UNITED STATES COURT OF APPEALS
Tenth Circuit
Byron White United States Courthouse
1823 Stout Street
Denver, Colorado 80294
(303) 844-3157
Patrick J. Fisher, Jr. Elisabeth A. Shumaker
Clerk Chief Deputy Clerk
August 20, 1997
TO: All recipients of the captioned opinion
RE: 96-4011, Grossman v. Novell, Inc., et al.
August 8, 1997
Please be advised of the following correction to the captioned decision:
In the attorney designation section on the first page of the opinion, counsel
Keith E. Eggleton’s name is misspelled; specifically, it should not have an “s” in
it. Please make the correction.
Very truly yours,
Patrick Fisher, Clerk
Susie Tidwell
Deputy Clerk
F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
AUG 8 1997
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
BRAD GROSSMAN,
Plaintiff-Appellant,
v.
NOVELL, INC., ROBERT J. No. 96-4011
FRANKENBERG, RAYMOND J.
NOORDA, STEPHEN C. WISE, and
ADRIAAN RIETVELD,
Defendants-Appellees.
Appeal from the United States District Court
for the District of Utah
(D.C. No. 95-CV-54)
Andrew D. Friedman, Berman Gaufin & Tomsic, Salt Lake City, Utah (Stuart D.
Wechsler, Jay D. Gurmankin, Wechsler Harwood Halebian & Feffer LLP, New
York, New York and Lawrence G. Soicher, New York, New York with him on the
briefs), for Plaintiff-Appellant.
Boris Feldman, Wilson, Sonsini, Goodrich & Rosati, P.C., Palo Alto, California
(Nina F. Locker, Keith E. Eggleton, Wilson, Sonsini, Goodrich & Rosati, Palo
Alto, California and Max D. Wheeler, Stephen J. Hill, Snow, Christensen &
Martineau, Salt Lake City, Utah with him on the briefs), for Defendants-
Appellees.
Before EBEL, KELLY, and BRISCOE, Circuit Judges.
EBEL, Circuit Judge.
Plaintiff-Appellant Brad Grossman brought this putative shareholder class
action in the District of Utah based on alleged statements by Novell, Inc.
(“Novell”), a Utah-based company and leading provider of computer network
operating software, and by some of its officers, regarding Novell’s merger with
WordPerfect Corp. (“WordPerfect”), another Utah company and the producer of a
leading word processing application. Grossman alleged violations of §§ 10(b)
and 20(a) of the Securities Exchange Act and common law fraud arising out of a
seven percent decline in the price of Novell stock after the company announced
disappointing earnings for the third quarter of its 1994 fiscal year. The District
Court granted Novell’s motion to dismiss, ruling that Plaintiff had failed to allege
a materially misleading statement or omission, that Novell had disclosed the risks
of the merger, and that Plaintiff had not pled fraud with sufficient particularity.
Additionally, the district court denied Plaintiff’s request to amend his complaint
pursuant to Fed. R. Civ. P. 15(a). Plaintiff now appeals pursuant to 28 U.S.C. §
1291. We affirm.
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Background
This case concerns statements made by defendants, Novell, Inc. and several
of its present and past officers and directors, 1 relating to the merger between
Novell and WordPerfect and the effect of the merger on Novell’s business
prospects. Novell, a public company headquartered in Provo, Utah, was the
world’s leading provider of network operating software. In March 1994, Novell
announced it would acquire and merge with WordPerfect, a privately held
company based in Orem, Utah. WordPerfect developed and sold software
applications, including a leading word processing program. To complete the
WordPerfect merger, Novell issued stock, which it exchanged for the outstanding
WordPerfect shares. In connection with the issuance of this stock, Novell filed a
registration statement with the Securities and Exchange Commission (“SEC”) on
April 22, 1994, and filed three amendments to the registration statement in June
1994. During this same time Novell purchased the Quattro Pro spreadsheet
program from Borland, Inc. for approximately $145 million in cash.
The registration statement included a warning that the integration of Novell
and WordPerfect could be difficult due to intense competition in WordPerfect’s
1
Defendant Raymond J. Noorda is Novell’s former chairman. Defendant Robert
J. Frankenberg is Novell’s president, chief executive officer, and chairman. Defendant
Adriaan Rietveld was at the time of the merger the chief executive officer of
WordPerfect, and later became president of Novell’s WordPerfect/Novell applications
group. Defendant Stephen C. Wise is Novell’s senior vice-president for finance.
-3-
market sector and the company’s declining financial performance, and cautioned
that Novell’s earnings and stock price could fluctuate in the quarters following
the merger. The registration statement further cautioned that the acquisitions of
WordPerfect and Quattro Pro could be difficult because they were large
acquisitions in new markets where Novell did not have management or marketing
experience. The registration statement warned that no assurance could be given
that the various businesses could be successfully integrated. Also, the dominant
competition expected from Microsoft was stressed. In addition, Novell warned
that the merger and acquisition would lead to higher expenditures in sales,
marketing and support, and higher other costs. Novell predicted that its future
earnings and stock prices could be subject to “significant volatility, particularly
on a quarterly basis” and warned that WordPerfect’s market was “characterized by
severe competitive pressure” that could “materially adversely affect Novell.” 2
In the first amendment to the registration statement, which was filed on
June 10, 1994, Novell amended its pro forma financial statements to reflect that
WordPerfect’s first quarter results were significantly worse than projected, and
that if the merger had been completed by the end of the second quarter, Novell’s
2
Grossman, the defendants, and the district court all referred liberally to the
Registration Statement and amendments thereto, both below and on appeal, even though
they were not explicitly incorporated in the complaint. Accordingly, we refer to them as
well based on the apparent consent of the parties that they can be considered in this
Motion to Dismiss.
-4-
net income per share would have been diluted by $.09 per share. This
amendment, as well as the later amendments filed on June 20 and June 23, 1994,
reiterated the warnings included in the initial registration statement. In addition,
further disclosures were made. For example, the June 10 amendment to the
Registration Statement advised that “disruptions associated with the merger and
the acquisition of Quattro Pro have resulted in declines in sales of Quattro Pro in
recent periods.” Also, significant deteriorations in the sales and profitability of
WordPerfect were disclosed.
The merger was completed on June 24, 1994, five weeks before the end of
the third quarter. On August 19, 1994, Novell announced that its consolidated
third quarter earnings would fall between 15 and 20 percent below estimates
previously published by financial analysts, and that the company would recognize
a $120 million charge against earnings for the quarter. 3 The next business day,
August 22, 1994, Novell’s stock price fell from $15.12 per share to $14 per share,
a 7% drop.
Following the decline in the Novell stock price, Grossman, a Novell
shareholder, brought this action, seeking to certify a class of all purchasers of
Novell stock during the period between April 27, 1994, and August 19, 1994 (the
3
The charge reflected $114.4 million for research and development costs
associated with the acquisition of the Quattro Pro software program from Borland, Inc.,
and $5.8 million in merger expenses.
-5-
“Class Period”). The central allegation in the complaint is that beginning on
April 27, 1994, Novell issued a series of false and misleading statements and
omissions of material fact to the press and to financial analysts regarding the
effect of the merger on Novell’s then existing operations and near term earnings
potential. Significantly, Grossman does not claim false or misleading statements
in the registration statement or amendments thereto. The allegedly false and
misleading statements and omissions to the press allegedly inflated the price of
Novell stock during the period. The specific statements alleged by Grossman to
have been false and misleading are the following:
(1) a statement by defendant Wise on April 27, 1994, that there
were “indications” that WordPerfect was “gaining market
share . . . from less than 20% in 1992 to more than 40% today”
and that “the combination wouldn’t dilute future earnings;”
(2) a statement by defendant Frankenberg, on June 27, 1994, that
Novell had experienced substantial success in the integration
of the sales forces and operations of WordPerfect and that the
merger process had been moving “faster than we thought it
would;” Frankenberg also stated in the same June 27, 1994,
publication that “we have not slowed down the effort to create
new products, we’ve accelerated it” and that he believed there
was “a compelling set of opportunities” available to the new
Novell;
(3) Rietveld’s statement on June 28, 1994, that the merger had
been “perhaps the smoothest of mergers in recent history;”
(4) Frankenberg’s statement on June 28, 1994, that “he was
pleased with the accelerating pace of product development
since the acquisition was completed in March;” and,
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(5) Novell’s statement on July 20, 1994, that “[b]y moving rapidly
to a fully integrated sales force, we are leveraging our
combined knowledge of the expanding scope of network
solutions,’ . . . ‘Novell expects that network applications will
quickly reshape customer expectations and expand the role of
our channel partners in supporting end-user network
solutions.”
Grossman argues not only that these statements were misleading, but that
they gave rise to a duty on behalf of Novell to disclose that WordPerfect had
continued to experience declines in sales and revenues and increases in expenses;
that it had expended excessive amounts on its new spreadsheet research and
development; that it would be required to take $120 million in charges against
third quarter earnings; and that earnings projections for the third quarter of 1994
published by market analysts would not be achieved.
These statements and omissions were alleged to have given rise to three
causes of action: (1) violation of § 10(b) of the Securities and Exchange Act of
1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, 15 U.S.C. §
78j(b); 17 C.F.R. § 240.10b-5; (2) violation of Exchange Act § 20(a), 15 U.S.C. §
78t(a); and (3) common law fraud. Grossman alleges that this series of
misstatements and omissions created a “fraud on the market” which both falsely
inflated Novell’s stock price and gave rise to a duty to disclose accurate third
quarter earnings projections.
-7-
According to Grossman, financial analysts were initially pessimistic about
the near-term benefits of the WordPerfect merger, leading to a 25% decline in the
value of Novell stock in the weeks prior to the Class Period. However, because
of the statements, various analysts upgraded their evaluation of Novell to “buy.”
Additionally, by falsely inflating the price of Novell stock, defendants were able
to ensure the merger would be completed, and that 90% of shareholders would
vote to approve the merger, thus enabling Novell to use the Pooling Method in
accounting for the merger. Finally, the fraud allegedly enabled defendants to
raise capital by inducing option holders to exercise their stock options. The fraud
was allegedly exposed on August 19, 1994, when Novell announced its third
quarter earnings.
In response to the complaint, Defendants filed a motion to dismiss under
Fed. R. Civ. P. 12(b)(6) and 9(b). Defendants argued that: (1) the alleged
statements were not material; (2) Novell had no duty to disclose financial
projections for the third quarter during the class period; and (3) plaintiffs had not
pled the circumstances amounting to fraud, and specifically scienter on the part of
the defendants, with sufficient particularity.
The district court granted the defendants’ motion to dismiss. The court
concluded that: (1) Plaintiff had not pled facts showing material misstatements or
omissions; (2) Novell had sufficiently disclosed the risks of the merger; and (3)
-8-
Plaintiff had not pled scienter with sufficient particularity. Grossman v. Novell,
Inc., 909 F. Supp. 845, 848-50 (D. Utah 1995). Additionally, the court denied
Grossman’s motion to amend the complaint, ruling that any amendment would be
futile. Id. at 851-52. Grossman now appeals, claiming the district court erred on
the three securities law issues, and that the court abused its discretion in denying
leave to amend the complaint. We have jurisdiction under 28 U.S.C. § 1291.
Discussion
Grossman’s claims have been brought under Section 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 thereunder, 17 C.F.R. §
240.10b-5. 4 To state a claim under Rule 10b-5, a plaintiff must allege: (1) a
misleading statement or omission of a material fact; (2) made in connection with
the purchase or sale of securities; (3) with intent to defraud or recklessness; (4)
reliance; and (5) damages. Farlow v. Peat, Marwick, Mitchell & Co., 956 F.2d
982, 986 (10th Cir. 1992). Defendants do not dispute that the alleged statements
4
Although Appellant also raised claims under § 20(a) of the Exchange Act, 15
U.S.C. 78t(a), and common law fraud, those claims were not specifically argued in the
briefs and were not discussed by the district court. Accordingly, Grossman has waived
any separate arguments he may have as to dismissal of those claims.
Additionally, because Grossman’s complaint was filed on August 25, 1994, the
Private Securities Litigation Reform Act of 1995 (“PSLRA”), Pub. L. No. 104-67, 109
Stat. 743 (codified at 15 U.S.C. § 77z-1, 77z-2, 78u-4, 78u-5, 77t, 78o, 78t and 78u), is
not applicable here. The PSLRA applies only to cases filed after December 22, 1995,
the date the statute was enacted. See id. § 108.
-9-
and omissions were made in connection with the purchase or sale of securities,
and damages were likewise not disputed below. Additionally, where a claim is
based on the “fraud on the market” theory, as this one is, an investor’s reliance on
public material misrepresentations is presumed. Basic, Inc. v. Levinson, 485 U.S.
224, 247 (1988). Thus, in assessing the sufficiency of Grossman’s complaint, we
focus on whether Grossman has adequately alleged that defendants made a
misleading statement or omission of material fact, and that the statement or
omission was made with scienter.
Standard of Review
We review de novo a district court decision to dismiss a complaint pursuant
to Fed. R. Civ. P. 12(b)(6). 5 A Rule 12(b)(6) dismissal will be upheld “only when
it appears that the plaintiff can prove no set of facts in support of the claims that
would entitle the plaintiff to relief.” Roman v. Cessna Aircraft Co., 55 F.3d 542,
543 (10th Cir. 1995) (quotations omitted). In reviewing a Rule 12(b)(6)
dismissal, “we must accept all the well-pleaded allegations of the complaint as
true and must construe them in the light most favorable to the plaintiff.” Id. In
5
A dismissal for failure to plead fraud with sufficient particularity under
Fed. R. Civ. P. 9(b) is reviewed under the same standards as a Rule 12(b)(6)
dismissal. Seattle-First Nat’l Bank v. Carlstedt, 800 F.2d 1008, 1011 (10th Cir.
1986).
- 10 -
the securities context, Rule 12(b)(6) dismissals are difficult to obtain because the
cause of action deals primarily with “fact-specific inquir[ies]” such as materiality.
Basic, 485 U.S. at 240; Fecht v. Price Co., 70 F.3d 1078, 1080-81 (9th Cir. 1995)
(noting that materiality is typically a jury question), cert. denied, 116 S. Ct. 1422
(1996). Nonetheless, courts do not hesitate to dismiss securities claims pursuant
to Rule 12(b)(6) where the alleged misstatements or omissions are plainly
immaterial, or where the plaintiff has failed to allege with particularity
circumstances that could justify an inference of fraud under Rule 9(b). See, e.g.,
Farlow, 956 F.2d at 990; San Leandro Emergency Medical Group Profit Sharing
Plan v. Philip Morris Cos., 75 F.3d 801, 808-12 (2d Cir. 1996); In re Donald
Trump Sec. Litig., 7 F.3d 357, 371-73 (3d Cir. 1993), cert. denied, 114 S. Ct.
1219 (1994); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413 (9th Cir.
1994), cert. denied, 116 S. Ct. 185 (1995).
I
Grossman’s Allegations of Securities Fraud
The district court dismissed Grossman’s complaint under three distinct
theories. First, the court concluded the statements alleged by Grossman were not
material misstatements or omissions. Grossman, 909 F. Supp. at 848-49. The
court reasoned that the statements were not sufficiently specific, but rather were
the sort of “vague statements of corporate optimism” courts have found not to be
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actionable under the securities laws, and that these general statements of
corporate optimism did not give rise to a duty on the part of Novell to disclose
third quarter earnings projections. Id. Second, the court held that even if the
statements were materially misleading, any effect on Novell’s stock price caused
by the statements was nullified by cautionary language in Novell’s registration
statements, and thus Grossman’s claim was barred under the “bespeaks caution”
doctrine. Id. at 850. Third, the court concluded Grossman had not alleged fraud
with sufficient specificity under Fed. R. Civ. P. 9(b). Id. at 851-52.
We agree with the district court that Grossman has failed to state a cause of
action under the securities laws. For several reasons, none of the alleged
statements or omissions satisfies the materiality element of a 10b-5 claim.
Although several of the alleged statements were properly characterized as a
“vague statement of corporate optimism,” the remainder of the statements were
sufficiently specific that dismissal under that rubric was improper. However, the
remaining statements and omissions were properly dismissed either because
Grossman has not made sufficient allegations that many of the statements were
actually false when made or because the specific cautions in Novell’s registration
statement and amendments thereto precluded the possibility that the statements
could have been materially misleading. Further, we agree with the district court’s
conclusions that Novell had no duty to disclose the information allegedly omitted,
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because Novell did not make any materially misleading statements that would
give rise to such a duty. Because we dispose of all claims on these grounds, we
do not address the issue whether Grossman pled scienter with sufficient
particularity to satisfy Fed. R. Civ. P. 9(b).
A.
Materiality
To satisfy the first element of a 10b-5 claim, a plaintiff must allege facts
showing the defendant made an untrue statement of material fact, or failed to state
a material fact necessary to make the statements that were made not misleading.
17 C.F.R. § 240.10b-5. A statement or omission is only material if a reasonable
investor would consider it important in determining whether to buy or sell stock.
See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); Basic, 485
U.S. at 231-232. Whether information is material also depends on other
information already available to the market; unless the statement “significantly
altered the ‘total mix’ of information” available, it will not be considered
material. TSC Indus., 426 U.S. at 449.
In applying the materiality element, courts have identified several
categories of statements which are not considered materially misleading. Two
such categories are relevant to the statements and omissions at issue here:
statements considered immaterial because they are only vague statements of
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corporate optimism, and statements considered immaterial because other
documents available to the investing public “bespoke caution” about the subject
matter of the alleged misstatement at issue.
Statements classified as “corporate optimism” or “mere puffing” are
typically forward-looking statements, or are generalized statements of optimism
that are not capable of objective verification. 6 Vague, optimistic statements are
not actionable because reasonable investors do not rely on them in making
investment decisions. See Raab v. General Physics Corp., 4 F.3d 286, 289 (4th
Cir. 1993) (statements in Annual Report that company expected “10% to 30%
growth rate over the next several years” and was “poised to carry the growth and
success of 1991 well into the future” held to be immaterial “soft ‘puffing’”
statements); San Leandro Emergency Medical Group Profit Sharing Plan v. Philip
Morris Cos., 75 F.3d 801, 811 (2d Cir. 1996) (statement that company was
“‘optimistic’ about [its earnings] in 1993" and that it “should deliver income
growth consistent with its historically superior performance” held to be mere
“puffery” and to “lack the sort of definitive positive projections that might require
later correction”) (emphasis in original) (internal quotations omitted); Hillson
6
This is not to say that forward-looking statements cannot be material. The
Supreme Court in Virginia Bankshares v. Sandberg, 501 U.S. 1083, 1093-94 (1991),
made it quite clear that a statement as to beliefs or opinions (there an opinion as to the
fair current value of a tender price) may be actionable if the opinion is known by the
speaker at the time it is expressed to be untrue or to have no reasonable basis in fact.
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Partners Ltd. v. Adage, Inc., 42 F.3d 204, 212-14 (4th Cir. 1994) (statements in
press release that year would “produce excellent results” and that “significant
sales gains should be seen as the year progresses” held to be mere general
predictions and not material as a matter of law); Searls v. Glasser, 64 F.3d 1061,
1066-67 (7th Cir. 1995) (holding that statements that a company was “recession-
resistant” and that it would maintain a “high” level of growth were too vague to
constitute material statements of fact); In re Storage Technology Corp. Sec. Litig.,
804 F. Supp. 1368, 1372 (D. Colo. 1992) (statement of being “proud” of a
particular product and opining that it would be a “blowout winner” were mere
puffing and could not support a claim because no reasonable person would be
misled by them); In re Software Publishing Sec. Litig., 1994 WL 261365, at *4-*7
(N.D. Cal. Feb. 2, 1994) (dismissing claims based on statement that company
believed it had “the combination of people and products in place to be successful”
and was “now positioned to effectively compete”) Compare Marx v. Computer
Science Corp., 507 F.2d 485, 490 (9th Cir. 1974) (prediction that company
“expects . . . a net income of approximately $1.00 a share” for fiscal year to close
in two months held to be a material statement); Virginia Bankshares v. Sandberg,
501 U.S. 1083, 1094-95 (1991) (director’s statement in a proxy solicitation that
the tender price of the company’s stock of $42 a share was “high” and “fair” to
minority shareholders was a material statement in that context where stock
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valuation was subject to objective methods of valuation and the directors’
opinions were shown to be false).
Forward-looking representations are also considered immaterial when the
defendant has provided the investing public with sufficiently specific risk
disclosures or other cautionary statements concerning the subject matter of the
statements at issue to nullify any potentially misleading effect. This doctrine,
which is called the “bespeaks caution” doctrine, “provides a mechanism by which
a court can rule as a matter of law (typically in a motion to dismiss for failure to
state a cause of action 7 or a motion for summary judgment) that defendants’
forward-looking representations contained enough cautionary language or risk
disclosure to protect the defendant against claims of securities fraud.” In re
Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413 (9th Cir. 1994), cert. denied,
116 S. Ct. 185 (1995) (citation omitted). However, not every risk disclosure will
be sufficient to immunize statements relating to the disclosure; rather, “the
cautionary statements must be substantive and tailored to the specific future
projections, estimates or opinions . . . which the plaintiffs challenge.” Trump, 7
F.3d at 371. At bottom, the “bespeaks caution” doctrine stands for the
“unremarkable proposition that statements must be analyzed in context” when
The “bespeaks caution” doctrine may properly be applied in considering a
7
motion to dismiss. See, e.g., Trump, 7 F.3d at 371; Philip Morris, 75 F.3d at 811;
Romani, 929 F.2d at 879; Worlds of Wonder, 35 F.3d at 1413.
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determining whether or not they are materially misleading. Rubinstein v. Collins,
20 F.3d 160, 167 (5th Cir. 1994).
The Tenth Circuit has not expressly endorsed the “bespeaks caution”
doctrine. However, two district court opinions in this circuit have applied the
doctrine. See Grossman, 909 F. Supp. at 850; In re Storage Technology Sec.
Litig., 147 F.R.D. 232, 237 (D. Colo. 1993). Moreover, every circuit that has
addressed the issue has endorsed the doctrine. See Gasner v. Board of
Supervisors, 103 F.3d 351, 358 (4th Cir. 1996); In re Worlds of Wonder Sec.
Litig., 35 F.3d 1407, 1413 (9th Cir. 1994), cert. denied, 116 S. Ct. 185 (1995); In
re Donald Trump Sec. Litig, 7 F.3d 357, 371-73 (3d Cir. 1993), cert. denied, 114
S. Ct. 1219 (1994); Moorhead v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 949
F.2d 243, 245-46 (8th Cir. 1991); Sinay v. Lamson & Sessions Co., 948 F.2d
1037, 1040 (6th Cir. 1991); I. Meyer Pincus & Assocs. v. Oppenheimer & Co.,
936 F.2d 759, 763 (2d Cir. 1991); Romani v. Shearson Lehman Hutton, 929 F.2d
875, 879 (1st Cir. 1991); Rubinstein v. Collins, 20 F.3d 160, 167 (5th Cir. 1994);
Saltzberg v. TM Sterling/Austin Assocs., Ltd., 45 F.3d 399, 400 (11th Cir. 1995).
Cf. PSLRA, which has created a statutory version of the doctrine. 15 U.S.C. §
77z-2; see Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1213 & n. 23 (1st
Cir. 1996) (discussing statutory version of “bespeaks caution” found in PSLRA).
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Accordingly, we hold that the “bespeaks caution” doctrine, as articulated in this
opinion, is a valid defense to a securities fraud claim in the Tenth Circuit.
In assessing the materiality of the alleged statements and omissions at issue
here, we must consider the context in which the statements were made. We note
here that the statements complained of are all contained in press releases or
interview statements, and were made in conjunction with a registration statement
that contained many explicit risk factors and warnings which Grossman has not
challenged as inadequate. The three page long “Risk Factors” discussion in
Novell’s initial registration statement contained numerous cautionary statements,
and the amendments to the registration statement contained numerous cautionary
statements as well. In the initial registration statement, Novell made specific,
repeated disclosures regarding the precise subjects addressed in the alleged
misstatements. Novell outlined the complexity of integrating the two companies,
and highlighted the risks involved in entering the competitive software
applications market. 8 Importantly, the statements specifically disclosed that
8
The registration statement disclosed that integration might be “difficult and
require a greater period of time to accomplish” than mergers in other businesses; that
“Novell has historically not had any presence in the software applications market and
accordingly may lack the management and marketing experience” necessary to
successfully integrate the two companies; and that the relevant market was “intensely
competitive.”
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revenues would tend to fluctuate following the merger, 9 and Amendment No. 1
specifically stated that short-term quarterly earnings were diluted by $.09 (over
15%) per share through the second quarter. With respect to quarterly earnings in
particular, Novell’s cautionary statements could hardly have been more explicit:
[F]uture earnings and stock price could be subject to significant
volatility, particularly on a quarterly basis. [Novell’s] revenues and
earnings may be unpredictable. . . . [Q]uarterly financial results are
difficult to predict and quarterly financial results may fall short of
anticipated levels.
These disclosures were highly specific, very factual, and directly address the
predictive statements that form the basis of Grossman’s complaint. In a fraud on
the market case, those cautions cannot be ignored in construing the materiality of
optimistic predictions.
We conclude that the following statements were correctly determined by the
district court as a matter of law to be immaterial statements of corporate
optimism: 1) Frankenberg’s statements that Novell had experienced “substantial
success” in integrating the sales forces of the two companies, that the merger was
moving “faster than we thought,” and that the merger presented a “compelling set
of opportunities” for the company; and 2) Novell’s statements that “[b]y moving
9
The statement disclosed that WordPerfect’s revenues tended “to fluctuate ,
sometimes significantly, on a quarter-by-quarter basis,” and that such fluctuation could
“contribute to the volatility of the trading price of Novell Common Stock in any given
period following the merger.” In a subsequent portion of the registration statement,
Novell further warned that competitive market conditions could “materially adversely
affect WordPerfect’s operating results and financial condition.” Id. at 140-41
- 19 -
rapidly to a fully integrated sales force, we are leveraging our combined
knowledge of the expanding scope of network solutions,” and that it “expects that
network applications will quickly reshape customer expectations.” These are the
sort of soft, puffing statements, incapable of objective verification, that courts
routinely dismiss as vague statements of corporate optimism.
We also agree with the district court’s conclusion that dismissal of certain
portions of Grossman’s complaint was proper under the “bespeaks caution”
doctrine. Wise’s statement regarding the dilution of “future” earnings is a
forward-looking projection, the subject matter of which is covered in great detail
in the registration statement. In the registration statement, Novell clarified its
expectation that earnings would fluctuate drastically in the years following the
merger, and specifically notes charges that would impact earnings in the third
quarter in particular. The district court properly applied “bespeaks caution” to
that statement. Likewise, the forward-looking aspects of the statements
concerning the “compelling opportunities” available to Novell, the manner in
which Novell was moving rapidly toward a fully integrated sales force” and
“leveraging” the “combined knowledge” of the two companies, and the degree to
which the company was “quickly reshaping customer expectations” were
relatively general, forward-looking projections dealing with subjects that were
- 20 -
dealt with in much greater detail in the cautionary sections of the registration
statement and amendments thereto.
Grossman contends that the “bespeaks caution” doctrine should not be
applied in the context of this case because: (1) the risk disclosures made by
Novell were made in a different document than those in which the alleged
misrepresentations occurred; and (2) several of the alleged misstatements referred
to historical facts, whereas the “bespeaks caution” doctrine only applies to
forward-looking statements.
In dicta, the Worlds of Wonder court stated that the “bespeaks caution”
doctrine applies only when “precise cautionary language elsewhere in the
document adequately discloses the risks involved.” 35 F.3d at 1413 (emphasis
added); see also In re Synergen, Inc. Sec. Litig., 863 F. Supp. 1409, 1415-16 (D.
Colo. 1994) (finding “bespeaks caution” inapplicable to current and historical
facts and to statements not themselves “coupled” with cautionary language).
However, when actually faced with the issue, courts have not required cautionary
language to be in the same document as the alleged misstatement or omission.
See Philip Morris, 75 F.3d at 811 (cautionary language in Annual Report held to
“bespeak caution” with regard to optimistic statements in press releases and
newspaper articles); Raab, 4 F.3d at 289 (cautionary language in press release
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held to bespeak caution with regard to optimistic statement in contemporaneous
Annual Report). 10
It does not appear that any court has squarely held that the risk disclosures
must be in the same document as the alleged misstatement. The cases cited by
Grossman instead hold that on the facts of those cases the risk disclosures were
inadequate in light of the “total mix” of information then available to the market.
See Fecht v. Price Co., 70 F.3d 1078, 1081-82 (9th Cir. 1995) (considering
cautionary language in separate document but concluding that the cautionary
language was insufficient to render other alleged false predictions non-material),
cert. denied, 116 S. Ct. 1422 (1996); Goldman v. Belden, 754 F.2d 1059, 1068
(2d Cir. 1985) (same); Huddleston v. Herman & MacLean, 640 F.2d 534, 543-44
(5th Cir. 1981) (involving a single document -- a prospectus -- but concluding the
cautions were inadequate to avoid liability for making predictions that were
known to be false at the time they were made), aff’d in part and rev’d in part, 459
U.S. 375 (1983).
10
Indeed, this court has previously held that an investor may not rely on oral
misstatements when the risks of an investment are adequately disclosed in an
accompanying private placement memorandum. Zobrist v. Coal-X, Inc., 708 F.2d 1511,
1518 (10th Cir. 1983). Novell relies heavily on this case. However, Zobrist is not
completely dispositive here because in that case the relevant investment was a security
marketed pursuant to Section 4(2) of the Securities Act only to experienced investors.
Id. at 1514.
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Particularly in a fraud on the market case, the relevant inquiry concerns the
total mix of information available to the market at the time of the allegedly
fraudulent statements. Basic, 485 U.S. at 246 (“[T]he market price of shares
traded on well-developed markets reflects all publicly available information.”).
This is not to say that it is irrelevant whether the cautionary language was in the
same document as the alleged misstatement, because the caution must reasonably
be related to the alleged false prediction before the “bespeaks caution” doctrine
may be invoked. Remote cautions are less likely effectively to qualify predictions
contained in separate statements.
Here, the cautions were contained in formal documents of considerable
legal weight -- the registration statement and amendments thereto. The allegedly
misleading predictions were contained in less formal press releases and interviews
which were all closely proximate in time to the registration statement and they all
were obviously directly related to the transactions described in great detail in the
registration statement. Under the circumstances presented in this case, in a claim
of fraud on the marketplace, we believe the cautionary statements contained in the
registration statement may fairly be considered as limiting the forward-looking
predictions made in subsequent discussions of the same transaction.
Grossman correctly observes that the “bespeaks caution” doctrine only
applies to forward-looking statements. “By definition, the bespeaks caution
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doctrine applies only to affirmative, forward-looking statements.” In re Stac
Elec. Sec. Litig., 89 F.3d 1399, 1408 (9th Cir. 1996), cert. denied, 117 S. Ct. 1105
(1997). Because several of the allegedly misleading statements referred to then-
present factual conditions, or implied background factual assumptions a
reasonable investor would regard the speaker as believing to be true, the
“bespeaks caution” doctrine would be of no assistance to defendants as to those
statements. For instance, the aspects of the alleged statements relating to
WordPerfect’s increased market share, the pace of new product development and
workforce integration, as well as the statement that the merger was “smooth,”
imply assertions concerning then-present factual conditions. However, the
doctrine does assist us in affirming the district court’s ruling of non-materiality as
to predictive statements. The remaining statements, which can not be dismissed
as either non-material statements of corporate optimism or non-material because
of the cautions given by Novell in related documents, may be dismissed for a
different reason. As will be discussed below in Section I.B, Grossman has not
alleged that those factual statements were untrue when made, were later shown to
be untrue, or had any impact on Novell’s stock price when their falsity was
disclosed.
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B.
Failure to Plead Falsity
After distilling out the immaterial portions of the statements of which
Grossman complains, we are left with the following statements: Wise’s statement
on April 27, 1994 that there were “indications WordPerfect is gaining market
share in the Windows word processing software market from less than 20% in
1992 to more than 40% today;” Frankenberg’s statement that “we have not slowed
down the effort to create new products, we’ve accelerated it;” Rietveld’s
statement that the merger was “perhaps the smoothest in recent history;” and
Frankenberg’s statement that he was “pleased with the accelerating pace of
product development since the acquisition was announced in March.” These
statements cannot be dismissed as mere corporate optimism, because each of these
statements could have, and should have had, some basis in objective and
verifiable fact. Further, Novell’s risk disclosures would not immunize those
statements under the “bespeaks caution” doctrine, at least to the extent the
statements may be construed as indicating the speakers’ beliefs concerning then-
present factual conditions. As the Supreme Court noted in Virginia Bankshares,
such statements of opinion or belief must rest on “a factual basis that justifies
them as accurate, the absence of which renders them misleading.” 501 U.S. at
1093.
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Our conclusion in that regard is bolstered by the allegations in the
complaint that analysts in fact relied upon these statements in upgrading their
recommendations regarding Novell stock to “buy.” Although, of course, an
analyst’s response to a statement by the company is not dispositive, it certainly
needs to be taken into account in determining whether the statement could, as a
matter of law, be determined to be immaterial.
Nonetheless, the dismissal of Grossman’s claims based on these statements
may be affirmed on the alternative ground that nowhere in the complaint are facts
alleged showing that anything about these statements is false. Mere conclusory
allegations of falsity are insufficient. Fed. R. Civ. P. 9(b) requires that to state a
claim for securities fraud, “[t]he plaintiff must set forth what is false or
misleading about a statement, and why it is false. In other words, the plaintiff
must set forth an explanation as to why the statement or omission complained of
was false or misleading.” In re GlenFed Sec. Litig., 42 F.3d 1541, 1548 (9th Cir.
1994) (en banc); cf. 15 U.S.C. § 78u-4 (b) (requiring plaintiff to set forth “each
statement alleged to have been misleading” and “the reason or reasons why the
statement is misleading” in securities fraud cases); Hillson, 42 F.3d at 209
(holding that “[w]here fraudulent projections are alleged, the plaintiffs must
identify in the complaint with specificity some reason why the discrepancy
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between a company’s optimistic projections and its subsequently disappointing
results is attributable to fraud”).
This requirement ensures that securities claims will not be based on “fraud
by hindsight.” As the Ninth Circuit recently explained,
What makes many securities fraud cases more complicated is that
often there is no reason to assume that what is true at the moment
plaintiff discovers it was also true at the moment of the alleged
misrepresentation, and that therefore simply because the alleged
misrepresentation conflicts with the current state of facts, the
charged statement must have been false. Securities fraud cases often
involve some more or less catastrophic event occurring between the
time the complained-of statement was made and the time a more
sobering truth is revealed (precipitating a drop in stock price). Such
events might include, for example, a general decline in the stock
market, a decline in other markets affecting the company’s product, a
shift in consumer demand, the appearance of a new competitor, or a
major lawsuit. When such an event has occurred, it is clearly
insufficient for plaintiffs to say that the later, sobering revelations
make the earlier, cheerier statement a falsehood. In the face of such
intervening events, a plaintiff must set forth, as part of the
circumstances constituting fraud, an explanation as to why the
disputed statement was untrue or misleading when made.
GlenFed, 42 F.3d at 1548-49 (emphasis in original).
Grossman has not come close to satisfying this requirement. Grossman
alleges that the stock price drop on August 22, 1994 was caused by the disclosure
of disappointing earnings figures for the third quarter of that year. While the
alleged statements may have helped to bolster the share price during the class
period, there is no allegation of fact that there was anything materially misleading
about these statements, let alone that the statements were material to the drop in
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Novell’s stock price on August 22, 1994. There has been no allegation that the
merger was not smooth, that Novell was not stepping up the pace of new product
development, or that WordPerfect was not gaining market share. Nor has there
been any allegation that the market ever discovered these assertions to be untrue, or
that such discoveries had an adverse impact on Novell’s stock price. Accordingly,
the district court properly concluded Grossman had not stated a claim based on
those statements.
Additionally, we note that Grossman’s failure to satisfy the Rule 9(b)
requirement of specifically pleading facts showing falsity extends to many of the
other statements we have found immaterial as a matter of law. Thus, Rule 9(b)
stands as an alternative, and self-sufficient, basis for dismissing many of the non-
material allegations found in Grossman’s complaint.
C.
Duty to Disclose
The district court further correctly held that Novell had no duty to disclose
its third quarter earnings forecasts prior to its August 19, 1994, disclosure of actual
third quarter earnings, which showed them to be disappointing. Grossman, 909 F.
Supp. at 845. Under Basic, “silence, absent a duty to disclose” cannot serve as the
basis for liability under Rule 10b-5. 485 U.S. at 239 n.17. However, if a defendant
makes a statement on a particular issue, and that statement is false or later turns out
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to be false, the defendant may be under a duty to correct any misleading impression
left by the statement. See, e.g., In re Time-Warner Inc. Sec. Litig., 9 F.3d 259, 267
(2d Cir. 1993), cert. denied, 511 U.S. 1017 (1994). Grossman contends that the
statement by defendant Wise that the merger would not dilute “future earnings”
gave rise to a duty to disclose actual third quarter earnings forecasts before the
actual third quarter earnings themselves were known and disclosed. The district
court concluded Wise’s statement was too vague and indefinite to give rise to such
a duty to disclose. Grossman, 909 F. Supp. at 845 n.5. We agree.
Wise’s vague, optimistic statement that “future” earnings would not be
diluted was not a “definite positive projection” with respect specifically to third
quarter earnings. See Time-Warner, 9 F.3d at 267 (requiring “definite positive
projections” before such a duty will be imposed). Further, there was no allegation
of facts showing that Wise’s statement was false when made or that third quarter
earnings forecasts by Novell even existed before actual third quarter earnings were
released. Second quarter earnings were, in fact, timely released before the merger
was consummated and pro forma income figures were released showing that, had
the merger been completed as of the second quarter, pro forma net income would
have been reduced by $.09 per share. Requiring premature quarterly earnings
forecasts itself could give rise to potential claims of liability if the forecasts should
turn out to be inaccurate. Here, Novell gave copious warnings regarding the
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potential fluctuations in quarterly earnings and regarding the risks to its earnings
posed by the proposed merger. There is no challenge that Novell failed timely and
accurately to release the actual third quarter earnings figures. We do not believe
that Wise’s statement about non-dilution of future earnings created any duty on
behalf of Novell to make further disclosures beyond those actually made.
Grossman also alleges that Novell made materially misleading omissions
regarding its sales and revenues figures, its allegedly excessive research and
development costs for new spreadsheet programs, and the fact that it would take a
$120 million charge against third quarter earnings due to its acquisition of Quattro
Pro. However, these alleged omissions concern matters discussed in great detail in
the registration statement, and Grossman has not alleged that there was anything
materially misleading about that document. With respect to the Quattro Pro write-
off in particular, the Quattro Pro acquisition was a cash purchase of a product from
another company, and thus Grossman does not suggest that Novell had any choice
but to account for the purchase as a one time charge against income for the quarter
in which the transaction occurred. Thus, Novell was under no duty to make further
disclosures concerning these subjects.
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II.
Dismissal Under Fed. R. Civ. P. 9(b) for Failure to Allege Scienter with
Particularity
Because we conclude that Grossman failed to allege any material
misstatements or omissions, we need not address whether the district court properly
dismissed the complaint for failing to sufficiently allege facts showing scienter
pursuant to Fed. R. Civ. P. 9(b).
III.
Denial of Motion to Amend
The district court dismissed the complaint, finding it would be “futile” to
allow amendment. Grossman, 909 F. Supp. at 852. The court provided two bases
for this conclusion. First, the court pointed to new (and what it viewed as invalid)
scienter theories in Grossman’s memorandum in opposition to the motion to dismiss
as indicating proper scienter allegations were not forthcoming. Id. Second, the
court concluded that its “bespeaks caution” conclusion meant that Grossman could
not raise any allegations that would tend to show that investors were “mislead
about the potential impact of the WordPerfect merger.” Id.
We review the district court’s decision to deny leave to amend a complaint
for abuse of discretion. T.V. Communications Network v. Turner Network, 964
F.2d 1022, 1028 (10th Cir. 1992). Although Fed. R. Civ. P. 15(a) provides that
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leave to amend shall be given freely, the trial court may deny leave to amend where
amendment would be futile. Id. (citing Foman v. Davis, 371 U.S. 178, 182 (1962)).
While it is an abuse of discretion for the court to deny leave to amend “without
expressing any justification . . ., if the denial rests on articulated reasons such as
failure to cure deficiencies or futility of amendment the district court’s decision
shall stand.” Id. However, if the stated reasons are incorrect as a matter of law,
the district court will be found to have abused its discretion in dismissing the claim
with prejudice.
The district court denied leave to amend, in part, because its “conclusion that
Novell’s SEC registration statements adequately disclosed the potential risks of the
WordPerfect merger mean[t] that Grossman could not raise any new allegations
sufficient to show that investors were mislead about the potential impact of the
WordPerfect merger,” and the alleged false statements were generally nonmaterial
as corporate optimism. Grossman, 909 F. Supp. at 852. Thus, the amendments did
not attempt to add a new misstatement, but rather went to scienter. We agree with
the district court, and affirm the denial of leave to amend on that basis.
Grossman alleged that the “fraud” was exposed when Novell announced its
third quarter earnings on August 19, 1994. The only alleged misstatement relevant
to this earnings announcement was the alleged statement by defendant Wise that
future earnings would not be diluted. However, under the “bespeaks caution”
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doctrine, this statement was immaterial in light of the disclosures in Novell’s
registration statements.
Grossman has not argued that the other alleged statements were false when
made, that they were ever revealed to be false, or that they had any negative impact
on Novell’s stock price when they were revealed to be false. Nor has he made any
suggestion that he intends to make such allegations. In fact, Grossman provides no
indication as to what any amendment to the complaint would allege, aside from an
unsupported assertion that “there was sufficient information regarding Novell’s
stock sales that the District Court believed was relevant but had not been alleged in
the complaint.” Br. for Aplt. at 45-46. Moreover, Grossman failed to make a
formal request to amend, and the lack of a record on such a request deprives us of a
clear understanding of exactly what Grossman hoped to cure through amendment.
Here, Grossman has failed to show us that any amendment would cure the
deficiencies we have identified. Accordingly, we can find no error in the district
court’s conclusion that any amendment would be futile.
CONCLUSION
For the foregoing reasons, the judgment of the district court is AFFIRMED.
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