                            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
              AMENDED SEPTEMBER 3, 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;
plaintiffs 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
2                                               No. 03-3189

all investors who purchased during that time either in the
open market or by exchanging their shares of Fusion
Medical Technologies. (Baxter acquired Fusion in a
stock-for-stock transaction; 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 dis-
missed 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 Securities 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 statute’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
future—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
No. 03-3189                                                  3

Baxter knew it. That charges the defendants with stupidity
as much as 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
exceeding $10 million. The district court assumed, as shall
we, that failure to disclose these facts would create prob-
lems 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 su b s ta n t i a l ch a rge against
earnings)—though the cost of products that had been made
at these plants may have been secret. Whether all
firm-specific non-disclosures add up to a material
nondisclosure—and whether Baxter had some non-public
information about those matters that seem to be general
information—are topics we need not tackle.
  Section 77z-2, which deals with statements covered by the
Securities Act of 1933 (here, those in the registration
4                                                 No. 03-3189

statement and prospectus for the stock that Baxter ex-
changed for Fusion’s shares) and §78u-5, which deals with
statements covered by the Securities Exchange Act of 1934
(here, the statements in Baxter’s press releases, press
conferences, and periodic filings) are identical in all signifi-
cant 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
forward-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
forward-looking statement itself as materially misleading.
A safe harbor matters only when the firm’s disclosures
(including the accompanying cautionary statements) are
false or misleadingly incomplete; yet whenever that condi-
tion is satisfied, one can complain that the cautionary
statement must have been inadequate. The safe harbor
loses its function. 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
No. 03-3189                                                 5

releases and other statements referred—is the best illustra-
tion:
    Statements throughout this report that are not
    historical facts are forward-looking statements.
    These statements are based on the company’s
    current expectations and involve numerous risks
    and uncertainties. Some of these risks and uncer-
    tainties 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 medi-
    cal 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
    diffiulties; ability to enforce patents; actions of
    regulatory bodies and other government authori-
    ties; reimbursement policies of government agen-
    cies; commercialization factors; results of product
    testing; and other factors described elsewhere in
    this report or in the company’s other filings with
    the Securities and Exchange Commission. Addition-
    ally, 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
6                                                No. 03-3189

    operations or cash flows in the period in which it is
    recorded.
    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
    projected growth rates in its sales and net earnings
    outside the United States could be negatively
    impacted.
    The company believes that its expectations with
    respect to forward-looking statements are based
    upon reasonable assumptions within the bounds of
    its knowledge of its business operations, but there
    can be no assurance that the actual results or
    performance of the company will conform to any
    future results or performance expressed or implied
    by such forward-looking statements.
The district court concluded that these are “meaningful
cautionary statements identifying important factors that
could cause actual results to differ materially from those in
the forward-looking statement”. They deal with Baxter’s
business specifically, mentioning risks and product lines.
Plaintiffs offer two responses. First they contend that the
cautionary statements did not cover any of the six matters
that (in plaintiffs’ view) Baxter had withheld. That can’t be
dispositive; otherwise the statute would demand prescience.
As long as the firm reveals the principal risks, the fact that
some other event caused problems cannot be dispositive.
Indeed, an unexpected turn of events cannot demonstrate
a securities problem at all, as 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
No. 03-3189                                                7

F.2d 624 (7th Cir. 1990). The other response is that the
cautionary statement did not follow the firm’s fortunes:
plants closed but the cautionary statement remained the
same; sterilization failures occurred but the cautionary
statement remained the same; and bad news that (plaintiffs
contend) Baxter well knew in November 2001 did not cast
even a shadow in the cautionary statement.
  Before considering whether plaintiffs’ objections defeat
the safe harbor, we ask whether the cautionary statements
have any bearing on Baxter’s 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 state-
ment is “accompanied by” the meaningful caution; a
statement published elsewhere differs from one that
accompanies the press release. As for the oral statements:
§77z-2(c)(2)(A)(ii), a special rule for oral statements,
provides a safe harbor only if the statement includes “that
the actual results could differ materially from those pro-
jected in the forward-looking statement” and in addition:
    (i)    the oral forward-looking statement is accompa-
           nied by an oral statement that additional infor-
           mation concerning factors that could cause actual
           results to differ materially from those in the
           forward-looking statement is contained in a
           readily available written document, or portion
           thereof;
    (ii)   the accompanying oral statement referred to in
           clause (i) identifies the document, or portion
           thereof, that contains the additional information
           about those factors relating to the
           forward-looking statement; and
8                                                No. 03-3189

    (iii)   the information contained in that written docu-
            ment is a cautionary statement that satis-
            fies the standard established in paragraph (1)(A).
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 main-
tain, that this suit must proceed with respect to the press
releases and oral statements even if the cautionary lan-
guage 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
No. 03-3189                                                   9

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 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 transmis-
sion likely, and if the market for Baxter’s stock is inefficient
then this suit collapses because a fraud-on-the-market
claim won’t fly. An investor who invokes the
fraud-on-the-market theory must acknowledge that all
public information is reflected in the price, just as the
Supreme Court said in Basic. See 485 U.S. at 246. See
Flamm v. Eberstadt, 814 F.2d 1169, 1179-80 (7th Cir. 1987);
In re Apple Computer Securities Litigation, 886 F.2d 1109,
1115-16 (9th Cir. 1989); Grossman v. Novell, Inc., 120 F.3d
1112, 1122-23 (10th Cir. 1997). Thus if the truth or the
nature of a business risk is widely known, an incorrect
statement can have no deleterious effect, and if a caution-
ary statement has been widely disseminated, that news too
affects the price just as if that statement had been handed
to each investor. If the executives’ oral statements came to
plaintiffs through professional traders (or analysts) and
hence the price, then the cautions reached plaintiffs via the
same route; market professionals are savvy enough to
discount projections appropriately. Then §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
10                                              No. 03-3189

actual results to differ materially from those in the for-
ward-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 accom-
pany 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 (or, indeed,
any new legislation), and those who wanted a safe harbor
along the lines of the old Rule 175 (discussed in our Wielgos
decision) that did not require any cautionary statements
but just required the projection to have a reasonable 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. As is often the situation, a compromise
enabled the bill to pass but lacks much content; it does not
encode a principle on which political forces agreed as much
as it signifies conflict about both the scope and the wisdom
of the safe harbor. Compromises of this kind lack spirit.
Still, the language was enacted, and we must make some-
thing of it.
  Plaintiffs say that Baxter’s cautions were boilerplate, but
No. 03-3189                                                 11

they aren’t. Statements along the lines of “all businesses
are risky” or “the future lies ahead” come to nothing other
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 a preci-
pice 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
reasons covered at length in Wielgos, however, this is not a
sensible requirement. Many of the assumptions and
calculations would be more useful to a firm’s rivals than to
its investors. Suppose, for example, that Baxter had
revealed its sterility failure in the BioSciences Division, the
steps it had taken to restore production, and the costs and
prospects of each. Rivals could have used that information
to avoid costs and hazards that had befallen Baxter, or to
find solutions more quickly, and as Baxter could not have
charged the rivals for this information they would have
been able to undercut Baxter’s price in future transactions.
Baxter’s shareholders would have been 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
expected growth in the low teens, Baxter might have added
that events could deviate 5% in either direction (so the real
12                                               No. 03-3189

projection was that growth would fall someplace between
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.
Revealing 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 outcome, 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 determine 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 dis-
counts.) 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 attached to the likely outcomes.
  Whether or not Baxter could have made the cautions
more helpful by disclosing assumptions, methods, or
confidence intervals, none of these is required. The PSLRA
does not require the most helpful caution; it is enough to
“identify[ ] important factors that could cause actual results
to differ materially from those in the forward-looking
statement”. This means that it is enough to point to the
principal contingencies that could cause actual results to
No. 03-3189                                                13

depart from the projection. The statute calls for issuers to
reveal the “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
elaborate detail also would defeat the goal of facilitating
projections, 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. Incom-
plete information usually is better than none, because
market professionals know other tidbits that put the news
in context.) Moreover, “[i]f enterprises cannot make predic-
tions about themselves, then securities analysts, newspaper
columnists, and charlatans have protected turf. There will
be predictions 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
discovery—that the items mentioned in Baxter’s cautionary
language were those that at the time were the (or any of
the) “important” sources of variance. The problem is not
that what actually happened went unmentioned; issuers
need not anticipate all sources of deviations from expecta-
tions. 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 objectively faced when it made its forecasts
were exactly those that, according to the complaint, came to
pass, yet the cautionary statement mentioned none of them.
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 omitted important variables
from the cautionary language and so made projections more
certain than its internal estimates at the time warranted.
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 possibil-
ity that investors looked at all of the projections as fluff and
responded only to the hard numbers; on this view it was a
reduction in Baxter’s growth rate, not the embarrassment
of a projection, that caused the price decline in July 2002;
again it is too early in the litigation to reach such a conclu-
sion. 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 perfor-
mance was up to snuff—close enough to the projections that
No. 03-3189                                              15

any difference was immaterial. Once again, it is inappropri-
ate 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 implica-
tion is that Baxter may have overstated its 2002 results.
Whether that is so cannot be determined on the pleadings,
even when supplemented with the documents that Baxter
has filed with the SEC.
                                REVERSED AND REMANDED
A true Copy:
      Teste:

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



                   USCA-02-C-0072—9-3-04
