
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                 ____________________          No. 96-1138                           VICKI MATCH SUNA AND LORI ROSEN,                               Plaintiffs - Appellants,                                          v.                             BAILEY CORPORATION, ET AL.,                               Defendants - Appellees.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF NEW HAMPSHIRE                   [Hon. Steven J. McAuliffe, U.S. District Judge]                                              ___________________                                 ____________________                                        Before                               Torruella, Chief Judge,                                          ___________                                Boudin, Circuit Judge,                                        _____________                              and Lisi,* District Judge.                                         ______________                                _____________________               Jules Brody, with whom Stull,  Stull & Brody, Backus, Meyer,               ___________            _____________________  ______________          Solomon & Rood and Weiss & Yourman were on brief for appellants.          ______________     _______________               Sydelle Pittas, with whom Law Offices of Sydelle  Pittas was               ______________            ______________________________          on brief for appellee Bailey Corporation.                                 ____________________                                  February 26, 1997                                 ____________________                                        ____________________          *  Of the District of Rhode Island, sitting by designation.                    TORRUELLA, Chief  Judge.  On May  26, 1994, Plaintiffs-                    TORRUELLA, Chief  Judge.                               ____________                                        ____________________          Appellants  Vicki Match  Suna ("Suna")  and Lori  Rosen ("Rosen")          1   The  officers included  William A.  Taylor, who  served as  a          (collectively  "plaintiffs" or  "appellants") brought  this class          consultant  and as a Bailey director at all relevant times; Roger          R.  Phillips, who  served as  Chairman  of the  Board, President,          action suit against Bailey Corporation ("Bailey")  and individual          Chief Executive Officer  and Secretary of Bailey during the class          period; Leonard Heilman,  who served as Senior  Vice President --          officers1  of  the  corporation  (collectively   "defendants"  or          Finance  and Administration, Chief  Financial Officer, Treasurer,          and  Assistant Secretary  of Bailey during  the class  period; E.          "appellees")  on behalf  of  all persons  who purchased  Bailey's          Gordon Young, who served as a director of Bailey and as Executive          Vice  President at  all relevant  times; and  John G.  Owens, who          common  stock during  the class  period.   The suit  alleges that          served  in  various management  capacities and  as a  director of          Bailey during the class period.          appellees  violated Section 12 of the Securities Act2 of 1933 and          2  Any person who --          Sections  10(b)3 and  20(a)4 of  the Securities Exchange  Act  of                    (1) offers or sells a security . . . by means                    of  a prospectus or oral communication, which                    includes  an untrue  statement of  a material                    fact  or  omits  to  state  a  material  fact                    necessary in order to make the statements, in                    the  light of  the circumstances  under which                    they  were made, not  misleading . .  . , and                    who shall  not sustain  the  burden of  proof                    that he did not know,  and in the exercise of                    reasonable care could not have known, of such                    untruth or omission,          shall be liable to  the person purchasing such security  from him          . . . .          15 U.S.C.   771 (1976).          3  Section 10(b) provides:                    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                    or  any  security   not  so  registered,  any                    manipulative    or   deceptive    device   or                    contrivance  in  contravention of  such rules                    and   regulations   as  the   Commission  may                    prescribe as necessary or appropriate  in the                    public  interest or  for  the  protection  of                                         -2-          1934,  as well as Rule  10b-55 promulgated by  the Securities and          Exchange Commission  ("SEC").   Appellants allege  that appellees          made,  or caused  to  be made,  materially  false and  misleading          statements either through Bailey's corporate documents or through          analysts'  reports disseminated to  the public.   On November 10,          1994,  the District  Court  of New  Hampshire granted  appellees'                                        ____________________                    investors.          15 U.S.C.   78j(b) (1981).          4  Section 20(a) provides, in part:                    Every  person  who,  directly or  indirectly,                    controls   any   person   liable  under   any                    provision of  this chapter or of  any rule or                    regulation  thereunder  shall also  be liable                    jointly and  severally with  and to  the same                    extent  as  such  controlled  person  to  any                    person  to  whom  such controlled  person  is                    liable . . . .          15 U.S.C.   78t (1981).          5  Rule 10b-5 provides:                    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,                      (a)    To  employ any  device,  scheme,  or                    artifice to defraud,                      (b)   To  make  any untrue  statement of  a                    material fact or to  omit to state a material                    fact  necessary   in   order  to   make   the                    statements   made,  in   the  light   of  the                    circumstances under which they were made, not                    misleading, or                      (c)   To  engage in  any act,  practice, or                    court  of business  which  operates or  would                    operate as a fraud or deceit upon any person,                    in  connection with the  purchase or  sale of                    any security.          17 C.F.R.   240.10b-5 (1996).                                         -3-          motion to dismiss this  complaint for failure to comply  with the          pleading requirements  of Federal  Rule of Civil  Procedure 9(b).          The  district  court  then  allowed  appellants  to  amend  their          complaint,  but rejected the  first amended  complaint appellants          submitted.  The district court "reluctantly grant[ed]  plaintiffs          leave  to file a second amended complaint," Order of November 10,          1994,  at 2, but cautioned that if "the second complaint fail[ed]          to  satisfy the pleading requirements, the action [would] then be          dismissed with prejudice."  Id.  On September 1, 1995, appellants                                      ___          filed a Second Amended Complaint, which the district court  ruled          did  not meet Rule 9(b)'s  pleading requirements.   Order of Dec.          29,  1995.   The district  court then  dismissed the  action with          prejudice.   Appellants now  appeal the  dismissal of the  Second          Amended Complaint.                                      BACKGROUND                                      BACKGROUND                    We  accept as  true  all facts  alleged in  appellants'          Second Amended Complaint.  Shields v. Citytrust Bancorp, Inc., 25                                     _______    _______________________          F.3d  1124, 1125  (1st Cir.  1994).   Bailey manufactures  molded          plastic exterior  components and supplies them  to North American          original equipment  manufacturers of  cars,  light trucks,  sport          utility vehicles and minivans.  Bailey's primary customer is Ford          Motor  Company,  which accounted  for  approximately ninety-three          percent of Bailey's  sales in  the nine months  ending April  25,          1993.   Of  the remaining  sales, three  percent were  to General          Motors Corporation and four percent to other customers.                                         -4-                    During  the class  period,  the  individual  defendants          signed various SEC filings.   Each received or had access to non-          public  reports   and  documents  depicting   Bailey's  financial          condition and  business prospects.   Each participated  in Bailey          board  meetings  at  which  information  about  the  company  was          discussed.   A secondary public  offering was held  on August 18,          1993,  during which  Bailey  and the  individual defendants  sold          shares at $11 each.                    On April 5, 1994, both  Suna and Rosen purchased Bailey          stock.  During the class period, the stock reached a high of more          than $18 per share.                    The public  documents issued  by Bailey and  alleged by          appellants  to contain materially false and misleading statements          include  Bailey's  April  18, 1993,  Prospectus  and Registration          Statement, its 1993 Annual Report, and 10-K, quarterly reports to          shareholders,  and  press  releases.    In  addition,  appellants          contend  that  reports published  by analysts  regarding Bailey's          earnings  prospects  and  its  ability to  continue  to  increase          earnings per  share are imputable to Bailey.   Appellants contend          that  all of  these  documents artificially  inflated the  market          price of Bailey common stock.                    Large sections of appellants'  brief and Second Amended          Complaint are devoted to quoting at length  from these documents.          We will not  reproduce all  of these quotes,  but will  highlight          relevant  portions as becomes  necessary throughout  the opinion.          Appellants  contend that the  statements at issue  were false and                                         -5-          misleading because  Bailey's anticipated growth did  not continue          and  its  revenue declined.   The  decline  in revenue  led  to a          decrease  in the value  of Bailey's  common stock  to $6  1/8 per          share.     Appellants   argue  that   the  representations   were          "materially  false  and  misleading  because  appellees  knew, or          recklessly disregarded, .  . . that Bailey's  profitability would          decline sharply because of a much less profitable mix of parts to          be supplied to Ford."   Appellant's Brief at 8.  They  claim that          Bailey  knew or  should have known  that there  was no  reason to          expect sustained growth based  on knowledge gathered from, "among          other  things,   a   '26-week  forecasts   [sic]  of   production          requirements,'" id., supplied to Bailey by Ford.  These forecasts                          ___          allegedly  indicated a shift in the product mix required by Ford.          Appellants  indicate that the  product mix  Ford was  phasing out          would  prove more profitable than the product mix to which Bailey          was shifting  production.  Appellants contend  that Bailey should          have  disclosed that it was  moving to a  less profitable product          mix.                    In September  1993, the  investment firm of  McDonald &          Company Securities, Inc. ("McDonald"), in a publicly disseminated          report,  gave Bailey  an  "aggressive buy  rating."   That report          projected  earnings per share for  fiscal years 1994  and 1995 of          $1.15 and $1.60 respectively.   In December 1993, an  analyst for          Hancock  Institutional  Equity Services,  an affiliate  of Tucker          Anthony,  a co-lead underwriter  of Bailey's  secondary offering,          reviewed  with  defendant-appellee  Leonard  Heilman   a  written                                         -6-          research  opinion  regarding Bailey  that  Hancock  was about  to          disseminate publicly.   The  Hancock analyst informed  Heilman of          her  earnings  per  share   estimates  and  her  methodology  and          assumptions  in  reaching those  estimates.    She also  informed          Heilman  of  her  view  regarding  Bailey's  financial prospects.          Following this conversation, Hancock publicly disseminated a very          positive report on Bailey.  Appellants contend that these reports          contained materially false and  misleading statements in the form          of financial  projections that  were "wildly optimistic"  and the          result of "guidance" from Bailey.                    In  a  report  regarding  Bailey's  fiscal 1994  second          quarter,  ending January  31,  1994, Bailey  claimed revenue  and          earnings  increases, attributing  the increases  to "productivity          improvements."     Bailey  failed   to  disclose  "that   it  was          experiencing severe  production problems  at newly  acquired mid-          western  plants,"   which  appellants   contend  could   and  did          materially  impact  future  earnings.    Appellants  acknowledge,          however,  that  these production  problems  did  not arise  until          February, 1994.                    On May  20, 1994, Bailey  announced that it  had earned          $0.16  per share  in  its  third  quarter,  in  contrast  to  the          projected  $0.37   per  share.    This   earnings  shortfall  was          attributable  to, among  other  things, a  substantial change  in          product mix  and production  problems at Bailey's  newly acquired          mid-western plants.  After this announcement, the market price of          Bailey common stock fell to $6 1/8 per share.                                         -7-                                      DISCUSSION                                      DISCUSSION                    We  review  the  dismissal  of  a  complaint  de  novo.                                                                  ________          Serabian v. Amoskeag  Bank Shares,  Inc., 24 F.3d  357, 361  (1st          ________    ____________________________          Cir. 1994).    "Generally,  we will  uphold  a  district  court's          dismissal of  a claim only if  it appears that the  plaintiff can          prove no set of facts upon which relief may be granted."  Shields                                                                    _______          v. Citytrust Bancorp, Inc.,  25 F.3d 1124, 1127 (1st  Cir. 1994).             _______________________          Nevertheless,  Federal Rule  of  Civil Procedure  9(b) imposes  a          heightened  pleading requirement  on  plaintiffs alleging  fraud.          Lucia v. Prospect St.  High Income Portfolio, Inc., 36  F.3d 170,          _____    _________________________________________          174  (1st Cir. 1994).   Rule 9(b)  states:  "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).   "[A] complaint making such          allegations must  '(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, 25  F.3d  at  1127-28                                             _______          (quoting Mills v. Polar  Molecular Corp., 12 F.3d 1170,  1175 (2d                   _____    ______________________          Cir. 1993)).                    The goals  of Rule  9(b) are  "'to provide a  defendant          with  fair  notice  of  a  plaintiff's  claim,   to  safeguard  a          wrongdoing, and to protect a defendant against the institution of          a  strike suit.'"    Id. at  1128  (quoting O'Brien  v.  National                               ___                    _______      ________          Property  Analysts Partners, 936  F.2d 674, 676  (2d Cir. 1991)).          ___________________________                                         -8-          Rule  9(b)'s  relaxation  of  the  scienter  requirement  is  not          intended  to  allow  plaintiffs  to  "base  claims  of  fraud  on          speculation and conclusory allegations.   Therefore, to serve the          purposes of Rule 9(b), we require plaintiffs to allege facts that          give  rise  to  a  strong inference  of  fraudulent  intent." Id.                                                                        ___          (citations  and  internal  quotations  omitted).    A  securities          plaintiff must allege "'specific facts that make it reasonable to          believe that  defendant[s] knew  that a statement  was materially          false  or  misleading.'"    Serabian, 24  F.3d  at  361  (quoting                                      ________          Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992)).  We          __________    ____________          impose this heightened requirement  "'even when the fraud relates          to  matters  peculiarly  within  the knowledge  of  the  opposing          party.'"   Lucia, 36  F.2d at  174 (quoting  Romani, 929 F.2d  at                     _____                             ______          878).                    We recently  set forth guidelines intended  to strike a          balance  between   the  pleadings   required  of   plaintiffs  in          securities fraud  litigation and the concern  that defendants not          be subject to  strike suits  intended to increase  the amount  of          settlement  awards rather than set forth a legitimate claim.  See                                                                        ___          New England  Data Servs., Inc. v. Becher,  829 F.2d 286, 289 (1st          ______________________________    ______          Cir. 1987).                         "First,  [p]laintiffs must  plead more                      than that  defendants acted irresponsibly                      and  unwisely, but  that they  were aware                      that 'mismanagement had occurred and made                      a  material  public  statement about  the                      state  of corporate  affairs inconsistent                      with     the     existence     of     the                      mismanagement.'"                                         -9-                         "Second,  defendants  may not  be held                      liable  under  the  securities  laws  for                      accurate reports of past  successes, even                      if present circumstances are less rosy, .                      . . and  optimistic predictions about the                      future  that  prove  to be  off  the mark                      likewise are  immunized unless plaintiffs                      meet   their   burden  of   demonstrating                      intentional deception . . . ."                         "Third, and finally, general averments                      of the defendants' knowledge  of material                      falsity  will  not  suffice.   Consistent                      with Fed. R. Civ. P. 9(b),  the complaint                      must set forth 'specific facts  that make                      it    reasonable    to    believe    that                      defendant[s]  knew  that a  statement was                      materially  false  or  misleading.'   Id.                                                            ___                      The  rule  requires  that the  particular                      '"times, dates, places  or other  details                      of [the] alleged fraudulent involvement"'                      of the actors be alleged."          Serabian, 24  F.3d at 361.   In order to succeed  on their claim,          ________          appellants must have complied with these pleading requirements by          showing that the statements presented to the public were false or          misleading  at the  time they  were made  and showing that  it is          reasonable to believe that the defendants knew they were false or          misleading.   In addition,  appellants must show  that statements          made  were more than  tempered predictions about  the future that          later proved incorrect.  See id. at 366  ("It is well established                                   ___ ___          that  plaintiffs   in  a  securities  action   have  not  alleged          actionable  fraud if their claim rests on the assumption that the          defendants  must have  known of  the severity  of their  problems          earlier because conditions became so bad later on.").  We turn to          appellants' Second Amended Complaint.                                         -10-          I.  STATEMENTS IN BAILEY'S PROSPECTUS          I.  STATEMENTS IN BAILEY'S PROSPECTUS                    A.  Section 10(b) & Rule 10b-5 Claims                    A.  Section 10(b) & Rule 10b-5 Claims                        _________________________________                    The  complaint quotes  extensively from  various Bailey          corporate  documents, alleging that  these quotes were materially          false and misleading.   These  statements tend to  fall into  two          categories:    (1)  statements  about  past  performance  of  the          company;  and  (2)  statements  about future  performance.    The          district court  succinctly and accurately summarized  the alleged          false representations made by Bailey:                    1.   The Company falsely stated that it would                         achieve  increased   profits  by  moving                         production from its  plant in  Seabrook,                         New   Hampshire,   to   newly   acquired                         factories in Michigan.  Complaint,   2.                    2.   The   Company  knowingly   issued  false                         predictions  regarding  future  earnings                         prospects   during   pre-offering   road                         shows.  Complaint,   5.                    3.   When   the   Company  made   the  public                         offering  it knew but failed to disclose                         that  its  profitability  would  decline                         sharply   because   of   a   much   less                         profitable mix of  parts to be  supplied                         to Ford.  Complaint,   8.                    4.   The  Company failed  to disclose  to the                         public   "severe"   problems  it   began                         experiencing  at  its  Contour  facility                         beginning  in  February,  1994 (i.e.,  6                         months after the first day of the public                         offering  and after issuance  of all but                         one  of  the public  documents  of which                         plaintiffs complain).  Complaint,   13.          Order of December  29, 1995, at  6.  Paragraph  62 of the  Second          Amended Complaint attempts to  describe why these statements were          false  and misleading:  "Bailey's earnings  would not continue to          grow, they would  decline materially  due to a  massive shift  of                                         -11-          Bailey's  production  to a  much  less  profitable product  mix."          Second Amended Complaint at   62(a).                      Regarding statements about past performance, appellants          present  no   argument  that   such  statements  were   false  or          inaccurate.     At   most,   appellants  suggest   that  Bailey's          presentation of figures indicating past performance somehow imply          that  the company would attain the same level of profitability in          the  future.  In presenting figures of past performance, Bailey's          prospectus does not in any way project future earnings.                    Instead,  the  contention here  is  that  the company's          predictions would prove to  be false and that earnings  would not          continue to  grow.   Appellants contend that  Bailey's Prospectus          promised increased revenue.  See Second Amended Complaint,    54,                                       ___          55, 57, 61.  The statements cited by appellants, however, make no          such representations  and, in fact, are  tempered with cautionary          language.  For example, appellants cite the following sentence to          support its contention  that Bailey's  prospectus indicated  that          revenues  would continue  to grow  rapidly:   "While the  Company          expects continued revenue growth, revenue may or may not increase          at the same  rate as the  number of components  in the  Company's          product  line."   This statement  is certainly  not a  promise of          future profitability and contains language indicating uncertainty          as to future revenues.   Appellants cite the following  statement          as indicating  that Bailey  would become "even  more profitable":          "The   Company  intends  to   transfer  certain  labor  intensive          operations  from  Seabrook  to  Hillsdale  and  Madison  to  take                                         -12-          advantage of  lower average  labor  cost and  more fully  utilize          existing  capacity."  Again, there is no suggestion or promise of          increased  profits in this statement.   Finally, the following is          quoted  in support of the contention that the company had secured          supply  agreements that  would make  up for  the loss  of certain          discontinued  products:    "[T]he  Company  believes  that  these          components   in  aggregate,   will  provide   the   Company  with          opportunities  comparable to those that have been provided by the          Taurus/Sable and  Tempo/Topaz models."  While  the company states          that  it  believes  the  opportunities will  be  comparable,  the          statement contains no promise to that effect.                    Bailey's 1993 Annual Report to Shareholders, registered          with the SEC on October 28, 1993, indicated that Bailey "expected          [certain accomplishments of 1993] to  help to sustain growth  and          strengthen our  competitive position in future years."  That same          document  labels Bailey's mid-western plants as "cost-efficient."          Additionally,  an annual report filed  on a Form  10-K for fiscal          year 1993 stated  that the acquisition of  the mid-western plants          provided the  company with "additional  manufacturing capacity at          lower  average   labor  costs  than  prevail   at  the  Company's          Seabrook[,  New Hampshire]  facility."   Appellants  contend that          these  statements  were  misleading   because  Bailey  failed  to          disclose that  the shift  in production would  "materially reduce          the Company's revenue and earnings," Complaint,   74, and because          the  mid-western plants were not  cost efficient.   No facts have          been provided in support of the contention that Bailey had reason                                         -13-          to know that the  production shift would be less  profitable, nor          do appellants  indicate why  Bailey should  have known,  prior to          operating a plant with lower labor costs, that the plant would be          less cost efficient than the Seabrook plant, at which labor costs          were higher.                    "Certainly,  predictions  'are  not  exempt'  from  the          securities  laws .  .  .  but they  are  actionable only  if  the          forecast might  affect a  'reasonable investor'  in contemplating          the value of a corporation's stock."  Colby v. Hologic, Inc., 817                                                _____    _____________          F.  Supp. 204,  211 (D.  Mass. 1993)  (citation omitted).   While          these statements  may convey the company's  desire for profitable          performance  in the future, they do not convey any promises about          future  performance and do not  project specific numbers that the          company will certainly attain.  No reasonable investor would have          read  these statements,  especially  as they  are accompanied  by          cautionary  language,   as  promises  or  guarantees   of  future          performance.                    The statements above, standing  alone, are not false or          misleading.  Had the appellants presented facts known by  Bailey,          and contemporaneous  with the  statements above, that  would show          that Bailey's anticipated success  was unlikely, such facts would          have adequately alleged  a claim of  securities fraud.   Instead,          all appellants  present  as factual  support  is the  receipt  by          Bailey of  26-week forecasts from  Ford, with no  indication from          appellants as to what  information contained within those reports          contradicts Bailey's projections, other than a vague reference in                                         -14-          paragraph 67 of  the complaint  that, "[a]s [will  be] set  forth          below, Ford's  demand for  certain parts  supplied by  Bailey was                                                                        ___          lower  in the Company's first calendar quarter of 1994 and Bailey          knew that would be so as of the day [of] the Offering."  The only          information  "set forth  below"  regarding a  decrease in  Ford's          demand for  parts was  discussed in  a  Hancock analyst's  report          publicly disseminated on  June 8, 1994.   The comments  regarding          Ford in  this document suggest that,  at the time the  report was          prepared, nearly a  year after the Prospectus,  Annual Report and          Form 10-K were  issued, Ford was  scaling back production  plans.          This  hardly  amounts  to  a  contemporaneous factual  allegation          indicating  that statements  made  by Bailey  in  August of  1993          regarding  future prospects were false  or misleading, or that it          was unreasonable for Bailey to make such  statements about future          profitability.                    In addition, appellants  state that "Bailey's  earnings          . . . would decline materially due to a massive shift of Bailey's          production to  a much less  profitable product mix."   Appellants          allege no facts to indicate that Bailey had any reason to suspect          at the  time the statements were made  that the product mix would          prove to be less profitable.                    Although  appellants  specify   statements  that   they          contend were  fraudulent, identify  the speaker, and  state where          and when the statements were made, they fail, on every allegation          of  fraud,  to  explain   why  the  statements  were  fraudulent.          Appellants  offer   no  factual  support   for  their  conclusory                                         -15-          allegations that  Bailey knew  that  a product  mix would  become          unprofitable or that  production problems would arise  at a plant          it was not even operating at the time  the Prospectus was issued.          Thus, there  is no  factual support  that Bailey made  materially          false or misleading statements  when it presented positive future          expectations.  Appellants repeatedly recite their contention that          the "26-week  forecasts" received  from Ford indicated  to Bailey          Ford's  projected  supply  requirements  through   the  company's          "fiscal third quarter," the time at which the actual requirements          allegedly diminished, causing  the decline  in Bailey's  earnings          per share.  Appellants fail,  however, to identify information in          the  forecasts that would have  put Bailey on  notice that supply          requirements would decline.  That Ford presented forecasts of its          requirements  does not  guarantee  that  forecasts  presented  to          Bailey  26   weeks  prior  to  the  third  quarter,  and  perhaps          contemporaneously   with  the   dissemination   of   the   Bailey          Prospectus, accurately identified the actual  requirements of the          third quarter.  Those  requirements may have changed dramatically          after  Ford presented  Bailey with its  forecasts for  that third          quarter.    Because  appellants  fail to  cite  with  specificity          anything in the 26-week  forecasts that would have put  Bailey on          notice of a  decline in products  to be  supplied, they have  not          shown   that   Bailey's   expectations   were   unreasonable   or          fraudulently presented.   That Bailey  may have been  mistaken in          its  projections,  which  were  apparently based  on  facts  that          appellants do not contend were false, is not enough.                                         -16-                      "[Appellants]   record[]   statements  by                      defendants predicting a prosperous future                      and  hold[] them up  against the backdrop                      of what actually transpired.  . . .  This                      technique  is  sufficient to  allege that                      the defendants were wrong;  but misguided                      optimism  is not a  cause of  action, and                      does not  support an inference  of fraud.                      We  have  rejected   the  legitimacy   of                      'alleging fraud by "hindsight."'"          Shields,  25 F.3d  at 1129.   "Because  all of  plaintiffs' 10(b)          _______          claims  rely fundamentally on  such unsupported  allegations, the          district  court properly  dismissed these  claims for  failure to          meet Rule 9(b)."  Lucia, 36 F.3d at 174.                            _____                    B.  Sections 12(2) and 20(a)                    B.  Sections 12(2) and 20(a)                        ________________________                    Appellants contend that  the district court  improperly          dismissed  their  claims  arising  under  Section  12(2)  of  the          Securities  Act of 1933 and  Section 20(a) of  the Securities and          Exchange  Act  of 1934.   They  argue  that the  district court's          dismissal  of  their complaint  was pursuant  to  Rule 9(b).   As          appellants  correctly note,  neither of  these claims  contain an          element  of fraud  and  Rule 9(b)'s  pleading with  particularity          requirements  do not  apply.   Nevertheless,  the district  court          properly dismissed these claims as well.                      1.  Section 12(2)                      1.  Section 12(2)                          _____________                    First, for a violation  of Section 12(2), the plaintiff          must  show that  the  defendant made  an  untrue statement  of  a          material fact or omitted such material fact.  Appellants  contend          that Rule  9(b)'s pleading  requirements do  not apply  to claims          under Section 12(2), claiming that Section 12 does not contain an          element of fraud.  As we find that appellants have failed to even                                         -17-          meet  the minimal requirements of a Section 12(2) claims, we need          not decide whether their  Section 12(2) claim sufficiently sounds          in fraud such that Rule 9(b)'s pleading requirements apply.                    Appellants  have  failed  to  point us  to  any  untrue          statements of  material fact,  nor have they  identified material          facts  whose   omission  would   render   a  previous   statement          misleading.  "[I]nformation is  'material' only if the disclosure          would  alter the 'total mix'  of facts available  to the investor          and  'if there  is  a substantial  likelihood  that a  reasonable          shareholder  would  consider  it  important'  to  the  investment          decision."  Milton v. Van  Dorn Co., 961 F.2d 965, 969  (1st Cir.                      ______    _____________          1992)  (quoting Basic,  Inc.  v. Levinson,  485 U.S.  224, 231-32                          ____________     ________          (1988)).   The statements  that appellants challenge  were either          true  at  the time  they were  made and  continued  to be  so, or          consisted  of   future  predictions  that  later   proved  to  be          incorrect.  These  predictions were  not of the  sort that  would          need  to be  corrected  by a  later  statement.   The  statements          addressed  by appellants indicate  that Bailey projected positive          future earnings, but these statements were tempered with language          indicating  that Bailey  did not,  and could  not, guarantee  the          future  profitability  of  the   company.    "'Soft,'   'puffing'          statements such  as these generally lack  materiality because the          market  price  of a  share is  not  inflated by  vague statements          predicting growth."  Raab  v. General Physics Corp., 4  F.3d 286,                               ____     _____________________          289 (4th Cir. 1993).                                         -18-                    Appellants'  complaint  contends   that  the   market's          reliance  on  statement  by   Bailey  artificially  inflated  the          company's  price  per  share.    We  find,  however,  that  "[n]o          reasonable investor would  rely on these statements, and they are          certainly  not  specific  enough  to perpetrate  a  fraud  on the          market.  Analysts and  arbitrageurs rely on facts in  determining          the  value of a security,  not mere expressions  of optimism from          company  spokesmen."  Id. at  290.  A  reasonable purchaser would                                ___          know that these statements consisted of optimistic predictions of          future  potential  and  would  not  have  been  misled  by  them.          Therefore,  the  district  court  properly  dismissed appellant's          Section 12(2) claims.                      2.  Section 20(a)                      2.  Section 20(a)                          _____________                    Finally,  regarding  the  Section  20(a)  claim,  which          attempts  to  attribute  joint   and  several  liability  to  the          individual  defendants  as  "control  persons,"  appellants  have          failed  to allege an underlying violation of the securities acts.          The  district court properly  dismissed appellants' Section 20(a)          claims.          II.  REPORTS OF SECURITIES ANALYSTS          II.  REPORTS OF SECURITIES ANALYSTS                    Appellants  also allege  that  Bailey  should  be  held          liable for false  and misleading statements  made by analysts  in          independent  reports disseminated to  the public.   The  first of          these  reports  was  disseminated  to  the  public  by  McDonald.          Appellants  allege that  the  analyst who  prepared that  report,          David  Garrity, spoke  with Leonard  Heilman,  an officer  of the                                         -19-          company, in preparing the report.  Garrity reviewed with  Heilman          his earnings estimates and  the methodology and/or assumptions of          those  estimates.   Thereafter,  McDonald  disseminated  a report          giving Bailey an "aggressive buy rating."  The report stated that          it expected  Bailey to earn  $1.15 per  share in fiscal  1994 and          $1.60 per share in fiscal 1995.  Finally, the  report stated that          it estimated that the price  of Bailey stock would reach  $20 per          share, with a down-side risk to the $10 level.                    The  second report,  prepared by  Hancock analyst  Jane          Gilday,  was reviewed with Heilman on or about December 20, 1993.          Gilday informed  Heilman of  her revenue  and earnings  per share          estimates and  the methodology  and assumptions used  in reaching          those  estimates.  She also  indicated to Heilman  her opinion of          Bailey's   financial  prospects.     Hancock's  report,  publicly          disseminated on  December 21,  1993, projected  Bailey's earnings          per share  at $1.05 for  fiscal 1994  and $1.25 for  fiscal 1995.          The  report  goes  on  to  make  predictions  regarding  Bailey's          profitability in the  coming year  based on growth  in its  parts          business  and the  company's shift of  manufacturing to  the mid-          western plants.                    A third report, disseminated  to the public by McDonald          on March  18, 1994,  indicated that  McDonald had concerns  about          Bailey's  product mix shift  and lowered  its earnings  per share          forecasts slightly.   The report still gave Bailey an "Aggressive          Buy" rating.                                         -20-                    After Bailey disclosed that  its earnings for the third          quarter of fiscal 1994 were  only $0.16, Hancock lowered Bailey's          investment rating from buy to sell, based in part on the "serious          credibility  problem"  of  Bailey  management.    Hancock  called          Bailey's third quarter earnings "a major negative surprise."                    In support of their argument that Bailey should be held          liable  for  alleged  misstatements in  these  analysts' reports,          appellants  cite cases in which courts have held that a defendant          company may be held liable for any false or misleading statements          contained in   analysts' reports.  See, e.g., Elkind v. Liggett &                                             ___  ____  ______    _________          Myers, Inc., 635  F.2d 156, 163  (2d Cir.  1980) (holding that  a          ___________          company may sufficiently entangle itself with analysts' forecasts          to  render  the  predictions  attributable to  the  company,  but          finding  no such liability);  In re RasterOps  Corp. Sec. Litig.,                                        __________________________________          No. C-93-20349, 1994 WL  618970, at *3 (N.D. Cal.  Oct. 31, 1994)          (finding  that  "[a] company  may be  liable for  analyst reports          which  it fostered  and  reviewed but  failed  to correct  if  it          expressly  or  impliedly  represented  that  the information  was          accurate or reflected the view of the company"); Alfus v. Pyramid                                                           _____    _______          Technology Corp., 764 F. Supp. 598, 603 (N.D. Cal. 1991) (finding          ________________          that  a  company  may  be  liable  for  not correcting  analysts'          forecasts where  it undertakes  to provide  information regarding          and  pass on the  analysts' forecasts,  but finding  no liability          where a  company officer  merely examines  and  comments upon  an          analyst's report);  In re Aldus Sec.  Litig., [1992-1993 Transfer                              ________________________          Binder]  Fed. Sec. L. Rep. (CCH   97,376 at 95,984-85 (W.D. Wash.                                         -21-          1993)   (finding  plaintiffs'  claim  sufficiently  alleged  that          defendants  placed their  imprimatur  on  analysts' reports,  but          employing a lower Rule 9(b) pleading requirement than  is applied          in this circuit);  In re Cypress Semiconductor Sec. Litig., [1993                             _______________________________________          Transfer Binder] Fed. Sec. L. Rep. (CCH)   97,060 at 94,698 (N.D.          Cal.  1992)  (holding  that  plaintiffs need  only  allege  "that          defendants provided information to  the securities analysts  upon          which the reports were based").                    Appellants argue that we  should adopt the more liberal          approach adopted  by these  courts, rather than  the "restrictive          approach," Appellant's Brief at 35,  employed by the court below.          Appellant's arguments are unpersuasive.  Our review of  the cases          appellant cites indicates that the law applied by those courts is          similar to,  if not the same as, that applied by the court below.          Where  the  cases  may differ  is  in  the  pleadings each  court          requires  in  order to  sufficiently  allege  that the  analysts'          reports  are attributable to  the defendant.   We have repeatedly          emphasized Rule  9(b)'s heightened pleading  requirements because          of our  concern that plaintiffs will bring  baseless strike suits          against securities  defendants in  order  to increase  settlement          amounts  or to  engage in  a fishing  expedition for  evidence on          which to base its claim.  See  Lucia, 36 F.3d at 174 (noting that                                    ___  _____          we  have  been  especially  rigorous  in  applying Rule  9(b)  to          securities claims because of these concerns); Romani, 929 F.2d at                                                        ______          878 (same).  We find, however, that the cases cited by appellants                                         -22-          do not differ  substantially from  the law applied  by the  court          below.                    This circuit has not  yet decided whether statements in          an  analyst's report may be  attributable to a defendant company.          As appellants claim that  Bailey fraudulently misled the analysts          who prepared  these  reports,  Rule  9(b)'s  heightened  pleading          requirements apply.  Assuming arguendo that a company may be held                                        ________          liable  for false or misleading statements in an analysts' report          where  that  company  has   adopted,  endorsed,  or  sufficiently          entangled itself with the analysts' reports, see Elkind, 635 F.2d                                                       ___ ______          at 163, we find  that appellants have failed to meet  Rule 9(b)'s          pleading requirements and  their claim  must fail.   As we  noted          above,  Rule  9(b) requires  that  plaintiffs  "'(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,  25 F.3d at 1127-28.   The district court pointed out to          _______          appellants  that their  earlier  complaints failed  to meet  Rule          9(b)'s requirements.  Order of July 31,  1995 at 2; Order of Nov.          10, 1994 at 13.  In an apparent attempt to cure these defects, in          their Second Amended Complaint, appellants alleged the following:                      [I]t was the  Company's practice to  have                      top  managers,  namely,  Chief  Financial                      Officer  Heilman,  communicate  regularly                      with  securities  analysts   .  .  .   to                      discuss,   among    other   things,   the                      Company's    earnings   prospects,    its                      products, the efficiency of the Company's                      manufacturing     plants,     anticipated                      financial  performance,  and  to  provide                      detailed  'guidance'  to  these  analysts                                         -23-                      with respect to  the Company's  business,                      including  projected revenues,  earnings,                      and of particular importance to analysts,                      earnings per share.          In  its  order  dismissing  the  Second  Amended  Complaint,  the          district  court found  that appellants'  attempts to  satisfy the          requirements of  Rule 9(b)  were insufficient  because appellants          failed to identify the statements made by Heilman or describe how          those statements were  false or  misleading.  Order  of Dec.  29,          1995.   We  agree with  the district  court that  appellants have          failed  to  allege with  particularity  the  false or  misleading          statements made  by Heilman, or  any other defendant,  that would          have  induced  analysts'   to  publicly  disseminate   misleading          forecasts.                    We also find  that appellants have failed  to direct us          to any  facts to support their conclusory  allegation that Bailey          "endorsed the contents of those reports, adopted them as its own,          and placed  its imprimatur on  them."  Second  Amended Complaint,            36.  As presented by the appellants, the reports do not  appear          to  quote any Bailey officer or employee,  nor do they imply that          the forecasts were supplied or confirmed by any Bailey officer or          employee.   Appellants'  allegations regarding  analysts' reports          fail  to  meet the  pleading requirements  of  Rule 9(b)  and the          district court properly dismissed this count of the complaint.                                      CONCLUSION                                      CONCLUSION                    For  the  foregoing  reasons,  the  decision  below  is          affirmed.          affirmed          ________                                         -24-
