United States Court of Appeals
For the First Circuit
No. 05-1646
IN RE CREDIT SUISSE FIRST BOSTON CORP.
(AGILENT TECHNOLOGIES, INC.)
ANALYST REPORTS SECURITIES LITIGATION.
__________________
RICHARD BROWN ET AL.,
Plaintiffs, Appellants,
v.
CREDIT SUISSE FIRST BOSTON LLC ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. George A. O'Toole, Jr., U.S. District Judge]
Before
Selya and Lynch, Circuit Judges,
and Smith,* District Judge.
Brian P. Murray, with whom Murray, Frank & Sailler LLP, Marc
I. Gross, Pomerantz Haudek Block Grossman & Gross LLP, David
Pastor, and Gilman and Pastor LLP were on brief, for appellants.
Lawrence Portnoy, with whom Davis Polk & Wardwell, Robert A.
Buhlman, Siobhan E. Mee, and Bingham McCutcheon LLP were on brief,
for appellee Credit Suisse First Boston LLC.
__________
*Of the District of Rhode Island, sitting by designation.
Warren Feldman, Jeff E. Butler and Clifford Chance LLP on
brief for appellee Rogers.
Jeffrey B. Rudman, with whom Stephen A. Jonas, Jonathan A.
Shapiro, Matthew A. Stowe, Wilmer Cutler Pickering Hale and Dorr
LLP, Kenneth G. Hausman, Barbara A. Winters, Mark A. Sheft, and
Howard Rice Nemerovski Canady Falk & Rabkin were on brief, for
appellee Quattrone.
December 12, 2005
SELYA, Circuit Judge. Following a flurry of
investigations into the propriety of a single firm providing
investment banking services to a publicly held corporation while at
the same time opining as to the prospects of the corporation's
stock, the plaintiffs in this case sued one such firm, defendant-
appellee Credit Suisse First Boston Corp. (CSFB). They alleged
that they had sustained losses resulting from false and misleading
statements made by CSFB's analysts with respect to the stock of
Agilent Technologies, Inc. (Agilent). The district court, in a
lengthy unpublished opinion, dismissed the plaintiffs' consolidated
and amended class action complaint after concluding that the
plaintiffs had not met the pleading standards required for such
claims. See In re CSFB Corp. (Agilent Techs., Inc.) Analyst
Reports Sec. Litig., No. 02-12056, slip op. at 19 (D. Mass. Mar.
31, 2005) (D. Ct. Op.). Although the question is close — there is
very little authority dealing with the requirements for pleading
subjective falsity in a misstatement of opinion case — we conclude
that the plaintiffs' allegations are insufficient to show that
CSFB's analyst reports concerning Agilent (its quondam investment
banking client) were at odds with the analysts' privately held
beliefs. Consequently, we affirm the judgment below.
I. BACKGROUND
In reviewing the dismissal of a civil action under Rule
12(b)(6), we accept the factual averments of the plaintiffs'
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complaint. See Redondo-Borges v. U.S. Dep't of Hous. & Urban Dev.,
421 F.3d 1, 5 (1st Cir. 2005). We follow that praxis here.
A. Overview.
Agilent is a Hewlett-Packard "spin-off" that provides
enabling solutions to markets within the communications,
electronics, life sciences, and chemical industries. Its three
primary lines of business include test and measurement,
semiconductor products, and chemical analysis. The plaintiffs,
appellants here, are members of a putative class of persons who
acquired Agilent stock at various times from December 13, 1999
through February 20, 2001 (the class period). The gist of their
complaint is that analysts at CSFB, led by defendant-appellee
Elliot Rogers, issued reports recommending the purchase of Agilent
stock despite their lack of faith in the rosy picture they were
painting. These bullish reports were issued, the plaintiffs say,
in an effort to curry favor with Agilent and thereby secure future
investment banking business. A side effect, however, was an
artificial inflation of the price of the stock resulting in a wide
disparity between cost and true value. Unaware of that disparity,
the plaintiffs acquired Agilent securities at sky-high prices and
suffered losses when the stock plummeted.
B. CSFB's Overarching Fraudulent Culture.
CSFB is a global financial services firm, dealing, among
other things, in investment banking and investment research. At
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all times material hereto, defendant-appellee Frank P. Quattrone
served as the head of CSFB's global technology group (the Tech
Group). Although Quattrone was an investment banker, he had
complete control over the Tech Group's research activities. In
that capacity, he helped to determine the analysts' compensation
and had the power to terminate their employment.
Quattrone's omnipotence within the Tech Group allowed him
free rein to set up a system in which the analysts were pressured,
from time to time, to issue unduly positive ratings on certain
stocks in order to improve the chances of garnering investment
banking business for CSFB. Quattrone promised potential clients
favorable analyst reports and then used a carrot-and-stick
technique with his analysts to redeem those promises. During
Quattrone's reign, an analyst's bonus (which comprised a major
portion of his or her remuneration) was likely to correlate
positively to that analyst's support of the Tech Group's investment
banking activity. Conversely, analysts who issued negative reports
risked being reprimanded and passed over for choice assignments.
CSFB tied its analyst reports to a four-tiered ranking
format, composed of "strong buy," "buy," "hold," and "sell"
ratings. The plaintiffs, based on information gleaned from a
former CSFB employee, averred that the format was effectively
condensed into three tiers (dropping out the "sell" rating) and was
jiggled for the benefit of investment banking clients. Allegedly,
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common practices included issuing a "hold" rating if the analyst
actually believed stockholders should sell, affording a "buy"
rating to virtually all investment banking clients or prospective
clients, and using the "strong buy" rating only when the analyst
actually believed that investors should purchase the stock.
The analysts attached to the Tech Group sometimes
attended investment banking sales presentations, at which they
would distribute sample reports (invariably portraying the
potential investment banking client in an attractive light). This
participation was intended to assure prospective clients that they
would receive the benefit of positive reinforcement from the
analysts should they choose to retain CSFB for their investment
banking needs.
Quattrone's system initially proved to be a howling
success; in 1999, for example, CSFB managed more initial public
offerings (IPOs) in the United States than any other investment
banking house. In the year 2000, the Tech Group accounted for
almost half of CSFB's revenue from equity investment banking in the
United States. Shortly thereafter, Quattrone's persistent
dismantling of the compulsory "Chinese Wall" between banking and
research, required by the National Association of Securities
Dealers (NASD), inspired a series of governmental and regulatory
investigations. In a single six-month period, from the fall of
2002 through the following spring, Massachusetts state securities
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regulators, the New York Attorney General, the NASD, and the
Securities and Exchange Commission all initiated proceedings
against CSFB related to the internal conflicts of interest that
allegedly had caused CSFB's analysts to view the stock of CSFB's
present and potential investment banking clients through rose-
colored glasses.
C. CSFB's Involvement with Agilent.
CSFB's relationship with Agilent began when the Tech
Group, assisted by Rogers, made a sales pitch to Agilent's top
brass with an eye toward managing that company's forthcoming IPO.
Agilent was impressed, and CSFB helped to take the company public
on November 18, 1999. The stock, initially priced at $30 per
share, closed at $44 after its first day of trading.
On December 13, 1999 — the first day of the class period
— CSFB initiated its analyst coverage of Agilent stock with a "buy"
rating contained in a report authored by Rogers and two of his
confreres. The report set a twelve-month target price for the
stock of $55 per share. That day, the stock closed at $45.50 per
share, up $0.75 from the previous day's close.
CSFB published a second report, authored by the same trio
of analysts, on February 18, 2000. This report reiterated the
earlier "buy" recommendation and explained that Agilent's growth
was spurred by "strong" orders for semiconductor products (up
twenty-seven percent) and "reasonable gains in Test & Measurement."
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It discussed Agilent's six percent increase in test and measurement
(T&M) orders under the heading "Good Orders, but Not Explosive."
That day, the stock closed at $93.75 per share, down $3.25 from the
previous day's close.
Four days after issuing this "buy" recommendation, Rogers
sent the following e-mail to Agilent's Director of Investor
Relations:
TMO order growth was 6%. Communications test
and semi test were highlighted as key growth
drivers. One would expect communications test
growth to top 10% (vs. Q4:99). Growth in
Teradyne's Q4:99 orders was above 40%
sequentially, Credence's Jan:01 orders were up
over that amount. Yet Agilent's TMO business
only grew 6% despite two seemingly hot
markets. What retarded your growth, or were
Communications and Semi test less hot than you
let on?
On March 6, 2000, Agilent stock closed at its class
period high of $159 per share. Although the stock price tumbled
thereafter, CSFB analysts maintained a "buy" rating in their third
report (issued on May 19, 2000). That day the stock closed at
$66.62 per share, down $4.38 from the previous day's close.
On July 20, 2000, Agilent released a statement indicating
that third quarter earnings were expected to fall short of
forecasts as a result of manufacturing constraints, component
shortages, and sluggish sales attributable to two divisions. This
press release came as a surprise to the market as a whole. The
following day, the CSFB analysts issued their fourth report. The
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report maintained the stock's "buy" rating but flagged the surprise
announcement and cautioned that Agilent was rated a "buy" only "in
the most generous sense." The stock closed that day at $48.06 per
share, down $5.94 from the previous day's close.
On Saturday, August 12, 2000, Rogers received an e-mail
from a CSFB customer inquiring as to his outlook on Agilent stock.
Rogers replied: "Let's see what they announce thurs pm. Hopefully
some meaningful restructuring of the two problem divisions. Absent
that would not be aggressive despite the price pullback."
After the market closed on August 17, Agilent reported
that its third quarter earnings were better than anticipated. The
following day, the CSFB analysts issued their fifth report (which
was the last report authored in whole or in part by Rogers). This
document cited the upbeat announcement and reiterated the familiar
"buy" rating. That day, the stock closed at $56.38 per share, up
$9.88 from the previous day's close.
On October 12, 2000, a Tech Group analyst, Tim Mahon,
sent an e-mail to a fellow CSFB employee in response to a general
question about how to rate a struggling stock when investment
banking sensitivities existed. The e-mail read: "Suggest you ask
Elliot [Rogers] about the 'Agilent Two-Step'. That's where in
writing you have a buy rating . . . but verbally everyone knows
your position." Neither Mahon nor the analyst whom he advised was
ever involved in reporting on Agilent securities.
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In a November 8, 2000 e-mail to all Tech Group analysts,
Rogers used Agilent as an example of how to draft analyst reports.
Under the heading "Wordsmithing," Rogers wrote:
Verbally, you can say a lot more than what you
put into print without it coming back to haunt
you (he said, she said). That does not
preclude you from making your point, subtly.
For example: . . .
Agilent: money-losing operations supposedly
fixed in our quarter. Ha!! Fat Chance!!
"While management plans on turning the
operation around next quarter, we have chosen
to give them more breathing room to allow for
any slippage. As a result, our estimates are
more conservative than management's guidance,
but allow for upside to our EPS projections if
they achieve their bogey on the stated
timeline."
Other CSFB analysts issued Agilent reports on September
29, November 21, and December 6, 2000. Each report reaffirmed the
"buy" rating. The per share stock price rose on the dates of the
September and November reports (up $0.99 to $48.94 and up $4 to
$48.62, respectively), but fell following the December report (down
$3.06 to $52).
On February 21, 2001 — the last day of the class period
— Agilent announced that it was trimming back its forecast of
second quarter profits. That day, CSFB issued a report downgrading
Agilent stock from "buy" to "hold." The stock sagged to $40.20 per
share, down $3.80 from the previous day's close.
Throughout the class period, members of the Tech Group's
investment banking team maintained contact with Agilent executives
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regarding potential investment banking business. None
materialized.
D. Proceedings Below.
Against this factual backdrop, the plaintiffs sued CSFB
and Rogers, claiming that the analyst reports constituted false and
misleading statements actionable under section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5. In addition, they
brought section 20(a) "control person" claims against CSFB and
Quattrone for allowing and condoning such behavior. See 15 U.S.C.
§ 78t(a). Certain procedural skirmishing followed, none of which
is relevant here.
After the plaintiffs filed a consolidated and amended
class action complaint, the district court, on motions brought
pursuant to Fed. R. Civ. P. 12(b)(6), found the complaint's
allegations insufficient. Specifically, the court dismissed the
section 10(b) and Rule 10b-5 claims1 for failure adequately to
plead (i) any false or misleading statement, (ii) scienter, or
(iii) loss causation. D. Ct. Op. at 14, 17. It simultaneously
dismissed the section 20(a) claims as derivative of (and, thus,
sharing the frailty of) the underlying section 10(b) claims. Id.
at 17. This timely appeal ensued.
1
For simplicity's sake, we refer hereafter only to section
10(b) claims. Those references encompass Rule 10b-5 claims
wherever the context permits.
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II. ANALYSIS
In considering a motion to dismiss, the district court is
bound to "assume the truth of all well-pleaded facts and indulge
all reasonable inferences that fit the plaintiff's stated theory of
liability." In re Colonial Mortg. Bankers Corp., 324 F.3d 12, 15
(1st Cir. 2003). The court is free, however, to disregard bald
assertions, unsupportable conclusions, and opprobrious epithets.
Chongris v. Bd. of Appeals, 811 F.2d 36, 37 (1st Cir. 1987). We
review appeals from the grant or denial of Rule 12(b)(6) motions de
novo, using the same set of criteria that guided the district
court. See Redondo-Borges, 421 F.3d at 5.
The usual elements of a section 10(b) claim are that the
defendant (i) made a material misrepresentation, (ii) with
scienter, (iii) in connection with the purchase or sale of a
security, (iv) on which the plaintiff relied, (v) to his or her
detriment. Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627, 1631
(2005). To satisfy the final "loss" element, a plaintiff must show
both economic or transactional loss and loss causation. See id.
In cases involving publicly traded stock, the Private
Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4, makes
these elements important not only as a matter of proof but also as
a matter of pleading. In order to survive a motion to dismiss in
such a case, a section 10(b) claimant cannot take refuge in the
generous notice pleading formulation of Fed. R. Civ. P. 8(a)(2).
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Rather, he or she must satisfy the more stringent guidelines of the
PSLRA. With this in mind, we turn to that special set of pleading
requirements as they pertain to this case.
As a condition precedent to pleading the first element of
a section 10(b) claim, the PSLRA demands that a complaint "specify
each statement alleged to have been misleading, the reason or
reasons why the statement is misleading, and, if an allegation
regarding the statement . . . is made on information and belief,
the complaint shall state with particularity all facts on which
that belief is formed." 15 U.S.C. § 78u-4(b)(1). To achieve this
benchmark, a complaint "must provide factual support for the claim
that the statements . . . were fraudulent, that is, facts that show
exactly why the statements . . . were misleading." Aldridge v.
A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir. 2002). This support
typically will include particularized allegations regarding "the
time, place, and content of the alleged misrepresentations."
Greebel v. FTP Software, Inc., 194 F.3d 185, 193 (1st Cir. 1999).
Despite these strictures, however, a pleading setting forth a
section 10(b) claim need not be precise to the point of pedantry;
although it must set forth the supporting facts with particularity,
it need not elaborate upon every jot and tittle of evidentiary
detail. In re Stone & Webster, Inc. Sec. Litig., 414 F.3d 187,
194-95 (1st Cir. 2005).
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Circumstances differ from case to case, and we have shied
away from attempting to compile a mechanical checklist of the type
and kind of allegations that are essential to satisfy the PSLRA
pleading requirements. See In re Cabletron Sys., Inc., 311 F.3d
11, 32 (1st Cir. 2002) (explaining that "there is no one-size-fits-
all template" for analyzing securities cases). Rather, we have
instructed district courts to make an individualized assessment
that sweeps before it the totality of the facts in a given case.
See id.
The allegations at hand give an idiosyncratic twist to
this general guidance. The plaintiffs contend that their complaint
adequately identifies nine false or misleading statements. Eight
of these are of a piece: the plaintiffs claim that the "buy"
ratings in the eight analyst reports issued during the class period
qualify as specific misrepresentations because the defendants
employed that taxonomy even though they actually believed that wise
investors should not purchase Agilent securities. The ninth
instance is related: the plaintiffs contend that the statement in
the February 2000 analyst report describing Agilent's T&M order
growth as "reasonable" was false and misleading because this
description contradicted Rogers' actual view.
To put these claims in perspective, we must understand
the vocabulary that the analysts were using. CSFB's standard stock
ratings — "strong buy," "buy," "hold," and "sell" — are designed to
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reflect its analysts' predictions anent the likely future
performance of the securities in question.2 Although these ratings
are based to some degree on objective facts, they ultimately convey
an opinion about a stock's prospects and, perhaps, about the likely
proclivities of the stock market over a given period. Armed with
the same background facts, two knowledgeable analysts, each acting
in the utmost good faith, could well assign different ratings to
the same stock. Moreover, ratings are unlike the statements sued
upon in an archetypical section 10(b) action because they rest upon
outsiders' views about a corporation rather than upon a corporate
insider's factual assertions regarding his or her own company.
2
At the time, CSFB defined these ratings as follows:
"SB" (strong buy) — Stock is expected to outperform the
market significantly over the next 6-12 months and should
be bought today.
"B" (buy) — A good "story"; needs some time to develop
but should outperform. Those institutions that require
time to build a position should buy the stock today.
"H" (hold) — Would not buy the stock. Events may not yet
be apparent that would make it either a Buy or a Sell.
"S" (sell) — Would not buy if not owned and would use as
a source of funds if owned; there is nothing to make the
stock outperform. If an institution wanted to stay in
the same industry group, it would swap out of the stock.
Potential negatives are not yet reflected in the stock —
if you own it, sell it.
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Most ratings are, therefore, best understood as statements of
opinion, not as unadulterated statements of objective fact.3
Classifying ratings as opinions does not automatically
shield them from liability under the securities laws. See Virginia
Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1095 (1991). While
Virginia Bankshares specifically addressed a claim under section
14(a) of the Securities Exchange Act, other courts have applied its
reasoning to section 10(b) claims alleging false or misleading
opinions. See, e.g., City of Monroe Employees Ret. Sys. v.
Bridgestone Corp., 399 F.3d 651, 674 n.20 (6th Cir. 2005); In re
Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 372 n.14 (3d Cir.
1993). This transplantation makes sense; even though section
10(b), in terms, deals with statements of fact, a statement of
opinion may be considered factual in at least two respects: as a
statement that the speaker actually holds the opinion expressed and
as a statement about the subject matter underlying the opinion.
See Virginia Bankshares, 501 U.S. at 1092. On that logic, ratings
— and the bullish or bearish statements that accompany them — may
in some circumstances qualify as false or misleading statements of
fact. See, e.g., DeMarco v. Lehman Bros., Inc., 309 F. Supp. 2d
631, 634 (S.D.N.Y. 2004).
3
We say "most" because we recognize that some ratings, such as
those mechanically derived through input data, would be subject to
a different taxonomy. For purposes of this opinion, our references
to ratings only encompass those reports in which an analyst
exercises some degree of personal discretion.
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A plaintiff can challenge a statement of opinion by
pleading facts sufficient to indicate that the speaker did not
actually hold the opinion expressed (throughout this opinion, we
refer to such allegations as claims of "subjective falsity").
Because the plaintiffs cannot clear the subjective falsity hurdle,
we need not answer the thornier question of whether a plaintiff who
challenges a statement of opinion also must plead facts sufficient
to show, from an objective standpoint, that the statement either
expressly or by fair implication contained a false or misleading
assertion about its subject matter.
As to subjective falsity, the plaintiffs argue that the
CSFB analysts issued "buy" ratings when they did not truly believe
that wise investors should purchase Agilent stock. Although the
plaintiffs' arguments in support of this claim are not without some
force, we conclude that their complaint, which as we have said is
premised on misstatements of opinion, fails to satisfy the PSLRA's
heightened pleading standard.
Although a speaker's confession that his or her opinion
was false when made would suffice, on its own, to show subjective
falsity, that species of frank admission is unlikely to
materialize. In the usual case, therefore, plaintiffs will need to
rely on a more indirect form of evidence to meet their pleading
burden. See Virginia Bankshares, 501 U.S. at 1096. In the case at
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hand, there is no smoking gun, so the case falls into this latter
category.
Before we scrutinize the specifics of the complaint in
search of evidence of subjective falsity, we pause to discuss a
unique facet of the PSLRA's pleading requirements when applied to
misstatements of opinion. In the typical section 10(b) case, the
falsity and scienter elements do not overlap and, thus, necessitate
separate inquiries. See, e.g., Podany v. Robertson Stephens, Inc.,
318 F. Supp. 2d 146, 154 (S.D.N.Y. 2004). In those cases, the
falsity element addresses objective truth, whereas the scienter
element focuses on the speaker's subjective intent. In cases
premised on misstatements of opinion, however, the falsity element,
at a minimum, entails an inquiry into whether the statement was
subjectively false (whether it also entails an inquiry into
objective falsity is a matter on which we take no view).
Accordingly, the subjective aspect of the falsity requirement and
the scienter requirement essentially merge; the scienter analysis
is subsumed by the analysis of subjective falsity. See In re
Salomon Analyst Level 3 Litig., 350 F. Supp. 2d 477, 490 (S.D.N.Y.
2004). We think it follows that if a plaintiff adequately pleads
that a statement of opinion was subjectively false when made, the
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complaint will, ex proprio vigure, satisfy the pleading
requirements of the PSLRA relative to scienter.4
There is a relative dearth of authority speaking to the
topic of whether a plaintiff has adequately pleaded subjective
falsity in a false opinion case. Because subjective falsity is so
intricately tied to scienter in false opinion cases, the
authorities relative to pleading scienter are instructive (although
not necessarily controlling) when determining whether a plaintiff
has satisfied his or her pleading burden with respect to the
subjective aspect of the falsity claim.5 See Podany, 318 F. Supp.
2d at 156 n.4. Focusing directly on scienter, the PSLRA enunciates
a strict standard for pleading the second element of a section
10(b) claim. See 15 U.S.C. § 78u-4(b)(2); see also Greebel, 194
F.3d at 188. To plead scienter adequately, a complaint must, with
regard to each challenged act, "state with particularity facts
giving rise to a strong inference that the defendant acted with the
required state of mind." 15 U.S.C. § 78u-4(b)(2). That the
4
We need not explore the other side of the coin. If a
complaint does not successfully plead subjective falsity, it fails
to pass muster under the PSLRA. See In re Salomon, 350 F. Supp. 2d
at 493. That, in turn, negates any need for a separate scienter
inquiry.
5
Scienter, in its most abecedarian form, is "a mental state
embracing intent to deceive, manipulate, or defraud." Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). To establish
this mental state, a plaintiff must show that the defendant's
conduct evinced either a conscious intent to commit the alleged
fraud or a high degree of recklessness in connection with the
fraud. See Greebel, 194 F.3d at 198-201.
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statute, by its terms, requires a "strong," rather than merely a
"reasonable," inference that the defendant acted with scienter is
more than an odd linguistic quirk.
Commenting upon this distinction, we have suggested that
a plaintiff's allegations must show a high likelihood of scienter
in order to satisfy the PSLRA standard. Aldridge, 284 F.3d at 82.
Although the inference need not be ironclad, it must be persuasive.
Greebel, 194 F.3d at 203. Scienter allegations do not pass the
"strong inference" test when, viewed in light of the complaint as
a whole, there are legitimate explanations for the behavior that
are equally convincing. See id.
By analogy, these authorities indicate that conclusory
allegations regarding an analyst's hidden beliefs are not
sufficient to ground an assertion of subjective falsity. See
Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 361 (1st Cir.
1994) ("[G]eneral averments of the defendants' knowledge of
material falsity will not suffice, [rather] the complaint must set
forth specific facts that make it reasonable to believe that
defendant[s] knew that a statement was false or misleading")
(citation and internal quotation marks omitted). The plaintiff
must instead point to provable facts that strongly suggest knowing
falsity. See Podany, 318 F. Supp. 2d at 158.
As one contemplates the inner workings of an analyst's
mind, the line separating fact from conclusion often may seem
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blurred. In the end, it is only when "conclusions are logically
compelled, or at least supported, by the stated facts [to] an
acceptable level of probability, that 'conclusions' become 'facts'
for pleading purposes." Dartmouth Rev. v. Dartmouth Coll., 889
F.2d 13, 16 (1st Cir. 1989).
The sufficiency of a subjective falsity allegation must
be determined through a statement-by-statement analysis based on
the state of affairs extant at the time the opinion was rendered.
See In re Boston Tech., Inc. Sec. Litig., 8 F. Supp. 2d 43, 55 (D.
Mass. 1998); see also In re Salomon, 350 F. Supp. 2d at 493. The
fact that a speaker changes his or her mind and decides after the
fact that an earlier opinion was ill-advised is insufficient to
support an averment of subjective falsity. See In re Cabletron,
311 F.3d at 36-37. Furthermore, the fact-specific nature of the
falsity analysis compels a conclusion that a plaintiff cannot
succeed in pleading subjective falsity merely by identifying an
overarching fraudulent scheme or corrupt environment. See In re
Salomon, 350 F. Supp. 2d at 493. Rather, the plaintiff must, for
each allegedly false opinion, plead provable facts strongly
suggesting that the speaker did not believe that particular opinion
to be true when uttered. See id. at 493-94; see also Lentell v.
Merrill Lynch & Co., 396 F.3d 161, 171 (2d Cir. 2005) (suggesting,
in dictum, that evidence of false opinions in analyst reports
issued on one company would not suffice to meet the PSLRA pleading
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standard in a case alleging false opinions contained in reports
regarding a different company).6 Thus, when alleging that an
analyst's opinions are false or misleading, a plaintiff must plead
facts that directly implicate both the rated stock and the
questioned report. See Podany, 318 F. Supp. 2d at 158.
The bottom line, then, is that while the plaintiffs'
allegations regarding the obvious conflicts of interest and general
state of corruption within CSFB's analyst ranks may be enough to
turn the stomach of an ethically sensitive observer, they are
insufficient, on their own, to support a fraud pleading with
respect to the subjective falsity of the eight "buy"
recommendations issued on Agilent stock. See In re Salomon, 350 F.
Supp. 2d at 492 (finding that allegations of "conflicts of
interest, incentives to increase compensation, or internal pressure
on analysts that is not tied to the particular stock at issue are
not sufficient, standing alone, to satisfy the particularity
requirements"); see also Lentell, 396 F.3d at 171 (suggesting that
although conflicts of interest present opportunities for fraud,
they cannot, without more, furnish the basis of a fraud complaint).
Such allegations are tantamount to pleading conclusory statements
6
This is not to say that the same provable fact may not be
used to plead more than one allegedly false opinion. For example,
if an analyst sent out an e-mail explicitly stating that he had
always considered a certain stock to be a dog, that e-mail might
well be used to plead the subjective falsity of every previous
"buy" recommendation that the analyst had made with respect to that
stock.
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regarding motive and opportunity — and we have made it pellucid
that such gauzy generalities, without more, are insufficient to
plead scienter in a PSLRA case. See, e.g., Greebel, 194 F.3d at
197. Since they are not tied to a specific statement, we find them
equally wanting as a basis for pleading subjective falsity.
In an effort to plead the "something more" needed to
bolster their general allegations, the plaintiffs mention four
events, each occurring in the year 2000, that are arguably
connected to the Agilent "buy" ratings. Upon close perscrutation,
and viewed against the backdrop of CSFB's overarching fraudulent
scheme, none of these events gives rise to the necessary inference
that the analysts believed the ratings to be false when made. We
explain briefly.
The first event is the e-mail referencing the "Agilent
Two-Step." The plaintiffs hawk this e-mail as supportive of their
theory that Rogers took his Agilent "buy" ratings with several
grains of salt. They argue that this e-mail indicates that Rogers
speciously rated the stock a "buy" while simultaneously telling a
select few his "true, negative, opinion." Appellants' Br. at 18.
To be sure, this e-mail mentions Agilent and, thus,
satisfies the company-specific component of the subjective falsity
inquiry. It fails, however, to satisfy the transaction-specific
component. The language of the e-mail is patently insufficient to
support an inference that Rogers misstated his true opinion every
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time he settled upon a "buy" rating for Agilent stock. Moreover,
as the district court observed, the plaintiffs have not alleged
that Rogers, or any other CSFB analyst for that matter, performed
the "Two Step" with respect to any of the reports at issue. See D.
Ct. Op. at 11. When all is said and done, the e-mail, though
suggestive of sharp practice, is too general to satisfy the PSLRA's
rigorous particularity requirements. See Greebel, 194 F.3d at 193.
The PSLRA requires plaintiffs to specify the reason or reasons why
a particular statement is false or misleading; it is not enough to
give a reason suggesting that the defendant was perfectly willing
to shade the truth or that some unidentified statement or
statements suffer from that shortcoming. See 15 U.S.C. § 78u-
4(b)(1).
The plaintiffs next point to the February 22 e-mail from
Rogers to an Agilent executive, written four days after Rogers
issued a report that described Agilent's T&M order growth as
"reasonable" and gave the company a "buy" rating. They suggest
that Rogers' inquiry as to why Agilent's T&M order growth was less
robust than some of its competitors demonstrates a disconnect
between his privately held and publicly expressed opinions because
it evinces his personal belief that the growth was not "reasonable"
and that investors should refrain from purchasing the stock. This
suggestion requires an inferential leap that the facts do not
support.
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As an initial matter, past performance is not necessarily
indicative of future stock prices. The market often anticipates
both favorable and unfavorable information. Moreover, it sometimes
is said that a rising tide lifts all boats, and Rogers might have
rated the competitors as "strong buys" (based on their "strong"
growth) when he gave Agilent a less aggressive, though still
positive, "buy" rating (based on its "reasonable" growth). The
complaint leaves these and a myriad of other possibilities wide
open.
We acknowledge that, on a Rule 12(b)(6) motion, a court
must view the stated facts in the light most favorable to the
pleader. See Redondo-Borges, 421 F.3d at 5. This approach,
however, does not require the court, in a PSLRA case, to turn a
blind eye to the universe of possible conclusions stemming from a
given fact or set of facts. See Greebel, 194 F.3d at 203 (finding
scienter allegations inadequate to satisfy PSLRA pleading standards
when there may have been "any number of legitimate reasons" for the
described behavior). In this instance, the plaintiffs' suggested
inference simply does not achieve the level of strong probability
needed to satisfy the PSLRA's pleading requirements.
The plaintiffs' reliance on the August 12 e-mail from
Rogers to a CSFB client, suggesting that he would not be
"aggressive" on Agilent stock absent some "meaningful restructuring
of the two problem divisions," exhibits a similar flaw. Once
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again, the desired inference — that Rogers' "buy" rating of August
18 misstated his privately held view because Agilent had not
undertaken the restructuring — is only one of a number of
possibilities, several just as likely as the inference plaintiffs
desire. This is insufficient to carry the plaintiffs' pleading
burden, even when viewed in light of the other pleaded facts. The
plaintiffs' failure to do more to bring their desired inference to
an acceptable level of probability renders this e-mail insufficient
to meet their pleading burden. See id.
None of this is to say that analyst e-mails that reveal
negative feelings about certain stocks, coupled with sufficiently
contemporaneous "buy" ratings, can never satisfy the PSLRA's
particularity requirement for pleading subjective falsity. Such
cases do exist. See, e.g., In re Salomon, 350 F. Supp. 2d at 493
(finding pleading standard met for "buy" ratings issued after
analyst sent internal e-mail stating that the stocks "must not
remain buys"); DeMarco, 309 F. Supp. 2d at 634 (finding pleading
standard met when analyst gave stock the highest possible "buy"
rating after sending e-mails to institutional investors instructing
them to sell it short). In those cases, the disconnect between the
opinion expressed in the e-mail and the opinion implicit in the
rating was stark and unambiguous. In contrast, there is no
necessary inconsistency between the statement "I would not be
aggressive" and an expressed belief that Agilent stock nonetheless
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qualified for CSFB's "buy" rating. See supra note 2 (setting
parameters of "buy" ratings in CSFB's standard lexicon). Given
CSFB's four-tiered rating system, it is entirely possible that
Rogers equated aggressive behavior with a "strong buy" rating. In
all events, the pleadings do not negate such a possibility — and
the plaintiffs cannot hinge their subjective falsity claim solely
on their unsubstantiated interpretation of Rogers' ambiguous word
choice. See Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061, 1069 (5th
Cir. 1994) (concluding, in a section 10(b) case, that the defendant
was not obliged to employ the adjectival characterization that the
plaintiffs thought to be most accurate).
Here, moreover, a significant intervening event
transpired between the date of the e-mail and the date of the
interdicted report. On August 17 — five days after the e-mail and
one day before the report issued — Agilent made a surprise
announcement that its third quarter earnings were better than
expected. Even if Rogers had been wary of the stock's prospects on
August 12, the surprise announcement easily could have changed the
decisional calculus. The fact that the very first line of the
August 18 report notes that Agilent's third quarter was "not as bad
as forecast" bolsters this inference.
The last "event" is the November 8 e-mail from Rogers to
his fellow analysts. In that e-mail, Rogers used Agilent's
unexpected negative forecast (announced on July 20, 2000) and his
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subsequent "buy" rating (contained in a report issued the next day)
to demonstrate the art of "wordsmithing." This rodomontade put
Rogers in a bad light, but it fails to support a reasonable
inference that Rogers actually misstated a privately held opinion.
While isolated statements in this e-mail might well be considered
indicative of an appetite for sleazy practice, those statements
cannot be wrested from their contextual moorings when determining
whether the plaintiffs have satisfied the PSLRA pleading standard.
See Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir.
1996). In this instance, the statement immediately preceding
Rogers' list of examples notes that the illustrations are intended
to show how to "mak[e a] point, subtly." It is too much of a
stretch to read this statement as an admission by Rogers that he
had issued false opinions.
One more possibility warrants our attention. Even though
there is a gray area within which reasonable analysts legitimately
may issue differing recommendations, it is unlikely that a trained
analyst would actually believe in the truth of a recommendation
that, from an objective standpoint, was totally unfounded. One can
imagine cases in which the facts so strongly suggest that an
opinion was objectively false when made that an inference of
subjective falsity may be drawn. See, e.g., Serabian, 24 F.3d at
368 (finding strong evidence of objective falsity sufficient to
satisfy scienter pleading requirement). Here, however, the pleaded
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facts are too problematic to show objective falsity (and, thus, to
prop up an otherwise deficient showing of subjective falsity).
The short of it is that the plaintiffs have pleaded no
contemporaneous facts that debunk the legitimacy of the "buy"
ratings when made. Their main refrain is that they have set forth
facts showing that the majority of the challenged "buy" ratings
turned out to be dead wrong: after hitting an all-time high in
March of 2000, Agilent's stock price dropped like a stone
throughout much of the remaining class period. From this
historical record, the plaintiffs seek to have us infer that the
ratings must have been objectively false because the stock "should
not have been 'bought' by a rational investor who wished to
increase, rather than decrease, his capital." Appellants' Reply
Br. at 7. This is whistling past the graveyard.
Ratings, like other forecasts, cannot be found to be
false — objectively or subjectively — simply because they turn out
to be inaccurate. See Glassman v. Computervision Corp., 90 F.3d
617, 626 (1st Cir. 1996); see also Shaw, 82 F.3d at 1223 (warning
against attempts to plead fraud by hindsight). To ground an
inference of objective falsity, the facts must suggest that a
particular rating was not plausibly premised on, or was
inconsistent with, the information available to the analyst at that
time. Glassman, 90 F.3d at 627. To hold otherwise would run an
unacceptable risk of subjecting conscientious analysts to liability
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if, after the fact, external events or corporate mismanagement
adversely impacted a stock that was a legitimate "buy" when it was
rated.
By the same token, the plaintiffs have failed adequately
to plead facts indicating the objective falsity of the statement in
the February 18, 2000 report describing order growth in one segment
of Agilent's business as "reasonable." To support their assertion
that this characterization is objectively false, the plaintiffs
point to the e-mail sent four days later by Rogers to an Agilent
executive inquiring why Agilent's order growth was less robust than
that of its chief competitors. This places more weight on the e-
mail than it can bear.
The February 18 report did not characterize Agilent as a
leader in order growth, so the e-mail does not suggest a necessary
inconsistency between the analysts' description and the true state
of affairs. Cf. Virginia Bankshares, 501 U.S. at 1094 (finding
description of a $42 per share merger price as "high" and "fair"
objectively false in the face of evidence that the bank's "going
concern" value at the time the statements were made exceeded $60
per share).
Especially when considered in context — the analysts'
description was given under the heading "Good Orders, but Not
Explosive" — the e-mail, standing alone, is insufficient to show
objective falsity. The plaintiffs do not challenge the accuracy of
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the rate of growth specified in the report (six percent) and the
report clearly stated that Agilent's competitors enjoyed more
appreciable order growth. Under these circumstances, the adjective
"reasonable" cannot be said to have been objectively false.
To summarize, the plaintiffs do not meet the PSLRA
requirement for pleading a misstatement of opinion. Their general
allegations, Agilent-specific allegations, and transaction-specific
allegations, whether viewed separately or in the ensemble, do not
support the necessary inference that the ratings were subjectively
false. As an aside, the plaintiffs' failure satisfactorily to
plead subjective falsity also supplies a solid basis for a finding
that they have failed to satisfy the PSLRA standard for pleading
scienter.
This conclusion effectively ends our consideration of the
section 10(b) claims. Because the plaintiffs have failed to meet
these PSLRA pleading requirements in regard to subjective falsity
and scienter, we need not address other issues, such as the need to
plead objective falsity in a misstatement of opinion case, the
materiality of the allegedly false statements, or the district
court's alternate holding in this case that the plaintiffs failed
adequately to plead loss causation. See D. Ct. Op. at 17.
This pleading failure also provides a sufficient basis
upon which to affirm the district court's dismissal of the
plaintiffs' section 20(a) claims. Section 20(a) creates derivative
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liability for those that directly or indirectly control a person or
firm found liable under a provision of the Securities Exchange Act.
See 15 U.S.C. § 78t(a). Thus, our rejection of the underlying
section 10(b) violations dooms the plaintiffs' claims against CSFB
and Quattrone under section 20(a). See Greebel, 194 F.3d at 207;
see also D. Ct. Op. at 17.
III. CONCLUSION
We need go no further. The plaintiffs' allegations, if
true, show beyond hope of contradiction that the defendants
operated without much concern for ethical standards. But the fact
that an organization is ethically challenged does not impugn every
action that it takes. In a securities fraud case, the plaintiffs
still must carry the burden, imposed by the PSLRA, of pleading
facts sufficient to show that the particular statements sued upon
were false or misleading when made. This is as it should be: the
securities laws — and section 10(b) in particular — were designed
to provide a damages remedy for losses incurred as a result of
false or misleading statements, not to punish defendants for bad
behavior in a vacuum. Although ably represented, the plaintiffs in
this case have not carried the pleading burden that the PSLRA
imposes. Thus, the defendants, despite their inappropriate
actions, cannot be held legally responsible for the plaintiffs'
ill-fated investments in Agilent stock.
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Affirmed.
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