Gross v. Summa Four CV-94-364-B 11/08/95 UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE

David Gross

v. Civil No. C-94-364-B

Summa Four, Inc., et al.

MEMORANDUM AND ORDER

This is a securities class action brought by David Gross as

representative of an uncertified class, against Summa Four, Inc.,

and certain of its officers and directors1 ("the Defendants"),

for claims arising under §§ 1 0 (b) and 2 0 (a) of the Securities

Exchange Act of 1934, 15 U.S.C.A. §§ 78j(b) and 78t(a) (West

1981), Securities Exchange Commission Rule 10b-5,

.10b-5 (1994), and related common law. Gross alleges, on

behalf of all persons who purchased the common stock of Summa

Four from January 18, 1994 through July 5, 1994 ("the Class

Period"), that the Defendants perpetrated a fraud-on-the-market.

Specifically, he claims the Defendants falsely and recklessly

mislead the investing public through statements and omissions

made during the Class Period which artificially inflated the

market price of the company's common stock. The Defendants moved

to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b), after

1 The individual defendants are Barry Gorsun, current president, CEO and Chairman of the Board; James J. Fiedler, president and director from July 1993 through July 1994; John A. Shane, director since 1976; William M. Scranton, director since 1976; and Robert A. Degan, director since 1984. plaintiff filed his first amended complaint. For the following

reasons, I grant Defendants' Motion to Dismiss.

I. FACTUAL BACKGROUND

Because this case is before me on the Defendants' motion to

dismiss, I recite the extensive factual background in the light

most favorable to the plaintiff. Berniger v. Meadow Green-

Wildcat Corp.,

(1st Cir. 1991) (court must accept

all facts in complaint as true, drawing all reasonable inferences

in plaintiff's favor).

A. Summa Four

Summa Four is a Delaware corporation with its principle

executive offices located in Manchester, New Hampshire. It

develops, distributes, and services, both domestically and

internationally, switching systems and advanced signaling

solutions for telephone companies. 55 12, 34, 35.2 Sales of its

products are directly to end-users of these systems as well as

through telecommunications systems integrators, including IBM and

Digital Eguipment Corporation. 5 35. The SDS series of

distributed switching systems and the Portico SS-7

2 All paragraph references are to the plaintiffs' First Amended Complaint. internetworking product are its leading products. 5 36.

On September 23, 1990, Summa Four completed its initial

public offering ("IPO") and provided a prospectus in which it

portrayed the company as expanding and "poised for rapid growth."

5 38. The individual defendants sold a portion of their common

shares into the IPO, but retained a substantial guantity of those

shares. 5 39. As provided in a "lock-up" agreement, these

retained shares could not be sold until 180 days after the date

of the IPO prospectus. 5 39.

In late 1993, the company, through its officers as well as

press releases, touted the progress and prospects of the company.

55 40 - 41. Summa Four had regular, extensive, and non-public

contact with various stock market professionals, analysts, and

money managers, including analysts from Montgomery Securities and

Cruttenden & C o . 5 42. At least with respect to the analysts

from Cruttenden & Co., Summa Four conveyed detailed information

regarding its business and operations not available to the

public. 5 42. As a result of these contacts, the analysts

released "extremely positive" reports. Newspapers, including the

Manchester Union Leader, guoted these statements in articles

printed during October 1993. 5 43.

3 On November 15, 1993, Summa Four issued a press release

indicating that it had entered into a world wide cooperative

agreement with IBM, with initial orders over $ 1 million. 5 44.

In December, the company issued another press release announcing

expansion of its European operations and also highlighting the

rapidly growing market share and opportunities of Summa Four.

55 45 - 46.

B. The Class Period

During the Class Period, the Defendants, as well as market

analysts, made numerous positive statements concerning the

company's financial position, market potential, and sales.

55 48 - 60. Contemporaneously, Summa Four was actually

experiencing downward trends evidenced by facts and events not

disclosed to the public. 55 61 - 98. During the Class Period,

on May 27, 1994, Gross purchased 200 shares of Summa Four Common

Stock at $ 27.5625 per share. 5 11.

1. Statements by the Defendants

On the first day of the Class Period, January 18, 1994,

Summa Four issued a press release containing several statements.

55 48 - 50. The press release announced the company's results

for the end of its third fiscal guarter, stating that its

revenues were $ 7,277,000 and its net income was $ 1,852,000. In

4 addition, the president of Summa Four stated: "We are also

seeing increased demand for our SDS distributed switch in a

number of international markets." (emphasis added). He

continued, "[t]he SDS distributed switch is becoming the platform

of choice." (emphasis added). Finally, the release noted that

Summa Four had received orders from Unisys, Sprint, IBM, DEC,

Pacific Bell, US West and AT&T.

The Defendants made several statements in the Spring of

1994. 55 52 - 55. On April 25, 1994, they introduced a new

product, stating that it was a revolutionary product and would

put "carriers in a position to win back [lost] customers by

providing flexible cost-effective access to overlay network

services." Shortly thereafter, the Defendants reported their

fourth guarter, year-end operating results for fiscal 1994,

reporting revenues of $8,344,000 and net income of $1,675,000 for

the guarter, and revenues of $27,257,000 and net income of

$5,287,000 for the year.

In a press release issued the same day, the Defendants

stated: "We see the current market continuing to expand over the

next several years. ... We continue to be enthusiastic about our

opportunities to grow over the next several years." 5 54.

Furthermore, the Defendants stated they had received "significant

5 orders" for "new and existing applications, domestically and

internationally," from AT&T, McCaw, Sprint, GTE, Unisys and IBM.

5 55.

Finally, the Defendants made statements in the 10-k form

submitted to the Securities and Exchange Commission ("SEC") and

in a letter to shareholders accompanying the 1994 Annual Report

issued June 29, 1994. 55 59 - 60. In the 10K form, filed two

weeks before the end of the guarter, the Defendants described the

company in an optimistic light, stating more than once that it

"anticipated growth." Likewise, in its letter to shareholders

the tone was optimistic: "We have a . . . strong financial

position"; "We continue to be enthusiastic about our opportunity

to grow over the next several years"; "Our major goal in Fiscal

Year 1995 is to continue to further leverage our market

leadership position as the telecommunications industry continues

to expand worldwide."

2. Statements by analysts

Montgomery Securities issued three favorable analyst reports

regarding Summa Four, dated January 19, 1994, May 4, 1994, and

May 31, 1994, based in large part on the Defendants' public

statements and private communications between the individual

defendants and analysts at Montgomery. 55 51, 56, 57. The

6 January report included the following statements: "SUMA [sic]

business is very strong"; "We have increased our revenue and EPS

estimates"; "For FY:1995 we have increased our revenue and EPS

forecasts"; "The company is performing well with outstanding

prospects. We are, furthermore, aware of several situations

which could add some upside to our FY:95 forecast."

The May 4th report expressed similar optimism, stating:

"SUMA [sic] business remains strong"; "We have increased our

revenue estimates... and we have also increased our fiscal 1995

revenue estimate"; "The company is performing well, with

outstanding prospects. We are, furthermore, aware of several

situations which could add some upside to our FY:1995 forecast."

Finally, Montgomery issued a report on May 31st stating:

"The Company's intermediate to long-term prospects have never

looked brighter"; "The VCO [product] is an important product and

should result in a greater than doubling of SUMA's [sic]

addressable market to more than $300 million." In addition, the

report cited a deal with AT&T which Montgomery believed had

potential to Summa Four of "perhaps greater than $10 million over

an 18-24 month period."

3. Undisclosed, adverse facts

Plaintiff delineates several facts, relying primarily on

7 internal budgetary reports, which allegedly indicate that the

true state of affairs experienced by Summa Four during the Class

Period belied the positive statements and optimistic predictions

disseminated by the Defendants and analysts. 55 61 - 98.

Specifically, the company was unable to meet internally budgeted

results of operations, the Defendants employed, or authorized,

the use of undisclosed or unauthorized accounting procedures

which created a false and misleading impression of its growth and

prosperity and the company's international operations were "in a

state of disarray and ... had a materially negative effect upon

the Company's results during the Class Period." 5 61.

(a) Summa Four was consistently off-budget during the Class Period

In December 1993, the company made an adjustment for income

tax which "enabled the Company to meet or exceed analysts'

predictions with regard to the Company's operating results."

According to the company's internal reports, dated January 20,

1994, December 1993 revenues were $68,000 below projections,

general and administrative expenses were $11,000 over budget, and

research and development expenses were $37,000 over budget.

Similar results were reported for the guarter ending December 31,

1993. In addition, the report indicated that for the previous nine months the company had experienced "significant cost

overruns," totalling $746,000 over budget.

Both Summa Four's Monthly Operating Report and its Revised

Flash Report for January 1994, indicated that revenue, gross

margin, and net income fell below the forecasted budget. A

similar assessment was made of the company's situation in

February 1994. The company's president acknowledged to the Board

that several major orders were delayed and that he would have to

adjust downward the guarterly bookings forecast. I 70. By March

1, 1994, Summa Four was $2,019,000, or 43.66%, behind budgeted

revenues for the fourth fiscal guarter. Gross margin as well as

research and development expenses were below budget by similar

percentages. The February Flash Report stated that projected

operating profit for the fiscal year ending March 31, 1994, was

$532,000, or 13.51%, under budget. Net income reflected similar

shortfalls. These trends continued through March and April of

1994 .

(b) Improper recognition of revenue during the Class Period

According to GAAP and FASB, a company must wait in most

cases until goods are shipped in order to recognize revenue for

accounting purposes. $[$[ 110 - 111. In conformance with these principles, Summa Four's 10K form for fiscal 1994 states that

"[r]evenue from product sales is recognized generally on

shipment." Nevertheless, plaintiff contends that Summa Four

improperly recognized revenue as soon as orders were received.

As a result, plaintiff contends that Summa Four materially

overstated its revenues during the class period. It supports

this assertion with allegations that minutes for Summa Four's

June 20, 1994, board meeting state that a draft revenue

recognition policy had been prepared for review which "is a more

formalized and somewhat more restrictive policy than was

previously in place." Plaintiff also cites to a statement

allegedly made by defendant Fiedler at a June 19, 1995 board

meeting in which Fiedler claimed that Summa Four might be able to

generate up to $4.7 million in revenues in two weeks from

"orders" which had not yet been received. Since the complaint

alleges that Summa Four does not ship goods until long after

orders are received, plaintiff contends that this statement is

evidence of Summa Four's overstatement of revenues.

(c) International operations in disarray

In its Monthly Operating Report dated January 20, 1994, the

company commented that "overall international sales and marketing

efforts are currently under review and will be revised." In the

10 February 25, 1994 Operating Report, the company stated that it

planned "a major reorganization of sales responsibilities..." in

March. The refocusing of sales and marketing efforts in their

international subsidiary was confirmed in the company's March

Operating Report. In addition, Summa Four fired its Managing

Director of European Operations that month as well as two other

management team members. The company appointed a new managing

director that same month.

In addition, there were indications of slowdowns with

respect to certain international customers as of January 1994.

In June 1994, the Board dispatched one individual "to check one

more time to see if all international opportunities are abandoned

at this time."

4. The July 5, 1994 Announcement

As of the June 6, 1994 "Watch Meeting," Summa Four had only

shipped $4,298,720 in products, although the guarter was two

thirds complete and the predicted revenues were $8.7 million by

analysts and $9,025 million by the company for that guarter. The

company revised its expectations for the guarter setting an

additional $3.6 million in shipments as its goal for the

remainder of the guarter.

11 On June 14, 1994, the Board convened by phone to address the

issue again. It was determined at this point in the quarter that

revenues would reach only $7.7 to 7.8 million which fell 11.49%

and 14.68% behind analysts and company estimates respectively.

The below budget prospects were attributed to internal

disruptions experienced by regular customers as well as

international orders being received at a slower rate than

expected.

The Board determined that any insider trading at this point

would be inappropriate and further discussed this issue at a

meeting on June 20, 1994. At that meeting the Board also

discussed the prospect of making an announcement concerning

financial performance and guidelines for such announcements. No

decision was reached at that meeting, but further review was

undertaken in the subsequent weeks.

In its July 5th announcement the Defendants stated that they

anticipated net revenues for the first fiscal quarter 1995 of

between $7,400,000 to $7,600,000, and net earnings of $875,000 to

$1,000,000. These projected results contrasted with analysts'

projections which placed revenue estimates at $8.7 million for

that quarter.

12 Following the announcement, the company's stock experienced

a rapid sell-off resulting in a single-day decline of 46.6% in

Summa Four's market price.

C. The Aftermath

The company reported its earning for the first guarter 1995

on July 19, 1994, which confirmed its announcement made earlier

that month. Summa Four replaced its president that month and

attributed its failure to attain projections for that guarter on

"longer than anticipated negotiation and procurement processes"

of certain major customers. This assessment was echoed by

analysts' reports later that month which also contained revised

estimates of the company's future prospects. These revisions,

even taking into account the delays, showed a 23.91% decrease in

estimated projected earnings per share from previous estimates.

Estimates of revenue generating EPS were also adjusted downward

representing an 8.97% and a 13.79% decrease in revenues and

earnings per share respectively.

According to Montgomery Securities, two of the six contracts

needed to be closed in order for Summa Four to meet the original

projections for that guarter. In contrast, Summa Four closed

only one of the six contracts.

13 Summa Four also attributed its poor first quarter of 1995 to

decreased unit shipments of its SDS-1000 product in its Form 10-Q

filed with the SEC on August 11, 1994. This statement is in

contrast to its statements in December 1993 and March 1994

attributing increased revenues to the sale of its SDS products.

II. STANDARDS OF REVIEW AND ELEMENTS OF THE CLAIM

Defendants argue that the complaint should be dismissed

pursuant to Rule 12(b)(6) because it fails to state a claim and

pursuant to Rule 9 because it fails to plead fraud with

particularity.

A. Federal Rules of Civil Procedure 12(b)(6) and 9(b)

A motion to dismiss pursuant to Federal Rule of Civil

Procedure 12(b)(6) requires the court to review the allegations

of the complaint in the light most favorable to the plaintiff,

accepting all material allegations as true, with dismissal

granted only if no set of facts entitles plaintiff to relief.

E.g., Berniger,

; Dartmouth Review v. Dartmouth

College,

(1st Cir. 1989) .

In the context of a motion to dismiss a claim of fraud or

misrepresentation, however, the claim must also meet the special

pleading requirements of Fed. R. Civ. P. 9(b). Romani v.

14 Shearson Lehman Hutton,

(1st Cir. 1991); Havduk

v. Lanna,

(1st Cir. 1985) . Rule 9(b) provides:

"In all averments of fraud or mistake, the circumstances

constituting fraud or mistake shall be stated with particularity.

Malice, intent, knowledge, and other conditions of mind of a

person may be averred generally." Fed. R. Civ. P. 9(b). While

the term "fraud" need not appear in the complaint. Rule 9

reguires that the circumstances indicating fraud be stated with

particularity. Simcox v. San Juan Shipyard, Inc.,

(1st Cir. 1985) (although plaintiffs did not use word fraud,

complaint stated with sufficient particularity circumstances

entitling them to relief on a theory of fraud).

The purpose of Rule 9(b)'s particularity reguirement is "to

apprise the defendant of fraudulent claims and of the acts that

form the basis for the claim [sic]." Havduk,

(emphasis added). Specifically in the context of securities

fraud cases, "Rule 9 operates to diminish the possibility that a

plaintiff with a largely groundless claim [will be able] to

simply take up the time of a number of other people [by extensive

discovery], ... [without] a reasonably founded hope that the

process will reveal relevant evidence." Wavne Inv., Inc. v. Gulf

Oil Corp.,

(1st Cir. 1984) (internal guotations

15 and citations omitted). In order for this purpose to be

adequately fulfilled, the rule requires "specification of the

time, place, and content of an alleqed false representation."

McGintv v. Beranqer Volkswagen, Inc.,

(1st Cir.

1980); accord Serabian v. Amoskeaq Bank Shares, Inc.,

(1st Cir. 1994) (qeneral averments of defendant's

knowledqe of material falsity insufficient); Havduk,

(conclusory alleqations of fraud insufficient even if

repeated several times). Further, the complaint must "set forth

specific facts that make it reasonable to believe that defendants

knew that a statement was materially false or misleadinq" when

made. Lucia v. Prospect St. High Income Portfolio, Inc., 3

(1st Cir. 1994) (quotinq Serabian,

);

accord Romani,

(time, place, and content

specificity insufficient where no factual support for inference

of fraud). This requirement is not relaxed even thouqh the bases

and specific supportinq facts relate "'to matters peculiarly

within the knowledqe of the opposinq party.1" Havduk,

(quotinq Wavne,

); see also Romani,

. Alleqations of fraud by hindsiqht are insufficient to

meet these requirements. Serabian,

(claim cannot

assume defendants knew severity of problems earlier because

16 conditions became bad later); accord Berliner v. Lotus Dev.

Corp.,

(D. Mass. 1992).

B. Elements of Claim under 10(b)

Section 1 0 (b) of the Securities Exchange Act, and Rule 10b-5

promulgated thereunder, prohibit any person from, directly or

indirectly, committing fraud in connection with the purchase or

sale of securities. 15 U.S.C.A. § 78j(b);3

.10b.5

(1994);4 Rand v. Cullinet Software, Inc.,

(D. Mass. 1994). "In order to prevail on a rule 10b-5 claim, a

plaintiff must show: (1) a material misstatement or omission by

3 Section 10(b) of the Act states in pertinent part: "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange ... (b) To 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 Commission may prescribe...." 15 U.S.C.A. § 78kj(b).

4 Rule 10b-5 states in pertinent part: "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange ... (b) To make any untrue statement of a material fact or to omitto 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 ... in connection with the purchase or sale of any security."

.10b.5.

17 the defendant; (2) scienter;5 (3) reliance;6 and (4) due care by

the plaintiff." Rand,

- 05 (citing Blue Chip

Stamps v. Manor Drug Stores,

(1975)).

" [M]ateriality depends on the significance the reasonable

investor would place on the withheld or misrepresented

information." Basic, 485 U.S. at 240; accord Rand,

; Colby, 817 F. Supp. at 209. If a reasonable investor

would view the misrepresented or omitted fact as "having

significantly altered the total mix of information made

available," then the materiality reguirement is satisfied.

Basic, 485 U.S. at 232 (internal guotations and citations

omitted). Therefore, in pleading a claim under Rule 10b-5 in

conformity with the reguirements of Rule 9 (b), the complaint must

5 The scienter element is "...satisfied if plaintiffs 'prove an intent to deceive, manipulate, or defraud.'" Rand,

. In this circuit, "recklessness amounting to indifference is an acceptable substitute."

(citing Hoffman v. Easterbrook & Co.,

(1st Cir. 1978)). Under Rule 9(b), a plaintiff's complaint must support an inference that the defendant's knew, or should have known, that the statements were false or misleading. Romani,

.

6 Reliance is presumed in a fraud on the market case. Colby v. Holoqic, Inc.,

, 209 n.7 (D. Mass. 1993) (citing Basic Inc. v. Levinson,

, 246 - 47 (1988)); accord In re Apple Computer Sec. Litiq.,

, 1113 - 14 (9th Cir. 1989), cert. denied,

(1990).

18 "(1) specify the statements that the plaintiff contends were

fraudulent, (2) identify the speaker, (3) state where and when

the statements were made, and (4) explain why the statements were

fraudulent." Shields v. Citvtrust Bancorp., Inc.,

(2d Cir. 1994) (emphasis added) (internal quotations and

citations omitted); accord Suna v. Bally Corp., No. 94-273-M,

slip op. at 8 (D.N.H. Nov. 10, 1994) . With these principles in

mind, I address the sufficiency of the plaintiff's complaint.

III. THE COMPLAINT

The challenged statements at issue fall into three

categories: (1) allegedly false statements of current facts; (2)

allegedly false forward-looking statements; and (3) current or

forward-looking statements that were literally true, but

misleading because the speaker withheld other material

information on the same subject.7 I address each category in

7 Plaintiffs allege that not only were many statements misleading when made because of the omission of material facts necessary to make the statement complete, but that the Defendants had a duty to correct statements that became misleading only after the statements were made. 5 122. The First Circuit has definitively held that no duty to correct exists if the statements were true and not misleading when made. Backman, 910 F.2d at 17. Because I conclude plaintiff failed to adequately show that the statements at issue were false or misleading when

19 turn.

A. Statements of Current Fact

"[D]efendants may not be held liable under the securities

laws for accurate reports of past successes, even if present

circumstances are less rosy." Serabian,

. "[I]f

defendants reported correctly, without more, 'This is our eighth

consecutive quarter in which our gross has increased,' there [is]

no duty to add, for the benefit of market buyers, 'We are

concerned about the next one.'" Capri Optics Profit Sharing v.

Digital Equip. Corp.,

(1st Cir. 1991). If the

plaintiff alleges the statements were false when made, then the

complaint must contain facts which would support a reasonable

inference that the defendants deliberately or recklessly

disregarded known adverse facts at the time they made the

statements. Steiner v. Unitrode Corp.,

(D.

they were made, I dismiss this portion of the complaint. See Fed. R. Civ. P. 12 (b) (6) . The complaint is also based in part on statements by analysts. There is no duty to correct statements by third parties unless the defendant has significantly entangled itself with the third party's production of the statement. Elkind v. Liggett & Myers, Inc.,

, 163 - 64 (2d Cir. 1980). As discussed below, the plaintiff failed to plead with sufficient specificity any entanglement between the defendants and Montgomery Securities. Thus, this portion of the complaint is also dismissed. See Fed. R. Civ. P. 9(b).

); Berliner,

(plaintiff's

claim amounted to fraud by hindsight because disclosure seven

months after alleged misrepresentation not sufficient to show

defendant's knew it was false when made). Absent a showing that

the statements were false or misleading at the time they were

made, such statements are not actionable under Rule 10b-5.

For the following reasons I find that the plaintiff's

allegations that defendants fraudulently misstated current fact

cannot meet the particularity reguirement of Rule 9. Therefore,

I dismiss this portion of the complaint.

1. Statements of current fact other than revenue statements

Plaintiff claims that certain statements in the January 18th

press release ("we are also seeing increased demand for our SDS

distributed switch . . . . [T]he SDS distributed switch is

becoming the platform of choice . . .. "), the May 3rd press

release (Summa Four had received "significant orders" from AT&T,

Sprint, GTE, Unysis, and IBM), and a letter accompanying the 1994

Annual Report (Summa Four is in a "strong financial position")

misstated current facts. 55 49-50, 55, 60. Defendants argue

that plaintiff has failed to satisfy his Rule 9 (b) burden of

pleading with particularity the facts which form the basis of his

21 claim that these statements were false when they were made.

The only pleaded facts that even arguably support

plaintiff's contention that the cited statements were false when

made are allegations in the complaint that Summa Four's own

documents establish that (1) the company's revenues, gross

margin, and net income during the Class Period were below

internal budget projections; (2) March bookings were lower than

expected; and (3) the company's internal operations were in a

state of disarray. 55 69-72, 74, 92-98, 121(b). However, these

allegations are insufficient to satisfy plaintiff's burden under

Rule 9 (b) to identify specific facts that make it reasonable to

believe that the statements were false. A reasonable person

could not infer from the pleaded facts that demand for the SDS

switch was no longer growing, that significant orders had not

been received from major corporations, or that the company was

not in a "strong financial position" simply because it did not

meet its short-term budget projections, its orders for one month

were lower than expected, and its international operations were

in a state of disarray. Accordingly, this portion of the

complaint must be dismissed.

22 2. Current Revenue Statements

Plaintiff alleges that defendants materially overstated

Summa Four's revenues. Specifically, he contends that Summa Four

stated in its public filings that it complied with GAAP and FASB

but nevertheless violated these standards by recognizing revenue

as soon as an order was placed rather than when goods were

shipped. As a result, plaintiff claims that Summa Four's revenue

statements were false and misleading.

The First Circuit recognizes that "a general allegation

that the practices at issue resulted in a false report of company

earning is not a sufficiently particular claim of

misrepresentation to satisfy the reguirements of Rule 9 (b).

Serabian,

n.5. Plaintiff seeks to satisfy this

reguirement by pointing to the minutes of the June 20, 1994 board

meeting (noting that the board's review of a draft revenue

recognition policy which was more conservative than the policy

then in effect) and the June 14, 1994 board meeting (noting

Fiedler's statement that Summa Four might be able to generate up

to $4.7 million in revenue in two weeks from "orders" which had

not yet been received). However, these records, simply will not

support a reasonable inference that Summa Four was materially

overstating its revenues during the period in guestion. Thus,

23 this portion of the complaint must be dismissed as well.

B. Forward-looking Statements

1. Analyst statements

Plaintiff seeks to attribute to the defendants three

statements by Montgomery Securities during the Class Period,

claiming that these statements regarding anticipated growth and

increasing revenues, were false and misleading, and lacking in a

reasonable basis. 5 121(a). Further, he alleges that the

defendants failed to correct these statements during the Class

Period when the statements were or became materially false and

misleading. 5 122. This part of the complaint is attacked by

the Defendants on grounds that it lacks the reguisite specificity

necessary to justify the inference that the Defendants so

entangled themselves that the statements may be treated as their

own.

In order to base a claim of fraud on statements by third

parties, the plaintiff must demonstrate that those statements may

be fairly attributed to the defendants. Raab v. General Physics

Corp.,

, 288 - 89 (4th Cir. 1993). Where defendants

have so entangled themselves "with the analysts' forecasts such

that they assumed a duty to disclose the analysts' errors," the

statements by analysts may be attributed to the defendant.

24 Colbv,

. "[S]ince the allegation of

entanglement is central to the overall allegation of securities

fraud, plaintiffs seeking to hold a corporate insider liable for

an analyst's forecasts should plead entanglement with the degree

of specificity reguired under [Rule 9]." In re Caere Corporate

Sec. Litiq.,

(N.D. Cal. 1993) (limning

three reguirements to meet this hurdle). Rule 9 (b) imposes the

burden on the plaintiffs in this context to allege facts from

which it can be inferred that company exercised sufficient

control over an analyst such that company may be held liable for

the analyst's statements. Raab,

- 89; Elkind,

(where company so involves itself in preparation or

reports and projections of analysts it may have duty to correct

material errors); In re Caere,

(advocating

strict construction of entanglement reguirement because analysts

make forecasts about publicly traded companies freguently).

Where company officers are directly guoted, other courts

have sustained such allegations against Rule 9 challenges.

Colbv,

n.10 (collecting cases). The analysts

cited by the plaintiff here, however, do not directly guote the

defendants or make reference to information provided by the

defendants. See

(analysts' statements not

25 attributable to company where no direct quoting and no reference

to misleading information provided by company). All three

reports "were presented as independent opinions and [none]

referred to any role of [Summa Four] or its officers in the

preparation, approval, or editing of the" reports.

at 213 -

14; accord Raab,

(failed to meet Rule 9 specificity

requirement where no allegations of who supplied information, how

it was supplied or how company controlled contents, especially

where report did not directly quote company). The amended

complaint only states that some defendants had private

communications with representatives from Montgomery Securities

and Cruttenden & Company. It does not allege facts which would

support a reasonable inference that the statements in question

were based on false or misleading information obtained directly

from the defendants. While it is unclear whether this circuit

would require that the reports quote the defendants in order to

impute the former to the latter, because there is no other basis

alleged which would establish any, let alone a significant,

connection between the defendants and the analysts, I find that

the analyst's statements fail to meet the Rule 9(b) requirement.

Therefore, claims based on these statements should also be

dismissed.

26 2. Defendants' Statements

Plaintiff cites several statements which he characterizes as

forward-looking statements that are actionable under Rule 10b-5

because they lacked a reasonable basis when made. These

statements are found in the May 3rd press release ("We see the

current market continuing to expand over the next several

years. ... We continue to be enthusiastic about our

opportunity to grow over the next several years"), Summa Four's

10K Form filed with the SEC ("anticipated growth"), and its

letter to shareholders accompanying its Annual Report ("We

continue to be enthusiastic about our opportunity to grow"; "Our

major goal in Fiscal Year 1995 is to continue to further leverage

our market leadership position"). 5 54, 59 and 60.

"Although 'predictions are inherently uncertain, they are

not exempt from the anti-fraud provisions of the federal

securities laws . . . materially misleading predictions made with

the scienter are actionable.'" Rand,

(citations omitted); accord In re Apple Computer,

. Because predictions imply a factual basis, they come

within the purview of Rule 10b-5's prohibitions. See Virginia

Bankshares v. Sandberg, 111 S. C t . 2749, 2758 (1991) (statements

of belief or opinion are factual statements actionable under

27 securities laws); In re Apple Computer,

(listing

three factual assertions implied in predictions). Therefore, if

a reasonable investor would rely on the predictive statement in

making a decision to buy or sell securities, then the prediction,

if false or misleading, is actionable. See Basic,

. Statements, however, that are general, vague, or lack

specificity, or are not guarantees, even if made without a

reasonable basis, are not actionable because a reasonable

investor would not rely on them. Capri Optics,

;

Rand,

; Colby,

- 11

("prospects for long term growth" not actionable because no

projection of earnings or sales statistics and no temporal

reference point); Elkind,

("we expect another

good year in 1972," not actionable). Furthermore, absent a

showing of intentional deception, "optimistic predictions about

the future that prove to be off the mark likewise are

immunized...." Serabian,

; accord Greenstone v.

Cambex Corp.,

(1st Cir. 1992); Shapiro v. UJB

Fin. Corp.,

, 282 (3d Cir.), cert. denied, 113 S. C t .

365 (1992); Dileo v. Ernst & Young,

(7th Cir.),

cert. denied,

(1990).

28 The statements cited by the plaintiff although predictive,

lack any specificity as to projected earnings, lack any time

frame, and lack any guarantees. Compare Colby,

(statement that "prospects for long term growth are

bright" not actionable because vague and no specific projections)

with Cosmas v. Hassett,

(2d Cir. 1989) (statement

predicting EPS of $.90 to 1.15 for next fiscal year actionable).

No reasonable investor would rely on such vague expressions of

optimism in deciding whether to purchase Summa Four's securities.

Nor could such statements be considered so significant as to

alter the total mix of information available to the reasonable

investor. Colby,

. Thus, these statements

fail to meet the materiality reguirement necessary to state a

claim under Rule 10b-5. Therefore, this portion of the complaint

is dismissed. See Fed. R. Civ. P. 12 (b) (6) .

C. Omissions

Finally, plaintiff asserts that many of the statements

cited, while technically true, were in fact misleading because of

defendants' failure to disclose the whole truth. The challenged

statements include portions of the January 18th press release

(I 50), the May 3d press release (I 55), and the April 25th

announcement of their new product (I 52). Plaintiff points to

29 several omitted facts that he claims should have been disclosed

in order to cure the misleading nature of the public statements,

including: numerous reports during the Class Period indicating

that Summa Four was not meeting budget targets; a June 6, 1994

report indicating that two-thirds through the first guarter of

1994 Summa Four had only shipped 50% of what analysts had

predicted and even less than its own predictions 5 84; a June

14th report indicating that revenue would only be $7.7 million,

approximately 30% below projections (I 87); and an acknowledgment

on June 14th that lower revenues were due to delays in the

approval of contracts (I 88).

Where the plaintiff alleges that a defendant's silence

precipitated the fraud, the complaint must allege that the

omitted facts were not only material, but also that the defendant

had a duty to disclose those facts. Basic,

n. 16;

Dirks v. SEC,

(1983); Backman, 910 F.2d at

12. Nondisclosure in the context of fraud on the market deals

with reliance by investors on misleading statements, i.e.,

misleading because prior disclosures were inaccurate or

incomplete. Backman, 910 F.2d at 13; Boeder v. Alpha Indus.,

Inc.,

(1st Cir. 1987) . Thus, where "a

corporation does make a disclosure - whether it be voluntary or

30 required - there is a duty to make it complete and accurate."

Lucia, 36 F.3d at 175. (internal quotations and citations

omitted).

There is no duty, however, that companies make full

disclosure of all material information. Backman, 910 F.2d at 12,

16 (duty to disclose does not arise from mere possession of

nonpublic information nor from disclosure of one fact about a

product) (quotinq Chiarella v. United States,

(1980)). "Manaqement cannot be expected to disclose information

that some may find distasteful but that does not alter the total

mix of information made available to the investor." Boeder,

(internal quotations and citations omitted); accord

Colbv,

(duty to disclose does not arise

merely because investors may be interested in the information).

Althouqh the "adverse" facts cited by the plaintiff present

a picture of a company concerned about its ability to meet its

own projections, nothinq in these facts indicates that the

challenqed statements were misleadinq for failure to include

these facts. See Backman, 910 F.2d at 16 (disclosed facts cannot

be so incomplete as to mislead). Althouqh the omitted facts

miqht have been important to the reasonable investor, absent a

sufficient showinq that the disclosed information was so

31 incomplete as to be misleading, defendants were under no duty to

disclose this information. Absent something more, this portion

of the complaint amounts to nothing more than "fraud by

hindsight," not actionable under the securities laws. Thus, this

portion of the complaint is dismissed. See Fed. R. Civ. P. 9(b).

IV. LEAVE TO AMEND

At oral argument. Plaintiff reguested that in the event that

I dismissed his complaint, or portions of it, he be granted leave

to amend. Ordinarily leave to amend should be grated liberally.

In this case, however. Plaintiff has had the benefit of

Defendants' first motion to dismiss as well as limited discovery

to prepare the present complaint. Thus, he had "ample

opportunity to allege any facts . . . from which liability may

flow." Tapogna v. Egan,

(D. Mass. 1992). In

light of these circumstances, I deny Plaintiff's reguest for

leave to amend.

V. OTHER ISSUES

Because Count I of the complaint is dismissed with

prejudice, the Plaintiff cannot assert a claim under 15 U.S.C.A.

§ 78t(a) (West 1981). Therefore, that claim is also dismissed

32 with prejudice. Finally, I decline to exercise supplemental

jurisdiction over the pendent state law claims. See

(c)(3) (West 1993) Therefore, these claims are dismissed

without prejudice.

VI. CONCLUSION

For the foregoing reasons I grant Defendants' Motion to

Dismiss (document no. 17) .

SO ORDERED.

Paul Barbadoro United States District Judge

November 8, 1995

cc: Peter J. MacDonald Edward L. Hahn Jules Brody Lee Shalov Joseph H. Weiss

33