pacific Bell, USWest and AT&T. We
reject Gross's claims with regard to this statement for
essentially the same reasons that we reject his claim that
the May 3 statement was materially misleading.

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misleading. As Gross acknowledges, the statement about the

orders is not false: Gross does not contend that Summa Four

did not receive the orders. Moreover, the statement

specifically concerns past events -- the receipt of orders in

the prior quarter. We have consistently held that the fact

that a company makes an affirmative true statement about past

results does not give rise to a duty to comment on its

current status. Serabian, 24 F.3d at 361; Capri Optics ________ _____________

Profit Sharing v. Digital Equip. Corp., 950 F.2d 5, 8 (1st ______________ _____________________

Cir. 1991).

Moreover, the cases on which Gross relies for the

proposition that the failure to disclose information similar

to that alleged here was a material omission are clearly

distinguishable. For example, Gross cites Alfus v. Pyramid _____ _______

Technology Corp., 764 F. Supp. 598, 603-04 (N.D. Cal. 1991), ________________

as holding that a company's failure to disclose, inter alia, __________

"manufacturing delays" and "flattening sales" was an omission

sufficient to survive the company's motion to dismiss. In

Alfus, however, the public statements allegedly undermined by _____

the nondisclosed information were more specific statements

about the company's revenue and earnings potentials than

those Gross alleges here. Where Gross only points to two

public statements concerning past orders received by Summa

Four, the statements in Alfus dealt with definite projections _____

(e.g., "[W]e forecast total revenue growth of 40 percent, to ____



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$110-120 million. We view this as a conservative

estimate."). Id. at 602; see also In re Sunrise Technologies ___ ___ ____ __________________________

Sec. Litig., [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ___________

97,042 (N.D. Cal. Sept. 22, 1992) (similar). In short, we do

not believe that Gross's allegations that the company knew,

but failed to disclose, that it was suffering various delays

in closing contracts, receiving orders, and shipping products

are sufficient to support a claim that its statement in the

May 3 press release about past orders received was materially

misleading. Furthermore, to the extent that the statement

that Summa Four had received "significant orders" carries a

positive implication about the its future success (viz., that ____

Summa Four received significant orders last quarter implies

that it would fill and profit from those orders this

quarter), an so might, arguably, be the basis for a duty to

update claim, we think this statement falls in the category

of vague and loosely optimistic statements that this court

has held nonactionable as a matter of law. See Glassman, ___ ________

slip op. at 49-50; Shaw, 82 F.3d at 1217-19. ____

In any event, the amended complaint does not set

forth sufficiently particular facts from which one could

reasonably infer that Summa Four knew about the alleged

delays at the time it issued the May 3 press release. Gross

first points to a March 17 report that stated both that Summa

Four had experienced "delays in resolving several customer



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issues and gaining closure on contracts [that] caused some

[revenue] slippage out of [February]" and that, due to delays

of several major orders in February, Summa Four had reduced ________

its internal bookings and revenue forecasts for the quarter

ending March 31, 1994. Both of these excerpts, however,

speak to events that occurred in February 1994 and do not

support the inference that Summa Four was continuing to

experience delays in May substantial enough to make the

statements in the May 3 press release materially misleading.

Moreover, neither do we believe that the references

in the minutes of the June 14 board meeting to delays in

orders that the company was experiencing at that time

sufficiently support the inference that Summa Four was (and

knew that it was) experiencing the alleged delays and other

difficulties at the time of the May 3 press release. The

June 14 board meeting was held five weeks after the company

issued the May 3 press release. Compare Philip Morris, 75 _______ ______________

F.3d at 812 (cannot infer that company knew statements in

prospectus concerning retail sales were false when made on

the basis that decline in sales was announced three weeks

later) with Shaw, 82 F.3d at 1224-25 (where prospectus was ____ ____

issued just eleven days prior to the end of the quarter with

disappointing results -- and three weeks prior to the actual

disclosure of the disappointing results -- the proximity in





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time, although not sufficient by itself to survive Rule 9(b),

provided some support for the fraud claims).

4. Overstatement of Revenue ____________________________

Gross also claims that Summa Four's statements

regarding its revenue and earnings during the class period

were materially misleading because, contrary to GAAP, Summa

Four recognized revenue upon receipt of orders rather than on

shipment of products. Gross claims that this premature

recognition of income allowed Summa Four to overstate

significantly its revenues and earnings during the class

period.

To support this claim, Gross alleges that, although

Summa Four typically requires twelve to twenty weeks to ship

its switches following the placement of an order, Fiedler

stated at a June 14 board meeting that the company could

generate up to $4.7 million in new revenues through the

receipt of new orders in the two weeks remaining before the

end of the quarter. Gross contends that, given the time it

takes Summa Four to fill orders, the statement is

inexplicable unless the company was recognizing revenue upon

receipt of orders instead of upon shipment. Gross finds

further corroboration for this claim in Summa Four's May 1994

board meeting minutes where it is recorded that the company's

chief financial officer was working on a new "revenue





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recognition policy" that was to be "more formalized and

somewhat more restrictive" than its previous policy.

Though these contentions give us some pause, we

nonetheless agree with the district court that Gross failed

to plead this claim with sufficient particularity for

purposes of Rule 9(b). As we have noted, "a general

allegation that the practices at issue resulted in a false

report of company earnings is not a sufficiently particular

claim of misrepresentation [to satisfy Rule 9(b)]."

Serabian, 24 F.3d at 362 n.5. In this case, Gross has failed ________

to allege any particulars to support his general allegation

of inflated earnings through the use of improper accounting

methods. Specifically, he has not alleged the amount of the

putative overstatement or the net effect it had on the

company's earnings. See Shushany v. Allwaste, Inc., 992 F.2d ___ ________ ______________

517, 522 (5th Cir. 1993) (allegation that company had

adjusted the accounting of its inventory to inflate revenues

and earnings does not sufficiently plead fraud where

complaint does not explain, inter alia, how the adjustments _____ ____

affected the company's financial statements and whether they

were material in light of the company's overall financial

position); Roots Partnership, 965 F.2d at 1419 (allegation __________________

that company "failed to establish adequate reserves for its

excessive and outdated inventory" does not satisfy Rule 9(b)

where investor does not allege "what the reserves were or



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suggest how great the reserves should have been"); Decker v. ______

Massey-Ferguson, Ltd., 681 F.2d 111, 116 (2d Cir. 1982) ______________________

(allegation that company's failure to write down value of

obsolete equipment does not sufficiently plead fraud where

plaintiff did not allege amounts at which equipment was

carried--or should have been carried--on company's books);

Schick v. Ernst & Young, 141 F.R.D. 23, 27 (S.D.N.Y. 1992) ______ _____________

(allegations that accountants "significantly overstated"

assets of company in prospectus did not adequately

particularize the alleged misrepresentations and omissions

where plaintiff failed to allege the amount of the purported

overstatement); cf. Cohen v. Koenig, 25 F.3d 1168, 1173 (2d ___ _____ ______

Cir. 1994) (fraud pleaded with sufficient particularity by

setting out representations made, what financial figures they

were given, and what they alleged to be the true financial

figures).

Moreover, the single statement by Fiedler during

the minutes of the June 14 board meeting is far too tenuous a

foundation (at least for Rule 9(b) purposes) to support

Gross's claim that Summa Four had fraudulently overstated its

revenue. Arguably, the statement supports a reasonable

inference that the company, or at least Fiedler, may have

contemplated booking revenue upon the receipt of orders

rather than shipment for the quarter ending on June 30, 1994;

however, we do not think that the statement, by itself, is



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sufficient to indicate that the company had actually booked

as revenue sales instead of shipments in any previous

quarter.8 Moreover, we do not think the ambiguous

statements taken from the minutes of the May 1994 board

meeting concerning review of the company's accounting system

corroborate Fiedler's June 14 statement sufficiently to

overcome the deficiencies in Gross's pleadings.9

III. III. ____

Conclusion Conclusion __________

For the foregoing reasons, we affirm the judgment affirm ______

of the district court. Costs to appellee. Costs to appellee. _________________








____________________

8. As with the June 29 letter, Gross would have no standing
to assert a securities fraud claim that Summa Four misstated
its revenue only for the quarter ending June 30, 1994.

9. Gross also contends that the district court erred in
refusing to consider two additional affidavits Gross filed
with the court to accompany his motion for reconsideration
pursuant to Fed R. Civ. P. 59(e). The district court refused
to consider the additional affidavits, noting that Gross had
"not demonstrated that he could not have produced this
information in response to defendant's motion to dismiss."
In that the affidavits address whether the amended complaint
adequately alleged undisclosed facts to support the inference
that a reasonable investor would have considered Summa Four's
public statements to be false and misleading -- an issue
clearly before the court on Summa Four's motion to dismiss --
we find no abuse of discretion by the district court in its
refusal to consider them. See, e.g., Williams v. Poulos, 11 ___ ____ ________ ______
F.3d 271, 289 (1st Cir. 1993) (reconsideration rulings
reviewed only for abuse of discretion).

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