BRIAN ASHER, et al., Plaintiffs-Appellants, v. BAXTER INTERNATIONAL INCORPORATED, et al., Defendants-Appellees.
No. 03-3189
United States Court of Appeals For the Seventh Circuit
ARGUED JANUARY 22, 2004—DECIDED JULY 29, 2004 AMENDED SEPTEMBER 3, 2004
Before EASTERBROOK, MANION, and ROVNER, Circuit Judges.
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 02 C 5608—Blanche M. Manning, Judge.
Baxter‘s projection, repeated many times (sometimes in documents filed with the SEC, sometimes in press releases, sometimes in executives’ oral statements), was that during 2002 the business would yield revenue growth in the “low teens” compared with the prior year, earnings-per-share growth in the “mid teens,” and “operational cash flow of at least $500 million.” Baxter often referred to these forecasts as “our 2002 full-year commitments,” which is a strange locution. No firm can make “commitments” about the future—Baxter can‘t compel its customers to buy more of its products—unless it plans to engage in accounting shenanigans to make the numbers come out right no mаtter what happens to the business. But nothing turns on the word; the district court took these “commitments” as “forward-looking statements,” see
According to the complaint, Baxter‘s projections were materially false because: (1) its Renal Division had not met its internal budgets in years; (2) economic instability in Latin America adversely affected Baxter‘s sales in that part of the world; (3) Baxter closed plants in Ronneby, Sweden, and Miami Lakes, Florida, that had been its principal source of low-cost dialysis products; (4) the market for albumin (blood-plasma) products was “over-saturated,” resulting in lower prices and revenue for the BioSciences Division; (5) sales of that division‘s IGIV immunoglobin products had fallen short of internal predictions; and (6) in March 2002 the BioScience Division had experienced a sterility failure in the manufacturе of a major product, resulting in the destruction of multiple lots and a loss exceeding $10 million. The district court assumed, as shall we, that failure to disclose these facts would create problems but for the statutory safe harbor—though items (2) and (4) at least are general business matters rather than Baxter‘s secrets, and the securities laws do not require issuers to disclose the state of the world, as opposed to facts about the firm. See Wielgos v. Commonwealth Edison Co., 892 F.2d 509 (7th Cir. 1989). Item (3) also was public knowledge (Baxter issued a press release announcing the closings and a substantial charge against earnings)—though the cost of products that had been made at these plants may have been secret. Whether all firm-specific non-disclosures add up to a material nondisclosure—and whether Baxter had some non-public information about those matters that seem to be general information—are topics we need not tackle.
Baxter provided a number of cautionary statements throughout the class period. This one, from its 2001 Form 10-K filing—a document to which many of the firm‘s press
Statements throughout this report that are not historical facts are forward-looking statements. These statements are based on the company‘s current expectations and involve numerous risks and uncertainties. Some of these risks and uncertainties are factors that affect all international businesses, while some are specific to the company and the health care arenas in which it operates.
Many factors could affect the company‘s actual results, causing results to differ materially, from those expressed in any such forward-looking statements. These factors include, but are not limited to, interest rates; technological advances in the medical field; economic conditions; demand and market acceptance risks for new and existing рroducts, technologies and health care services; the impact of competitive products and pricing; manufacturing capacity; new plant start-ups; global regulatory, trade and tax policies; regulatory, legal or other developments relating to the company‘s Series A, AF, and AX dialyzers; continued price competition; product development risks, including technological difficulties; ability to enforce patents; actions of regulatory bodies and other government authorities; reimbursement policies of government agencies; commercialization factors; results of product testing; and other factors described elsewhere in this report or in the company‘s other filings with the Securities and Exchange Commission. Additionally, as discussed in Item 3—“Legal Proceedings,” upon the resolution of certain legal matters, the company may incur charges in excess of presently established reserves. Any such change could have a material adverse effect on the company‘s results of
operations or cash flows in the рeriod in which it is recorded. Currency fluctuations are also a significant variable for global companies, especially fluctuations in local currencies where hedging opportunities are unreasonably expensive or unavailable. If the United States dollar strengthens significantly against most foreign currencies, the company‘s ability to realize projected growth rates in its sales and net earnings outside the United States could be negatively impacted.
The company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business operations, but there can be no assurance that the actual results or performance of the company will conform to any future results or performance expressed or implied by such forward-looking statements.
The district court concluded that these are “meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement“. They deal with Baxter‘s business specifically, mentioning risks and product lines. Plaintiffs offer two responses. First they contend that the cautionary statements did not cover any of the six matters that (in plaintiffs’ view) Baxter had withheld. That can‘t be dispositive; otherwise the statute would demand prescience. As long as the firm reveals the principal risks, the fact that some other event caused problems cannot be dispositive. Indeed, an unexpected turn of events cannot demonstrate a securities problem at all, as thеre cannot be “fraud by hindsight.” Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (Friendly, J.). See also Murray v. Abt Associates Inc., 18 F.3d 1376 (7th Cir. 1994); DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990). The other response is that the cautionary statement did not follow the firm‘s fortunes: plants closed but the cautionary statement remained the same; sterilization failures occurred but the cautionary statement remained the same; and bad news that (plaintiffs contend) Baxter well knew in November 2001 did not cast even a shadow in the cautionary statement.
Before considering whether plaintiffs’ objections defeat the safe harbor, we ask whether the cautionary statements have any bearing on Baxter‘s рotential liability for statements in its press releases, and those its managers made orally. The press releases referred to, but did not repeat verbatim, the cautionary statements in the Form 10-K and other documents filed with the Securities and Exchange Commission. The oral statements did not do even that much. Plaintiffs say that this is fatal, because
- (i) the oral forward-looking statement is accompanied by an oral statement that additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statement is contained in a readily available written document, or portion thereof;
- (ii) the accompanying oral statement referred to in clause (i) identifies the document, or portion thereof, that contains the additional information about those factors relating to the forward-looking statement; and
(iii) the information contained in that written document is a cautionary statement that satisfies the standard established in paragraph (1)(A).
If this were a traditional securities suit—if, in other words, an investor claimed to have read or heard the statement and, not having access to the truth, relied to his detriment on the falsehood—then plaintiffs’ argument would be correct. But this is not a traditional securities claim. It is a fraud-on-the-market claim. None of the plaintiffs asserts that he read any of Baxter‘s press releases or listened to an executive‘s oral statement. Instead the theory is that other people (professional traders, mutual fund managers, securities analysts) did the reading, and that they made trades or recommendations that influenced the price. In an efficient capital market, all information known to the public affects the price and thus affects every investor. Basic Inc. v. Levinson, 485 U.S. 224, 241-47 (1988), holds that reliance on the accuracy of the price can substitute for relianсe on the accuracy of particular written or oral statements, when the statements affect the price—as they do for large and well-followed firms such as Baxter, for which there is a liquid public market. This works only to the extent that markets efficiently reflect (and thus convey to investors the economic equivalent of) all public information. See Daniel R. Fischel, Efficient Capital Markets, the Crash, and the Fraud on the Market Theory, 74 Cornell L. Rev. 907, 917-22 (1989); Jonathan R. Macey & Geoffrey P. Miller, Good Finance, Bad Economics: An
When markets are informationally efficient, it is impossible to segment information as plaintiffs proрose. They ask us to say that they received (through the price) the false oral statements but not the cautionary disclosures. That can‘t be; only if the market is inefficient is partial transmission likely, and if the market for Baxter‘s stock is inefficient then this suit collapses because a fraud-on-the-market claim won‘t fly. An investor who invokes the fraud-on-the-market theory must acknowledge that all public information is reflected in the price, just as the Supreme Court said in Basic. See 485 U.S. at 246. See Flamm v. Eberstadt, 814 F.2d 1169, 1179-80 (7th Cir. 1987); In re Apple Computer Securities Litigation, 886 F.2d 1109, 1115-16 (9th Cir. 1989); Grossman v. Novell, Inc., 120 F.3d 1112, 1122-23 (10th Cir. 1997). Thus if the truth or the nature of a business risk is widely known, an incorrect statement can have no deleterious effect, and if a cautionary statement has been widely disseminated, that news too affects the price just as if that statement had been handed to each investor. If the executives’ oral statements came to plaintiffs through professional traders (or analysts) and hence the price, then the cautions reached plaintiffs via the same route; market professionals are savvy enough to discount projections appropriately. Then
The parties agree оn two propositions, each with support in decisions of other circuits. First, “boilerplate” warnings won‘t do; cautions must be tailored to the risks that accompany the particular projections. Second, the cautions need not identify what actually goes wrong and causes the projections to be inaccurate; prevision is not required. See Halperin v. EBanker USA.com, Inc., 295 F.3d 352, 359 (2d Cir. 2002); Helwig v. Vencor, Inc., 251 F.3d 540, 558-59 (6th Cir. 2001) (en banc); Ehlert v. Singer, 245 F.3d 1313, 1320 (11th Cir. 2001) (discussing a judicially developed defense, the bespeaks-caution doctrine, that applies to statements such as those made in tender offers to which the statutory safe harbor does not apply); Semerenko v. Cendant Corp., 223 F.3d 165, 182-83 (3d Cir. 2000) (same); Harris v. Ivax Corp., 182 F.3d 799, 807 (11th Cir. 1999) (same). Unfortunately, these principles don‘t decide any concrete case—for that matter, the statutory language itself does not decide any concrete case. It is the result of a compromise between legislators who did not want any safe harbor (or, indeed, any new legislation), and those who wanted a safe harbor along the lines of the old Rule 175 (discussed in our Wielgos decision) that did not require any cautionary statements but just required the projection to have a reasonable bаsis. Rule 175 was limited to statements in certain documents filed with the SEC; proponents of the PSLRA wanted to extend this to all statements, including oral declarations and press releases. As is often the situation, a compromise enabled the bill to pass but lacks much content; it does not encode a principle on which political forces agreed as much as it signifies conflict about both the scope and the wisdom of the safe harbor. Compromises of this kind lack spirit. Still, the language was enacted, and we must make something of it.
Plaintiffs say that Baxter‘s cautions were boilerplate, but
What investors would like to have is a full disclosure of the assumptions and calculations behind the projections; then they could apply their own discount factors. For reasons covered at length in Wielgos, however, this is not a sensible requirement. Many of the assumptions and calculations would be more useful to a firm‘s rivals than to its investors. Suppose, for example, that Baxter had revealed its sterility failure in the BioSciences Division, the steps it had taken to restore production, and the costs and prospects of each. Rivals could have used that information to avoid costs and hazards that had befallen Baxter, or to find solutions more quickly, and as Baxter could not have charged the rivals for this information they would have been able to undercut Baxter‘s price in future transactions. Baxter‘s shareholders would have been better off. Similarly Baxter might have added verisimilitude to its projections by describing its sales policies and the lowest prices it would accept from major customers, but disclosing reservаtion prices would do more to help the customers than to assist the investors.
Another form a helpful caution might take would be the disclosure of confidence intervals. After saying that it expected growth in the low teens, Baxter might have added that events could deviate 5% in either direction (so the real
Whether or not Baxter could have made the cautions more helpful by disclosing assumptions, methods, or confidence intervals, none of these is required. The PSLRA does nоt require the most helpful caution; it is enough to “identify[ ] important factors that could cause actual results to differ materially from those in the forward-looking statement“. This means that it is enough to point to the principal contingencies that could cause actual results to
Yet Baxter‘s chosen language may fall shоrt. There is no reason to think—at least, no reason that a court can accept at the pleading stage, before plaintiffs have access to discovery—that the items mentioned in Baxter‘s cautionary language were those that at the time were the (or any of the) “important” sources of variance. The problem is not that what actually happened went unmentioned; issuers need not anticipate all sources of deviations from expectations. Rather, the problem is that there is no reason (оn this record) to conclude that Baxter mentioned those sources of variance that (at the time of the projection) were the principal or important risks. For all we can tell, the major risks Baxter objectively faced when it made its forecasts were exactly those that, according to the complaint, came to pass, yet the cautionary statement mentioned none of them.
Baxter urges us to affirm the judgment immediately, contending that the full truth had reached the market despite any shortcomings in its cautionary statements. If this is so, however, it is hard to understand the sharp drop in the price of its stock. A “truth-on-the-market” defense is available in principle, as we discussed in Flamm, but not at the pleading stage. Likewise one must consider the possibility that investors looked at all of the projections as fluff and responded only to the hard numbers; on this view it was a reduction in Baxter‘s growth rate, not the embarrassment of a projection, that caused the price decline in July 2002; again it is too early in the litigation to reach such a conclusion. It would be necessary to ask, for example, whether the price rose relative to the rest of the market when Baxter made its projections; if not, that might support an inference that the projections were so much noise.
Nor has the time arrived to evaluate Baxter‘s contentiоn that its projections panned out, so there was no material error. Baxter insists that all of the projections dealt with the entire calendar year 2002, and that by year-end performance was up to snuff—close enough to the projections that
REVERSED AND REMANDED
A true Copy:
Teste:
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Clerk of the United States Court of Appeals for the Seventh Circuit
USCA-02-C-0072—9-3-04