Lead Opinion
MERRITT, J., delivered the opinion of the court, in which MARTIN, C. J., DAUGHTREY, MOORE, COLE, CLAY, and GILMAN, JJ„ joined. KENNEDY, J. (pp. 566-73), delivered a separate dissenting opinion, with BOGGS, NORRIS, SUHRHEINRICH, SILER, and BATCHELDER, JJ„ joining in Judge KENNEDY’S dissent.
OPINION
The complaint in this securities class action features allegations of insider trading, fraudulent omissions, and inflated stock prices punctured by bad news in the health care industry. The principal issues on appeal arise under the new pleadings standard created by the Private Securities Litigation Reform Act of 1995. As often is the case in suits for securities fraud, we must deal with controverted inferences of knowledge and intent to defraud from facts that give rise to more than one interpretation. How to steer a course between indulging strike suits and predatory allegations on the one hand and deterring meritorious claims on the other: This has been the work of Congress and a number of our sister circuits. The fruit of their efforts has been a statute containing general language at a high level of abstraction, an ambiguous legislative history, and a triparted split among the circuit courts. We conclude that plaintiffs here have stated a claim for securities fraud by creating — in the words of the statute — a “strong inference” that defendants projected financial well-being at a time when they had actual knowledge that their statements were false or misleading, while knowingly omitting material facts that would have tempered their optimism. Accordingly, the judgment of the district court will be REVERSED and the case REMANDED for further proceedings.
An outline of our discussion of the issues is as follows:
I. Facts
II. The Private Securities Litigation Reform Act
A. The Safe Harbor
B. The Pleading Standard
*545 III. Plaintiffs’ Allegations Concerning the Effect of the Balanced Budget Act
A. Vencor’s Forward-Looking Statements
1. Materiality
2. Actual Knowledge of Misleading or False Nature
3. Not Identified as Forward Looking / Absence of Meaningful Cautionary Statements
B. Sufficiency of Plaintiffs’ Complaint
C. Response to the Dissent
IV. Other Claims
A. Vencor’s Acquisition of TheraTx
B. Vencor’s Acquisition of Transitional Hospitals Corporation
C. Vencor’s Proposed Sale of Behavioral Healthcare Corporation
V. Conclusion
I. FACTS
The factual allegations of this case are more fully described in section III of the opinion after a discussion of the pleading-standard to be applied under the new Act. We will recite only the most salient details here. At the time of the events in suit, defendant Vencor, a company then traded on the New York Stock Exchange, was said to be the largest full-service long-term health care provider in the United States, focusing on hospital and nursing services. Six of its directors are also named as defendants. Plaintiffs are a class of investors in Vencor. They allege a number of misstatements and material omissions by Vencor calculated to artificially balloon stock prices and defraud purchasers. A divided panel of this court concluded that plaintiffs failed to state a claim. Helwig v. Vencor, Inc.,
1. The Impact of the Balanced Budget Act — On February 6, 1997, President Clinton proposed the Balanced Budget Act (the “Budget Act”), which featured several Medicare provisions that would substantially affect the health care industry. Separate bills passed the House and Senate on June 25, 1997. This necessitated a conference report, which was filed on July 30. President Clinton signed the bill on August 5. See Balanced Budget Act of 1997, Pub.L. No. 105-33 (1997).
During this half-year of legislative deliberation, the proposed act alarmed sectors •of the health care industry because it changed Medicare reimbursement and reduced incentive payments for hospitals that kept actual costs below federal targets. Because Vencor derived significant revenue from Medicare, it too was concerned about several aspects of the proposed act and received regular updates from its lobbyists in Washington, D.C. Plaintiffs claim that the company undertook an analysis of the proposed act as early as April 1997. According to plaintiffs, these cost analyses culminated in July 1997 when Thomas Schumann, vice president and director of Vencor’s reimbursement department, circulated an internal memorandum detailing the potential impact of the legislation.
In the meantime-from at least February 10, 1997, until October 21, 1997' — defendants maintained that they were “comfortable” with projections of fourth-quarter earnings of $0.59 to $0.64 per share and yearly returns between $2.10 to $2.20 for 1997 and $2.60 to $2.65 for 1998. Such sanguine statements led market analysts to recommend Vencor’s stock as a “buy.” In its 1996 Form 10 K, filed March 27,
[T]he Company cannot predict the content of any healthcare or budget reform legislation which may be proposed in Congress or in state legislatures in the future, and whether such legislation, if any, will be adopted. Accordingly, the Company is unable to assess the effect of any such legislation on its business. There can be no assurance that any such legislation will not have a material adverse impact on the Company’s future growth, revenues and income.
Other more cursory warnings later appeared in Vencor’s first- and second-quarter 10-Q forms, filed April 23 and July 25 respectively.
On October 22, 1997, Vencor lowered its estimates of fourth-quarter earnings due to “management’s recently completed analysis of the Balanced Budget Act of 1997.” The stock price dropped from $42-5/8 per share to $30 per share, a nearly thirty percent decline. Soon after, the company announced that an anticipated sale of one of its divisions would not be completed. The stock price fell further to $23 per share. Plaintiffs allege that Vencor knew about the likely adverse impact of the Budget Act before its October announcement but nonetheless made false and misleading earnings statements to boost stock prices.
2.Defendants’ Knowledge of the Effect of the Budget Act — In late June 1997, four months before Vencor publicly revealed how the Budget Act would affect its earnings, defendants Michael Barr, executive vice president and chief operating officer of Vencor, and James Gillenwater, senior vice president, met with employees of the newly acquired Transitional Hospitals Corporation. During this presentation, Barr gave the employees notice that they would be laid off in sixty days. Barr’s explanation, according to plaintiffs, was that “there were tough times coming in the industry because of the likely cutbacks in Medicare” and that they “would have been laid off anyway because the proposed Medicare regulations were going to make it difficult for Vencor to make money and stay profitable.” See Am. Compl. ¶ 72, J.A. 130.
This was nearly a month before Vencor filed its second-quarter 10-Q, in which defendants stated they could not predict whether Medicare reform proposals would be adopted by Congress “or if adopted, what effect, if any, such proposals would have on its business.” Also during this time, from July to September 1997, defendant executives sold nearly $9.5 million in stock holdings. Defendant Earl Reed, executive vice president and chief financial officer of Vencor, alone realized more than $3 million in stock sales in September, a sum large enough to elicit inquiries from the financial media.
3. Vencor’s Acquisition of TheraTx— On February 10,1997, Vencor announced a “definitive merger agreement” with Ther-aTx, another provider specializing in rehabilitation care and occupational health. In a press release, Vencor’s chief executive officer, Bruce Lunsford, explained that the acquisition would “be accretive to earnings based on projected synergies.” As part of the stock purchase, however, plaintiffs allege that Vencor also acquired $25 million in bad debt and 26 poorly performing nursing homes. Though Lunsford stated that by July 24, 1997, “we successfully integrated the operations of TheraTx,” computing incompatibilities prevented full consolidation until March 1998. Plaintiffs claim that these statements were false and misleading.
4. Vencor’s Acquisition of Transitional Hospitals Corporation — On May 7, 1997, Vencor announced another acquisition. Through a $500 million senior subor
5. Vencor’s Proposed Sale of Behavioral Healthcare Corporation — On September 16, 1997, Vencor announced a “definitive agreement” to sell Behavioral Healthcare Corporation to Charter Behavioral Health Systems. The press release detailing the sale explained that the “transaction, which is subject to acceptable financing, due diligence ... and certain regulatory approvals, is expected to close during the fourth quarter of 1997.” The deal collapsed, however, sagging Vencor stock further. On November 3, 1997, Ven-cor explained that the sale would not be consummated due to a dispute over final payment terms. Plaintiffs claim that they were misled as to the certainty of this transaction.
II. THE PRIVATE SECURITIES LITIGATION REFORM ACT
Plaintiffs claim that Vencor made misleading statements and omissions in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a) respectively, and Rule 10b-5 promulgated thereunder by the Securities Exchange Commission, 17 C.F.R. § 240.10b-5. Plaintiffs’ case turns on the discrepancy between what defendants said and what they knew prior to their announcement of revised earnings projections. Their complaint reflects the tension between the liberal requirements of notice pleading, see Miller v. American Heavy Lift Shipping,
A. The Safe Harbor
First, Congress created a “safe harbor” for “forward-looking statements.” 15 U.S.C. § 78u-5(c)(l). Based on the judicial “bespeaks caution” doctrine, this provision excuses liability for defendants’ projections, statements of plans and ob-
B. The Pleading Standard
Second, Congress heightened the pleading standard for securities fraud. Before 1995, a plaintiff had to allege fraud “with particularity.” Fed.R.Civ.P. 9(b). Under the PSLRA, a plaintiff must now “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) (emphasis added). In passing the Reform Act, Congress never defined “state of mind.” Hoffman v. Comshare,
Congress deliberately left this question unanswered. Though the Reform Act drew heavily on Second Circuit case law in fashioning the “strong inference” standard, Congress stated it did not intend to codify how that standard should be met. See H.R. Conf. Rep. No. 104-369, at 41 (1995). Prior to passage of the PSLRA, the Second Circuit required the securities fraud plaintiff to plead facts giving rise to a “strong inference of fraudulent intent.” Shields v. Citytrust Bancorp, Inc.,
In its version of the Reform Act, the Senate approved an amendment recognizing motive and opportunity as a basis for
The debate over pleading did not end with passage of the Act, however. Three years later, Congress revisited the issue of pleading requirements while debating the Securities Litigation Uniform Standards Act of 1998. Though the 1998 law concerned dual federal-state regulation of the securities market, Congress took the opportunity to underscore its intent in passing the Reform Act. In designating federal court as the exclusive venue for most securities class actions, the Senate Committee on Banking, Housing, and Urban Affairs also noted: “It was the intent of Congress, as was expressly stated during the legislative debate on the PSLRA, and particularly during the debate on overriding the President’s veto, that the PSLRA establish a uniform federal standard on pleading requirements by adopting the pleading standard applied by the ■ Second Circuit Court of Appeals.” S.Rep. No. 105-182, at 6 (1998). However, the aftermath of the PSLRA has been anything but uniform as courts attempt to divine how much of the Second Circuit standard Congress intended to incorporate. The muddled legislative history has produced conflicting interpretations of the Reform Act. See,' e.g., Comshare,
The Ninth Circuit has read the PSLRA to affect the substance of securities fraud litigation, raising the scienter element to require “strong evidence of deliberately reckless or conscious misconduct.” Janas v. McCracken (In re Silicon Graphics Sec. Litig.),
The Second and Third Circuits, in contrast, have concluded that Congress intended to make only a procedural change in passing the PSLRA. See, e.g., Novak,
The Eleventh Circuit has taken the middle road between these positions. While it held that the PSLRA did not alter its scienter requirement of "severe recklessness," it noted that a showing of motive and opportunity alone could not sustain a complaint for fraud. Bryant v. Avado Brands, Inc.,
In this Circuit, a defendant in an action for securities fraud may be liable for recklessness, that is, "highly unreasonable conduct which is an extreme departure from the standards of ordinary care." Mansbach,
The proper reading of Comshctre is less categorical and more fact-sensitive than that urged by defendants. While it is true that motive and opportunity are not substitutes for a showing of recklessness, they can be catalysts to fraud and so serve as external markers to the required state of mind. Comshare made this distinction by refusing to equate motive and opportunity with scienter but yet recognizing that facts showing each may support a strong inference of recklessness. We reaffirm that plaintiffs cannot simply plead "motive and opportunity" as a mantra for recovery under the Reform Act. The Act requires plaintiffs to "speci~y each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which the belief is formed." 15 U.S.C. § 78u-4(b)(1). In this wash of allegations, "motive" and "opportunity" are simply recurring patterns of evidence. We decide cases on facts, not labels. See Minger v. Green,
The First Circuit has adopted a fact-specific approach to the PSLRA, holding that “whatever the characteristic patterns of the facts alleged, those facts must now present a strong inference of scienter.” Greebel v. FTP Software, Inc.,
From the words of the Act, certain conclusions can be drawn. First, Congress plainly contemplated that scienter could be proven by inference, thus acknowledging the role of indirect and circumstantial evidence. Second, the words of the Act neither mandate nor prohibit the use of any particular method to establish an inference of scienter. Third, Congress has effectively mandated a special standard for measuring whether allegations of scienter survive a motion to dismiss. While under Rule 12(b)(6) all inferences must be drawn in plaintiffs’ favor, inferences of scienter do not survive if they are merely reasonable, as is true when pleadings for other causes of action are tested by motion to dismiss under Rule 12(b)(6). Rather, inferences of scienter survive a motion to dismiss only if they are both reasonable and “strong” inferences.
Id. at 195-96 (internal citations omitted).
We believe this approach best reflects the intent of Congress. In enacting the PSLRA, Congress was concerned with the quantum, not type, of proof. See H.R. Conf. Rep. No. 104-369, at 41 n. 23 (1995), U.S. Code Cong. & Admin. News at 740 (“For this reason, the Conference Report chose not to include in the pleading standard certain language relating to motive, opportunity, or recklessness.”). It is true that the Reform Act never refers to motive and opportunity-not because these are insufficient indicia of fraud but because Congress sought a fact-sensitive approach to pleading. According to Senator D’Amato, who managed the Reform Act on the floor of the Senate,
[the Specter] amendment goes further [than the Senate bill], to say precisely what evidence a party may present to show a strong inference of fraudulent intent. I think this strait-jackets the court. Having said that, I could accept deferring to the courts [sic] interpretation, but I think we are going too far if we adopt the language that the court referred to because it would tie the courts [sic] hand by forcing it to ask that plaintiffs prove exactly the delineated facts; [sic] alleging facts to show the defendant had both the motive and opportunity to commit fraud and by alleging facts that constitute strong circumstantial evidence.
141 Cong. Rec. S9201 (daily ed. June 28, 1995) (statement of Sen, D’Amato). Because Congress did not endorse or prohibit a particular manner of pleading, we cannot
(1*) insider trading at a suspicious time or in an unusual amount;
(2) divergence between internal reports and external statements on the same subject;
(3) closeness in time of an allegedly fraudulent statement or omission and the later disclosure of inconsistent information;
(4) evidence of bribery by a top company official;
(5) existence of an ancillary lawsuit charging fraud by a company and the company’s quick settlement of that suit;
(6) disregard of the most current factual information before making statements;
(7) disclosure of accounting information in such a way that its negative implications could only be understood by someone with a high degree of sophistication;
(8) the personal interest of certain directors in not informing disinterested directors of an impending sale of stock; and
(9)the self-interested motivation of defendants in the form of saving their salaries or jobs.
See Greebel,
III. PLAINTIFFS’ ALLEGATIONS CONCERNING THE EFFECT OF THE BALANCED BUDGET ACT
In this case, the district court stated that plaintiffs had met the pleading requirements of the PSLRA. Because the case was before the court on a motion to dismiss, this conclusion should have cleared plaintiffs over the Rule 12(b)(6) hurdle. Yet the court, sua sponte, without notice to either party and without further discovery, converted the motion to dismiss into a motion for summary judgment and ruled for the defendants. This was a serious error. Rule 12 authorizes such a conversion but mandates that parties be given an opportunity to submit materials to support or oppose summary judgment. We have underscored this requirement of “unequivocal notice” on numerous occasions. See, e.g., Salehpour v. Univ. of Tenn.,
Rather than reverse on the basis of the procedural error, we have undertaken a de novo review of the proceedings consistent with the proper Rule 12(b)(6) posture of the case. Accordingly, we “must construe the complaint in a light most favorable to the plaintiff, and accept all of [the] factual allegations as true. When an allegation is capable of more than one inference, it must be construed in the plaintiffs favor.” Bloch v. Ribar,
Contrary to defendants’ contention, the Reform Act did not reverse the polarity of securities pleading. As always under Rule 12(b)(6), we will indulge plaintiffs’ inferences of fraud — provided, of course, those inferences leave little room for doubt as to misconduct. . See 15 U.S.C. § 78u-4(b)(2) (requiring the plaintiff to “state with particularity facts giving rise to a strong inference of scienter”). Inferences must be reasonable and strong — but not irrefutable. “Strong inferences” nonetheless involve deductive reasoning; their strength depends on how closely a conclusion of misconduct follows from a plaintiffs proposition of fact. Plaintiffs need not foreclose all other characterizations of fact, as the task of weighing contrary accounts is reserved for the fact finder. Rather, the “strong inference” requirement means that plaintiffs are entitled only to the most plausible of competing inferences. See Black’s Law Dictionary 1423 (6th ed.1990) (defining “strong” as “cogent, powerful, forcible, forceful”). This represents a significant strengthening of the pre-PSLRA standard under Rule 12(b)(6), which gave the plaintiff “the benefit of all reasonable inferences,” Cameron v. Seitz,
With the aid of additional briefing and oral argument, the court has examined plaintiffs’ allegations in light of the plead
Accordingly, we must decide whether defendants can claim safe harbor protection for their forward-looking statements. For those statements that ares not forward-looking or do not fit within the statutory shelter, we must determine whether plaintiffs have stated a claim under the PSLRA. As we apply the pleading standards of the Reform Act, we keep in mind the substantive elements of a claim for securities fraud. To prevail on a § 10(b)(5)/Rule lOb-5 claim, a plaintiff must establish (1) a misrepresentation or omission, (2) of a material fact, (3) made with scienter, (4) justifiably relied on by plaintiffs, and (5) proximately causing them injury. See Aschinger v. Columbus Showcase Co.,
A. Vencor's Forward Looking Statements
Plaintiffs have alleged a class period of February 10, 1997, until October 21, 1997. During this time, defendants made numerous statements concerning the Balanced Budget Act and its effect on Vencor's business. In its quarterly and annual reports filed with the Securities and Exchange Commission, Vencor stated that it could not gauge the impact of the legislation as it progressed through Congress. At the same time, the company projected fourth-quarter earnings of $0.59 to $0.64 per share and yearly returns between $2.10 to $2.20 for 1997 and $2.60 to $2.65 for 1998. According to plaintiffs, Vencor told analysts that it was "comfortable" with these figures as late as Septem-her 25, 1997, nearly seven weeks after the Balanced Budget Act was signed into law. These statements were "forward-looking" within the meaning of the PSLRA in that they reflected predictions about earnings, revenue, and future economic performance. See 15 U.S.C. § 78u-5(i)(1). Plaintiffs urge that Vencor's professed inability to assess the impact of the Budget Act was a statement of then-present fact. Even as a statement of existing condition, however, these statements were forward-looking in that they concerned "assumptions underlying or relating to" economic predictions. 15 U.S.C. § 78u-5(i)(1)(D). Therefore, all of defendants' earnings projections and statements about the Balanced Budget Act qualify as "forward-looking." As such, defendants are liable only if the statements were material; if defendants had actual knowledge that the statements were false or misleading; and if the statements were not identified as
1. Materiality-Defendants would dismiss their optimistic projections and internal estimates as "soft, puffing statements" that are immaterial as a matter of law. There is support for the proposition that "sales figures, forecasts and the like only rise to the level of mateiiality when they can be calculated with substantial certainty." James v. Gerber Prod. Co.,
Arguably, matters that are not material because they are not so probable or relevant as to be required to be disclosed in a particular context may be material if information about them is stated falsely or misleadingly in communications that are not otherwise required to be made. If, by assumption, there is no need to make the statement, a volunteered false statement about the future is more likely to be uttered to serve the speaker's purpose, and pro tanto may be misleading, than a failure to make any statement about the future.
Victor Brudney, A Note on Materiality and Soft Infomiation~ Under the Federal Securities Laws, 75 Va. L.Rev. 723, 750 (1989).
The Supreme Court has endorsed a fact-intensive test of materiality in securities fraud cases. Basic Inc. v. Levinson,
In this case, it cannot be said that Yen-cor's preliminary appraisals and internal assessments of the Balanced Budget Act were material solely by virtue of their omission. As discussed infra, plaintiffs have alleged facts to produce a strong inference that defendants knew that the Budget Act could adversely affect their operations. Yet defendants simply rested on their disavowals of knowledge while continuing to make favorable earnings predictions. We conclude that there is a "substantial likelihood that the disclosure of the, omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Id. at 231-32,
2. Actual Knowledge of Misleading or False Nature-Defendants claim that the Balanced Budget Act was a "moving target" until it was signed, subject to committee compromise and negotiation, and that its complexity and impact were impossible to assess until long after it was enacted. As Vencor maintains, "Defendants did come to a reasonably certain conclusion that the impact of the [Balanced Budget Act] would be negative. But there are no facts suggesting that this occurred even a day earlier than October 22, 1997." The thrust of defendants' argument is not that they were surprised or caught unprepared for the Budget Act on October 22, 1997, the day Vencor announced lower earnings and triggered a nearly thirty percent decline in its stock. Rather, Vencor asserts that any assessment of the act before that time was tentative and did not require disclosure.
Vencor's claimed inability to assess the adverse impact of the Budget Act is plausible-but only to a point. As the legislation progressed through Congress, this protestation of ignorance became increasingly hollow. In their second-quarter 1O-Q filing, defendants reiterated that "[m]anagement cannot predict whether such proposals will be adopted or if adopted, what effect, if any, such proposals would have on its business." This was filed July 25, 1997, one month after budget bills had passed both the House of Representatives and the Senate, fifteen days after a committee conference was held, and six days before the final bill was cleared for the President's
These predictions and opinions contain “at least three implicit factual assertions: (1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement.” Schneider v. Vennard (In re Apple Computer Sec. Litig.),
As previously noted in section 1.2 above, plaintiffs have alleged that Executive Vice President Barr told Transitional Hospitals employees in June 1997 that they would be laid off because of the impact of the Budget Act and the “tough times coming” that “were going to make it difficult for Vencor to make money and stay profitable.” Ven-cor now explains that Barr’s reference to Medicare cutbacks was limited to Vencor’s hospital operations, which defendants claim comprised only 20 percent of the company’s revenues. What Barr intended by his warning is not an issue we are prepared to resolve at this stage. For
Also as noted above, plaintiffs state that defendants sold nearly a quarter million shares from July to September 1997, yielding proceeds of $9.5 million. Defendant Reed alone sold more than $3 million in stock in mid-September, after passage of the Budget Act but before Vencor released its revised earnings estimates. This amount was substantial enough to attract the attention of the financial media. Ven-cor told inquiring analysts that Reed was selling stock simply to retire a personal loan. Whether this explanation is accurate is not an issue we can decide on the pleadings. See Mayer v. Mylod,
These allegations suggest that it was obvious that the impact of the Balanced Budget Act would be adverse to Vencor before October 22, 1997. A health care executive whose organization represented Vencor testIfied before Congress about his concerns in April. The timing of Vencor's estimates and purported myopia concerning the Budget Act, when compared against the progress of the legislation through Congress, indicates that clefen-dants consciously disregarded the warning signs of health care cutbacks. Certain defendant executives even acknowledged that "tough times" were ahead for at least part of the company and sold millions of dollars in stock after the act was signed but before prices plummeted. We have previously compared the common law requirements for fraud to a showing of scienter under federal securities laws. Mansbach,
A defendant who asserts a fact as of his own knowledge or so positively as to imply that he has knowledge, under the circumstances when he is aware that he will be so understood when he knows that he does not in fact know whether what he says is true, is found to have intent to deceive, not so much as to the fact itself, but rather as to the extent of his information.
Prosser and Keaton on Torts 741-42 (5th ed.1984) (citations omitted). On the basis of these allegations, we conclude that plaintiffs have produced a strong inference that defendants persisted in making favorable predictions and feigning ignorance of the Budget Act with actual knowledge that their statements were misleading.
3. Not Identified as Forward-Looking/Absence of Meaningful Cautionary Statements-Though defendants described their predictions as "forward-looking" in the 1996 10-K, other SEC filings and press releases during the class period lacked this designation. Moreover, the first- and second-quarter 10-Q filings contained only a generic disclaimer of knowledge about "whether such proposals will be adopted or if adopted, what effect, if any, such proposals would have on its business." The safe harbor provision, in contrast, requires that defendants identify "important factors that could cause actual results to differ materially from those in the forward-looking statements." 15 U.S.C. § 78u-5(c)(1)(A)(i). While the Conference Committee explained that a company need not list all factors, the legislative history makes clear that "boilerplate warnings will not suffice.... The cautionary statements must convey substantive information about factors that realistically
The safe harbor was designed to encourage company disclosure of future plans and objectives by removing the threat of liability. H.R. Conf. Rep. No. 104-369, at 45 (1995). In crafting it, Congress drew on the judicially created “bespeaks caution” doctrine, which states that “beliefs about future statements which turn out to be incorrect are not actionable under Section 10(b) if the statements contain sufficient cautionary language.” Mayer,
According to the plaintiffs, that is not what happened here. In its 1996 10-K filing, dated March 27, 1997, Vencor described proposals for healthcare reform and specifically warned that its projections could differ from actual results due to possible legislation, cost-containment measures, problems in state licensure, and difficulties in integrating acquired entities. Yet as the Budget Act neared enactment and as the warning signs flared, Vencor’s precautions grew more cursory and abstract. In its first- and second-quarter filings of 1997, the company stated only that it could not predict the form, effect, or likelihood of any proposed legislation. Substantially similar language also appeared in Vencor’s 10-K filings from 1995, 1994, and 1993. In applying the bespeaks caution doctrine, we have noted that “cautionary statements must be substantive and tailored to the specific future projections, estimates, or opinions ... which the plaintiffs challenge.” Charal v. Royal Appliance Mfg. Co., No. 94-3284,
Defendants rely on a line of cases preceding the PSLRA that holds that a company need not disclose “soft information” to the investing public. This type of information is defined only by its uncertainty: predictions, matters of opinion, and asset appraisals have all been regarded in this Circuit as “soft.” See Murphy v. Sofamor Danek Group, Inc.,
Sofamor Danek involved alleged misrepresentations and omissions by a company that manufactured and marketed spinal implant devices. According to the complaint, which was dismissed prior to the enactment of the PSLRA, the defendant
Starkman also featured allegations of securities fraud. There, a shareholder of Marathon Oil sued the company for not disclosing merger negotiations with U.S. Steel. According to the complaint, the defendant did not divulge asset appraisals and earnings projections prepared in connection with a friendly tender offer. These figures, according to the plaintiff, would have informed his decision whether to sell his shares or await a higher price. A panel of this court affirmed summary judgment for the defendant, concluding that “a tender offer target must disclose projections and asset appraisals based upon predictions regarding future economic and corporate events only if the predictions underlying the appraisal or projection are substantially certain to hold.” Starkman,
Defendants maintain that their statements concerning the Balanced Budget Act are not actionable because they qualify as “soft information” under the non-disclosure rules of Starkman and So-famor Danek. This conclusion is mistaken because these cases are inapposite. In Sofamor Danek, the information claimed as adverse to the company had already been disclosed and was publicly available to permit an independent assessment by investors and analysts. And Starkman was a case about non-disclosure. This case, in contrast, is about selective disclosure of information known exclusively to defendants and essential to complete a picture they had only partially revealed. While it is true that “silence, absent a duty to disclose, is not misleading under Rule 10b-5,” Basic Inc. v. Levinson,
Under Starkman and Sofamor Danek, it is true that defendants had no independent duty to divulge their internal appraisals of the Budget Act, a comprehensive study that plaintiffs allege began in April and was completed by July. Nor do we disagree that the non-disclosure cases survive the Reform Act. But the protections for soft information end where speech begins. Though forward-looking statements may contain soft information, they do not themselves constitute soft information; thus, public revelation cannot partake of the shelter under Starkman. In fact, the argument defies application: how can a rule of non-disclosure apply to a company’s disclosure? If-as defendants contend-the protection for soft information remains intact even after a company speaks on an emerging issue, the speaker could choose which contingencies to expose and which to conceal. On any subject falling short of reasonable certainty, then, a company could offer a patchwork of honesty and omission. This proposition is untenable,
On the facts of Starkman, a corporation that chooses to divulge uncertain estimates “must also inform the shareholders as to the basis for and limitations on the projected realizable values.” Starkman,
In sum, while an attorney representing the seller in a securities transaction may not always be under an independent duty to volunteer information about the financial condition of his client, he assumes a duty to provide complete and non-misleading information with respect to subjects on which he undertakes to speak.
Id.
Contrary to the way in which the district court and panel majority framed the issue, the question in this case is not whether Vencor had a duty to divulge its internal assessments of the Balanced Budget Act. Rather, the question is whether the company had a duty to complete the information already given concerning the Budget Act and earnings estimates. Though the Reform Act does not impose a “duty to update,” see 15 U.S.C. § 78u-5(d), and we do not decide today whether such an obligation exists,
Vencor points to policy reasons against disclosure of information that has not achieved reasonable certainty. See, e.g., Searls v. Glasser,
Thus, it appears that the need for information in the name of completeness can conflict with the need to incubate uncertain data and avoid liability. These competing interests are reconciled in the Reform Act. If a company chooses to speak on an uncertain subject-as here, when Ven-cor claimed an inability to assess the Budget Act while simultaneously issuing flush earnings estimates-it cannot duck liability by pointing to the “soft” nature of the information it volunteered. It may, however, find refuge in the safe harbor of the Reform Act, provided that the statutory requirements are met. Here, we find they were not.
B. Sufficiency of Plaintiffs’ Complaint
Having concluded that defendants’ statements concerning the Balanced Budget Act are outside the statutory safe harbor, we now ask whether plaintiffs have alleged sufficient facts to state a cause of action for securities fraud. Because we find plaintiffs to have produced a strong inference that defendants made projections and disavowed the impact of the Balanced Budget Act with actual knowledge that their statements were misleading, a fortiori plaintiffs have produced a strong inference that defendants acted recklessly in their statements and omissions concerning earnings estimates and the Budget Act. As to these allegations, then, plaintiffs have met the pleadings standards of the Reform Act. 15 U.S.C. § 78u-4(b)(l)(2).
C. Response to the Dissent
The dissent is out of bounds in relying upon this Circuit’s “soft information” cases. The dissent has challenged the writer of this opinion, claiming an inconsistency between what is said' here and what he wrote in Starkman v. Marathon Oil Co., a case decided ten years before the PSLRA was passed. Though we find the result here to be consistent with Stark-man, we do not view that case as controlling or even especially relevant to the matter at hand. Starkman was an attempt by this court before the PSLRA to strike a balance between optimal disclosure of facts and permissive withholding of corporate prospects. In 1995, Congress re-calibrated that balance by passing the Reform Act. It is that Act, not Starkman, that we must apply now.
Applying the PSLRA, it is clear that the earnings estimates are “forward-looking statements” within the definition of 15 U.S.C. § 78u-5(i)(l). The dissent would characterize the unidentified contingencies affecting these projections — such as the company’s awareness of the Budget Act— as “soft information” that need not be disclosed. Yet this “soft information” designation appears nowhere in the Reform Act. On the contrary, the PSLRA compels
The dissent has a second line of attack: simply brush aside plaintiffs’ allegations as immaterial. This strategy is equally unconvincing. As the Supreme Court has noted, the issue of materiality is a mixed question of law and fact. TSC Indus., Inc. v. Northway, Inc.,
Accusing us of sleight-of-hand, the dissent states that we have “turn[ed] the question from whether future earnings were capable of being calculated with substantial certainty to whether there was a substantial certainty that the [Budget] Act, if enacted, would have any adverse effect on Vencor’s business.” Dissent at 568. Yet it is the dissent that clouds the issue by pursuing a secondary line of inquiry. Materiality is about marketplace effects, not just mathematics. The question is not whether the earnings were precisely calculable — rather, the question is whether those projections, when viewed against the backdrop of the Budget Act, were significant to the reasonable investor.
In Basic v. Levinson, the Supreme Court stated the common sense principle that “materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information.” Basic,
The dissent insists that any data Vencor possessed concerning the Budget Act was likewise immaterial. ■ In essence, the dissent offers a syllogism that any study of the Budget Act was tentative, that tentative information is “soft,” that soft information is immaterial, and that immaterial information need not be disclosed-thus, Vencor’s study need not be disclosed. But this assumes the very conclusion by positing that Vencor’s knowledge of the Budget Act was somehow tentative or preliminary. The dissent states that “[tjhere is absolutely no indication that the form or the effect of the Act was objectively verifiable when Vencor made its projections.” Dissent at 569. Yet that is the whole thrust of plaintiffs’ case: that Vencor had reliable information concerning the adverse effect of health care legislation, as proposed and later passed, before the company announcement of lower earnings in October and that its firing of employees in anticipation of the Budget Act belied its rosy projections to the public.
Finally, the dissent claims it is unsure of what we have held. We think today’s ruling is fairly clear: a company may remain silent about estimates, projections, and preliminary data until the fullness of time and additional detail permit confident disclosure. If, however, the company chooses to make projections and issue estimates despite the uncertainty of that information, the Reform Act then controls the elective disclosure. At that point, the company “cannot duck liability by pointing to the ‘soft’ nature of the information it volunteered. It may, however, find refuge in the safe harbor of the Reform Act, provided that the statutory requirements are met.” Supra at p. 562. Among those requirements is the inclusion of “meaningful cautionary statements.” 15 U.S.C. § 78u-5(c)(l)(A)(i). This is entirely consistent with our requirement that an actor speak fully and truthfully when making a voluntary disclosure. Rubin,
Rather than confront plaintiffs’ allegations that Vencor spoke partially and misleadingly, the dissent attempts to re-characterize the facts. According to the dissent, defendant Barr’s alleged statement to outgoing employees of “tough times” ahead in the industry was only commiseration, not analysis. We think a fact-finder might regard this "as more than an oddly detailed, prescient expression of sympathy. As for’ allegations of insider stock sales, the dissent finds that “plaintiffs have made no allegation that the amount sold by defendants was not in line with prior practices.” Dissent at 573. We would note that the amended complaint clearly alleges otherwise, with accompanying charts. See Am. Compl. ¶ 12, J.A. 98. The point is not that one account of events is right and one is
IV. OTHER CLAIMS
A. Vencor's Acquisition of TheraTx
When Vencor announced plans to merge with TheraTx, another provider specializing in rehabilitation care and occupational health, Vencor's chief executive officer, Bruce Lunsford, explained that the acquisition would "be aecretive to earnings based on projected synergies." Plaintiffs maintain that this statement was false because Vencor also would be acquiring $25 million in bad debt and 26 poorly performing nursing homes from TheraTx. As a forward-looking statement, Lunsford's prediction falls within the safe harbor provisions of the PSLRA. Plaintiffs must plead facts giving rise to a strong inference that Vencor had actual knowledge of the false or misleading nature of the statement. 15 U.S.C. § 78u-5(c)(1)(B). The complaint is too conclusory in this regard to satisfy that standard. Naturally, Vencor's management would expect and publicly anticipate favorable results from its merger. We doubt that defendants would have completed the merger knowing that the deal would not "be accretive to earnings."
Plaintiffs also point to Lunsford's statement that "we successfully integrated the operations of TheraTx" as false because computing incompatibilities yet remained. However, plaintiffs fail to explain how computer problems precluded the successful integration of the companies. The allegations do not reveal Lunsford's statement to be false or misleading.
Plaintiffs have not stated a claim for securities fraud in connection with Ven-cor's acquisition of TheraTx.
B. Vencor's Acquisition of Transitional Hospitals Corporation
On May 7, 1997, Vencor announced plans to purchase Transitional Hospitals Corporation. To finance the acquisition, defendants sold $750 million of senior notes, which they exchanged in October for publicly traded notes. According to plaintiffs, the company would not have been able to complete the bond offering had investors known the truth about how the Balanced Budget Act-enacted two months earlier-would affect Vencor.
This claim appears to be an off-shoot of plaintiffs' charge that Vencor profited from failing to speak fully about the adverse impact of the Budget Act. We have already concluded that there is a strong inference that defendants knew more than they disclosed about the financial consequences of health care reform. In their allegations concerning stock prices, plaintiffs have shown that defendants had no reasonable basis for making earnings projections without discussing the potential effect of the Budget Act. Unlike the allegations concerning the earnings estimates, though, the complaint does not support its claim for fraud in the Transitional acquisition. As was the case in Comshare, plaintiffs here allege only motive and opportunity to mislead without the factual basis for either. Comshare,
C. Vencor's Proposed Sale of Behavioral Healthcare Corporation
On September 16, 1997, Vencor announced the sale of its subsidiary, Behav-
V. CONCLUSION
As evidenced by the ambiguous legislative history and the split among the federal circuits, the import and application of the Private Securities Litigation Reform Act is an evolving issue. Perhaps the question would have been simpler had Congress drafted statutory language to reflect its apparent intention, such as the translation offered by one commentator:
There are too many frivolous securities fraud class actions being filed. Such actions impose heavy costs on defendants as a result of the extensive discovery that is likely to ensue and often result in the defendants being forced to settle. There is no liability under Rule 10b 5 unless the defendant knew or recklessly disregarded that the representations were false or misleading. A court should not allow discovery unless it determines the best it can from the pleadings whether the case is likely to have merit (defendant(s) made false representations and knew they were false) if discovery is allowed or whether it appears frivolous. Judges keeping all of this in mind should exercise their discretion in determining whether the case should be allowed to proceed or be dismissed.
Harold S. Bloomenthal, Securities Law Handbook, 2-375 (2001 ed.). Congress has instead instructed us to dismiss complaints for securities fraud unless plaintiffs “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). With regard to defendants’ earnings projections and disclaimers of knowledge about the Balanced Budget Act, plaintiffs have done so here. We would note that the district court, before granting summary judgment in error, arrived at the same conclusion concerning the sufficiency of the pleadings. Accordingly, we REVERSE the dismissal for failure to state a claim of securities fraud, except with respect to the claims referred to in section IV above, and REMAND the case for further discovery and proceedings on plaintiffs’ claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934. ••
Notes
. For the language of this provision in the Reform Act, see note 2 infra.
. This formulation is drawn from the Statutory text, which is written in the negative disjunctive:
Except as provided in subsection (b), in any private action arising under this title that is based on an untrue statement of a material fact or omission of a material fact necessary to make the statement not misleading, a person referred to in subsection (a) shall not be liable with respect to any forward-looking statement, whether written or oral, if and to the extent that-
(A) the forward-looking statement is-
(i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual re-
suits to differ materially from those in the forward-looking statement; or (ii) immaterial; or
(B) the plaintiff fails to prove that the forward-looking statement-
(i) if made by a natural person, was made with actual knowledge by that person that the statement was false or misleading; or
(ii) if made by a business entity; [sic] was-
(I) made by or with the approval of an executive officer of that entity; and
(H) made or approved by such officer with actual knowledge by that officer that the statement was false or misleading.
15 U.S.C. § 78u-5(c)(1) (emphasis added).
. Basic concerned the proper standard of materiality. We do not understand the Supreme Court to have disturbed the premise for liability in that case, viz., "corporate officers are not required to speak, but once they do, they must be truthiul it their comments are material to investors' decisionmaking." Mayer v. Mylod,
. The panel majority found that "the pleadings set forth no statements, after August 5, 1997, which are directly attributable to any of the defendants.” The dissent likewise challenges our decision today as predicating liability on analysts' statements alone. We hold no such thing. Plaintiffs' allegation of the statement made by defendants on September 25, 1997, attributes the earnings projections to Lunsford and Reed. Moreover, the complaint identifies the analysts to whom the statements were made — Maureen Sullivan of Cowen & Company and Scott Mackesy of Morgan Stanley — as well as the liming and contents of the discussion. Am. Compl. ¶ 100, J.A. 142. These details meet the particularity requirement for pleading fraud under both Fed R. Civ. P. 9(b), see Michaels Bldg. Co. v. Ameritrust Co.,
. As discussed infra, we do not find the cautionary language sufficiently meaningful to correct this misleading representation. At any rate, the Conference Report pointed out that "the applicability of the safe harbor provisions under subsection [15 U.S.C. § 78u-51(c)(1)(B) shall be based on the 'actual knowledge' of the defendant and does not depend on use of cautionary language.” H.R. Conf. Rep. No. 104-369, at 47 (1995), U.S. Code Cong. & Admin. News at 746.
. The duty to update "concerns statements that, although reasonable at the time made, become misleading when viewed in the context of subsequent events.” In re Burlington Coat Factory Sec. Litig.,
Dissenting Opinion
dissenting.
According to the majority, plaintiffs have alleged sufficient facts that Vencor knowingly made false or misleading statements to overcome the Private Securities Litigation Reform Act’s heightened pleading standards. Because the majority fails to identify any material statements that defendants knew were false or misleading and adopts an excessively expansive view of the phrase “strong inference,” I must respectfully dissent.
It is not entirely clear to me what the majority has held. At some points, it appears it is holding that management’s statements that it could not predict the effect of the Balanced Budget Act were false. At others, it appears the majority concludes that management’s projections
I. Materiality
According to the majority, this is not a case about failure to disclose. Rather, it asserts, this is a case about selective disclosure. Under this Circuit’s precedent, it concludes, once a corporation begins to speak, the corporation must disclose information such as the effect of yet to be enacted legislation on its revenue. Specifically, the majority points to Rubin v. Schottenstein,
I do not believe the statements the majority identifies as misleading are material nor do I believe the information Vencor omitted is material under established securities law. In reviewing Vencor’s motion, we are entitled to take into account documents referred to in the pleadings, something the majority did not do. See 11 James Wm. Moore Et Al., Moore’s Federal Practice § 56.30[4] (3d ed.1998).
The majority identifies three statements Vencor made that it believes Vencor knew were false or misleading. One, in Vencor’s financial filings, specifically its 1997 second quarter 10 Q filing, for the period of April 1, 1997 to June 30, 1997, it stated it could not predict whether the Balanced Budget Act would be enacted and what effect such proposals, if enacted, would have. Two, the complaint alleges that Vencor spoke with analysts and projected fourth quarter earnings for 1997 and earnings for all of 1998. And three, according to the complaint, Vencor’s management informed analysts in September of 1997 that it was “comfortable” with the earnings projections made by analysts prior to the enactment of the Budget Act. See Maj. Op. at 554. It bears emphasis that the analysts’ report included in the joint appendix does not say management said it was comfortable with the projections; rather it says “management comfortable,” J.A. at 856, with the estimates, which could very well be the analysts’ understandings of management’s statements. Nevertheless, these were all misleading, according to the majority, because management failed to disclose predictions about the impact of the Balanced Budget Act on Vencor’s revenue.
A Statements Made
As the majority points out, if a statement is immaterial, it is not actionable. See 15 U.S.C. § 78u-5 (c)(l)(A)(ii); see also 17 C.F.R. § 240.10b-5(b). “Material representations must be contrasted with statements of subjective analysis or extrapolations, such as opinions, motives and instructions, or general statements of optimism, which ‘constitute no more than puf-fery and are understood by reasonable investors as such.’ ” EP Medsystems, Inc. v. EchoCath, Inc.,
That management’s statements have to be material to be actionable is only tangentially addressed by the majority. According to the majority, it does not believe that “Vencor’s strong estimates of stronger earnings were so uncertain or casually disregarded by the marketplace” as to make the projections immaterial. Maj. Op. at 555. Of course, the question is not whether the projections were “so uncertain,” but rather, whether they were capable of being calculated with substantial certainty. I do not believe there is any indication that they were substantially certain and the majority points to no information to persuade me otherwise. Instead, it nimbly turns the question from whether estimates were capable of being calculated with substantial certainty to whether there was a substantial certainty that the Act, if enacted, would have any adverse effect on Ven-cor’s business. This is disingenuous. That the Act may have an adverse effect does not mean that estimates were capable of being calculated with substantial certainty. If anything, the fact that a bill was before Congress which, if enacted, would potentially have an impact on Vencor’s revenues makes estimates more uncertain. And Vencor made investors aware of this by informing them that management’s projections did not include the effect of the Act with its statement that it could not predict the effect of the Act. The majority never answers the question of whether information existed to calculate future earnings with substantial certainty. Nor does it suggest how a statement that the projection does not purport to take into account proposed legislation is false because it does not take that legislation into account.
Even if there was such information, it would not make material all the statements the majority identifies. Two of the statements-the statement of comfort and the statement regarding the Act-are not earnings estimates made by Vencor’s executives. The majority does not explain why these statements are material. Nor can I, as I believe they are not. I am at a loss for how an executive’s statement that he is comfortable with another’s projections is material. As the Fourth Circuit observed, such statements are incapable of being proven false, and, consequently, incapable of being material. See Longman,
B. Information Omitted
More importantly, I think, the information the majority claims should have been disclosed — internal analyses by management of the Act’s effect — is immaterial. Our case law clearly establishes that such information need not be disclosed. In In re Sofamor Danek Group, Inc.,
The effect of the Act on Vencor’s revenue is undeniably soft information. There is absolutely no indication that the form or the effect of the Act was objectively verifiable when Vencor made its projections, which the majority seems to admit. “On any subject falling short of reasonable certainty, then, a company could offer a patchwork of honesty and omissions.” Maj. Op. at 560. But the majority finds “untenable ... both as a matter of policy and precedent,” Maj. Op. at 560-61, that information that is not reasonably certain- — that is, information that is by definition immaterial — need not be disclosed. In its mind, “the protections for soft information end where speech begins.” Maj. Op. at 560. Indeed, according to the majority, the argument “defies application: how can a rule of non-disclosure apply to a company’s disclosure?” Maj. Op. at 560. The answer is simple: exactly as § 78u-5(c)(A)(ii) says it does. Under that section, a forward-looking statement is not actionable to the extent that it is immaterial. 15 U.S.C. § 78u-5(c)(A)(ii). If a statement is not actionable, what principled reason is there for requiring disclosure?
The majority’s reliance on Rubin to answer this question is unfounded. According to the majority, in Rubin we established that an executive “assumes a duty to provide complete and non-misleading information with respect to subjects on which he undertakes to speak.” Maj. Op. at 561. That characterization omits the important restriction on the disclosure requirement. If the majority had gone one line further in the Rubin opinion, it would have realized that duty applies only to material information. “Having concluded that [the defendants] were under a duty not to misrepresent or omit material facts in connection with the proposed investment. ...” Rubin,
The principle espoused by the majority contradicts our position previous to today’s ruling. For, as Judge Merritt states in Starkman, “we begin ... with the basic proposition that only material facts — those substantially likely to affect the deliberations of the reasonable shareholder — must be disclosed, and then only if the nondis
There are three public statements by Marathon management at issue here. First, Marathon’s November 11, 1981, press release, which states, in pertinent part that:
Our Board of Directors has determined that Mobil Corporation’s unsolicited tender offer is grossly inadequate. The offer is not in the best interests of Marathon Oil or its shareholders. It doesn’t reflect current asset values and it doesn’t permit the long-term investor the opportunity to participate in the potential values that have been developed.
Starkman argues that the failure of any of these communications to disclose the Strong and First Boston and the five-year earnings and cash flow projections constituted an omission of material facts....
Starkman,
II.
While the above analysis is sufficient to demonstrate that the outcome the majority
A. Analysts’ Statements
The first of these principles is the majority’s implicit holding — -it does not discuss the question in any detail but such a conclusion is necessary to its decision— that Vencor may be liable for statements made by analysts. Specifically, analysts’ statements that management was comfortable with their projections. Our Circuit has not addressed the issue of whether a company’s executives can be liable for statements of analysts, and while the majority opinion makes clear they can, it does little to explain why and how. As the majority gives no explanation, I suggest that the Second Circuit’s position on the matter is persuasive.
In our original panel decision, relying on In re Time Warner, Inc., Securities Litig.,
B. Strong Inference
Adoption of the reports and the materiality of the statements and omissions aside, the majority has not convinced me that plaintiffs have alleged facts giving rise to a strong inference that management knew the statements were false or misleading. According to the majority, Ven-cor’s statements were false or misleading because, “[w]hen defendants disclaimed any ability to predict health care legislation, while persisting in favorable earnings estimates seven weeks after the enactment of the Budget Act, Vencor was representing that it knew of no way the Budget Act could adversely affect its operations.” Maj. Op. at 557.
I do not think that is a precise statement of the facts and, moreover, I find that conclusion to be quite a leap. Management statements concerning the legislation were made on July 25, 1997, before the conference committee report was released on July 29 and before the legislation was signed into law on August 5, 1997.
Proceeding from this more reasonable reading of the statements, I do not think the allegations to which the majority points give rise to a strong inference that management actually knew its statements were false or misleading. The majority points to three allegations in the complaint: (1) that in April of 1997, the president of the Federation of American Health Systems testified that the members of his organization, which included Vencor, were concerned about the effects the legislation might have, (2) “Barr told employees in June of 1997 that they would be laid off because of the impact of the Budget Act and the ‘tough times coming’ that ‘were going to make it difficult for Vencor to make money and stay profitable,’ ” Maj. Op. at 557, and (3) that Reed sold three million dollars worth of stock.
As an initial matter, I do not believe the majority’s statement of the occasion at which Barr spoke, accurately conveys what the complaint alleges. According to the complaint, Barr met with employees of Transitional, a company recently acquired by Vencor, who were being laid off for reasons unrelated to the Budget Act. “Barr told [the employees] that they probably would have been laid off anyway because the proposed Medicare regulations were going to make it difficult for Vencor to make money and stay profitable.” J.A. at 130. Having cleared that up, I do not think that statement can be reasonably said to give rise to a strong inference. The statement is not the product of a reasoned report or analysis. Rather, the statement is from an executive attempting to let unhappy employees down easy. Similarly, that the president of an organization to which Vencor belonged testified in April of 1997 that its members were concerned about some of the proposals in the Bill is of little significance. At that time the final form of the Act was not yet certain — as I noted earlier, the Bill had gone through several changes — and its passage was also uncertain. How then, could Vencor predict what the final version of the Act would look like or how that version would affect its revenue? Finally, I find unconvincing the argument that defendants had actual knowledge of the false or misleading nature of their statements because of their sale of stock. Combined, the defendants’ ownership of stock during the class period decreased by less than five
For all of the foregoing reasons, I dissent. I concur in the dismissal of the remaining claims.
. Lest there be any doubt that the majority is rejecting the long-standing principle that soft information is immaterial, it says in response to my dissent that Basic, Inc. v. Levinson,
To the extent the majority is suggesting that the Supreme Court's application of the materiality standard in Basic controls our analysis here and does not permit us to hold as a matter of law that soft information is immaterial, I draw the reader’s attention to footnote nine of the Court's opinion which made clear the Court did "not address ... any other kinds of contingent or speculative information, such as earnings or forecasts." Basic,
. The 10-Q warned, "Congress is currently considering various proposals which could re
It seems to me that we have to look at the statement in terms of the quarter for which it was intended — the quarter ending June of 1997 — rather than the date on which it was signed. Anyone reading the statement should know that the analysis was made prior to the end of that quarter. The majority completely disregards the fact that the statement in the 10-Q was made in relation to a quarter that ended in June of 1997.