Case Information
*2 Before: H ENDERSON , R OGERS and P ILLARD , Circuit Judges . Opinion for the Court by Circuit Judge R OGERS . R OGERS , Circuit Judge
: Between April 2007 and February 2008, Harman International Industries, Inc., and three of its officers are alleged to have knowingly and recklessly propped up the Company’s stock price by making materially false and misleading statements about the Company’s financial condition and by failing to disclose related material adverse facts, in violation of Section 10(b) of the Securities Exchange Act of 1934 (“the Act”), 15 U.S.C. § 78j(b); Rule 10b-5, 17 C.F.R. § 240.10b-5; and Section 20(a) of the Act, 15 U.S.C. § 78t(a). This is alleged to have occurred during a period when the Company was being considered for acquisition. Only after the acquisition did not go forward, it is alleged, did the Company disclose information that would have been important to a reasonable investor. The district court dismissed the complaint for failure to state a claim.
On appeal, the only question is whether the complaint stated a plausible claim of securities fraud with respect to three alleged statements that focus primarily on the status of the Company’s personal navigational device (“PND”) products. Consistent with the standard to be applied in considering a motion to dismiss for failure to state a claim, we necessarily offer no view on the merits of the allegations. The district court concluded two of the alleged statements fell within the statutory safe harbor for forward-looking statements accompanied by meaningful cautionary language and the third statement was “puffery” and thus inactionable. Upon de novo review, we hold that although the challenge to the forward-looking nature of two statements was forfeited, the complaint plausibly alleges that those statements were not entitled to safe harbor protection because the accompanying cautionary statements were misleading insofar as they failed to account for historical facts about PNDs that would have been important to a reasonable investor. We also hold that the third statement, in the Company’s annual report, is plausibly understood, in the alleged circumstances, as a specific statement about its recent financial performance and not mere “puffery.” Because loss causation was adequately pleaded and the Section 20(a) claims alleged against the individual defendants are plausible, we reverse the dismissal of the complaint as to these three statements and remand the case to the district court for further proceedings.
I.
Section 10(b) of the Securities Exchange Act of 1934, as amended, provides that it shall be unlawful “[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b). SEC Rule 10b-5 closely tracks Section 10(b), providing that, “in connection with the purchase or sale of any security,” it is unlawful:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person[.]
17 C.F.R. § 240.10b-5. The Act, as amended, provides a safe harbor from liability for forward-looking statements that are “identified as . . . forward-looking” and “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i) (emphases added); see Private Securities Litigation Reform Act of 1995, Pub. L. 104-67, 109 Stat. 737 (1995). Section 20(a) subjects to liability “[e]very person who, directly or indirectly, controls any person liable under” another provision of the Act or implementing rules. 15 U.S.C. § 78t(a).
In 2008, when the consolidated class action complaint was filed, Harman International Industries, Inc., was “a leading manufacturer of high-quality, high fidelity audio products and electronic systems for the automotive, consumer, and professional markets in the Americas, Europe, and Asia.” Compl. ¶ 2. Its products included information and entertainment systems for automobiles. According to the complaint, on April 26, 2007, the Company announced its potential acquisition by an entity formed by Kohlberg Kravis Roberts and an affiliate of Goldman Sachs, two prominent private equity firms. The same day, and on two subsequent occasions at issue, the Company, through its chief executive officers and chief financial officer and in its FY 2007 Annual Report, made statements regarding past and forecasted sales of its products, including PNDs. The price of the Company’s stock rose markedly following the April 2007 merger announcement and held steady through September 2007. When the Company announced in September 2007 that the acquisition plans had been abandoned, the Company’s share price fell by more than 24 percent. It fell again in January 2008 when the Company lowered projected earnings per share, noting among other things “a major shift” in its PND business. Id. ¶ 109. It continued to fall in February 2008, when the Company announced the financial results for the second quarter of FY 2008, noting PND sales had fallen by $29 million compared to the same period in the previous year, in part due to sale of older products at substantial discounts. Id . ¶ 113.
The lead plaintiff, Arkansas Public Employees’ Retirement System (“Appellant”), a purchaser of common stock between April 26, 2007, and February 5, 2008, sued the Company and three of its officers for securities fraud. Count one of the complaint alleges that the Company violated Section 10(b) of the Act and Rule 10b-5 when its chief executive officers and chief financial officer “knowingly or recklessly propped up [the Company’s] stock price by issuing materially false and misleading disclosures regarding the Company’s financial condition in fiscal 2007 (ending June 30, 2007) and in fiscal 2008 (beginning July 1, 2007).” Id. ¶ 3. They, additionally, “knowingly or recklessly failed to disclose material adverse facts about the [c]ompany’s financial condition.” Id. Count two alleges that three officers were individually liable under Section 20(a) of the Act for the Company’s Section 10(b) and Rule 10b- 5 violations “[b]y virtue of their positions as controlling persons.” Id. ¶ 186. The complaint identified a number of allegedly actionable false and misleading statements. Only three statements are at issue on appeal, and they relate primarily to the Company’s automotive PND line of business. We quote relevant portions of the alleged statements.
First , on April 26, 2007, CEO Sidney Harman stated during a conference call with analysts:
I had indicated in earlier conference calls that the PND environment in Europe was not as margin challenged as it is in the United States, but that we could surely anticipate it. There was reasonable foresight in that observation. In the recent quarter, the European PND market has become extremely competitive. We are working extraordinarily hard to increase sales and to maintain adequate margins in that environment. In our earnings call three months ago, it was noted that Harman/Becker PND inventories in Europe had grown substantially . We said then that the inventory had been developed to support a vigorous sales effort and that we planned to reduce it to normal levels at year-end . The plan forecasts total unit sales of 618,000 units for the fiscal ‘07 year, and that plan is proceeding . Where March 31 inventory was $75 million, we expect April 30 inventory to be approximately $50 million, May 31 inventory to be approximately $30 million, and June 30 inventory to be approximately $15 million, that a very normal level. Id. ¶ 57 (bold emphases added). Thereafter, in response to a question by an analyst, the Company CFO, Kevin Brown, stated that the Company had sold 84,000 PNDs during the prior quarter and 300,000 units for the preceding nine months. When asked whether, in light of those numbers, he still expected total PND sales to eclipse 600,000 for the fiscal year, CEO Harman stated: “We do, and we said so.” Id. ¶ 58 (emphasis omitted). Following the April 26 acquisition announcement and conference call, the Company’s stock price rose from $102.56 to $122.50, closing the next day at $122.59. At the beginning of the conference call the moderator had stated that “certain statements by the [C]ompany during this call are forward- looking statements” that “include the [C]ompany’s beliefs and expectations as to future events and trends affecting the [C]ompany’s business and are subject to risks and uncertainties.” Harman Int’l Indus. Earnings Release Conf. Call Tr. at 1 (Apr. 26, 2007). Persons on the call were “advised to review the reports filed by Harman International with the [SEC] regarding these risks and uncertainties.” Id.
The complaint alleges that the CEO’s forecast for PND sales, particularly his statement that “that plan is proceeding,” was materially false and misleading because the defendants “knew or recklessly disregarded that the Company’s foray into PND sales in Europe would cause material declines in its operating income as a percentage of net sales.” Compl. ¶ 64(a). At the time of the April conference call, the complaint alleges, there was “a large inventory of older generation, obsolete PNDs which [the Company] could not sell or was forced to sell at a substantial loss,” and the “prospects for future sales of PNDs were being adversely affected by increasing competition and pressures from competitive pricing.” Id. ¶ 64(b). The Company’s former sales engineer advised that the Company had not sold PNDs up to expectations in either FY 2006 or FY 2007, with the result that the Company “had a stockpile of the devices in inventory,” id. ¶ 64(c), and that in early 2007, the Company modified its PND design, rendering all of the earlier generation units in inventory obsolete. The Company’s former accounting manager advised that the Company had released five different versions of the same PND between March 2006 and July 2007 but did not sell a significant number of the devices until July 2007.
Second , on August 29, 2007, the Company filed its FY 2007 year-end Annual Report with the SEC, on Form 10-K, which was signed by the individual defendants. The Report stated: “ Sales of aftermarket products, particularly PNDs, were very strong during fiscal 2007 .” Compl. ¶ 82 (emphasis added). Once the Annual Report was publicly released, the Company’s stock rose, from $112.93 to $113.39. Early on the Report stated that it “contains forward-looking statements within the meaning of the [Act]” and that readers should “not place undue reliance on these statements.” Harman Int’l Indus. SEC Form 10-K at i (Aug. 29, 2007). The Report listed various factors that “may cause fluctuations in [the Company’s] operating results and/or the price of [its] common stock,” id. at ii, and included a detailed account of the “risk factors,” id. at 9.
The complaint alleges the statement that the Company’s PND sales were “very strong” was “false and misleading when made and/or omitted to disclose material facts necessary to make the statement[] made not misleading.” Compl. ¶ 86. Specifically, the Company failed to disclose: (1) the growing inventory of obsolete PNDs, (2) the fact that the Company had missed PND sales targets for the previous fiscal year by more than $85 million, and (3) that the Company had recently sold 100,000 obsolete PND units at a substantial discount.
Third , on September 27, 2007, CFO Brown stated during a conference call with analysts that the Company had forecast first quarter FY 2008 sales to be $950 million, up 15 percent compared to the first quarter of FY 2007. When an analyst observed that “the $950 million of revenue expectation is the highest number [the Company had] ever achieved” and asked whether “that observation [is] correct” and “to what degree did the spillover of [Mercedes Benz] C Class revenues influence that number,” id. ¶ 101, CFO Brown responded:
Yes, Peter, you are correct that that is a very strong first quarter on the top line for us, reflecting getting fully up the ramp curve on Mercedes C Class but also reflecting the fact that we are bringing additional business on stream at Chrysler as we ramp up our Missouri plant and in the PND business, where we continue the growth and expansion of that business primarily in Europe.
Id. (bold emphases added). The conference call was convened to discuss the Company’s almost-completed first quarter FY 2008 financial results and expectations for the remainder of the fiscal year. The conference call’s moderator again began the call by stating that “certain statements made by the Company during this call are forward-looking statements” that “include the Company’s beliefs and expectations as to future events and trends affecting the Company’s business and are subject to risks and uncertainties.” Harman Int’l Indus. Guidance Announcement Tr. at 1 (Sept. 27, 2007). Those on the call were “advised to review the reports filed by Harman International with the [SEC] regarding these risks and uncertainties.” Id.
The complaint alleges that the statement “growth and expansion” would “continue” in the PND business was materially false and misleading, primarily because of the historical evidence of growing inventory, widespread obsolescence, and stagnant sales. Compl. ¶ 102.
Proceeding on a corrective disclosure theory of loss causation, the complaint points to the Company’s statements in January and February 2008, allegedly “when [the Company] disclosed [its] deteriorating financial condition and the truth became apparent to the market, [and the Company’s] stock fell sharply,” eliminating “the prior artificial inflation.” Id . ¶ 125.
• On January 14, 2008, prior to the opening of the market, a Company press release disclosed revised FY 2008 earnings guidance, “significantly lowering estimates of earnings per share.” Id . ¶ 109. The release explained that “[t]he change in guidance was prompted primarily by a major shift in the market for Portable Navigation Devices (PNDs). In recent months this sector has experienced significant pricing pressure which is affecting the entire industry.” Id. The release quoted the statement of the Company’s then-CEO, Dinesh Paliwal, that “[w]hile the growth fundamentals of our core business remain sound, the difficult PND environment presents a challenge.” Id. The share price of the Company’s stock dropped by nearly 40 percent on the day the press release issued. Id. ¶ 110.
• On February 5, 2008, the Company announced its FY 2008 second quarter results, stating that “its Automotive division’s earnings were ‘under pressure’ due to PNDs and that it had suffered a gross margin decline from lower margins on PND products; product mix change . . . ; and higher than expected material costs.” Id. ¶ 112. Operating income for the second quarter of FY 2008 (ending December 31, 2007) was $61 million, or 5.7 percent of sales, as compared to $116 million and 12.4 percent, respectively, for the same quarter of the previous year. The Company’s “ PND sales had fallen by $29 million compared to the same period in 2006 ” and “PND sales and margins decreased due to aggressive price reduction by competitors, the delay of new products, and the sale of older products at substantial discounts .” Id. ¶ 113 (emphases added) (internal quotation marks omitted). The Company’s stock price fell more than 15 percent the next day. According to the complaint, the second quarter report, which was filed on SEC Form 10-Q on February 11, 2008, “disclosed more specifically the reasons why operating income and margins had declined in the first six months of fiscal 2008.” Id. ¶ 115. That is, “the [recent] gross margin decline was the result of lower margins on PND products ” attributable to “a significant decline in average market prices, delayed introductions and lower volumes of new generation products and the inventory clearance of prior generation models at a loss .” Id. (emphases added).
The district court granted the defendants’ motion to dismiss
the complaint on the grounds that the statements during the
conference calls fell within the safe harbor for forward-looking
statements accompanied by meaningful cautionary statements,
and the statement in the FY 2007 Annual Report was “mere
puffery” and inactionable.
In re Harman Int’l Indus., Inc. Sec.
Litig.
,
II.
The elements of a claim under Rule 10b-5 are “(1) a
material misrepresentation or omission by the defendant; (2)
scienter; (3) a connection between the misrepresentation or
omission and the purchase or sale of a security; (4) reliance
upon the misrepresentation or omission; (5) economic loss; and
(6) loss causation.”
Janus Capital Grp., Inc. v. First Derivative
Traders
,
A.
The complaint alleges that none of the Company’s
statements were entitled to safe-harbor protection because many
were not “
identified
” as forward looking and that, “[t]o the
extent there were any forward-looking statements, there were no
meaningful cautionary statements . . . .” Compl. ¶ 171
(emphasis added). The district court concluded that the parties
were “not in dispute as to whether any particular statement is
‘forward-looking,’” explaining that although Appellant had
alleged that many of the statements “were not
identified
as
forward-looking when made,” Appellant did not move forward
with this theory in briefing on the motion to dismiss.
Harman
,
Appellant has at least forfeited the argument that the two
conference call statements were not forward looking.
See
United States v. Volvo Powertrain Corp.
, 758 F.3d 330, 338
(D.C. Cir 2014). It is true that the court has recognized that
“‘[o]nce a federal claim is properly presented, a party can make
any argument in support of that claim; parties are not limited to
the precise arguments they made below.’”
Woodruff v. Peters
,
482 F.3d 521, 525 (D.C. Cir. 2007) (quoting
Yee v. City of
Escondido
, 503 U.S. 519, 534 (1992)). Neither this court’s
precedent nor the Supreme Court in
Yee
sweeps as broadly as
Appellant suggests. In
Yee
,
Although this court has acknowledged it has discretion to
consider issues raised for the first time on appeal,
Roosevelt v.
E.I. Du Pont de Nemours & Co.
,
B.
To come within the statutory safe harbor, a statement must not only be forward looking (and identified as such), but also “accompanied by meaningful cautionary statements.” 15 U.S.C. § 78u-5(c)(1)(A)(i). The safe harbor defines “meaningful cautionary statements” as those that “identify[] important factors that could cause actual results to differ materially from those in the forward-looking statement.” Id. We first address the legal standard, then its application.
1.
Although the statutory text is somewhat ambiguous,
see
Slayton v. Am. Express Co.
,
Dictionary definitions may not, in and of themselves, be dispositive of whether a particular statement falls within the safe harbor, but they indicate the general nature of the information that Congress concluded must be part of a cautionary statement for safe harbor protection. The word “meaningful” means “significant,” 9 O XFORD E NGLISH D ICTIONARY 522 (2d ed. 1989), or “having a serious, important, or useful quality or purpose,” N EW O XFORD A MERICAN D ICTIONARY 1052 (2d ed. 2005). The word “important” means “[h]aving much import or significance; carrying with it great or serious consequences; weighty, momentous, grave, significant,” 7 O XFORD E NGLISH D ICTIONARY 728, or “of great significance or value; likely to have a profound effect on success, survival, or well-being,” N EW O XFORD A MERICAN D ICTIONARY 849. The words imply information that is tailored to a particular company’s status at a particular time, because cautionary statements that are too temporally general, or advise of a company’s performance in the distant past, would not be “significant,” 9 O XFORD E NGLISH D ICTIONARY 522, to an investor, nor would they have any “useful quality or purpose,” N EW O XFORD A MERICAN D ICTIONARY 1052. Furthermore, to the extent application of these terms is ambiguous, the legislative history is helpful. Congress’s purpose in enacting the safe harbor was to lessen the “muzzling effect” of potential liability for forward-looking statements, which often kept investors in the dark as to what was foreseen for the company by managers “[f]ear[ful] that inaccurate projections w[ould] trigger the filing of securities class action lawsuit[s].” H.R. R EP . N O . 104-369, at 42–43 (1995) (“C ONF . R EP .”).
Applying the text and hewing to Congress’s purpose, our sister circuits have resolved the definitional ambiguity as follows:
“The requirement for ‘meaningful’ cautions calls for
substantive company-specific warnings based on a realistic
description of
the risks applicable
to
the particular
circumstances.”
Southland Sec. Corp. v. INSpire Ins. Solutions,
Inc.
,
By contrast, mere boilerplate — “This is a forward-looking
statement: caveat emptor,”
Asher
, 377 F.3d at 729 (internal
quotation marks omitted) — does not meet the statutory standard
because by its nature it is general and ubiquitous, not tailored to
the specific circumstances of a business operation, and not of
“useful quality,” N EW O XFORD A MERICAN D ICTIONARY 1052.
See Slayton
,
At the same time, cautionary language cannot be
“meaningful” if it is “misleading in light of historical fact[s],”
Slayton
,
Because Congress required that cautionary statements warn of “important factors that could cause actual results to differ,” the cautionary language need not necessarily “mention the factor that ultimately belies a forward-looking statement.” Harris v. Ivax Corp. , 182 F.3d 799, 807 (11th Cir. 1999). That is, Congress did not require the cautionary statement warn of “ all ” important factors, so long as “an investor has been warned of risks of a significance similar to that actually realized,” such that the investor “is sufficiently on notice of the danger of the investment to make an intelligent decision about it according to her own preferences for risk and reward.” Id. (citing C ONF . R EP . at 44). Perfect clairvoyance may be impossible because of events beyond a company’s control of which it was unaware. See Asher , 377 F.3d at 730, 732. Congress required that a company must warn of factors that “[h]av[e] much import or significance” and “carry[] with [them] great or serious consequences,” 7 O XFORD E NGLISH D ICTIONARY 728, and which are “likely to have a profound effect on success,” N EW O XFORD A MERICAN D ICTIONARY 849.
We join our sister circuits’ reasoned analysis of the safe harbor requirement that forward-looking statements be accompanied by “meaningful cautionary statements.” The words Congress chose provide instructive guidance and the remaining ambiguity in application is informed by and resolved in view of Congress’s purpose to protect companies from “[a]busive litigation,” C ONF . R EP . at 42, while still providing investors the information they require to make reasoned decisions, id. at 43–44.
2. The question, then, is whether the Company’s statements during the two conference calls were accompanied by warnings specific to the Company and tailored to the specific forward- looking statements, not mere boilerplate, and consistent with the historical facts when the statements were made, thereby carrying out Congress’s purpose to ensure that investors have the information they need to make an informed decision on whether or not to invest, or remain invested, in the Company.
The Company does not dispute that PND obsolescence was an “important factor[] that could cause actual results to differ materially from those in the forward-looking statement,” 15 U.S.C. § 78u-5(c)(1)(A)(i), and thus that it was required to alert investors to the risk of obsolescence in order to gain safe harbor protection. See Appellees’ Br. 32–37. Rather, the Company states that it did warn of obsolescence “many times.” Id. at 35. The moderator began both conference calls by warning generally of risk and referring listeners to the Company’s recent Annual Report. The 2006 Annual Report, referred to in the April conference call, stated sales could suffer if the Company failed to “develop, introduce and achieve market acceptance of new and enhanced products,” that it had to “maintain and improve existing products, while successfully developing and introducing new products,” and could “experience difficulties that delay or prevent the development, introduction or market acceptance of new or enhanced products,” as well as that competitors could “introduce superior designs or business strategies, impairing [the Company’s] distinctive image and [its] products’ desirability.” 2006 Annual Report at 9–10. More specifically, the Company stated that PND “inventories . . . had grown substantially,” increasing to approximately $50 million. Compl. ¶ 57 (emphasis omitted). Consequently, the Company concludes that when “[c]onsidered against Dr. Harman’s particular warnings about the competitive European PND market, the obsolescence risk was adequately identified.” Appellees’ Br. 36.
Several of the cautionary statements relied on by the Company consist of boilerplate, such as the generalities in the moderators’ comments and the Annual Reports. To the extent other statements were tailored to the Company’s PND business operations, the purportedly cautionary statements were not meaningful because they were misleading in light of historical fact. References to amassed inventory did not convey that inventory was obsolete, as opposed to stocked with the latest, cutting-edge models. Even if viewed as implicitly raising the specter of obsolescence, the statements were insufficient for at least the reason that they did not warn of actual obsolescence that had already manifested itself. The court, thus, need not reach the parties’ arguments regarding the role of actual knowledge under the safe harbor, 15 U.S.C. § 78u-5(c)(1). See Appellant’s Br. 24 n.12; Appellees’ Br. 37.
The allegations in the complaint plausibly show that by failing to disclose that PND obsolescence that had already materialized and to tailor its cautionary statements to its PND business, the purported cautionary statements were inadequate to qualify the April conference call statement for safe harbor protection. According to the complaint, when the April conference call was made, the threat of serious obsolescence was materializing, because, according to a former sales engineer, the Company itself had made a modification in early 2007 , “which rendered all of the older-generation units in inventory obsolete.” Compl. ¶ 64(d); see also id. ¶ 53. In addition, the Company’s 2006 PND sales had been lower than anticipated and this resulted in the Company storing PNDs in a warehouse. Id. ¶ 64(c). Furthermore, the Company released five different versions of its PND between March 2006 and July 2007, but at the time of the first conference call had not sold “a significant number.” Id. ¶ 64(e). By early 2007, the sales engineer had initiated conversations with Company sales representatives regarding the need to lower PND prices in order to remain competitive. Id. ¶ 52. Nonetheless, there was no indication during the April conference call that the Company’s PND business was compromised by obsolescence, as distinct from inventory, let alone due to the Company’s own actions, see id. ¶ 64(d).
“[A]s a general matter, investors know of the risk of
obsolescence posed by older products forced to compete with
more advanced rivals. Technical obsolescence of computer
equipment in a field marked by rapid technological advances is
information within the public domain.’”
Parnes v. Gateway
2000, Inc.
,
CEO Harman’s April statement referred to the Company’s plan to draw down its PND inventory to “normal levels,” commenting “that plan [wa]s proceeding.” Compl. ¶ 57. Yet the purportedly cautionary statements did nothing to distinguish any risk faced by PNDs in particular. The 2006 Annual Report that was referenced by the conference call moderator spoke generally of “products,” both “existing” and “new.” See 2006 Annual Report at 9–10. Even viewing CEO Harman’s explanation “that the PND market in Europe was ‘extremely competitive’ and that the [C]ompany had to work ‘extraordinarily hard’ to increase sales and maintain margins” as “not merely statements about general market risks, but . . . specific to the European PND market of which Plaintiffs complain,” Harman , 27 F. Supp. 3d at 46, nothing said during the conference call or in the Annual Report warned of PND obsolescence. Likewise, the Company’s statement that it had amassed a sizeable PND inventory does not render the cautionary language “meaningful.” CEO Harman’s statements that “[i]n our earnings call three months ago, it was noted that Harman Becker PND inventories in Europe had grown substantially” and that a plan had been developed to reduce inventory and “[wa]s proceeding,” Harman Int’l Indus. Earnings Release Conf. Call Tr. at 7, is not a warning at all, much less of obsolescence.
The Company’s cautionary language is not rendered
adequate by the Company’s statement during the April
conference call that, although it had projected annual sales of
618,000 units, the Company had sold only 300,000 through the
first nine months of FY 2007. In isolation, the statement could
be viewed as “allowing investors to evaluate for themselves
whether [the Company’s] projection of 318,000 unit sales in the
fourth quarter was realistic.”
Harman
,
The circumstances recounted in the complaint are not unlike
those in
Lormand
,
The allegations in the complaint also plausibly show that the cautionary language provided during the September conference call was inadequate for safe harbor protection for the same reasons. CFO Brown referred to a favorable projection of revenue, stating “we are bringing additional business on-stream . . . in the PND business, where we continue the growth and expansion of that business primarily in Europe.” Compl. ¶ 101 (emphasis omitted). For an investor, “[ e ] qually important was ‘inventory clearance of prior generation models at a loss,’ i.e. , inventory obsolescence . . . [that the Company allegedly] did not disclose for more than six months .” Reply Br. 15. In September, no mention was made of the Company’s inventoried products that would not be saleable due partly to obsolescence, or to the stalling of the plan to reduce inventory to normal levels, or to anything else that could warn of the serious obsolescence problem. See id. ¶¶ 86(c)-(e). Instead, the cautionary statements are essentially the same as those made during the April conference call: a boilerplate statement about risk generally and reference to the Company’s FY 2007 Annual Report, which repeated the general warnings in the FY 2006 Annual Report. (The Company acknowledges that the two annual reports are more or less indistinguishable. See Appellees’ Br. 35–36.)
The warnings accompanying the September statement, like
those that accompanied the April statement, were misleading in
light of historical facts and were not tailored to the specific
forward-looking statement the Company made. According to the
complaint, by June 2007, the Company had agreed to sell
100,000 PNDs for $110 less than the ordinary $350 price tag.
Compl. ¶¶ 56, 86(e). In all, the Company missed its PND sales
projected by more than 200,000 units in FY 2007,
id.
¶ 55, which
meant PND sales fell short of projections by at least $85 million,
id.
¶¶ 56, 86(d). The information provided by the Company’s
former accounting manager indicated that “the Company had on
hand hundreds of millions of dollars worth of obsolete
Generation 2 PNDs which were being superseded by newer
Generation 3 PNDs in August 2007.”
Id.
¶ 86(c). By the end of
FY 2007, there was no longer a mere risk and some evidence of
obsolescence, but rather an intractable problem of obsolescence
was a reality that the Company failed to disclose. “[T]he risk of
which [the Company] warned . . . had already transpired,”
Slayton
,
Reinforcing our conclusion that safe harbor protection is
unavailable for the September statement is the fact that the
Company’s cautionary statements remained unchanged despite
a significant change in circumstances of material importance to
an investor.
See Slayton
,
The complaint points, moreover, in support of the theory of corrective disclosure, to the Company’s January and February 2008 releases that disclosed, allegedly for the first time, the obsolescence problems facing its PND line of business. See Compl. ¶¶ 133, 135. CEO Harman had assured investors in April that there was a plan to reduce inventory to normal levels, from $75 million to $15 million by June 30, 2007, id. ¶ 57, and CFO Brown had reassured investors in September that the PND business was growing and expanding, id. ¶ 101. Thus, over this period the Company failed to disclose what was an historical fact of importance to a reasonable investor: by April, inventory obsolescence was becoming a problem, see id. ¶¶ 64 (b), (d), (e); by September it had fully materialized into a serious problem effecting Company revenues, see id. ¶¶ 86(c)-(e). Prior to the January and February statements, according to the complaint, the Company had not “even mentioned that rapid obsolescence might pose a material risk to the Company’s PND business, let alone that such obsolescence might be caused by the Company’s own product changes.” Appellant’s Br. 21; see Compl. ¶ 64(d). Given the rosy picture that the Company painted during the April-September period, investors were unaware of the obsolescence problem until January-February 2008, when the Company, in announcing disappointing financial results in February 2008, first disclosed PND obsolescence that had resulted in “the sale of older products at substantial discounts.” Id. ¶ 113 (internal quotation marks omitted).
The Company responds that it needed only to warn of
“
risks
,”
Harris
,
Finally, the Company maintains that the internal reports on
which the complaint relies are irrelevant and unreliable, and
therefore inadmissible as a matter of law. This is because, the
Company continues, the complaint “fails to identify any
information about the internal reports,
i.e.
, who prepared them,
who received them, how firm the numbers were within them,
how they were distributed, or to whom they were distributed, and
does not allege that any of the
individual defendants
received and
reviewed the internal reports.” Appellees’ Br. 49–50. The
precedent on which the Company relies for its categorical rule is
inapposite.
San Leandro Emergency Medical Group Profit
Sharing Plan v. Philip Morris Companies, Inc.
,
For these reasons, we hold the allegations in the complaint plausibly show that the April and September statements were not accompanied by meaningful cautionary language and, consequently, were not entitled to safe harbor protection.
C.
The third statement appeared in the Company’s FY 2007
Annual Report. For a statement to be actionable under Section
10(b) and Rule 10b-5, it must be “material” in the sense that it
would have “been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made
available,”
Halliburton Co. v. Erica P. John Fund, Inc.
, 134 S.
Ct. 2398, 2413 (2014) (quoting
Basic Inc. v. Levinson
, 485 U.S.
224, 231–32 (1988)). The Supreme Court has recognized that
“statements of reasons, opinions, or beliefs” can be actionable,
Va. Bankshares, Inc. v. Sandberg
,
In the FY 2007 Annual Report, the Company stated that
“[s]ales of aftermarket products, particularly PNDs, were very
strong during fiscal 2007.” Compl. ¶ 82. The district court
concluded that statement was immaterial puffery because
“strong” is “subjective and provides no standard against which
a comparison can be drawn.”
Harman
,
PNDs, although only a “rather small component of [the
Company’s] total portfolio,” Harman Int’l Indus. Earnings Call
Tr. at 6 (Feb. 5, 2008), were part of the Company’s automotive
division, which “comprised approximately 70% of [the
Company’s] business and generated the bulk of the Company’s
revenue and earnings.” Compl. ¶ 141. CEO Harman explained
during the April conference call that the Company would
undertake a “vigorous sales effort” to reduce PND inventory to
“normal levels at year-end,” and, when asked whether the
Company thought FY 2007 sales totals could double in the final
quarter, he responded “[w]e do, and we said so.”
Id.
¶¶ 57–58.
The “very strong” statement was specific about product and time
period, and comparable to the statement in
In re Lucent
Technologies, Inc. Sec. Litig.
,
The Company maintains that the “very strong” statement is
puffery because it “lacked a standard against which a reasonable
investor could expect [it] to be pegged,” quoting
City of Monroe
,
D.
A claim under Section 10(b) and Rule 10b-5 requires proof
of “the traditional elements of causation and loss.”
Dura
Pharmaceuticals, Inc. v. Broudo
,
The Company maintains, unpersuasively, that the complaint failed adequately to plead that the alleged misrepresentations or other fraudulent conduct proximately caused economic loss to Appellant. According to the complaint, the Company’s January 14, 2008, press release on revised earnings guidance and its February 5, 2008, press release announcing results for the second quarter of FY 2008 disclosed that the Company’s PND business was not as strong as previously indicated in the three statements now at issue. Both releases were followed by marked declines in the Company’s stock price, the first by a 37.65 percent decline and the second by a drop of 15 percent, see Compl. ¶¶ 110, 114. The alleged releases were not, as the Company suggests, simply “announcement[s] of a failed projection.” Appellees’ Br. 56. Rather, they provided specific information about the state of the Company’s PND business, disclosing, allegedly for the first time, that it was not flourishing as the Company had indicated during the April and September conference calls and the FY 2007 Annual Report.
The Company responds that “the Complaint, on its face,
identifies so many alternative reasons for [Appellant’s] share
price drop that [Appellant] cannot prove loss causation as a
matter of law.” Appellees’ Br. 58. But “[p]laintiffs need not
demonstrate on a motion to dismiss that the corrective disclosure
was the only possible cause for decline in the stock price.”
Carpenters
,
III.
Appellant also sued under Section 20(a) of the Act, which
provides that “a plaintiff must show a primary violation by the
controlled person and control of the primary violator by the
targeted defendant.”
SEC v. First Jersey Sec., Inc.
, 101 F.3d
1450, 1472 (2d Cir. 1996);
see also Stevens v. InPhonic, Inc.
,
The court need not decide which approach to adopt because the allegations in the complaint suffice to show culpable participation by the individual defendants. See Compl. ¶¶ 142–167. According to the complaint, each personally made actionable statements: CEO Harman during the April conference call, CFO Brown during the September conference call, joined by CEO Paliwal, and each individual defendant also signed in August 2007 the SEC Form 10-K for the FY 2007 Annual Report containing the “very strong” statement. Even if corporate job titles may not alone suffice, see Appellees’ Br. 62, the complaint plausibly alleges each defendant made false and misleading statements about the Company.
Accordingly, we reverse the dismissal of the complaint for
failure to state a claim with respect to the three statements at
issue, and we remand the case for further proceedings.
Inc.
, 84 F.3d 393, 396 (11th Cir. 1996);
Harrison v. Dean Witter
Reynolds, Inc.
,
Notes
[1]
Compare SEC v. J.W. Barclay & Co.
,