                             In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 03-3189
BRIAN ASHER, et al.,
                                            Plaintiffs-Appellants,
                                 v.


BAXTER INTERNATIONAL INCORPORATED, et al.,
                                            Defendants-Appellees.

                          ____________
          Appeal from the United States District Court for
         the Northern District of Illinois, Eastern Division.
          No. 02 C 5608—Blanche M. Manning, Judge.
                          ____________
    ARGUED JANUARY 22, 2004—DECIDED JULY 29, 2004
                    ____________



 Before EASTERBROOK, MANION, and ROVNER, Circuit
Judges.
   EASTERBROOK, Circuit Judge. Baxter International, a
manufacturer of medical products, released its second-
quarter financial results for 2002 on July 18 of that year.
Sales and profits did not match analysts’ expectations. Shares
swiftly fell from $43 to $32. This litigation followed; plain-
tiffs contend that the $43 price was the result of materially
misleading projections on November 5, 2001, projections
that Baxter reiterated until the bad news came out on July
18, 2002. Plaintiffs want to represent a class of all investors
2                                                 No. 03-3189

who purchased during that time either in the open market
or by exchanging their shares of Fusion Medical Technolo-
gies. (Baxter acquired Fusion in a stock- for-stock transac-
tion; plaintiffs think that Baxter juiced up the market price
so that it could secure Fusion in exchange for fewer of its
own shares.) Bypassing the question whether the suit could
proceed as a class action, but see Fed. R. Civ. P. 23(c)(1)(A),
the district court dismissed the complaint for failure to
state a claim on which relief may be granted. 2003 U.S. Dist.
LEXIS 12905 (N.D. Ill. July 17, 2003). The court did not doubt
that the allegations ordinarily would defeat a motion under
Fed. R. Civ. P. 12(b)(6). Still, it held, Baxter’s forecasts
come within the safe harbor created by the Private Securi-
ties Litigation Reform Act of 1995, 15 U.S.C. §§ 77z-2(c), 78u-
5(c). The PSLRA creates rules that judges must enforce at the
outset of the litigation; plaintiffs do not question the stat-
ute’s application before discovery but do dispute the district
court’s substantive decision.
   Baxter’s projection, repeated many times (sometimes in
documents filed with the SEC, sometimes in press releases,
sometimes in executives’ oral statements), was that during
2002 the business would yield revenue growth in the “low
teens” compared with the prior year, earnings-per-share
growth in the “mid teens,” and “operational cash flow of at
least $500 million.” Baxter often referred to these forecasts
as “our 2002 full-year commitments,” which is a strange
locution. No firm can make “commitments” about the fu-
ture—Baxter can’t compel its customers to buy more of its
products—unless it plans to engage in accounting shenani-
gans to make the numbers come out right no matter what
happens to the business. But nothing turns on the word; the
district court took these “commitments” as “forward- looking
statements,” see 15 U.S.C. §§ 77z-2(a), 78u-5(a), and plaintiffs
do not quarrel with that understanding. What they do say
is that the projections were too rosy, and that Baxter knew
it. That charges the defendants with stupidity as much as
No. 03-3189                                                 3

with knavery, for the truth was bound to come out quickly,
but the securities laws forbid foolish frauds along with
clever ones.
   According to the complaint, Baxter’s projections were
materially false because: (1) its Renal Division had not met
its internal budgets in years; (2) economic instability in
Latin America adversely affected Baxter’s sales in that part
of the world; (3) Baxter closed plants in Ronneby, Sweden,
and Miami Lakes, Florida, that had been its principal
source of low-cost dialysis products; (4) the market for
albumin (blood-plasma) products was “over-saturated,”
resulting in lower prices and revenue for the BioSciences
Division; (5) sales of that division’s IGIV immunoglobin
products had fallen short of internal predictions; and (6) in
March 2002 the BioScience Division had experienced a
sterility failure in the manufacture of a major product,
resulting in the destruction of multiple lots and a loss ex-
ceeding $10 million. The district court assumed, as shall we,
that failure to disclose these facts would create problems
but for the statutory safe harbor—though items (2) and (4)
at least are general business matters rather than Baxter’s
secrets, and the securities laws do not require issuers to
disclose the state of the world, as opposed to facts about the
firm. See Wielgos v. Commonwealth Edison Co., 892 F.2d
509 (7th Cir. 1989). Item (3) also was public knowledge
(Baxter issued a press release announcing the closings and
a substantial charge against earnings)—though the cost of
products that had been made at these plants may have been
secret. Whether all firm-specific non-disclosures add up to a
material non-disclosure—and whether Baxter had some
non-public information about those matters that seem to be
general information—are topics we need not tackle.
  Section 77z-2, which deals with statements covered by the
Securities Act of 1933 (here, those in the registration
statement and prospectus for the stock that Baxter ex-
changed for Fusion’s shares) and §78u-5, which deals with
4                                                 No. 03-3189

statements covered by the Securities Exchange Act of 1934
(here, the statements in Baxter’s press releases, press con-
ferences, and periodic filings) are identical in all significant
respects, so from now on we mention only the former
statute. The statutory safe harbor forecloses liability if a
forward-looking statement “is accompanied by meaningful
cautionary statements identifying important factors that
could cause actual results to differ materially from those in
the forward-looking statement” (§77z-2(c)(1)(A)(i)). The
fundamental problem is that the statutory requirement of
“meaningful cautionary statements” is not itself meaning-
ful. What must the firm say? Unless it is possible to give a
concrete and reliable answer, the harbor is not “safe”; yet a
word such as “meaningful” resists a concrete rendition and
thus makes administration of the safe harbor difficult if not
impossible. It rules out a caution such as: “This is a for-
ward-looking statement: caveat emptor.” But it does not
rule in any particular caution, which always may be
challenged as not sufficiently “meaningful” or not pinning
down the “important factors that could cause actual results
to differ materially”—for if it had identified all of those
factors, it would not be possible to describe the for-
ward-looking statement itself as materially misleading. A
safe harbor matters only when the firm’s disclosures (in-
cluding the accompanying cautionary statements) are false
or misleadingly incomplete; yet whenever that condition is
satisfied, one can complain that the cautionary statement
must have been inadequate. The safe harbor loses its func-
tion. Yet it would be unsound to read the statute so that the
safe harbor never works; then one might as well treat §77z-
2 and §78u-5 as defunct.
  Baxter provided a number of cautionary statements
throughout the class period. This one, from its 2001 Form
10-K filing—a document to which many of the firm’s press
releases and other statements referred—is the best illus-
tration:
No. 03-3189                                                    5

   Statements throughout this report that are not
   historical facts are forward-looking statements.
   These statements are based on the company’s cur-
   rent expectations and involve numerous risks and
   uncertainties. Some of these risks and uncertainties
   are factors that affect all international businesses,
   while some are specific to the company and the
   health care arenas in which it operates.
   Many factors could affect the company’s actual
   results, causing results to differ materially, from
   those expressed in any such forward-looking state-
   ments. These factors include, but are not limited to,
   interest rates; technological advances in the medical
   field; economic conditions; demand and market
   acceptance risks for new and existing products,
   technologies and health care services; the impact of
   competitive products and pricing; manufacturing
   capacity; new plant start-ups; global regulatory,
   trade and tax policies; regulatory, legal or other
   developments relating to the company’s Series A,
   AF, and AX dialyzers; continued price competition;
   product development risks, including technological
   difficulties; ability to enforce patents; actions of reg-
   ulatory bodies and other government authorities;
   reimbursement policies of government agencies;
   commercialization factors; results of product test-
   ing; and other factors described elsewhere in this
   report or in the company’s other filings with the
   Securities and Exchange Commission. Additionally,
   as discussed in Item 3—“Legal Proceedings,” upon
   the resolution of certain legal matters, the company
   may incur charges in excess of presently established
   reserves. Any such change could have a material
   adverse effect on the company’s results of opera-
   tions or cash flows in the period in which it is
   recorded.
6                                                No. 03-3189

    Currency fluctuations are also a significant variable
    for global companies, especially fluctuations in local
    currencies where hedging opportunities are unrea-
    sonably expensive or unavailable. If the United States
    dollar strengthens significantly against mist foreign
    currencies, the company’s ability to realize pro-
    jected growth rates in its sales and net earnings
    outside the United States could be negatively
    impacted.
    The company believes that its expectations with
    respect to forward-looking statements are based
    upon reasonable assumptions within the bounds of
    its knowledge of its business operations, but there
    can be no assurance that the actual results or per-
    formance of the company will conform to any future
    results or performance expressed or implied by such
    forward-looking statements.
The district court concluded that these are “meaningful
cautionary statements identifying important factors that
could cause actual results to differ materially from those in
the forward-looking statement”. They deal with Baxter’s
business specifically, mentioning risks and product lines.
Plaintiffs offer two responses. First they contend that the
cautionary statements did not cover any of the six matters
that (in plaintiffs’ view) Baxter had withheld. That can’t be
dispositive; otherwise the statute would demand prescience.
As long as the firm reveals the principal risks, the fact that
some other event caused problems cannot be dispositive.
Indeed, an unexpected turn of events cannot demonstrate
a securities problem at all, as there cannot be “fraud by
hindsight.” Denny v. Barber, 576 F.2d 465, 470 (2d Cir.
1978) (Friendly, J.). See also Murray v. Abt Associates Inc.,
18 F.3d 1376 (7th Cir. 1994); DiLeo v. Ernst & Young, 901
F.2d 624 (7th Cir. 1990). The other response is that the
cautionary statement did not follow the firm’s fortunes:
plants closed but the cautionary statement remained the
same; sterilization failures occurred but the cautionary
No. 03-3189                                                   7

statement remained the same; and bad news that (plaintiffs
contend) Baxter well knew in November 2001 did not cast
even a shadow in the cautionary statement.
   Before considering whether plaintiffs’ objections defeat
the safe harbor, we ask whether the cautionary statements
have any bearing on Baxter’s potential liability for state-
ments in its press releases, and those its managers made
orally. The press releases referred to, but did not repeat
verbatim, the cautionary statements in the Form 10-K and
other documents filed with the Securities and Exchange
Commission. The oral statements did not do even that much.
Plaintiffs say that this is fatal, because §77z-2(c)(1)(A)(i)
provides a safe harbor only if a written statement is “ac-
companied by” the meaningful caution; a statement pub-
lished elsewhere differs from one that accompanies the press
release. As for the oral statements: §77z-2(c)(2)(A)(ii), a spe-
cial rule for oral statements, provides a safe harbor only if
the statement includes “that the actual results could differ
materially from those projected in the forward-looking
statement” and in addition:
    (i) the oral forward-looking statement is accom-
        panied by an oral statement that additional
        information concerning factors that could
        cause actual results to differ materially from
        those in the forward-looking statement is
        contained in a readily available written
        document, or portion thereof;
    (ii) the accompanying oral statement referred to
         in clause (i) identifies the document, or por-
         tion thereof, that contains the additional
         information about those factors relating to
         the forward-looking statement; and
  (iii) the information contained in that written doc-
        ument is a cautionary statement that satis-
        fies the standard established in paragraph
        (1)(A).
8                                                  No. 03-3189

15 U.S.C. §77z-2(c)(2)(B). When speaking with analysts
Baxter’s executives did not provide them with all of this
information, such as directions to look in the 10-K report for
the full cautionary statement. It follows, plaintiffs maintain,
that this suit must proceed with respect to the press releases
and oral statements even if the cautionary language filed with
the SEC in registration statements and other documents
meets the statutory standard.
   If this were a traditional securities suit—if, in other words,
an investor claimed to have read or heard the statement
and, not having access to the truth, relied to his detriment
on the falsehood—then plaintiffs’ argument would be
correct. But this is not a traditional securities claim. It is a
fraud-on-the-market claim. None of the plaintiffs asserts
that he read any of Baxter’s press releases or listened to an
executive’s oral statement. Instead the theory is that other
people (professional traders, mutual fund managers,
securities analysts) did the reading, and that they made
trades or recommendations that influenced the price. In an
efficient capital market, all information known to the public
affects the price and thus affects every investor. Basic Inc.
v. Levinson, 485 U.S. 224, 241-47 (1988), holds that reliance
on the accuracy of the price can substitute for reliance on
the accuracy of particular written or oral statements, when
the statements affect the price—as they do for large and
well-followed firms such as Baxter, for which there is a
liquid public market. This works only to the extent that
markets efficiently reflect (and thus convey to investors the
economic equivalent of) all public information. See Daniel
R. Fischel, Efficient Capital Markets, the Crash, and the
Fraud on the Market Theory, 74 Cornell L. Rev. 907, 917-22
(1989); Jonathan R. Macey & Geoffrey P. Miller, Good
Finance, Bad Economics: An Analysis of the
Fraud-on-the-Market Theory, 42 Stan. L. Rev. 1059 (1990).
  When markets are informationally efficient, it is impossi-
ble to segment information as plaintiffs propose. They ask us
No. 03-3189                                                   9

to say that they received (through the price) the false oral
statements but not the cautionary disclosures. That can’t
be; only if the market is inefficient is partial transmission
likely, and if the market for Baxter’s stock is inefficient then
this suit collapses because a fraud-on-the-market claim won’t
fly. An investor who invokes the fraud-on-the-market theory
must acknowledge that all public information is reflected in
the price, just as the Supreme Court said in Basic. See 485
U.S. at 246. See Flamm v. Eberstadt, 814 F.2d 1169, 1179-
80 (7th Cir. 1987); In re Apple Computer Securities Litiga-
tion, 886 F.2d 1109, 1115-16 (9th Cir. 1989); Grossman v.
Novell, Inc., 120 F.3d 1112, 1122-23 (10th Cir. 1997). Thus
if the truth or the nature of a business risk is widely
known, an incorrect statement can have no deleterious
effect, and if a cautionary statement has been widely
disseminated, that news too affects the price just as if that
statement had been handed to each investor. If the execu-
tives’ oral statements came to plaintiffs through profes-
sional traders (or analysts) and hence the price, then the
cautions reached plaintiffs via the same route; market
professionals are savvy enough to discount projections
appropriately. Then §77z-2(c)(2)(B) has been satisfied for the
oral statements (and so too §77z-2(c)(1)(A)(i) for the press
releases). And if the cautions did not affect the price, then
the market must be inefficient and the suit fails for that
reason. So we take the claim as the pleadings framed it: the
market for Baxter’s stock is efficient, which means that
Baxter’s cautionary language must be treated as if attached
to every one of its oral and written statements. That leaves
the question whether these statements satisfy the statutory
requirement that they adequately “identify[ ] important
factors that could cause actual results to differ materially
from those in the forward-looking statement”.
  The parties agree on two propositions, each with support
in decisions of other circuits. First, “boilerplate” warnings
won’t do; cautions must be tailored to the risks that ac-
10                                               No. 03-3189

company the particular projections. Second, the cautions
need not identify what actually goes wrong and causes the
projections to be inaccurate; prevision is not required. See
Halperin v. EBanker USA.com, Inc., 295 F.3d 352, 359 (2d
Cir. 2002); Helwig v. Vencor, Inc., 251 F.3d 540, 558-59 (6th
Cir. 2001) (en banc); Ehlert v. Singer, 245 F.3d 1313, 1320
(11th Cir. 2001) (discussing a judicially developed defense,
the bespeaks-caution doctrine, that applies to statements
such as those made in tender offers to which the statutory
safe harbor does not apply); Semerenko v. Cendant Corp.,
223 F.3d 165, 182-83 (3d Cir. 2000) (same); Harris v. Ivax
Corp., 182 F.3d 799, 807 (11th Cir. 1999) (same). Unfortu-
nately, these principles don’t decide any concrete case—for
that matter, the statutory language itself does not decide
any concrete case. It is the result of a compromise between
legislators who did not want any safe harbor, and those who
wanted a safe harbor along the lines of the old Rule 175
(discussed in our Wielgos decision) that did not require any
cautionary statements but just required the projection to
have a reasonable basis. Rule 175 was limited to statements
in certain documents filed with the SEC; proponents of the
PSLRA wanted to extend this to all statements, including
oral declarations and press releases. The President threat-
ened a veto unless Congress accepted provisos agreeable to
the SEC; as the legislature lacked the votes to override a
veto, a deal was struck that could not have carried in the
absence of the threat to sink the whole package. As is often
the situation, a compromise enabled the bill to pass but
lacks much content; it does not encode a principle on which
political forces agreed as much as it signifies conflict about
both the scope and the wisdom of the safe harbor. Compro-
mises of this kind lack spirit. Still, the language was
enacted, and we must make something of it.
  Plaintiffs say that Baxter’s cautions were boilerplate, but
they aren’t. Statements along the lines of “all businesses
are risky” or “the future lies ahead” come to nothing other
No. 03-3189                                                 11

than caveat emptor (which isn’t enough); these statements,
by contrast, at least included Baxter-specific information
and highlighted some parts of the business that might
cause problems. For its part, Baxter says that mentioning
these business segments demonstrates that the caution is
sufficient; but this also is wrong, because then any issuer
could list its lines of business, say “we could have problems
in any of these,” and avoid liability for statements implying
that no such problems were on the horizon even if the
management well knew that a precipice was in sight.
  What investors would like to have is a full disclosure of
the assumptions and calculations behind the projections;
then they could apply their own discount factors. For rea-
sons covered at length in Wielgos, however, this is not a
sensible requirement. Many of the assumptions and calcu-
lations would be more useful to a firm’s rivals than to its
investors. Suppose, for example, that Baxter had revealed
its sterility failure in the BioSciences Division, the steps it
had taken to restore production, and the costs and prospects
of each. Rivals could have used that information to avoid
costs and hazards that had befallen Baxter, or to find
solutions more quickly, and as Baxter could not have
charged the rivals for this information they would have
been able to undercut Baxter’s price in future transactions.
Baxter’s shareholders would have been worse off. Similarly
Baxter might have added verisimilitude to its projections by
describing its sales policies and the lowest prices it would
accept from major customers, but disclosing reservation
prices would do more to help the customers than to assist
the investors.
  Another form a helpful caution might take would be the
disclosure of confidence intervals. After saying that it ex-
pected growth in the low teens, Baxter might have added
that events could deviate 5% in either direction (so the real
projection was that growth would fall someplace between
12                                                No. 03-3189

8% and 18%); disclosure of the probability that growth will
be under 10% (or over 16%) would have done much to avoid
the hit stock prices took when the results for the first half of
2002 proved to be unexpectedly low. Baxter surely had
developed internally some estimate of likely variance. Re-
vealing the mean, median, and standard deviation of these
internal estimates, and pinpointing the principal matters
that could cause results to differ from the more likely out-
come, could help to generate an accurate price for the stock.
Knowledge that the mean is above the median, or that the
standard deviation is substantial, would be particularly
helpful to those professional investors whose trades deter-
mine the market price. (It might imply, for example, that as
in Wielgos the firm was projecting what would happen if
nothing unexpected happened; because some things always
go wrong, investors could apply discounts.) Perhaps,
however, a firm’s data do not permit estimates to be stated
in probabilities. If, for example, a major source of uncertainty
for Baxter’s business was how Congress would resolve the
debate about Medicare coverage for prescription drugs, or
whether a rival would manage to win the FDA’s approval
for a product that would compete with one of Baxter’s most
profitable items, it would be hard to reduce these chances
to probabilities. Events such as these are discrete rather
than continuous variables, so standard confidence intervals
would be meaningless even if probabilities could be at-
tached to the likely outcomes.
   Whether or not Baxter could have made the cautions
more helpful by disclosing assumptions, methods, or con-
fidence intervals, none of these is required. The PSLRA does
not require the most helpful caution; it is enough to “iden-
tify[ ] important factors that could cause actual results to
differ materially from those in the forward-looking state-
ment”. This means that it is enough to point to the principal
contingencies that could cause actual results to depart from
the projection. The statute calls for issuers to reveal the
No. 03-3189                                                 13

“important factors” but not to attach probabilities to each
potential bad outcome, or to reveal in detail what could go
wrong; as we have said, that level of detail might hurt
investors (by helping rivals) even as it improved the
accuracy of stock prices. (Requiring cautions to contain elab-
orate detail also would defeat the goal of facilitating projec-
tions, by turning each into a form of registration statement.
Undue complexity would lead issuers to shut up, and stock
prices could become even less accurate. Incomplete informa-
tion usually is better than none, because market profession-
als know other tidbits that put the news in context.)
Moreover, “[i]f enterprises cannot make predictions about
themselves, then securities analysts, newspaper columnists,
and charlatans have protected turf. There will be predic-
tions aplenty outside the domain of the securities acts,
predictions by persons whose access to information is not as
good as the issuer’s. When the issuer adds its information and
analysis to that assembled by outsiders, the collective
assessment will be more accurate even though a given
projection will be off the mark.” Wielgos, 892 F.2d at 514
(emphasis in original).
  Yet Baxter’s chosen language may fall short. There is no
reason to think—at least, no reason that a court can accept
at the pleading stage, before plaintiffs have access to dis-
covery—that the items mentioned in Baxter’s cautionary
language were those thought at the time to be the (or any
of the) “important” sources of variance. The problem is not
that what actually happened went unmentioned; issuers
need not anticipate all sources of deviations from expec-
tations. Rather, the problem is that there is no reason (on
this record) to conclude that Baxter mentioned those sources
of variance that (at the time of the projection) were the
principal or important risks. For all we can tell, the major
risks Baxter knew that it faced when it made its forecasts
were exactly those that, according to the complaint, came to
pass, yet the cautionary statement mentioned none of them.
14                                                 No. 03-3189

Moreover, the cautionary language remained fixed even as
the risks changed. When the sterility failure occurred in
spring 2002, Baxter left both its forecasts and cautions as
is. When Baxter closed the plants that (according to the
complaint) were its least-cost sources of production, the
forecasts and cautions continued without amendment. This
raises the possibility—no greater confidence is possible
before discovery—that Baxter knew of important variables
that would affect its forecasts, but omitted them from the
cautionary language in order to depict the projections as
more certain than internal estimates at the time made
them. Thus this complaint could not be dismissed under the
safe harbor, though we cannot exclude the possibility that
if after discovery Baxter establishes that the cautions did
reveal what were, ex ante, the major risks, the safe harbor
may yet carry the day.
  Baxter urges us to affirm the judgment immediately,
contending that the full truth had reached the market
despite any shortcomings in its cautionary statements. If
this is so, however, it is hard to understand the sharp drop
in the price of its stock. A “truth-on-the-market” defense is
available in principle, as we discussed in Flamm, but not at
the pleading stage. Likewise one must consider the pos-
sibility that investors looked at all of the projections as fluff
and responded only to the hard numbers; on this view it
was a reduction in Baxter’s growth rate, not the embarrass-
ment of a projection, that caused the price decline in July
2002; again it is too early in the litigation to reach such a
conclusion. It would be necessary to ask, for example,
whether the price rose relative to the rest of the market
when Baxter made its projections; if not, that might support
an inference that the projections were so much noise.
  Nor has the time arrived to evaluate Baxter’s contention
that its projections panned out, so there was no material
error. Baxter insists that all of the projections dealt with
the entire calendar year 2002, and that by year-end per-
No. 03-3189                                              15

formance was up to snuff—close enough to the projections
that any difference was immaterial. Once again, it is inap-
propriate to entertain such an argument at the pleading
stage. The district court will need to determine whether all
of the forward-looking statements referenced calendar 2002
as a whole, rather than anticipated improvements quarter-
by-quarter over the preceding year. It will be necessary to
evaluate whether differences between the projections and
the outcome were material under the standard of Basic.
Finally it may be necessary to explore what Baxter’s full-
year results actually were; plaintiffs’ reply brief accuses
Baxter of using gimmicks to report extra revenue in 2002 at
the expense of later years. The implication is that Baxter
may have overstated its 2002 results. Whether that is so
cannot be determined on the pleadings, even when supple-
mented with the documents that Baxter has filed with the
SEC.
                                REVERSED AND REMANDED
16                                        No. 03-3189

A true Copy:
      Teste:

                    ________________________________
                    Clerk of the United States Court of
                      Appeals for the Seventh Circuit




               USCA-02-C-0072—7-29-04
