The plaintiffs in this class action under sections 10(b) and 20(a) of the Securities Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), and the SEC’s Rule 10b-5, 17 C.F.R. § 240.10b-5, seek to recover the damages they claim to have suffered as a consequence of buying stock in Centel Corporation during a period in which, according to the complaint, the defendants (Centel and two of its officers) were exaggerating the prospects for a planned auction of the company. The district judge granted summary judgment for the defendants on the ground that there had been no actionable misrepresentations.
Centel comprised local telephone companies and cellular phone systems. The cellular-phone business was hot, and the local-telephone business cool, and Centel’s board believed that the combination was unlovely to investors and that the firm’s assets would be worth more if the company were sold either as a unit (presumably to a telecommunications firm whose assets would make a good fit with Centel’s assets) or in pieces. The disadvantage of a sale in pieces was that Centel might owe corporate income tax on the difference between the sale price of its assets and its basis in the assets, which was low, whereas a merger of the entire firm into another firm would avoid corporate income tax. See Boris I. Bittker & James S. Eustice, Federal Income Taxation of Corporations and Shareholders ¶¶ 12.42[1], 12.62[2] (6th ed.1994); 1 Martin D. Ginsburg & Jack S. Levin, Mergers, Acquisitions, and Buyouts: A Transactional Analysis of the Governing Tax, Legal, and Accounting Considerations §§ 302, 603 (1997).
Rather than just seek out possible purchasers and negotiate privately with them, Centel decided to organize an auction at which bidders could bid on the whole company or on parts of it as they wished. The auction was intimated in a public announcement by Centel on January 23, 1992, that it had hired two prominent investment banks to “explore strategic alternatives to maximize shareholder value, including the possible sale of the company.” On the day of the announcement, the price of Centel’s shares rose from $37 to almost $48. Centel’s investment bankers explored the possibility of a sale of part or all of the company to one or more of the seven Baby Bells or GTE, but all eight of these companies were noncommittal. Either despite or because of its failure to extract a quick commitment, Centel on February 17 confirmed its intention to conduct an auction, announcing that its board of directors had “decided to solicit proposals for the purchase of all or part of the company as a result of the indications of interest received since the
The countdown to the auction continued. On March 25, Pacific Telesis, one of the Baby Bells and a potential bidder for Centel’s Nevada properties, a major asset, announced that it wouldn’t bid for them after all. Centel reacted with a public statement that “the bidding process continues to go very well” and “very smoothly.” By this time, several other large potential purchasers had expressed a lack of interest as well, and Centel was beginning to suspect that it would receive fewer bids than it had expected. The price of its stock had drifted lower than its peak on January 23, but it was still above $40.
April 16 was the deadline for the submission of bids. As the day approached, Centel’s investment bankers visited several potential purchasers in an effort to stimulate bids. On April 13, Centel’s chief executive officer announced publicly that there was “widespread interest almost down to every [Centel telecommunications] exchange,” and the next day the Chicago Tribune reported that “people involved in the auction of Centel Corp. said Monday [April 12] that as many as 35 to 40 parties have explored submitting bids for the Chicago company or its pieces by Thursday’s deadline. An investment banker for Centel provided the number of parties that have conducted so called due-diligence reviews of the company’s books.”
We must pause here to explain the term “due-diligence reviews.” “Due diligence” is used in the corporate context in two senses. The first, which is irrelevant to this case, is as a defense to liability for a false registration statement. See 1 William E. Knepper & Dan A. Bailey, Liability of Corporate Officers and Directors § 13-4, p. 521 (5th ed.1993). The second sense of the term (which one encounters in a variety of legal contexts besides corporate law; see, e.g., Clark v. Robert Young & Co., 5 U.S. (1 Cranch) 181, 192-93, 2 L.Ed. 74 (1803)) is simply the exercise of due care. In re Integrated Resources, Inc., 3 F.3d 49, 51 (2d Cir.1993). Boards of directors have to be careful before committing themselves to major transactions, lest they be sued by disgruntled shareholders if the transaction is a bust. Right after announcing the auction, Centel had designated a room in which potential bidders could inspect confidential data concerning Centel’s operations and finances. In order to be admitted to the data room, they had to sign an agreement promising not to use the data for any purpose other than formulating a bid. Visiting the data room was an appropriate step in conducting a due-diligence review of a contemplated purchase of some or all of Centel’s assets. Whether it was a necessary step is another question. Centel was a publicly regulated company, so a great deal of information about it was available without a visit to the data room; its “books” were largely a matter of public record. A prospective purchaser might deem the incremental value of the data in the data room offset by the potential liability if he signed, and was later accused of violating, the confidentiality agreement. Signing the agreement might thus inhibit the signer’s ability to compete with Centel, should Centel survive the auction.
We don’t know exactly what the term “due-diligence reviews of the company’s books” as it appeared in the Tribune article means, because the reporter who wrote the article was not deposed. What we do know is that only 16 firms visited the data room (and two of those announced before the interview with the Tribune's reporter that they had lost interest in bidding), although at least two dozen had expressed a serious interest in submitting bids and perhaps a dozen others had expressed some interest, which would
The auction was held on April 16 as scheduled, but it was a bust. Only seven bids were submitted, none for the whole company. Although Centel kept mum, it accepted none of the bids. Instead it approached Sprint hat in hand and quickly negotiated a sale of the entire company to Sprint at a price equivalent to only $33.50 a share, which was $9 below the then-current market price and roughly 10 percent below the market price before the auction was first intimated. As soon as the deal with Sprint was announced, on May 27,1992, the value of Centel’s shares plummeted, from $42.50 a share to $32. The plaintiff class consists of investors who bought Centel stock between the formal announcement of the auction on February 17 and just before the announcement of the purchase of the company by Sprint. Some of these investors lost as much as $15 a share, almost a third of the price they had paid.
The ultimate issue is whether Centel made false representations about the progress of the auction and if so whether any of those representations were material, meaning that a reasonable investor would have considered them a reason to buy (or not sell, if he already owned) stock in Centel. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32,108 S.Ct. 978,108 S.Ct. at 983-84, 99 L.Ed.2d 194 (1988); Searls v. Glosser, 64 F.3d 1061, 1066 (7th Cir.1995); Pommer v. Medtest Corp., 961 F.2d 620, 623 (7th Cir. 1992); In re Time Warner Inc. Securities Litigation, 9 F.3d 259, 267-68 (2d Cir.1993). The best candidate for a material misrepresentation is the one reported in the Tribune article, which the plaintiffs not implausibly interpret to mean that Centel was telling the investing public that 35 to 40 companies had visited the data room; this would indicate a very high level of interest because, as we said, visitors to the data room were only a subset of serious potential bidders. The article, however, is hearsay: an out-of-court statement offered to prove the truth of its contents — to prove, that is, that Centel or its investment bankers made the comments attributed to them. And hearsay is inadmissible in summary judgment proceedings to the same extent that it is inadmissible in a trial, Bombard v. Fort Wayne Newspapers, Inc., 92 F.3d 560, 562 (7th Cir.1996); Evans v. Technologies Applications & Service Co., 80 F.3d 954, 962 (4th Cir.1996); Schwimmer v. Sony Corp. of America, 637 F.2d 41, 45 n. 9 (2d Cir.1980), except that affidavits and depositions, which (especially affidavits) are not generally admissible at trial, are admissible in summary judgment proceedings to establish the truth of what is attested or deposed, Fed.R. Civ. P. 56(c), (e); Waldridge v. American Hoechst Corp., 24 F.3d 918, 921 (7th Cir.1994); Winskunas v. Bimbaum, 23 F.3d 1264, 1267-68 (7th Cir.1994), provided, of course, that the affiant’s or deponent’s testimony would be admissible if he were testifying live. There is no similar dispensation for newspaper or magazine articles, which not being attested are considered less reliable than affidavits or depositions.
Some courts have, it is true, allowed letters, articles, and other unattested hearsay documents to be used as evidence in opposition to summary judgment, Church of Scientology Flag Service Organization, Inc. v. City of Clearwater, 2 F.3d 1514, 1530 and n. 11 (11th Cir.1993); Pennington v. Vistron Corp., 876 F.2d 414, 426 n. 15 (5th Cir.1989)provided some showing is made (or it is obvious) that they can be replaced by proper evidence at trial. Pritchard v. Southern Co. Services, 92 F.3d 1130, 1135, amended on rehearing on other grounds, 102 F.3d 1118 (11th Cir.1996); Williams v. Borough of West Chester, 891 F.2d 458, 465 n. 12 (3d Cir.1989); Catrett v. Johns-Manville Sales Corp., 826 F.2d 33, 38 (D.C.Cir.1987); Edward J. Brunet, Martin H. Redish & Michael A. Reiter, Summary Judgment: Federal Law and Practice § 5.06, p. 120 (1994). An example would be a letter inadmissible only because the signature on it had not been verified and there was no doubt that it could and would be. Any broader dispensation to disregard the rules of evidence in summary judgment proceedings would make it impossible ever to grant summary judgment, and, as pointed out by Brunet et at., id. at 119, is not supported by the Supreme Court’s statement in Celotex Corp. v. Catrett, 477 U.S.
There are many exceptions to the rule that makes hearsay evidence inadmissible at a trial; if none of them is applicable, the “evidence” submitted in opposition to summary judgment is likely to be pretty worthless. No doubt there should be an exception for the cases just mentioned in which it hasn’t been feasible to obtain better evidence but it is reasonably clear that such evidence will be available at trial. That exception (possibly implicit in the Federal Rules of Evidence, as we are about to see, as well as in the ease law) isn’t applicable here. Although the plaintiffs’ lawyer told us at argument that she had been unable to depose the Tribune’s reporter because of the discovery deadline set by the district judge, this contention does not appear in her briefs and we treat it as waived.
In these circumstances, the article cannot be treated as if it were attested. It was therefore admissible in summary judgment proceedings only if it fit into one of the exceptions permitting the use of hearsay evidence at trial. The only exception claimed to be applicable is the catchall exception for cases in which the out-of-court declarant, though available to testify, is not called. This exception requires that the statement be “more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts” and have “circumstantial guarantees of trustworthiness” equivalent to those of the enumerated exceptions. Fed.R.Evid. 803(24). Neither condition is met, the first because the plaintiffs could easily have obtained the reporter’s affidavit even if it was for some reason infeasible to depose him.
The problem concerning satisfaction of the second condition is not so much doubt as to whether the reporter was telling the truth— he had no motive to lie — but uncertainty about what he meant in the passage that we quoted. He could have meant that Centel had told him that 35 to 40 firms had expressed interest in bidding; but this was true, as we have seen. The intensity of their interest is another matter, but would be difficult to gauge in advance, so “interest” cannot reasonably be interpreted as greatly interested. Prospective buyers do not go out of their way to trumpet interest in the property that they want to buy, lest they induce the seller to raise his price or, in the case of an auction, induce other bidders to raise their bids because they think that the property is worth more than they thought or that they must in any event pay more to get it because they’re competing with someone who sets a very high value on it. To avoid jacking up the bidding in this way, prospective bidders will want to avoid seeming too eager. So it is entirely reasonable for the seller to think that there are more really interested bidders than have actually indicated a determination to bid.
Alternatively, the reporter may well have meant that Centel had told him that 35 to 40 firms had visited the data room. This would be false, since only 16 had done so. Would it have been a material falsehood? We do not know what investors would have assumed if Centel had kept mum throughout the entire process; and number of potential bidders is an inherently ambiguous indicator of the likely outcome of an auction — a large number of potential bidders could mean that Centel was expected to sell off its properties at bargain-basement prices; a lion’s carcass will attract a lot of hyenas. We need not decide. We may assume that the precise number of visitors to the data room would have been material to investors. But it is unclear from the grammar of the quoted passage whether “the number of parties that have conducted so-called due-diligence reviews of the company’s books” is the same number as the number of parties (35 to 40) who had “explored submitting bids.” One wouldn’t think exploration a synonym for due diligence, but who knows? The number of explorers (35 to 40) appears in the sentence just before the sentence discussing due-diligence reviews, and the second
We cannot even be certain, though it seems likely, that the reporter meant by “due-diligence reviews of the company’s books” visits to the data room. Centel or its investment bankers may have told him the number of potential bidders and mentioned that a number of firms had reviewed data in the data room, but without specifying that number, and the reporter — or an editor at the Tribune — may have conflated the two classes of potential bidder. For that matter it is possible that the reporter didn’t intend to conflate them, but merely wrote clumsily or was edited clumsily. The record contains no information about the editing process at the Tribune or the reporter’s sophistication in financial reporting.
We acknowledge the possibility that even if statements by Centel or its investment bankers were garbled by the press, Centel would not be privileged to sit by and allow investors to be misled by the garble. While it is true, as we shall see, that in this circuit, and maybe now in all circuits (as a result of the recent amendments to the securities laws), there is no duty to correct a prediction falsified by subsequent events, it needn’t follow that a corporation or its advisors can as it were “adopt” a misleading press account of an interview that they gave, in order to influence the markets. (Obviously a corporation has no duty to correct rumors planted by third parties. Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 949 (2d Cir.1969) (Friendly, J.); see also In re Time Warner Inc. Securities Litigation, supra, 9 F.3d at 265; State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843, 850 (2d Cir.1981). The rumor might be planted by the target of a hostile takeover and be designed to elicit, if there is a legal duty to correct inaccurate rumors, a premature disclosure of the takeover firm’s intentions.) But we need not decide this; it is not argued by the plaintiffs; their argument is that the Tribune article was an accurate report of what Centel’s investment banker told the writer of the article, and this we simply cannot know because of the plaintiffs’ failure to authenticate it.
Issues of the admissibility of evidence are for the district judge to resolve in the first instance, subject to the light appellate touch signified by the “abuse of discretion” formula. E.g., Whitted v. General Motors Corp., 58 F.3d 1200, 1204 (7th Cir.1995); Cavado v. Star Enterprise, 100 F.3d 1150, 1153-54 (4th Cir.1996); Daubert v. Merrell Dow Pharmaceuticals, Inc., 43 F.3d 1311, 1315 (9th Cir.1995). The district judge discussed the Tribune article as a source of possible misrepresentation, which means he didn’t exclude it from evidence. But because he didn’t discuss the question of admissibility, though it had been raised, we cannot be certain that he even considered it. He didn’t think he had to consider it, because he believed that even if Centel had lied about the number of visitors to the data room, this was not a material misrepresentation.
When the district judge has not addressed the admissibility of possibly critical evidence in summary judgment proceedings, the appellate court must decide whether the judge would have abused his discretion had he admitted it. If the judge would have abused his discretion to admit the evidence, then of course the appellate court will not consider it in deciding whether to uphold summary judgment. If the judge would not have abused his discretion to admit the evidence, then the appellate court will consider it and if, with it considered, there is enough evidence to defeat summary judgment, the appellate court will vacate the grant of summary judgment to give the judge a chance to exercise his discretion. If on remand the judge decides to exclude the evidence in the proper exercise of his discretion, and the evidence was crucial to the appellate court’s determination that summary judgment should not have been granted, the district judge should reinstate the summary judgment. Id. at 1315. For his action on remand in properly excluding the evidence would have eliminated the evidentiary basis for a denial of summary judgment.
We are more certain that the Tribune article is inadmissible — that a district judge would be abusing his discretion to admit it and thus that it is not available in opposition
We doubt that nonspecific representations that an auction process is going well or going smoothly could, in the circumstances of this case (the significance of this qualification will become clear shortly), influence a reasonable investor to pay more for a stock than he otherwise would. Everybody knows that someone trying to sell something is going to look and talk on the bright side. You don’t sell a product by bad mouthing it. And everybody knows that auctions can be disappointing. It would be unreasonable for investors to attach significance to general expressions of satisfaction with the progress of the seller’s efforts to sell, just as it would be unreasonable for them to infer from a potential bidder’s apparent lack of enthusiasm that the bidder was uninterested rather than just was jockeying for a better price. The heart of a reasonable investor does not begin to flutter when a firm announces that some project or process is proceeding smoothly, and so the announcement will not drive up the price of the firm’s shares to an unsustainable level—
Unless (the qualification we alluded to) the announcement is concealing a disaster. Suppose that on February 18 Centel’s lawyers had told Centel that it couldn’t legally sell any of its assets because they were encumbered and the lienors would not give their consent to a sale. In these circumstances to have announced that the auction process was going smoothly would have been materially deceptive. “Going smoothly” may mean nothing more than — going; but it means at least that; if the process has been stopped, a representation that it is continuing may well induce purchases of the stock at a price that reflects the prospect that the process will continue to its end.
It would not be a defense in such a ease that it was in the interest of the investors as a whole, though contrary to the interest of the hapless investors who bought as a result of the concealment, to drum up interest in the sale by whatever means, in the hope that some sucker would buy. All that that would mean is that the winners from the fraud would outnumber the losers among the seller’s investors. There would be another set of losers, the owners of the deceived buyer. The cases do not try to net out the gains from fraud in deciding how much if any damages to award the victims of the fraud. The losers get back what they lost; most of the winners get to keep what they gained (anyone who bought stock in Centel on January 22 and sold it on or before May 26 was a winner); no effort is made to compute the net social cost. See, e.g., Hoxworth v. Blinder, Robinson & Co., 903 F.2d 186, 203 n. 25 (3d Cir.1990); Wool v. Tandem Computers Inc., 818 F.2d 1433, 1437 (9th Cir.1987); Donald C. Langevoort, “Capping Damages for Open-Market Securities Fraud,” 38 Ariz.L.Rev. 639, 640 n. 4 (1996). Maybe the effort
Procedurally, the auction process went as smoothly as could be desired; no legal or other glitches derailed it. Substantively, the process did not generate as much interest as Centel would have liked — but how much interest is that? The company was sold to Sprint for $4 billion. Centel would have been delighted if the auction had yielded $8 billion. Even if it had made a public prediction of such a result, it would have had no legal duty, in this circuit anyway and perhaps in no circuit after the Private Securities Litigation Reform Act of 1995, Pub.L. No. 104-67, § 102(b), 109 Stat. 737, 755 (codified at 15 U.S.C. § 78u-5(d)), to make a public revision of the prediction when it became clear that no such bonanza was in the offing. Grassi v. Information Resources, Inc., 63 F.3d 596, 599 (7th Cir.1995); Stransky v. Cummins Engine Co., 51 F.3d 1329, 1331-32 (7th Cir.1995). It made no prediction. It never even predicted that there would be a purchaser for the whole caboodle. The plaintiffs’ briefs actually emphasize (presumably because they don’t want to get tripped up by Grassi and Stransky) that this is not a case about predictions. Centel’s chief executive officer stated repeatedly to the investment community that he did not know how many bids would be received. He even stated that the auction might not obtain adequate value for the shareholders, in which event the company would explore other possibilities, of which the “survivor entity” was one and sale outside the auction process another.
An utterly candid statement of the company’s hopes and fears, with emphasis on the fears, might well have pushed the company’s stock below $40, but perhaps only because, given the expectation of puffing, such a statement would be taken to indicate that the prospects for the auction were much grimmer than they were. Where puffing is the order of the day, literal truth can be profoundly misleading, as senders and recipients of letters of recommendation well know. Mere sales puffery is not actionable under Rule 10b-5. Searls v. Glasser, supra, 64 F.3d at 1066; Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1217-18 (1st Cir.1996); San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 811 (2d Cir.1996); Raab v. General Physics Corp., 4 F.3d 286, 289 (4th Cir.1993).
Centel cannot be faulted for having failed to tell the stock market that there would be only seven bidders and their bids would be no good. Had it known this from the start it wouldn’t have announced an auction. Hindsight is not the test for securities fraud. Pommer v. Medtest Corp., supra, 961 F.2d at 625; DiLeo v. Ernst & Young, 901 F.2d 624, 628 (7th Cir.1990); San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., supra, 75 F.3d at 812; Denny v. Barber, 576 F.2d 465, 470 (2d Cir.1978) (Friendly, J.). The question is whether Centel said things that were so discordant with reality that they would induce a reasonable investor to buy the stock at a higher price than it was worth ex ante. The answer, if we limit our consideration to the admissible evidence, as we must, is no. Centel put a rosy face on an inherently uncertain process; investors would have expected no less; the
Affirmed.