Kapps v. Torch Offshore, Inc.

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED AUGUST 10, 2004
July 26, 2004
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk

No. 03-30227

KARL L. KAPPS, Individually and
as Trustee; BRIAN PETERSON;
JORGE VARGAS; DORIS KLEGA; and
HELEN FOSTER,

Plaintiffs-Appellants,

versus

TORCH OFFSHORE, INC.; UBS WARBURG LLC;
CIBC WORLD MARKETS CORP.; HOWARD WEIL,
a Division of Legg Mason Wood Walker,
Inc.; LYLE G. STOCKSTILL; LANA J. HINGLE
STOCKSTILL; ERIC N. SMITH; WILLIAM J.
BLACKWELL; CURTIS LEMONS; JOHN REYNOLDS;
and KEN WALLACE,

Defendants-Appellees.

Appeal from the United States District Court
for the Eastern District of Louisiana

Before GARWOOD, JONES, and STEWART, Circuit Judges.

GARWOOD, Circuit Judge:

Plaintiffs-appellants Karl L. Kapps, individually and as

Trustee, Brian K. Peterson, Jorge Vargas, Doris Klega, and Helen
Foster appeal the district court’s dismissal of their complaint

by its grant of the Rule 12(b)(6) motion filed by the defendants-

appellees, Torch Offshore, Inc., and certain of its officers and

underwriters. We affirm.

Facts and Proceedings Below

Torch Offshore, Inc. (Torch) is a service provider that

installs and maintains underwater oil and natural gas pipelines

and related infrastructure on the Gulf of Mexico’s Continental

Shelf. Torch’s customers include major energy companies and

independent oil and natural gas producers.

Commencing on June 7, 2001, Torch conducted an Initial

Public Offering (IPO) during which it sold 5,000,000 shares of

its common stock at $16 per share, raising $80 million. The IPO

was conducted pursuant to a registration statement and prospectus

dated June 7, 2001 which Torch filed with the Securities and

Exchange Commission (SEC).

In the prospectus, Torch disclosed the volatile nature of

oil and natural gas prices, the dependence of Torch’s business

upon oil and natural gas prices, and the time lags between the

prices and the demand for Torch’s services.1

1
Although in their original complaint, the plaintiffs
alleged omissions related to oil as well as natural gas, the only
allegations now before this Court relate to the price levels of
and disclosures pertaining to natural gas. The specific
disclosures made in the prospectus are addressed more fully in
the discussion section below.

2
 The prospectus asserted, truthfully, that natural gas prices

had increased by approximately 133% from February 1999 through

June 6, 2001. However, during the some five and one-third months

immediately preceding the June 7, 2001 IPO, natural gas prices

had in fact declined approximately 60%. That information was not

included anywhere in the prospectus. Though it did discuss the

volatile nature of oil and natural gas prices, the prospectus

made no mention of any particular decline in the price of natural

gas.

During the two month period after the issuance of the IPO,

Torch’s share prices declined to below $8 per share. On August

2, 2001, Torch issued a press release stating that during the

period after the IPO, domestic natural gas and crude oil prices

declined. The press release also noted that Torch had begun to

note delays in the completion of shallow water drilling projects.

On March 1, 2002, Kapps filed a putative class action suit

on behalf of all persons and entities who purchased Torch common

stock between June 7, 2001 and August 1, 2001.2 The plaintiffs

alleged violations of Sections 11 and 15 of the Securities Act of

1933 (the Securities Act), 15 U.S.C. §§ 77k and 77o. An amended

complaint was filed June 12, 2002. The plaintiffs named as

2
Plaintiffs chose August 1, 2001, as the end of the Class
Period because Torch stated in its August 2, 2001 press release
that it had noticed delays in the completion of some shallow
water drilling projects. Though Torch in its press release did
not attribute those delays to the decrease in natural gas prices,
the Plaintiffs believed that this correlation could be made.

3
defendants Torch, certain of its corporate officers, and the

underwriters for the IPO. Torch and other defendants filed

motions to dismiss under Rule 12(b)(6) for failure to state a

claim for which relief can be granted on August 19 and October

18, 2002. Plaintiffs never sought any leave to further amend.

The district court granted the motions to dismiss on

December 18, 2002, holding that federal securities laws do not

impose a duty on issuers to disclose industry-wide trends or

publicly available information. The plaintiffs timely appealed.

Discussion

1. Standard of Review

This court reviews the district court’s dismissal of a

complaint pursuant to Rule 12(b)(6) de novo. Kane Enterprises v.

Macgregor (USA) Inc., 322 F.3d 371, 374 (5th Cir. 2003). On a

motion to dismiss, this Court must construe the factual

allegations in a complaint, and all reasonable inferences

therefrom, in the light most favorable to the plaintiffs. Id. at

374; In re Mastercard Int’l, Inc., 313 F.3d 257, 261 (5th Cir.

2002). A motion to dismiss must be denied unless it appears

beyond doubt that the plaintiff can prove no set of facts in

support of his claim which would entitle him to relief. Kane

Enterprises, 322 F.3d at 374.

Furthermore, Section 11 only requires notice pleading under

Fed. R. Civ. P. 8 rather than the detailed pleading mandated by

4
Fed. R. Civ. P. 9(b) or the Private Securities Litigation Reform

Act (PSLRA). See Swierkiewicz v. Sorema, N.A., 122 S.Ct. 992,

998 (2002); In re NationsMart Corp. Sec. Litig., 130 F.3d 309,

315-16 (8th Cir.1997), cert. denied, 118 S.Ct. 2321 (1998).

However, mere conclusory allegations will not suffice to prevent

a motion to dismiss. Kane Enterprises, 322 F.3d at 374;

Mastercard Int’l, Inc., 313 F.3d at 261.

2. Appellants’ arguments

In this appeal, appellants set forth three main arguments,

taking issue with disclosures that were and were not made in the

prospectus. They base their claims on violations of section 11

of the Securities Act.3

First, they argue that the statement in the prospectus

revealing that natural gas prices “have increased by

approximately 133%” between February 1999 and the day before the

IPO was materially misleading because, though technically

accurate, it failed to mention the fact that there had been an

approximately 60% drop in the price of natural gas in the some

3
Section 11 of the Securities Act provides in relevant part::
“(a) In case any part of the registration statement . . . contained an untrue
statement of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, any person
acquiring such security (unless it is proved that at the time of such acquisition he
knew of such untruth or omission) may, either at law or in equity, in any court of
competent jurisdiction, sue--
(1) every person who signed the registration statement;
...
(5) every underwriter with respect to such security.” 15 U.S.C. § 77k.

5
five and one-third months immediately preceding the IPO.

Second, appellants assert that the Torch’s statement in the

prospectus that there had been “recent increases in natural gas

prices” was not only materially misleading but also false when

made in light of the above noted fact that the price of natural

gas had actually decreased prior to the IPO.

Finally, the appellants claim that in any event, Torch

should have mentioned the noted decrease in the price of natural

gas because it was a trend that could reasonably be expected to

have a material impact on Torch’s operations, and therefore its

disclosure was required pursuant to Item 303 of the SEC

Regulation S-K; 17 C.F.R. § 229.303.

We will address each contention in turn.

A. Prospectus statements were not materially misleading

A portion of the prospectus states that natural gas prices

“have increased by approximately 133%” between February 1999 and

June 6, 2001, the day before the IPO.4 Although admittedly a

4
The prospectus addressed the fact that the price of natural
gas was an important component in assessing the success or
failure of Torch’s business, stating:
“The price levels of oil and natural gas are the
primary determinants of offshore exploration and
development activity. From two year lows in February
1999 to June 6, 2001, NYMEX closing current oil
contract prices have increased by approximately 126%
and NYMEX closing current natural gas contract prices
have increased by approximately 133%. As oil and
natural gas prices increase or remain at favorable

6
factually correct and true statement, appellants assert that it

was materially misleading because it failed to mention the fact

that there had been an approximately 60% drop in the price of

natural gas in the five and one-third months immediately

preceding the IPO. The amended complaint reflects that between

February 1999 and December 27, 2000, the price of natural gas

rose from $2 to $10 per BTU, including a sharp upward spike (from

approximately $4.50 to approximately $10) during November and

December 2000. Then, in what Torch characterizes as a

correction, there was a sharp downward spike from December 28,

2000 through most of February 2001 (from approximately $10 to

approximately $5), followed by a gradual decline to June 7, 2001,

during which natural gas prices fell to approximately $4 per BTU.

We do not find the statement that the price of natural gas

“increased by approximately 133%” to be materially misleading

when read in the context of the prospectus as a whole.5 The

statement correctly set forth the increase in the price of

levels, our customers generally increase their capital
budgets for additional offshore exploration and
development. . . [T]he number of active jack-up
drilling rigs on the Shelf has increased from a low of
76 in April 1999 to 144 in April 2001. Demand for our
services on the Shelf generally follows successful
drilling activities by three to 12 months.”
(prospectus, 2).
5
Though it will be addressed specifically later in this
opinion, the following that analysis also applies to appellants’
contention it was materially misleading for the Prospectus to
state that there were “recent increases in natural gas prices.”

7
natural gas during a specified period of time.

(1) The statement was not misleading6

Appellants rely on Lucia v. Prospect Street High Income

Portfolio, Inc., 36 F.3d 170 (1st Cir. 1994), to establish that

it was materially misleading for the Prospectus to omit the fact

that natural gas prices had decreased in the some five and a

third months preceding the IPO. Lucia concerned a public

offering of shares in a mutual fund that invested in corporate

“junk bonds.” The prospectus in Lucia truthfully stated that the

average yields of certain junk bonds over the ten year period

preceding the mutual fund offering were higher than the yields of

U.S. Treasury bonds during that same ten year period. 36 F.3d at

172-73.

The plaintiffs in Lucia asserted that although those

statements in the prospectus were true, they were misleading to a

6
In Oxford Asset Management Ltd. v. Jaharis, 297 F.3d 1182,
1190 (11th Cir. 2002), the court held that there was no duty to
disclose in the prospectus all information material to the
offering, but only that material information necessary to make
the statements in the prospectus not misleading and that material
information specifically required by the securities laws to be
included. The court also approved the statement in Shaw v.
Digital Equipment, 82 F.3d 1194, 1202 (1st Cir. 1996) that the
“mere possession of material nonpublic information does not
create a duty to disclose.” See also Zucker v. Quasha, 891
F.Supp. 1010, 1014 (DNJ 1995), aff’d, 82 F.3d 408 (Table) (3d
Cir. 1996). “To avoid committing misrepresentation, a defendant
is not required to disclose all known information, but only
information that is ‘necessary to make other statements not
misleading.’ [Craftmatic Securities Litigation v. Kraftsow, 890
F.2d 628, 640 (3d Cir.1989)]”.

8
reasonable investor, because the prospectus failed to disclose

that during the six years immediately preceding the offering, the

yield of the junk bonds had in fact been lower than the yield of

Treasury bonds. Id. at 173. The First Circuit reversed the

district court’s conclusion that the representations were not

misleading because they were literally true, and held that a

determination of whether the prospectus statements were

misleading due to failure to disclose the rates in the six year

time period was a factual question, and therefore inappropriate

for resolution on a motion to dismiss. The court stated:

“the six years at issue are the six years leading up to
the fund’s public offering. Moreover, while any one or
two years might favor Treasury securities without
amounting to an unfavorable trend, we think that a six-
year comparison favoring Treasury securities is
substantial enough to cast some doubt on the reliability
of the reported ten-year figure. . . . [W]e cannot say as
a matter of law that the undisclosed information about
the six-year period would not alter the total mix of
facts available to the investor.” Id. at 176.

Here, the appellants claim that stating there was a 133%

increase when in reality the price had declined 60% in the months

preceding the Prospectus was misleading for the same reasons set

forth by the Lucia court. However, the First Circuit

specifically stated that their decision might have been different

had they only been dealing with a one or two year time period.

In that case, the Treasury bonds were better during a six year

period, and specifically, they were better during six of the ten

years that were referenced in the prospectus. This means that

9
during 60% of the time at issue, the Treasury bonds in fact

performed better than the junk bonds. Therefore, the court found

the omission of that fact to be a question for the jury to

consider.

In the case sub judice, not only are we dealing with a

significantly shorter time period (five and one-third (5.33) of

twenty-seven and one half (27.5) months as compared to six (6) of

ten (10) years), but we are also dealing with a much smaller

percentage of the total time (nearly twenty (20) percent, as

opposed to sixty (60) percent).7 Moreover, approximately three-

fourths of the 60% drop in price occurred during January and

February 2001, just after the initial rapid increase in November

and December 2000. Thus, from November 2000 through February

2001 there was a brief sharp spike up immediately followed by a

brief sharp spike down. Nothing in the prospectus indicated that

the 133% rise in price was steady (or unsteady), and during the

entire period referenced in the challenged prospectus statement

the price never fell to its February 1999 level. In fact, as the

7
Based on the graph included in the amended complaint
showing the high and low prices of natural gas, the statement in
the prospectus was accurate. Appellants do not contend
otherwise. The entire time period at issue ranges from February
26, 1999 to June 7, 2001, a period of twenty seven and one half
(27.5) months. The period of natural gas price decrease was five
and one-third (5.33) months, ranging from a high on December 27,
2000, to the June 7, 2001 ending price. Five and one-third
months is 19.38% of 27.5 months, meaning that the period of
decrease occurred during nearly 20% of the entire described time.

10
prospectus states, the then current price was more than twice

what it had been in February 1999.

The time period at issue in Lucia was nearly twelve times as

long as the one here, and the undisclosed Treasury bond advantage

occurred during more than half of the time discussed. Therefore,

Lucia, with which we have no disagreement, does not support

appellants. Moreover, the Lucia court specifically held only

that there was a jury question, and that the “unfavorable six-

year figure . . . [did] not necessarily render the ten-year

comparison misleading.” Id. at 176.

(2) The public domain and the Section 11 element of

materiality

It appears that the district court granted the motions to

dismiss on the ground that the price of natural gas is publicly

available information, and therefore, the defendants could not

have been in violation of Section 11.8 If this is the

interpretation intended by the district court, it is incorrect.

Specifically, we hold that the definition of “material” under

Section 11 is not strictly limited to information that is firm-

8
In its Order and Reasons, the district court stated,
“Federal securities laws do not impose a duty on issuers to
disclose industry-wide trends or publicly available information.
. . . Information concerning publicly traded commodities such as
natural gas . . . are readily available in the public domain, and
therefore, omission of such information is not actionable under §
11. Weilgos [v. Commonwealth Edison Co., 892 F.2d 509, 517 (7th
Cir. 1989)] (‘Issuers of securities must reveal firm-specific
information . . .’).”

11
specific and non-public. While all material information need not

be included in the registration statement, an issuer is not free

to make material misrepresentations, or to omit material

information that is either required to be disclosed by law or

that is necessary to disclose in order to prevent statements made

in the registration statement from being misleading.

A fact is material “if there is a substantial likelihood

that a reasonable shareholder would consider it important” in

making an investment decision. Basic Inc. v. Levinson, 108 S.Ct.

978, 983, 985 (1988), quoting TSC Industries, Inc. v. Northway,

96 S.Ct. 2126, 2132 (1976). For an omission to be material,

“there must be a substantial likelihood that the disclosure of

the omitted fact would have been viewed by the reasonable

investor as having significantly altered the ‘total mix’ of

information made available.” Id. at 983 (emphasis added). This

Court must determine whether “the information allegedly omitted

or misrepresented in the prospectus was material, in the sense

that it would have altered the way a reasonable investor would

have perceived the total mix of information available in the

prospectus as a whole.” Krim v. BancTexas Group, Inc., 989 F.2d

1435, 1445 (5th Cir. 1993) (holding that certain omitted

information was not material, but based on the ground that the

substance of the information was adequately set forth in the

prospectus, not simply because the information was not firm-

12
specific or was publicly available). But see Ward v. Succession

of Freeman, 854 F.2d 780, 792-93 (5th Cir. 1988).9

In addition to the fact that natural gas prices were in the

readily available public domain, Torch made cautionary statements

regarding the volatility of gas prices. The prospectus

specifically emphasized the volatility of oil and natural gas

prices and the risks posed thereby.10 See Olkey v. Hyperion 1999

9
The court in Ward held that specific omissions were not
materially misleading because the information was in the public
domain. However, its reasoning in coming to that determination
is somewhat unclear. In its opinion, the Ward court cited
Johnson v. Wiggs, 443 F.2d 803 (5th Cir. 1971), an insider
trading case, in which one of the elements of the plaintiff’s
claim is that the defendant bought or sold securities while in
possession of non-public information. Therefore, though it is
established that information that is publicly known cannot be the
basis of an insider trading violation, Johnson does not decide
whether the failure to disclose publicly available information
may still be the basis for another claim under securities law.
The Eighth Circuit has cited Ward for the proposition that
“because passage of a statute is ‘as a matter of law in the
public domain,’ there is no duty of disclosure.” Sailors v.
Northern States Power Co., 4 F.3d 610, 613 (8th Cir. 1993).
10
In its opening “Prospectus summary” section under the
heading “Risk factors,” the prospectus stated, “You should review
and consider carefully the matters set forth under the caption
‘Risk factors,’ as well as the other information set forth in
this prospectus, including that our results will be affected by
the volatile nature of oil and gas prices . . .” (Prospectus, 3,
emphasis added).
Later, in the more detailed portion of the prospectus, under
the heading “Risk factors” there appears an introductory
statement that:
“You should consider carefully the following risk
factors and all other information in this prospectus
before you decide to purchase our common stock.
Investing in our common stock is speculative and
involves significant risk. Any of the following risks
could impair our business, financial condition and

13
Term Trust, Inc., 98 F.3d 2, 5-6 (2d Cir. 1996) (because

assurances in prospectus were balanced by cautionary language

which warned investors of the risk that the plaintiffs claim was

not disclosed, a reasonable investor would not have been

materially misled, and statements were not misleading); Klein v.

General Nutrition Cos., 186 F.3d 338, 342 (3d Cir. 1999) (holding

that certain omitted information was not material, observing that

a “determination of ‘materiality’ takes into account

considerations as to the certainty of the information, its

availability in the public domain, and the need for the

information in light of cautionary statements being made. See

operating results, could cause the trading price of our
common stock to decline and could result in a partial
or total loss of your investment.”
Then there follows a serial listing and accompanying discussion
of numerous different specific categories of “risks related to
our business and operations.” The very first of these states as
follows:
“Demand for our services is greatly influenced by oil
and natural gas prices. Because of the volatility of
these prices, demand for our services may vary
significantly. . . . Oil and natural gas prices and
the level of offshore drilling and exploration activity
have varied substantially in recent years, resulting in
significant fluctuations in demand for our services.
Significant downturns in the oil and natural gas
industry in the past have adversely impacted our
financial performance, resulting in operating losses.
A significant or prolonged reduction in oil or natural
gas prices in the future would likely depress offshore
drilling and development activity. A substantial
reduction in such activity would reduce demand for our
services and have a material adverse effect on our
financial condition and results of operations.”
(Prospectus, 8; emphasis added).

14
Trump, 7 F.3d at 371-72, 377”) (emphasis added).11

In Wielgos v. Commonwealth Edison, Co., 892 F.2d 509 (7th

Cir. 1989), the court stated, “Issuers of securities must reveal

firm-specific information. Investors combine this with public

information to derive estimates about the securities’ value. It

is pointless and costly to compel firms to reprint information

already in the public domain.” Id. at 517. Contrary to the way

the district court may have understood that passage, we conclude

that the Wielgos court likely did not mean for it to be taken as

a strict rule that securities laws never require disclosure of

any information that is not firm-specific or that is publicly

available. For example, as we will discuss in more detail below,

the SEC requires an issuer to disclose certain “trends” that

could affect its business, and in appropriate circumstances this

11
The Third Circuit in In re Donald J. Trump Casino Sec.
Litig., 7 F.3d 357 (3d Cir. 1993), based its decision more on
cautionary statements than public domain, stating, “[t]he
application of bespeaks caution depends on the specific text of
the offering document or other communication at issue, i.e.,
courts must assess the communication on a case-by-case basis . .
. . Nevertheless, we can state as a general matter that, when an
offering document's forecasts, opinions or projections are
accompanied by meaningful cautionary statements, the
forward-looking statements will not form the basis for a
securities fraud claim if those statements did not affect the
‘total mix’ of information the document provided investors. In
other words, cautionary language, if sufficient, renders the
alleged omissions or misrepresentations immaterial as a matter of
law.” 7 F.3d at 371. See also Olkey, 98 F.3d at 5-6. Trump does
partially base its decision on public domain type considerations.
7 F.3d at 377.

15
requirement may extend to certain trends that are not firm-

specific or are publicly available. Moreover, the court in

Wielgos stated that it was not addressing the question of whether

omitted facts were material, but was rather ruling on whether the

disclosures complied with SEC rules.

The appellants emphasize that the case sub judice deals with

Section 11, not section 10(b)(5) which places a burden on the

plaintiffs to show scienter. While it is true that scienter is

not required here, many cases say that “materiality,” as it is

used in Section 11, in effect means the same thing as it does in

section 10(b). See Rosenzweig v. Azurix Corp., 332 F.3d 854,

873-74 (5th Cir. 2003) (holding that plaintiffs’ claims under

Section 11 fail because none of the challenged representations

were material, and “[e]ven though the district court did not

explicitly consider the materiality issue with respect to § 11,

its analysis would be identical” to that under section 10b-5);

see also In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357,

368 n.10 (3d Cir. 1993) (“Because our analysis here is predicated

on the materiality requirement, which is common to [plaintiffs’

section 10(b), 11 and 12(2) claims], we do not here distinguish

between [those provisions.]”); Klein, 186 F.3d at 344.12

12
We note that this case deals not only with plaintiffs who
purchased stock during the IPO, but also with those who bought on
the aftermarket. Under Rosenzweig all of these plaintiffs are
covered by Section 11. 332 F.3d at 872 (“We agree with
plaintiffs that § 11 applies to aftermarket purchasers”).

16
 Appellants claim that materiality should be a question of

fact for the jury, but many Section 11 cases have been properly

dismissed on the pleadings for lack of materiality. See, e.g.,

Rosenzweig, 332 F.3d at 854; Klein, 186 F.3d at 338; Trump, 7

F.3d at 369 n.13 (“Although materiality is a mixed question of

law and fact which the trier of fact ordinarily decides, see TSC,

426 U.S. at 450 . . .‘if the alleged misrepresentations or

omissions are so obviously unimportant to an investor that

reasonable minds cannot differ on the question of materiality [it

is] appropriate for the district court to rule that the

allegations are inactionable as a matter of law.’”) (internal

citations omitted); Krim, 989 F.2d at 1446.

Though in a section 10 case, the Fifth Circuit has defined

materiality as a “‘substantial likelihood’ that a reasonable

investor would consider . . . [the challenged] statements . . .

to have ‘significantly altered the “total mix” of information.’”

[citing Basic, 108 S.Ct. at 983]. Nathenson v. Zonagen Inc., 267

F.3d 400, 422 (5th Cir. 2001) (emphasis added). The "total mix"

of information normally includes information that is and has been

in the readily available general public domain and facts known or

reasonably available to the shareholders. United Paperworkers

Intern. Union v. International Paper Co., 985 F.2d 1190, 1199 (2d

17
Cir. 1993).

Natural gas prices are listed in daily papers.13 The Wall

Street Journal, for example, compares the day’s price with the

price one year ago (and historic daily prices are also available

through other sources, such as the New York Mercantile Exchange,

or NYMEX). While not of itself necessarily dispositive, such

common public ready availability must be considered in

determining whether the “total mix” of information was altered

because the price decline was not included in the prospectus.

When viewed in context, and taking into consideration the

cautionary language used in relation to the volatility of natural

gas prices and the ready public availability of natural gas

prices, neither of the statements at issue were materially

misleading. It was not materially misleading for the prospectus

to state that over the specified period the price had increased

by 133%, or, in the particular context where the language

appears, that there had been “recent increases in the price of

natural gas,”14 not simply because the omitted information was

not firm-specific or was publicly available, but because there is

no substantial likelihood that including the fact that the price

of natural gas had declined since December 27, 2000 would have

13
For example, the Wall Street Journal, the Dallas Morning
News, the Houston Chronicle and the Austin-American Statesman.
14
Appellants’ argument concerning the quoted “recent
increase” language will be further addressed in the following
section.

18
significantly altered a reasonable investor’s perception of the

“total mix of information available in the prospectus as a

whole.” Krim, 989 F.2d at 1445.

(B) “Recent increases in the price of natural gas” and

falsity

Appellants assert that the Torch’s statement in the

Prospectus that there had been “recent increases in natural gas

prices” was not only materially misleading but also false when

made in light of the fact that the price of natural gas had

actually decreased since December 2000.

The section of the prospectus at issue stated, “[d]omestic

natural gas supply and production capacity have declined due to

the depletion of reservoirs and the reduction in drilling

activity during the recent period of low oil and natural gas

prices in 1998 and 1999, leading to a limited supply of natural

gas. This imbalance between supply and demand has led to recent

increases in natural gas prices.” (emphasis added).15 When read

in context, the prospectus clearly sets forth a temporal

15
In that same section of the Management’s discussion and
analysis of financial condition and results of operations (MD&A),
the prospectus continued, “If higher natural gas price and volume
demands are sustained, we expect significant drilling activity to
continue on the Shelf, where, according to the Minerals
Management Service, over 70% of the hydrocarbons produced since
1990 have been natural gas. As a result of the current
environment, the number of active jack-up drilling rigs on the
Shelf has increased from a low of 76 in April 1999 to 144 in
April 2001 according to Offshore Data Services.” (Prospectus,
38).

19
reference, using the word “recent” to describe prices prevailing

and resultant events taking place in 1998 and 1999. Therefore,

one may not reasonably conclude that it was false for the June

2001 prospectus, in the very next sentence of the same paragraph,

to use the word “recent” to characterize the price increase in

the previous some two and one-fourth years.

Accordingly, in light of the immediately preceding sentence

of the same paragraph that also uses “recent” in reference to

natural gas prices, and taking into consideration the public

nature of the price of natural gas, and the fact that the

decrease prior to the IPO only occurred during 20% of the total

time period at issue, we hold that the challenged statement was

neither false nor materially misleading.

(C) Trends and Item 303

Appellants assert that, regardless of whether the statements

in the prospectus were misleading, Torch should have mentioned

the post December 2000 decrease in the price of natural gas in

its prospectus because it was a trend that could reasonably be

expected to have a material impact on Torch’s operations, and was

therefore a disclosure required pursuant to Item 303 of the SEC

Regulation S-K.

Section 11 of the 1933 Securities Act is violated if the

prospectus “omitted to state a material fact required to be

stated therein.” 15 U.S.C. § 77k(a). Item 303(a)(3)(ii) of SEC

20
Regulation S-K requires a public offering prospectus to disclose

“any known trends or uncertainties that have had or that
the registrant reasonably expects will have a material
favorable or unfavorable impact on net sales or revenue
or income from continuing operations. If the registrant
knows of events that will cause a material change in the
relationship between costs and revenues (such as known
future increases in costs of labor or materials or price
increases or inventory adjustments), the change in the
relationship shall be disclosed.” 17 C.F.R. §
229.303(a)(3)(ii).

The court in Oxford Asset Management, Ltd. v. Jaharis, 297

F.3d 1182, 1191 (11th Cir. 2002), interpreted this regulation,

stating “[a]s regards trends, we interpret this element to

require an assessment of whether an observed pattern accurately

reflects persistent conditions of the particular registrant’s

business environment. . . . We interpret this language as

establishing a negligence standard.” The Oxford court continued,

“‘[t]he discussion and analysis shall focus specifically
on material events and uncertainties known to management
that would cause reported financial information not to be
necessarily indicative of future operating results or of
future financial condition. This would include
descriptions and amounts of (A) matters that would have
an impact on future operations and have not had an impact
in the past, and (B) matters that have had an impact on
reported operations and are not expected to have an
impact upon future operations.’ Item 303(a)(3)(ii)
essentially says to a registrant: If there has been an
important change in your company’s business or
environment that significantly or materially decreases
the predictive value of your reported results, explain
this change in the prospectus.” Id. at 1191-92.16

16
In its amicus brief, the SEC states that the relevant
provision of Item 303 is not limited to disclosures of trends
that are firm-specific or that are not available to the public.
Furthermore, it asserts that its interpretation in an amicus

21
 We must address whether the 60% decrease in the price of

natural gas during the months before the prospectus was issued

was indeed a trend disclosure of which was required by Item 303.

Although the drop continued for five and one-third months before

the issuance of the June 7 prospectus, we again note that there

was a precipitous drop in the two months immediately following a

two month sharp increase; the price dropped the most rapidly in

January and February 2001, after which it only gradually

declined.

The prospectus was issued on June 7, 2001, and included the

first quarter unaudited returns.17 We assume that Torch

correctly reported first quarter returns, as the appellants

alleged no misstatements or misleading information as to those

numbers. Although it is unclear why, in their response to the

brief of one of its own regulations, such as what “trend” means
in Item 303, is controlling unless plainly erroneous or
inconsistent with the regulation. Auer v. Robbins, 519 U.S. 452,
461-63 (1997).
We note that although the SEC disagrees with the expressions
in the district court’s opinion indicative of a categorical rule
that matters in the public domain or which are not firm specific
never need be included in a prospectus, it does not take the
position that the ready availability of non firm specific public
domain information (or cautionary statements in a prospectus) is
categorically irrelevant to determining whether information must
be disclosed in the prospectus or to the particular complaints
presented by appellants respecting the June 2001 prospectus.
And, the SEC makes plain that it takes no position as to whether
the instant prospectus violates section 11 in any of the respects
claimed by appellants.
17
The first quarter ran from January 1, 2001, through March
31, 2001.

22
motion to dismiss below, the appellants included Torch’s form 10-

Q, filed with the SEC, for the quarter that ended June 30, 2002.

This form gives the comparable quarter of the previous year. We

know from the prospectus that revenues were $14.49 million for

the first quarter of 2001, and from the 10-Q that they were $14.3

million for the second quarter of 2001. Accordingly, at the time

of the IPO, it was not unreasonable to consider the decline in

natural gas prices as not yet constituting a trend, having not

significantly impacted Torch’s gross revenue.18

However, we must then consider the appellants’ “lag time”

argument. Before Torch’s services are required, Torch’s

customers generally first set up capital budgets which tend to

increase after the price of natural gas and oil increases. They

then conduct exploration drilling, and , if successful, they

start preparation for production activities. Only then do they

hire Torch to lay the pipe and carry the product to shore.

Therefore, Torch acknowledges that demand for their services does

not occur at the precise time drilling begins, or is delayed.

This “lag time” was revealed in the prospectus.19 Because the

18
We are concerned with gross revenues here because they are
the product of drilling activity. There is no allegation that
any of these figures reflected in the referenced 10-Q are
incorrect.
19
As the prospectus explained, there is a “lag time” between
the changes in the price of oil and natural gas, and changes in
offshore exploration and development activities, and there is
also a lag between the exploration and early development

23
downward spike in the price of natural gas did not immediately

affect Torch’s revenues, Torch’s management viewed it as an

anomaly, believing instead that the long term fluctuations,

increases, and decreases would dictate demand for Torch’s

services.

On August 2, 2001, Torch issued a press release stating that

during the period after the IPO, domestic natural gas and crude

oil prices declined. The press release also recited that Torch

had begun to note delays in the completion of shallow water

drilling projects “[l]ate in the second quarter.”20 In their

complaint, appellants alleged that because Torch knew, during a

period of time before the IPO, that completion of some shallow

drilling projects had been delayed, and in turn that these delays

could have an impact on demand for their services, therefore the

price decrease, which appellants allege led to the delays, was an

“event[] that will cause a material change in the relationship

between costs and revenues,” and accordingly should have been

revealed as a “trend.”21 17 C.F.R. § 229.303(a)(3)(ii).

activities and the demand for Torch’s services. Therefore, Torch
does not respond to short-term price fluctuations.
20
As the second quarter ended June 30, 2001, Torch may have
known about some of these completion delays before they issued
the prospectus.
21
Although the press release noted that there were delays in
completion of drilling projects, Torch claims it was not a
“corrective disclosure,” because it had no impact on their stock
price. Moreover, the press release does not correlate the

24
 In Oxford, the court said, “[t]he obvious focus [of Item

303(a)(3)(ii)] is on preventing the latest reported results from

misleading potential investors, thereby promoting a more accurate

picture of the registrant's future prospects.” 297 F.3d at 1192.

The court went on to state,

“[t]he prospectus stated that [the company] had lost
almost $80 million since its inception and that there
could be no assurance that the company would ever be
profitable. If booming [sales of a particular drug] had
carried [the company] for the previous several reported
quarters but suddenly and significantly declined, a
potential investor could be mislead by those reported
results unless [the company] disclosed the importance of
[that drug] and discussed the downward trend in [its]
sales. That is the type of situation Item 303(a)(3)(ii)
was designed to address.”22 Id.

Essentially, the company would be at fault for being negligent in

failing to discuss that sort of information. However, we

conclude that the appellants here have not alleged enough to meet

such a requirement.

In the August 2, 2001 press release, Torch announced that

revenues for the second quarter of 2001 were $14.3 million, up

from $11.0 million for the year-ago quarter, a matter appellants

do not dispute. However, the appellants allege that the press

release also lends them support. The press release reveals that

decrease in natural gas prices and the delays in completion.
22
The court continued, “[b]ut that is not this case. Because
the prescription information did not render [the company’s]
reported results any materially less indicative of the company's
future prospects, Item 303(a)(3)(ii) does not require its
disclosure.” Id. at 1192.

25
 “[f]ollowing the Company’s IPO, domestic natural gas and
crude oil prices experienced a decline. This created
caution throughout the Industry with a resultant
dampening of market growth. Late in the second quarter
the Company started to note delays in the completion of
shallow water drilling projects. However, there are more
jack-up drilling rigs operating than was the case during
the last market peak . . . . The Company believes that
these working rigs are simply taking longer to complete
individual wells, partially a result of drilling deeper
at each new well location.”

It appears that Torch attributes the “dampening of market growth”

and delays not only to decreased prices, as the appellants would

have us believe, but also to the deeper well depths. Appellants

allege nothing to suggest the incorrectness, much less the

impropriety, of such attribution.23

Appellants also discuss the contents of Torch’s January 22,

2001 draft prospectus (filed with the SEC but later withdrawn and

never issued). They note that that draft prospectus included the

following statement: “significant or prolonged reduction in oil

and natural gas prices would likely depress offshore drilling and

development activity.” Appellants suggest that this statement in

the draft prospectus reflects that Torch anticipated that

decreases in natural gas prices preceding the IPO would have a

material adverse impact on their revenue within the meaning of

Item 303. However, the statement is also included in the here

23
We also note that appellants do not allege any incorrectness in the August 2 press release
statement that more jack-up rigs were then operating than during the last market peak. We
further observe that the August 2 press release refers to a decline in domestic natural gas and
crude oil prices, and does not state what portion (if any) of the completion delays related to gas
wells.

26
challenged prospectus, giving warning that Torch’s revenue would

be impacted by a decline in natural gas prices. It was not a

predictive statement, but rather a cautionary one.

Finally, appellants note that the January 22, 2001 draft

prospectus indicated that it would include a graph reflecting

NYMEX closing natural gas prices “from approximately 1/1/97

through approximately 1/11/01.” They argue that had a similar

graph, extending to June 2001, been included in the June 7, 2001

prospectus it would have reflected the decline in prices between

December 27 and early June 2001. We conclude that this adds

nothing to appellants’ other arguments. The prospectus at issue

here, that of June 7, 2001, included no graph or table or

statement of daily (or weekly or monthly) natural gas prices over

any period of time; it merely correctly stated that “[f]rom two

year lows in February 1999 to June 6, 2001, . . . NYMEX closing

current natural gas contract prices have increased by

approximately 133%,” and it specifically noted the volatile

nature of gas prices and that they had varied substantially.24

Moreover, such prices were a part of the readily available public

domain information.

In a similar case, Zucker v. Quasha, 891 F. Supp. 1010, 1015

(D.N.J. 1995), aff’d, 82 F.3d 408 (Table)(3d Cir. 1996), a

24
We also observe that the amended complaint makes no mention of or reference to the
January 2001 draft prospectus.

27
prospectus issued three days before the close of the first

quarter of 1994. The issuer was a retailer whose policy allowed

customers to return unsold merchandise, and the prospectus gave

the previous year’s (1993) rate of returns, which was 13%.

However, plaintiffs claimed that during the first quarter of

1994, the rate of returns had increased to 15%. The court

determined that the retailer did not have to include this

information in its prospectus, and dismissed plaintiffs’ claim

that the accurate representation of the 13% return rate for the

last full year before the public offering was misleading.

Though it did not expressly address trends in Item 303, we

find Zucker to be informative. Like Torch’s disclosures, the

Zucker court noted that the 13% return rate, which was accurate,

“was not a prediction but a statement of historical performance.

. . . [The retailer] did not predict future return rates or

suggest that the 1993 rate was expected to continue. Therefore,

the subsequent increase in the return rate during the first

quarter of 1994, in progress at the time of the Public Offering,

did not render this statement of historical fact illegally false

or misleading.” 891 F.Supp. at 1015.

The court also stated, “data concerning a quarter that is in

progress is necessarily incomplete.” Id. at 1016. Although here

the decrease in the price of natural gas had been occurring since

December 28, 2000, there was no complete picture, nor did Torch

28
make representations or infer that the price would continue,

either up or down, but rather highlighted its volatility. We

hold that the referenced decrease in the price of natural gas was

not a trend required to be disclosed by Item 303. See also In re

Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1418-19

(9th Cir. 1994) (court did not impose liability based upon

corporate official’s failure to disclose financial data for the

fiscal quarter in progress where claim alleged that the

prospectus failed to disclose how far sales were lagging behind

internal sales projections for the quarter in progress during

IPO).

3. Section 15 claim

It is questionable whether appellants adequately briefed

their section 15 claim, 15 U.S.C. § 77o, to this Court.25

Regardless, because they have failed to allege a Section 11

violation, their section 15 claim must fail as well. See Klein

v. General Nutrition Companies, Inc., 186 F.3d 338, 344 (3d Cir.

1999).

Conclusion

25
Section 15 concerns Liability of controlling persons:
“Every person who, by or through stock ownership, agency, or
otherwise . . . controls any person liable under section[] 77k .
. . shall also be liable jointly and severally with and to the
same extent as such controlled person to any person to whom such
controlled person is liable, unless the controlling person had no
knowledge of or reasonable ground to believe in the existence of
the facts by reason of which the liability of the controlled
person is alleged to exist.” 15 U.S.C. § 77o.

29
 The district court properly granted defendants’ motions to

dismiss because the statements in the prospectus concerning

natural gas prices were neither false nor materially misleading.

Furthermore, the decrease in the price of natural gas was not a

trend required to be disclosed by Item 303 of SEC regulation S-K.

For the foregoing reasons, the district court’s grant of

defendants’ Rule 12(b)(6) motions to dismiss is

AFFIRMED.

30