Rubinstein v. Collins

                  United States Court of Appeals,

                            Fifth Circuit.

                             No. 92-2736.

   Judith RUBINSTEIN, Individually and on Behalf of All Others
Similarly Situated, and Howard Greenwald, Individually and on
Behalf of All Others Similarly Situated, Plaintiffs-Appellants,

                                  v.

         J. Patrick COLLINS, et al., Defendants-Appellees.

                             May 5, 1994.

Appeal from the United States District Court for the Southern
District of Texas.

Before GOLDBERG, GARWOOD, and WIENER, Circuit Judges.

     WIENER, Circuit Judge:

     In this securities fraud case, Plaintiffs-Appellants Judith

Rubinstein and Howard Greenwald ("Plaintiffs") appeal the order of

the district court dismissing their complaint pursuant to Rule

12(b)(6)1 for failure to state a claim.      Plaintiffs sought relief

under § 10(b)2 and § 20(a)3 of the Securities Exchange Act of 1934

(the "Exchange Act") and Rule 10b-54 promulgated thereunder.      The

district court dismissed these claims by applying what has been

called the "bespeaks caution" doctrine, holding that economic

forecasts and predictions are not actionable when such statements

are couched in cautionary language.          As we conclude that the


     1
      FED.R.CIV.P. 12(b)(6).
     2
      15 U.S.C. § 78j(b).
     3
      15 U.S.C. § 78t(a).
     4
      17 C.F.R. § 240.10b-5.

                                  1
district court erred in applying the "bespeaks caution" doctrine

too broadly, essentially as a per se bar to liability, we reverse

the dismissal of these federal claims and remand.

     Plaintiffs    also    assert   a    fraud   claim   and   a   negligent

misrepresentations claim under Texas common law.               The district

court likewise dismissed these claims pursuant to Rule 12(b)(6),

holding that economic predictions and forecasts are not actionable

under Texas law.    As we conclude that the court erred in holding

that such statements (hereafter referred to generically—but not as

a term of art—as "predictive statements") may never be actionable,

we also reverse the dismissal of these state claims and remand.

                                     I

                          FACTS5 AND PROCEEDINGS

     The parties to this appeal are:        1) the corporate Defendant-

Appellee, Plains Resources, Inc. ("Plains"), which is a Texas-based

independent oil and natural gas exploration and production company

operating primarily in the Gulf Coast and mid-continent regions of

the United States, and the seven affiliated individual Defendants-

Appellees, i.e., J. Patrick Collins, William H. Hitchcock, Greg L.

Armstrong, William C. Egg., Jr., Phillip D. Kramer, Michael P.

Patterson, and Thomas H. Delimitros, who hold various executive and




     5
      As this case was dismissed pursuant to Rule 12(b)(6), on
appeal we accept as fact the well-pleaded allegations contained
in the complaint of Plaintiffs and the statements included in all
documents incorporated therein. E.g., Caine v. Hardy, 943 F.2d
1406, 1411 n. 5 (5th Cir.1991) (en banc), cert. denied, --- U.S.
----, 112 S.Ct. 1474, 117 L.Ed.2d 618 (1992).

                                     2
board positions with Plains;6     and 2) the two named plaintiffs,

Greenwald and Rubinstein, who acquired and sold shares of Plains

stock during the period of the alleged misrepresentations by the

defendants (and who purport to represent other similarly situated

buyers and sellers of Plains stock).

       The alleged misrepresentations are found in statements made by

defendants concerning the value of newly discovered natural gas

reserves found as a result of Plains' drilling operations under an

exploration agreement with Texaco.     This agreement "farms out" to

Plains the exclusive exploration rights to a 13,000 acre tract in

southwest Cameron Parish, Louisiana, called the "Miami Fee." Under

this agreement, Plains is obligated to conduct certain exploration

activities, and, after pay-out (i.e. recovery of certain costs),

Plains is entitled to a 397 working interest in all producing wells

it drills in that tract.

 Initial News Reports

       This saga began on August 19, 1991, when Plains announced

       6
      Plaintiffs aver that the individual defendants held the
following positions during the relevant period:



                                            Board
Name             Executive Position        Position

Collins          President and CEO         Member
Hitchcock             * * *                Chairman
Armstrong        Senior V.P. and CFO         * * *
Egg              Senior V.P.—Exploration     * * *
                   and Production
Kramer           V.P. and Treasurer          * * *
Patterson        V.P., Secretary, and        * * *
                 Legal Counsel
Delimitros            * * *                Member

                                  3
publicly that it had made a significant natural gas discovery based

on "what appears to be a substantial pay"7 in its Miami Fee No. 1

well (the "discovery well").    The next day analyst Phillip Pace of

First Boston reported that the prospect could hold 500 billion

cubic feet ("bcf") of natural gas.       Of this report, Defendant-

Appellee Collins, President and CEO of Plains, observed "I would

not be critical of Pace's comments."      The market price of Plains

stock rose overnight from $7.63 per share to $15.25.

     On October 17, 1991, Plains announced the results of the

initial test of the discovery well, reporting that gas flowed at an

approximate daily rate of 23.5 million cubic feet ("Mmcf") of

natural gas and 1,353 barrels of condensate on a 3/8-inch choke,

with a flow-tube pressure of 8,551 pounds per square inch ("psi")

and an initial shut-in pressure of 10,764 psi.     Analysts commented

that these tests suggested that the well and the field in which it

was located were extremely valuable, possibly one of the largest

onshore discoveries of natural gas in recent years.

     During the next week the Plains announcement was commented on

by many financial analysts, one of whom estimated that the field

could contain as much as one trillion cubic feet of natural gas.

According to these analysts, Plains supported the optimistic tone

of these observations.    Specifically, Plains' investor relations

manager, Nancy Kirby, was quoted as having stated that "[t]he level

of condensate production is unusually high and is significant

     7
      In the oil and gas industry, "pay" denotes reservoir rock
containing oil or gas. See WILLIAMS AND MEYERS, MANUAL OF OIL AND GAS
TERMS 882 (8th Ed.1991).

                                   4
because it commands far higher prices than natural gas."                 She was

also reported to have said that the energy content of the gas was

exceptionally rich;      she originally reported the energy content as

1,170 British Thermal Units ("BTUs") per 1000 cubic feet of gas

("mcf"), then corrected this to 1,200 BTUs per mcf.

     Meanwhile, on October 23, 1991, Defendant-Appellee Armstrong,

the Chief    Financial    Officer    of    Plains,     was    reported   to   have

characterized as "realistic" an analyst's opinion that the well

could yield 500 bcf of gas and that the asset value of Plains was

between $66 to $100 per share.       Armstrong was also reported to have

stated that—based on the results from the initial test of the

discovery well—a cash-flow estimate of $26 million to $32 million

for fiscal year 1992 was feasible.              According to the analysts,

Kirby confirmed Armstrong's cash-flow and asset-value estimates.

On the same day that these announcements were made, Plains stock

reached a record high of $291/8 per share on record volume of more

than one million shares.

     Plaintiffs    allege     that        all   was     not    well,     however.

Specifically, they aver that the defendants knew—or were reckless

in not knowing—that Armstrong's and Kirby's statements of October

23rd were materially misleading.           According to Plaintiffs, these

predictive   statements     were    materially        misleading   because    the

initial test of the discovery well did not provide a reasonable

basis for such statements.           Moreover, the defendants had not

disclosed certain materially adverse facts regarding this initial

test;   specifically, that there had been a drop in flow-tube


                                      5
pressure and a decline in shut-in pressure.              Plaintiffs contend

that these decreases in pressure suggested that the reserves were

much smaller than originally projected.

 The Public Offering

      On November 8, 1991, Plains filed a registration statement for

a proposed secondary public offering of 1.5 million shares of its

common stock, of which 910,000 were to be sold by Plains and

590,000     by   certain   existing    stockholders.         The   registration

statement reiterated the initial test results, then went on to

assert:

      Although there is insufficient production history and other
      data available to definitively quantify the proved reserves
      attributable to this discovery, the Company believes, based
      upon well logs, sidewall core analyses and initial production
      test results, that the Miami Fee # 1 well is a significant
      discovery that, when fully evaluated, could add substantially
      to the Company's oil and natural gas reserves. There can be
      no assurance, however, that subsequent production, drilling
      and other data will not cause the Company to reevaluate its
      assessment of the significance of this discovery.

Plaintiffs allege that this registration statement was misleading

for   the   same   reasons   that     the   October   23rd    statements   were

misleading—defendants both knew that the discovery well testing

done up to that time was not sufficient to provide a reasonable

basis for these statements, and failed to disclose the declines in

flow-tube and shut-in pressures.

      The discovery well began operating in November 1991. Sales of

gas and condensate commenced on November 12th and continued until

the well was shut-in on November 27th—a fact that was not disclosed

until December 16, 1991.       During this operating period of roughly

two weeks, the well produced at rates generally lower than the ones

                                        6
reported in the initial testing.                   Moreover, once the well was

placed in production the flow-tube pressure declined immediately

and significantly.

       On November 15th and 20th—a time when the discovery well was

in operation—several of the individual defendants exercised their

stock options, then immediately sold most of their newly acquired

stock on the open market.         In total, these defendants sold 32,426

shares at prices ranging from $22.50 to $25.16 a share.                          The

aggregate proceeds from these sales was $760,599.8                        Plaintiffs

contend that these defendants exercised their options then sold

this       newly   acquired    stock    despite        having      material   inside

information concerning the drop in flow-tube pressure and the

decline in the daily production rate of gas and condensate.

       On    December   4,    1991,   the       defendants   for   the   first   time

disclosed some of the adverse information regarding the discovery

well.      Specifically, a press release was issued revealing that the

flow-tube pressure had suddenly dropped and that the shut-in

pressure had declined from 10,764 psi to 8,760 psi.                      The release

further stated that more tests were being conducted and that, until

these tests were complete and the results analyzed, Plains would be

unable to ascertain the precise cause of these pressure declines.

       The market reacted immediately to these adverse disclosures:

The price of Plains stock fell from $227/8 per share on December

3rd to $143/4 per share by the close of trading on December 5th.

       8
      In addition, two executives of Plains who are not
defendants sold 7,474 shares during this same period for an
additional $179,444.

                                            7
On December 5th, more than 1.2 million shares—approximately 12 per

cent of the total outstanding shares—were traded.

     Five    days    later—on       December     10th—Plains'      CEO,     Collins,

announced on behalf of Plains that the discovery well had been

reperforated,      was   up   and   running,     and     was   producing    gas   and

condensate at levels seen before the recent sharp drop in flow-tube

pressure.       Although Collins noted that Plains did not know what

caused    the    pressure     drop,     he     offered    as    explanations      the

possibility that the well was producing from a limited portion of

the overall "structure," or that the well had hit a gas cap above

an oil reservoir.

     On December 16, 1991, two analysts at Petrie Parkman & Co.

issued a report recommending the purchase of Plains stock, a

recommendation      based     largely     on     facts    disclosed    by    Plains

concerning the discovery well.               This report stated in pertinent

part:

     We estimate that the Vicksburg formation alone could contain
     net gas reserves in the range of 125-162 Bcf in the fault
     block in which the # 1 Miami Fee was drilled. Applying an
     estimated $1.00-1.25/mcf in-ground value, which reflects the
     high liquids content of the gas, to our reserve projection for
     the Vicksburg, we calculate that the discovery could add
     $12.00-19.00/share of incremental value to the company.
     Beyond its initial discovery, Plains could eventually add
     multiples to its year-end 1990 gas reserve base of 50.2 Bcf
     from its exposure to this high-potential, new exploration play
     in South Louisiana.9

Plains sent this report to its shareholders on January 3, 1992.

     On January 24, 1992, the planned public offering took place.

On that date, Plains offered 1.2 million shares to the public at a

     9
        Emphasis in original.

                                         8
price of $16 a share.        In the prospectus that accompanied this

offering,    Plains   did    disclose       that   the   discovery    well    had

experienced a decrease in flow-tube pressure during November and

December 1991.    Plains stated, however, that the significance of

this pressure decline was not yet known.            It further advised that:

      Notwithstanding the ultimate productive capacity of this well,
      the Company believes, based upon well logs, sidewall core
      analyses, the results from paleontological and depositional
      studies, initial production test results and actual production
      to date, that the Miami field discovery is significant and,
      when fully evaluated through additional drilling activity,
      could add substantially to the Company's oil and natural gas
      reserves.

Plains concluded by observing that there was insufficient data to

determine the quantity of reserves attributable to this discovery,

and   that   subsequent     production       and   drilling   might    lead    to

reevaluation.

      On March 30, 1992, Plains filed its 10-K report in which it

reiterated the October test results for the discovery well—which

revealed daily production rates of 23.5 Mmcf of gas and 1353

barrels of condensate with flow-tube pressure of 8,551 psi—and then

stated that, as of March 22, 1992, the well was producing at a

daily rate of approximately 10 Mmcf of natural gas and 700 barrels

of condensate with flow-tube pressure of approximately 4,530 psi.

Despite the drops in production rates and flow-tube pressure for

this first exploratory well, Plains stated that the Miami Fee field

"could add substantial incremental oil and natural gas volumes to

the Company's reserve base."

      On April 1, Plains announced that the discovery well was again

inoperable and was again undergoing repairs.               This announcement

                                        9
further disclosed that the well operations had ceased on March

28th—one day after the 10-K report had been signed.

     According to Plaintiffs, on April 13, 1992, the defendants'

scheme to inflate the market price of Plains stock came to an end.

On that date an analyst publicly reported that he had acquired

information indicating that the discovery well had reserves of only

3 bcf, which equates to a value of less than $2 million.   According

to that analyst, these reserves would not cover the actual cost of

the well.   On the day of this report Plains' stock price fell more

than $1 to close at $141/2 per share.

 The District Court Proceeding

     On April 27, 1992, Plaintiffs filed a complaint containing all

of the foregoing allegations. In addition, Plaintiffs sought class

certification for a class consisting of all persons who purchased

the common stock of Plains during the class period.    The asserted

class period ran from October 23, 1991—the date on which Armstrong

and Kirby had first offered their optimistic financial projections

to the public—to April 13, 1992—the date on which an analyst

publicly reported that the value of the reserves would not equal

the cost of the discovery well.         As noted above, Plaintiffs

grounded their complaint on the contention that the defendants

violated §§ 10(b) and § 20(a) of the Exchange Act and Rule 10b-5

thereunder, and that the defendants made fraudulent and negligent

misrepresentations in violation of Texas common law.

     Pursuant to Rule 12(b)(6), the district court dismissed all of




                                 10
these claims.10    Regarding the federal claims, the district court

held that as a matter of law the allegations did not state a claim

because the statements complained of by defendants "were made in

good faith, suggested reliability and bespoke caution."           According

to the district court, positive economic forecasts and predictions

such as those made by defendants may not form the basis of a

securities     fraud   action   when   such   statements   are   couched   in

cautionary language.11     As for the state law claims, the district

court held that as a matter of Texas law, predictions and opinions

may not form the basis of a fraud claim.               Plaintiffs timely

appealed.

                                       II

                        FEDERAL SECURITIES CLAIMS

          We review dismissals under Rule 12(b)(6) de novo.12          Such

dismissals may be upheld "only if it appears that no relief could

be granted under any set of facts that could be proven consistent




     10
      The district court did not reach the issue of class
certification. As we are only reviewing whether Plaintiffs
pleaded a claim, we likewise express no opinion on whether a
class should be certified.
     11
      At oral argument, counsel for the defendants proffered an
alternative ground for the district court's dismissal: That
Plaintiffs failed to plead their fraud claims with particularity
as required by Federal Rule of Civil Procedure 9(b). After
reviewing the complaint—which includes specific "who, what, when,
and where" detail not discussed in this opinion—we find this
argument to be meritless.
     12
      E.g., Federal Deposit Ins. Corp. v. Ernst & Young, 967
F.2d 166, 169 (5th Cir.1992); Guidry v. Bank of LaPlace, 954
F.2d 278, 281 (5th Cir.1992).

                                       11
with the allegations."13      For purposes of Rule 12(b)(6), we accept

as true all well-pleaded allegations in the complaint and we

construe those allegations in the light most favorable to the

plaintiff.14

           Plaintiffs' Rule 10b-5 claim is grounded in purportedly

misleading predictive statements.15        The elements of such a claim

are well-settled:        The plaintiff must prove 1) a misstatement or

omission 2) of material fact 3) occurring in connection with the

purchase or sale of a security, that 4) was made with scienter and

5)   upon which    the    plaintiff   justifiably   relied,   6)   and   that

proximately caused injury to the plaintiff.16             It is equally




      13
      Baton Rouge Bldg. & Constr. Trades Council v. Jacobs
Constructors, Inc., 804 F.2d 879, 881 (5th Cir.1986); see also,
Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2
L.Ed.2d 80 (1957).
      14
      E.g., Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683,
1686, 40 L.Ed.2d 90 (1974); O'Quinn v. Manuel, 773 F.2d 605, 608
(5th Cir.1985).
      15
      Plaintiffs also contend that the defendants are liable as
"controlling persons" under § 20(a) of the Securities and
Exchange Act. "Control person" liability is, however,
derivative, i.e., such liability is predicated on the existence
of an independent violation of the securities laws. See 15
U.S.C. § 78t(a); THOMAS LEE HAZEN, THE LAW OF SECURITIES REGULATION §
13.15 (1990) (discussing same). At this juncture of the
litigation, the only issue presented is whether Plaintiffs have
pleaded an independent violation under Rule 10b-5.
      16
      E.g., Tuchman v. DSC Communications Corp., 14 F.3d 1061,
1067 (5th Cir.1994); Schlesinger v. Herzog, 2 F.3d 135, 139 (5th
Cir.1993); Cyrak v. Lemon, 919 F.2d 320, 325 (5th Cir.1990);
Huddleston v. Herman & MacLean, 640 F.2d 534, 543 (5th Cir.1981),
rev'd in part on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74
L.Ed.2d 548 (1983).

                                      12
well-settled that Rule 10b-5 applies to predictive statements.17

As we observed in Isquith v. Middle South Utilities, Inc.:

     [W]hen   necessary,   courts   have  readily   conceded   that
     predictions may be regarded as "facts" within the meaning of
     the antifraud provisions of the securities laws....       Most
     often, whether liability is imposed depends on whether the
     predictive statement was "false" when made. The answer to
     this inquiry, however, does not turn on whether the prediction
     in fact proved to be wrong; instead, falsity is determined by
     examining the nature of the prediction—with emphasis on
     whether the prediction suggested reliability, bespoke caution,
     was made in good faith, or had a sound factual or historical
     basis.18

In sum, a predictive statement is one that contains at least three

factual     assertions   that   may   be   actionable:    1)   The   speaker

genuinely believes the statement is accurate;               2) there is a

reasonable basis for that belief;          and 3) the speaker is unaware of

any undisclosed facts that would tend seriously to undermine the

accuracy of the statement.19

A. The "Bespeaks Caution" Doctrine

     Applying what has come to be labeled the "bespeaks caution"

doctrine,20 the district court dismissed Plaintiffs' Rule 10b-5

claim. The court concluded that the complained of statements could

not constitute material misrepresentations as a matter of law.            In


     17
      E.g., Isquith v. Middle South Utilities, 847 F.2d 186,
203-04 (5th Cir.) (collecting cases), cert. denied, 488 U.S. 926,
109 S.Ct. 310, 102 L.Ed.2d 329 (1988).
     18
          Id. at 203-04 (citations omitted).
     19
      See id. at 203-205 & n. 13; In re Apple Computer Secur.
Litigation, 886 F.2d 1109, 1111 (9th Cir.1989), cert. denied, 496
U.S. 943, 110 S.Ct. 3229, 110 L.Ed.2d 676 (1990).
     20
      See In re Donald Trump Casino Securities Litigation, 7
F.3d 357, 364 (3d Cir.1993).

                                      13
effect, the district court took the per se position that economic

forecasts and predictions such as those made by the defendants may

never form the basis of a securities fraud action when such

statements are couched in cautionary language.

     The "bespeaks caution" doctrine applied by the district court

reflects a relatively recent, ongoing, and somewhat uncertain

evolution in securities law,21 an evolution driven by the increase

in and the unique nature of fraud actions based on predictive

statements.22   In essence, predictive statements are just what the

     21
      The doctrine was most recently applied in In re Trump
Casino Securities Litigation, 7 F.3d at 369-73 (concluding that
statements in prospectus were not actionable because of inclusion
of extensive cautionary statements tailored to the specific risks
involved). For examples of other recent cases applying the
"bespeaks caution" doctrine—or some variant of it—see, Romani v.
Shearson Lehman Hutton, 929 F.2d 875, 879-80 (1st Cir.1991)
(statement containing cautionary language that included specific
problems facing industry "bespoke caution" and was thus not
actionable); Moorhead v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 949 F.2d 243, 245-46 (8th Cir.1991) (same); Sinay v.
Lamson & Sessions Co., 948 F.2d 1037, 1040-41 (6th Cir.1991)
(stating that "[e]conomic projections are not actionable if they
bespeak caution."). Compare Mayer v. Mylod, 988 F.2d 635, 638-40
(6th Cir.1993) (concluding that a court must look at cautionary
statements on a case-by-case basis—Sinay panel erred in applying
a per se approach); Huddleston, 640 F.2d at 543-44 (boilerplate
cautionary warning of risk not negate failure to disclose
material adverse fact).
     22
      For many years the Securities and Exchange Commission (the
"SEC") prohibited disclosure of predictive information in
documents filed with the SEC. Perhaps realizing that such an
approach was inconsistent with the philosophy of full disclosure
embodied in the various Securities Acts, the SEC changed its
position in the early 1970's. See Isquith, 847 F.2d at 204-05
(noting same); John M. Olivieri Note, Liability for Forward-
Looking Statements: The Securities and Exchange Commission's
Ambiguous Stance, 1993 COLUM.BUS.L.REV. 221 (discussing history of
change in SEC's practice). By the late 1970's the SEC developed
various safe-harbor rules for certain types of predictive
statements contained in documents filed with it, rules that track
the precept that such statements are not actionable when they are

                                 14
name implies:        predictions.     As such, any optimistic projections

contained in such statements are necessarily contingent. Thus, the

"bespeaks caution" doctrine has developed to address situations in

which     optimistic       projections      are   coupled     with    cautionary

language—in          particular,      relevant       specific        facts      or

assumptions—affecting the reasonableness of the reliance on23 and

the materiality of24 those projections.            To put it another way, the

"bespeaks     caution"     doctrine      merely   reflects   the     unremarkable

proposition that statements must be analyzed in context.25

          Although    at   least   one    court   appears    facially    to   have

construed the "bespeaks caution" doctrine as broadly as did the




materially complete, made in good faith, and have a reasonable
basis. See Isquith, 847 F.2d at 204-05 n. 12 & n. 13. As can be
expected, the increase in disclosures of predictive information
has led to an increase in fraud actions based on such
disclosures.
     23
      See Schlesinger, 2 F.3d at 139 (observing that plaintiff
must establish "justifiable reliance" as an element of a 10b-5
claim); In re Trump Securities Litigation, 7 F.3d at 373
(concluding that disclosures of the specific risks and the
speculative nature of the investment meant that an optimistic
projection could not have "materially influenced a reasonable
investor" as a matter of law); see also Basic Inc. v. Levinson,
485 U.S. 224, 241-47, 108 S.Ct. 978, 988-92, 99 L.Ed.2d 194
(1988) (accepting fraud-on-the-market theory as method for
proving reliance—theory premised on assumption that in valuing
stock, the market reflects all information publicly
disseminated).
     24
      See, e.g., In re Trump Securities Litigation, 7 F.3d at
368-69, 71 (concluding that cautionary language may render
alleged misstatements or omissions concerning predictive
statements immaterial as a matter of law).
     25
      See In re Trump Securities Litigation, 7 F.3d at 364
(noting same).

                                          15
district court here,26 we are nonetheless satisfied that in so doing

the district court erred. Under our precedent, cautionary language

is   not     necessarily     sufficient,    in   and   of   itself,    to   render

predictive statements immaterial as a matter of law.27                 Rather, as

we have proclaimed, "[m]ateriality is not judged in the abstract,

but in light of the surrounding circumstances."28                 The appropriate

inquiry is whether, under all the circumstances, the omitted fact

or the prediction without a reasonable basis "is one [that] a

reasonable investor would consider significant in [making] the

decision      to   invest,    such   that   it   alters     the    total    mix   of




      26
      Sinay, 948 F.2d at 1040-41 (Sixth Circuit panel stating
that "[e]conomic projections are not actionable if they bespeak
caution."). But see, Mayer, 988 F.2d at 638-40 (Sixth Circuit
panel concluding that the court must look at cautionary
statements on a fact- and case-specific basis—Sinay panel erred
in applying a per se approach).
      27
       See, e.g., Krim v. BancTexas Group, 989 F.2d 1435, 1448-49
(5th Cir.1993) (observing that whether cautionary language and
disclosures of adverse facts affects materiality is determined by
analyzing particular facts of the case); Huddleston, 640 F.2d at
543-44 (concluding that boilerplate cautionary warning did not
negate materiality of failure to disclose a significant adverse
fact).

           At least two other circuits explicitly follow this
      fact- and case-specific approach, see In re Trump Securities
      Litigation, 7 F.3d at 371-73 (Third Circuit—concluding that
      application of "bespeaks caution" doctrine depends on
      specific text of communications at issue and nature of
      cautionary language); Mayer, 988 F.2d at 638-40 (Sixth
      Circuit—applying same approach). The one case cited by
      defendants that would arguably support a per se rule for
      cautionary language, Sinay v. Lamson & Sessions Co., was
      limited by Mayer to the fact- and case-specific approach.
      28
           Krim, 989 F.2d at 1448.

                                       16
information available about the proposed investment."29             Inclusion

of cautionary language—along with disclosure of any firm-specific30

adverse   facts   or    assumptions—is,     of   course,   relevant   to   the

materiality inquiry, for such inclusion or disclosure is part of

the "total mix of information."31 Nevertheless, cautionary language

as such is not per se dispositive of this inquiry.

B. Unsubstantiated Disclosure Theory

     Plaintiffs        have   pleaded       essentially     two     different

theories—unsubstantiated       disclosure;       incomplete   disclosure—in

support   of   their    contention   that    the   defendants'     optimistic

predictions    and     forecasts   regarding     the   discovery   well    were

     29
      Id. at 1445;       see also, Isquith, 847 F.2d at 207-08
(stating same).
     30
      General economic information, such as that the mineral
exploration business is inherently risky, need not be disclosed
as such information is already included in the "total mix of
information." See, e.g., Krim, 989 F.2d at 1446 (observing that
securities laws require issuers to disclose material,
firm-specific information regarding predictions—not information
concerning general economic "facts" and conditions already known
to investors and analysts); In re Trump Securities Litigation, 7
F.3d at 377 (same).
     31
      Factors such as the specificity of and the extensiveness
of the cautionary language are particularly pertinent to this
inquiry. E.g., Krim, 989 F.2d at 1448-49 (cautionary language
regarding substantial riskiness of investment and disclosure of
approximately $140 million in problem loans made immaterial
failure to classify as "potential problem loans" $50 million in
loans that were 30-89 days overdue); In re Trump Securities
Litigation, 7 F.3d at 370-77 (specific disclosures of assumptions
and industry risks rendered optimistic projections and failure to
disclose certain information immaterial as matter of law);
Romani, 929 F.2d at 878-79 (purported omissions not
material—defendants extensively disclosed riskiness of investment
and specific problems facing industry); Moorhead, 949 F.2d at
245 (feasibility study not contain an actionable omission or
misstatement—study contained specific cautionary language and
risk statements, and disclosed underlying economic assumptions).

                                      17
materially misleading.    The first of those theories is premised on

the notion that those predictions and forecasts did not have a

reasonable basis.   According to Plaintiffs, the initial testing of

the discovery well was insufficient to support such predictions and

forecasts.     Moreover, they contend, the initial and subsequent

testing of and production from the discovery well revealed drops in

flow-tube and shut-in pressure that would greatly lessen any

predictive significance that should be attached to those initial

test results.    Plaintiffs further insist that the defendants made

their optimistic    predictions   despite    knowledge   of—or   reckless

indifference    to—the   insufficiency   of     the   testing    and   the

significance of the drops in pressure.

     As noted, predictive statements are deemed to contain false

statements of "fact" under Rule 10b-5 when the predictions embodied

in those statements do not have a reasonable basis.         Predictions

concerning such matters as the potential productive capacity of a

well are not exempt from this rule.32       Here, one of the defendants

purportedly characterized as "realistic" an analysts's statement

that the discovery well could yield 500 bcf of gas and that the

asset value of Plains was correspondingly between $66 to $100 a

share.    This defendant further stated that, based on the test

results of the discovery well, a cash-flow estimate of $26 million


     32
      See Acme Propane, Inc. v. Tenexco, Inc., 844 F.2d 1317,
1321, 1325 (7th Cir.1988) (per Judge Easterbrook) (concluding
that prediction of productive capacity of well is an actionable
statement for purposes of Rule 10b-5—defendants had allegedly
compared future productive capacity of one well with another
without sound basis in fact).

                                  18
to $32 million for fiscal year 1992 was feasible—a range that is

approximately     double     the    actual     revenues        for   1990.      Not

unexpectedly, these statements had a dramatic affect on the price

of Plains stock:     On the day these optimistic statements were made

public, Plains stock reached a record high on a record volume of

trading.

     Because the instant complaint was dismissed pursuant to Rule

12(b)(6), there is no way for a court to determine whether the

extent and results of the initial testing of the discovery well

provided    a   reasonable    basis    for    these    statements.33         Such   a

determination would require evidence regarding practices in both

the securities and the oil-and-gas industries, along with evidence

regarding   the   actual     results   of    the     initial    testing   and   the

significance that could properly be attached to those results.

Neither is there any way of knowing at this juncture whether the

defendants'     knowledge    of    other     facts    may   have     affected   the

reasonableness of those statements.34

     Simply alleging that the predictive statements at issue here

did not have a reasonable basis—that is, that they were negligently

     33
      Plaintiffs also allege that the defendants made—or caused
to be made—other statements without a reasonable basis. As we
conclude that Plaintiffs have adequately pleaded that the
statements discussed above were without such a basis, we need not
address whether—according to the allegations in the
complaint—those other statements had a reasonable basis as a
matter of law.
     34
      The reasonableness of the grounds for the statements
challenged is tested, of course, as of the time that those
statements were made. E.g., Isquith, 847 F.2d at 203 (stating
that whether a prediction is "false" depends on whether the
prediction "was "false' when it was made").

                                       19
made—would hardly suffice to state a claim under Rule 10b-5.35                  As

we have consistently held, scienter is an element of such a claim.

Thus, Plaintiffs may not merely allege but must eventually prove

that the defendants made the challenged statements with scienter,

i.e., "a mental state embracing intent to deceive, manipulate, or

defraud."36      Scienter also embraces "reckless indifference," which

we have defined as:

       limited   to   those   highly  unreasonable   omissions   or
       misrepresentations that involve not merely simple or even
       inexcusable negligence, but an extreme departure from the
       standards of ordinary care, and that present a danger of
       misleading buyers or sellers which is either known to the
       defendant or is so obvious that the defendant must have been
       aware of it.37

            Plaintiffs have satisfied the pleading requirements for

scienter.        They have claimed that the defendants either knew—or

were    recklessly     indifferent     to—the    fact   that    the    predictive

statements did not have a reasonable basis.               In support of these

conclusional        allegations,     Plaintiffs    have     included       specific

allegations of insider trading:              that the defendants sold Plains

stock worth $760,599 in mid-November 1991 when they had material

inside information concerning declines in flow-tube and shut-in

pressures and in daily production rates.                  Insider trading in

suspicious       amounts   or   at    suspicious    times      is,    of   course,


       35
            E.g., Krim, 989 F.2d at 1449 (noting same).
       36
      Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96
S.Ct. 1375, 1381 n. 12, 47 L.Ed.2d 668 (1976) (quoted in Tuchman,
14 F.3d at 1067).
       37
      Tuchman, 14 F.3d at 1067 (quoting Shushany v. Allwaste,
Inc., 992 F.2d 517, 521 (5th Cir.1993)).

                                        20
presumptively probative of bad faith and scienter.38                  And this

particular inside information is presumptively material at this

juncture, given the allegation that within one day of publication

of the pressure declines in early December, Plains' stock price

fell by one-third.39

          From   the   foregoing,   we    conclude   that   Plaintiffs    have

adequately pleaded their "unsubstantiated disclosure" theory of

recovery under Rule 10b-5.            As we noted earlier, and as the

district    court      correctly   surmised,   the   inclusion   of    timely,

meaningful cautionary language by the defendants will, of course,

affect the "total mix of information"—hence the materiality—of

those optimistic projections. Nonetheless, until the facts of this

case are "judged [not] in the abstract, but in light of the




     38
      See, e.g., In re Apple Securities Litigation, 886 F.2d at
1117 (stating same); Tuchman, 14 F.3d at 1067 (noting that
allegations providing the motive to commit securities fraud allow
an inference of fraudulent intent). The defendants claim in
their brief and at oral argument that these sales were innocuous
because they were made in response to tax considerations. While
this may well turn out to be true, at this stage of the
litigation we only have the Plaintiffs complaint before us.
Thus, it is impossible for us to consider this "evidence" to
ascertain whether this purported insider trading occurred at
suspicious times or in suspicious amounts. Cf. In re Apple
Securities Litigation, 886 F.2d at 1117 (concluding that only
slight change in quantity traded during relevant period and
presence of innocent and credible explanations for those trades
defeated an inference of bad faith or scienter).
     39
      The fact that inside trading occurred just before this
disclosure is also indicative of materiality. See S.E.C. v.
Texas Gulf Sulphur Co., 401 F.2d 833, 851 (2d Cir.1968) (en
banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756
(1969); Basic, Inc. v. Levinson, 485 U.S. 224, 240 n. 18, 108
S.Ct. 978, 988 n. 18, 99 L.Ed.2d 194 (1988).

                                         21
surrounding circumstances,"40 the asserted materiality of those

optimistic projections cannot be determined as a matter of law.

C. Incomplete Disclosure Theory

          In   support   of   their   second     theory   of   recovery,   i.e.,

incomplete or "deceptively selective" disclosure, Plaintiffs allege

that the defendants made various optimistic projections—such as

those contained in the statements of October 23rd—while knowingly

concealing adverse, material information, such as the fact that the

discovery      well   experienced     declines    in   flow-tube   and   shut-in

pressures.      Plaintiffs aver that these declines started occurring

at the time of the initial testing—the results of which were

publicly announced on October 17, 1991—and continued throughout

November, when certain of the defendants were selling Plains stock

worth $760,599.       Yet, according to Plaintiffs, the defendants did

not disclose this adverse pressure drop information until December

4, 1991 (after their alleged insider trading was complete), upon

dissemination of which the price of Plains stock declined by almost

one-third.

     Plaintiffs have amply pleaded a claim under their "incomplete

disclosure" theory of recovery.41            As we have long held under Rule

     40
          Krim, 989 F.2d at 1448.
     41
      Rubinstein and Greenwald have also alleged that the
optimistic projections became materially misleading when
subsequent testing and production undermined the basis of those
projections. We note that, at least facially, it appears that
defendants have a duty under Rule 10b-5 to correct statements if
those statements have become materially misleading in light of
subsequent events. See Backman v. Polaroid Corp., 910 F.2d 10,
17 (1st Cir.1990) (stating same); In re Phillips Petroleum
Secur. Litigation, 881 F.2d 1236, 1245 (3rd Cir.1989) (same);

                                        22
10b-5, "a duty to speak the full truth arises when a defendant

undertakes a duty to say anything."42       Although such a defendant is

under no duty to disclose every fact or assumption underlying a

prediction, he must disclose material, firm-specific adverse facts

that affect the validity or plausibility of that prediction.43

     Moreover,     the    inclusion   of   general   cautionary   language

regarding a prediction would not excuse the alleged failure to

reveal known material, adverse facts.         We addressed this general

issue in Huddleston v. Herman & MacLean.44       In that case, an issuer

offered approximately $4.4 million of securities to the public to




Hanon v. Dataproducts Corp., 976 F.2d 497, 503-04 (9th Cir.1992)
(same); Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1043
(11th Cir.1986), cert. denied, 480 U.S. 946, 107 S.Ct. 1604, 94
L.Ed.2d 790 (1987) (same). Cf. Isquith, 847 F.2d at 205 n. 13
(discussing SEC position that issuers must correct predictive
statements that no longer have a reasonable basis); First
Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th
Cir.1977), cert. denied, 435 U.S. 952, 98 S.Ct. 1580, 55 L.Ed.2d
802 (1978) (holding that duty to disclose the whole truth arises
when a defendant undertakes to disclose material information).
In any event, we conclude that the adequacy-of-disclosure issue
presented here is inappropriate for resolution by a Rule 12(b)(6)
motion to dismiss. Cf. Isquith, 847 F.2d at 208 (discussing
complex inquiry necessary to remove adequacy-of-disclosure issue
from the jury).
     42
      First Virginia Bankshares, 559 F.2d at 1317;          see also,
Huddleston, 640 F.2d at 543-44.
     43
      See Huddleston, 640 F.2d at 543-44; see also Krim, 989
F.2d at 1446 (observing that securities laws require issuers to
disclose material firm-specific information regarding
predictions—information concerning general economic "facts" and
conditions is already known to investors and analysts); In re
Trump Securities Litigation, 7 F.3d at 377 (defendants need not
disclose general economic conditions—federal securities laws do
not compel disclosure of the obvious).
     44
          640 F.2d 534.

                                      23
finance     the    construction    of   a    raceway.45      In    the   prospectus

accompanying that offering, the issuer indicated that it believed

that approximately $400,000 in working capital would be available

after payment of the estimated construction expenses.                    The issuer

filed for protection in bankruptcy, however, shortly after the

offering.46

     The        Huddleston    prospectus      prominently     warned      potential

investors that the securities at issue involved "a high degree of

risk"     and    that   the   construction    cost   might    be    understated.47

Evidence adduced at trial disclosed, however, that at the time of

issuance the defendants were aware that the cost of construction

was in fact understated—hence the projection of working capital was

in fact correspondingly overstated.             We concluded that under those

circumstances the inclusion of general cautionary language was

insufficient to sanitize the false working capital projection from

liability under Rule 10b-5.             As we wrote:         "To warn that the

untoward may occur when the event is contingent is prudent;                     to

caution that it is only possible for the unfavorable events to

happen when they have already occurred is deceit."48

     Although the instant allegations do not contain the inherent

correlation between the omission and the prediction found in

Huddleston—preventing Huddleston from controlling here—that case is

     45
          Id. at 539.
     46
          Id.
     47
          Id. at 543.
     48
          Id. at 544.

                                        24
nonetheless instructive on the weight to be given generalized

cautionary language when significant, known historical facts have

been omitted.      We hasten to add, however, that under different

circumstances cautionary language might render omissions of certain

historical facts immaterial.49      Again, the appropriate inquiry is

whether—given     the   timely   inclusion    of   meaningful   cautionary

language within "the total mix of information"—the omitted fact "is

one [that] a reasonable investor would consider significant in the

decision to invest [or divest]."50        Factors such as the specificity

and the extensiveness of the cautionary language are relevant to

this inquiry.51

                                    III

     49
      As previously noted, the cautionary language also affects
the reasonableness of the reliance on optimistic projections.
See Schlesinger, 2 F.3d at 139 (observing that plaintiff must
establish "justifiable reliance" as an element of a 10b-5 claim);
In re Trump Securities Litigation, 7 F.3d at 373 (same); see
also Basic, 485 U.S. at 241-44, 108 S.Ct. at 988-90 (1988)
(accepting fraud-on-the-market theory, which is premised on
assumption that in valuing stock, the market reflects all
information publicly disseminated).
     50
          Krim, 989 F.2d at 1448.
     51
      See, e.g., Krim, 989 F.2d at 1448-49 (cautionary language
regarding substantial riskiness of investment and disclosure of
approximately $140 million in problem loans made immaterial
failure to classify as "potential problem loans" $50 million in
loans that were 30-89 days overdue); In re Trump Securities
Litigation, 7 F.3d at 370-77 (specific disclosures of assumptions
and industry risks rendered optimistic projections and failure to
disclose certain information immaterial as a matter of law);
Romani, 929 F.2d at 878-79 (purported omissions not
material—defendants extensively disclosed riskiness of the
investment and the specific problems facing industry); Moorhead,
949 F.2d at 245 (feasibility study not contain an actionable
omission or misstatement—study contained specific cautionary
language and risk statements, and it disclosed the underlying
economic assumptions).

                                    25
                              STATE FRAUD CLAIMS

        Plaintiffs pleaded two causes of action under Texas common

law:    a fraud claim and a negligent misrepresentation claim.              The

district court dismissed both, concluding flatly that as a matter

of Texas law statements of prediction or opinion may not form the

basis for fraud or negligent misrepresentation.              We conclude that

the district        court   erred   in   reading   too   rigidly   the   general

proscription against fraud actions based on opinion.                Rather, as

the Texas Supreme Court stated in Trenholm v. Ratcliff:

       There are exceptions to the general rule that an expression of
       opinion cannot support an action for fraud. An opinion may
       constitute fraud if the speaker has knowledge of its
       falsity.... An expression of opinion as to the happening of
       a future event may also constitute fraud where the speaker
       purports to have special knowledge of facts that will occur or
       exist in the future....     Additionally, when an opinion is
       based on past or present facts, an action for fraud may be
       maintained.52

       As noted earlier, Plaintiffs have advanced one theory of

recovery based on the unsubstantiated nature of the disclosures

made, and another based on the incompleteness of those disclosures.

Both theories are actionable under Texas law,53 and, given the

       52
            Trenholm v. Ratcliff, 646 S.W.2d 927, 930 (Tex.1983).
       53
      Knowingly failing to disclose material information
necessary to prevent a statement from being misleading is
actionable as fraud under Texas law. See, e.g., Southeastern
Financial Corp. v. United Merchants & Manufacturers, Inc., 701
F.2d 565, 566-67 (5th Cir.1983) (noting same). Likewise, a
representation concerning value may be false when one who has
superior access to information knows that the representation made
has no reasonable basis in fact. See, e.g., Haralson v. E.F.
Hutton Group, Inc., 919 F.2d 1014, 1029 (5th Cir.1990)
(representations as to value may be actionable as fraudulent
under Texas law when the disclosing party has superior access to
information); Olney Sav. & Loan Ass'n v. Trinity Banc Sav.
Ass'n, 885 F.2d 266, 273 (5th Cir.1989) (appraisal can constitute

                                         26
allegations discussed in Part II of this opinion, both have been

sufficiently pleaded here to avoid dismissal for failure to state

a claim.    We are not unmindful nonetheless that to recover on this

state fraud claim Plaintiffs will have no less burden than they

will if they are to recover on their federal Rule 10b-5 claim.54

      In contrast to the fraud claim, we are less sanguine about

Plaintiff's contention that the defendants may be held liable here

for uttering predictive statements simply because those statements

were negligently made.    It is axiomatic, of course, that we will

not expand state law beyond its presently existing boundaries.55

Plaintiffs fail to cite, and our limited independent research fails

to disclose, any Texas case in which a defendant has been held

liable for a merely negligent predictive misrepresentation made to

a plaintiff who relied thereon and purchased securities in a public

market.56   Moreover, extending a right of recovery to such a broad


an actionable false representation under Texas law—claim that an
appraisal is merely an opinion is meritless).
     54
      See Meyers v. Moody, 693 F.2d 1196, 1214 (5th Cir.1982),
cert. denied, 464 U.S. 920, 104 S.Ct. 287, 78 L.Ed.2d 264 (1983)
(observing that common law fraud claim in Texas contains all of
the elements of a Rule 10b-5 claim plus additional ones); see
also Trenholm, 646 S.W.2d at 930 (laying out elements of Texas
common law fraud claim); Jackson v. Speer, 974 F.2d 676, 679
(5th Cir.1992) (same).
     55
      E.g., Jackson v. Johns-Manville Sales Corp., 781 F.2d 394,
397 (5th Cir.1986) (en banc), cert. denied, 478 U.S. 1022, 106
S.Ct. 3339, 92 L.Ed.2d 743 (1986).
     56
      The one case found that could arguably stand for imposing
such liability, Lutheran Broth. v. Kidder Peabody & Co., Inc.,
829 S.W.2d 300, 305-06, 309 (Tex.App.—Texarkana), writ dismissed,
840 S.W.2d 384 (1992), is not to the contrary. In Lutheran
Brothers, the Texas appellate court allowed a claim to go forward
in which the defendant was alleged to have negligently failed to

                                  27
class of plaintiffs would appear to violate the carefully crafted

limits of the negligent misrepresentation cause of action.57

     Finally,     imposition       of   such    liability      for   predictive

statements     like   the   ones   at   issue   here   would    be   especially

troublesome.      The fundamental purpose of the federal securities

acts is to implement "a philosophy of full disclosure."58                Holding

a defendant liable for making a merely negligent prediction would

appear    to   undermine    this   full-disclosure     philosophy,     as   such

liability would be likely to chill the disclosure—and thus the

availability—of        predictive       information.            Simply      put,



disclose material facts concerning a prediction, i.e., the
continued financial viability of the issuer. Id. at 305-06, 309.
The plaintiff in that case, however, had been in contractual
privity with the defendant. Id. at 306-07. In contrast, in the
instant case Plaintiffs make no claim of contractual privity with
the defendants; instead, they are attempting to certify a class
action to hold the defendants liable to anyone who purchased or
sold Plains stock on the open market during the relevant period.
Cf. Cook Consultants, Inc. v. Larson, 700 S.W.2d 231, 235
(Tex.App.—5 Dist. [Dallas] 1985, writ ref'd n.r.e.) (limiting
duty of speaker who negligently misspeaks because of deleterious
consequences associated with such potentially broad exposure to
liability).
     57
      The Restatement (Second) of Torts, which Texas courts
often look to for guidance in defining the limits to the
negligent misrepresentation tort, see, e.g., Cook Consultants,
700 S.W.2d at 234-35, explicitly rejects a "reasonable
foreseeability" approach to delineating the class of potential
plaintiffs. RESTATEMENT (SECOND) OF TORTS § 552 cmt. h. (1977).
Rather, the Restatement provides that a defendant shall be liable
only to "a limited group of persons for whose benefit and
guidance [the defendant] intends to supply the information" and
for whom "he intends the information to influence [in a
transaction] or in a substantially similar transaction." Id. at
§ 552(2).
     58
      E.g., Santa Fe Industries, Inc. v. Green, 430 U.S. 462,
477-78, 97 S.Ct. 1292, 1302-04, 51 L.Ed.2d 480 (1977); Basic,
485 U.S. at 234, 108 S.Ct. at 984.

                                        28
predictions—unlike most statements of historical fact—often entail

the evaluation and weighing of complex, usually interconnected

assumptions.     As can be imagined, with the benefits of hindsight

predictions based on such a process are easily subjected to the

claim that they were negligently made. Unquestionably, exposure to

such potentially catastrophic liability would create a strong

disincentive to anyone contemplating a public prediction.59

     Despite the foregoing concerns, we decline to rule today on

the viability of the negligent misrepresentation claim, as this

issue is not yet ripe for disposition. Neither side has adequately

briefed    or   argued   this      issue,    and   neither     side   has   had    an

opportunity to respond to these concerns.                    In addition, it is

unclear     whether    Plaintiffs      intend      to   press     the   negligent

misrepresentation claim on remand; although this claim is included

in the complaint, Plaintiffs only touched lightly on it in their

appellate brief and did not refer to it at all during oral

argument.

                                        IV

                                    CONCLUSION

     As this case was dismissed pursuant to Rule 12(b)(6), the only

relevant inquiry on appeal is whether Plaintiffs have pleaded

specific    facts     that,   if    proved,    could    form    the   basis   of   a

securities fraud claim under Rule 10b-5 or Texas common law.

     59
      See Cook Consultants, Inc., 700 S.W.2d at 234-35
(observing that limiting liability encourages the free-flow of
commercial information). Section 552 of the Restatement (Second)
of Torts makes the same point. RESTATEMENT (SECOND) OF TORTS § 552
at cmt. a.

                                        29
Accordingly, we express no opinion on the truth or falsity of those

allegations   or   on    the   likelihood   of   Plaintiffs'   ultimately

succeeding on their claims.

     For the reasons stated in this opinion, though, we conclude

that Plaintiffs have sufficiently pleaded their Rule 10b-5 and

Texas common-law causes of action to state claims upon which relief

could be granted.       Consequently, the order of the district court

dismissing their complaint is REVERSED and the case is REMANDED for

further proceedings consistent with this opinion.




                                    30