           Case: 10-15910   Date Filed: 09/06/2012   Page: 1 of 11

                                                          [DO NOT PUBLISH]

             IN THE UNITED STATES COURT OF APPEALS

                     FOR THE ELEVENTH CIRCUIT
                      ________________________

                             No. 10-15910
                       ________________________

                   D. C. Docket No. 1:01-cv-01950-RWS


ROCHELLE PHILLIPS, on behalf of herself and
all others similarly situated,
KALFORD C. FADEM, et al.,

                                                          Plaintiffs-Appellants,
                                  versus

SCIENTIFIC-ATLANTA, INC.,
WALLACE G. HAISLIP, et al.,

                                                         Defendants-Appellees.

                       ________________________

                Appeal from the United States District Court
                   for the Northern District of Georgia
                      ________________________

                            (September 6, 2012)

Before WILSON, KRAVITCH and EDMONDSON, Circuit Judges.


PER CURIAM:
              Case: 10-15910     Date Filed: 09/06/2012     Page: 2 of 11

      This appeal is from the grant of summary judgment to Defendants. The case

involves allegations of securities fraud -- a fraud on the market -- brought by

private parties as part of a putative class action. Claims under the Securities

Exchange Act of 1934 (“the Exchange Act”) and Rule 10b-5 as promulgated

thereunder are involved.

      Plaintiffs contend that Defendant Scientific-Atlanta, Inc. and certain

members of the company’s senior management issued materially false and

misleading statements during the class period; that these statements caused

Plaintiffs to purchase S-A securities at artificially-inflated prices; and that

Plaintiffs experienced losses on their investments when S-A issued certain

“corrective disclosures” in 2001. The district court granted summary judgment for

Defendants based solely on Plaintiffs’ failure to present sufficient evidence of

“loss causation.” We affirm the judgment.



                                   BACKGROUND



      Defendant Scientific-Atlanta, Inc. (“S-A”) manufactures and sells products

-- such as digital set-top boxes -- for use in the cable television industry.

Defendants Wallace G. Haislip and James F. McDonald were S-A’s CFO and

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CEO (together with S-A, “the Defendants”). This case pertains to S-A’s financial

performance in fiscal year 2001 (July 2000 to June 2001) and to certain statements

made by the Defendants during the putative class period about S-A’s financial

performance.

       In a nutshell, Plaintiffs’ complaint contended that the Defendants engaged

in “channel stuffing”1 to cover up decreasing demand for S-A’s products; that

Defendants issued materially false and misleading statements as part of the

purported cover-up; that Plaintiffs relied upon these statements in purchasing their

S-A securities; and that the eventual disclosure of the truth in Defendants’ later-

issued “corrective disclosures” caused the price of Plaintiffs’ S-A securities to fall

and caused Plaintiffs to experience losses on their investments.

       Plaintiffs’ complaint contended that, even while S-A performed very well in

the first fiscal quarter of 2001, S-A management became aware (and continued to

learn over the course of the fiscal year) that various sales metrics for S-A products



   1
    Broadly speaking, “channel stuffing” is the practice of pulling sales from future fiscal
periods into the present fiscal period -- by way of encouragement, discounts, or incentives -- to
increase current fiscal period performance: taking from the future to embellish the present.
While “channel stuffing” is not per se illegal or fraudulent, it “may amount to fraudulent conduct
when it is done to mislead investors.” Garfield v. NDC Health Corp., 466 F.3d 1255, 1262 (11th
Cir. 2006). One particular way “channel stuffing” can mislead investors is by creating the
impression that sales for a product are strong, and will continue to be strong, when -- in fact --
“stuffed” product is stacking up at customers; and the product backlog will likely cause a slowing
of future orders.

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were declining or trending lower. Plaintiffs allege that Defendants responded by

using discounts, warehousing credits, unusually liberal return policies, and

extended repayment terms to bring sales of cable equipment to cable companies --

referred to as Multiple System Operators (“MSOs”) -- into earlier fiscal quarters

and to hide the evidence of slowing sales and orders from shareholders, like

Plaintiffs.

       Plaintiffs’ complaint contended that the alleged “channel stuffing” in this

case was done specifically to hide a decrease in sales and orders from shareholders

and to mislead investors about the company’s strength and performance. In

addition, Plaintiffs’ complaint contended that Defendants -- despite knowing that

non-channel-stuffed sales were falling and that customer inventory was increasing

-- made materially false and misleading statements about S-A’s financial

performance during the second and third fiscal quarters, failed to disclose the

slowdown in order volume, and failed to disclose the “channel stuffing” efforts

being undertaken to advance sales from future fiscal quarters into S-A’s second

and third fiscal quarters.

       The series of allegedly materially false and misleading statements identified

by Plaintiffs began on 18 January 2001 -- the start of the purported class period --

with an S-A press release announcing “record financial results” for the second

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fiscal quarter of 2001 and a press release announcing an increase in manufacturing

capacity “in response to the continuing acceleration in customer demand.” In an

earnings-related conference call with analysts and the media, Defendant Haislip

forecasted to the public continued growth in the set-top box business and

subscriber sales in general. This tone continued when S-A issued a press release,

in April 2001, reporting a large year-over-year increase2 in sales in the third fiscal

quarter and when Defendant McDonald -- in a pair of interviews with the financial

media -- described rising customer demand and predicted strong performance in

the upcoming fourth fiscal quarter.

       Plaintiffs’ complaint contended that the fraud was only revealed to the

public in July and August 2001. In July 2001, when S-A reported its fourth fiscal

quarter results, it announced that sales had decreased during the fiscal quarter. S-

A attributed the year-over-year decline in total bookings for the fourth quarter to

“the uncertain economic climate and reduced digital marketing efforts by cable

operators during the slower summer vacation period, in addition to customer

inventory levels and the slower than expected deployment of interactive

applications.” In an earnings-related conference call with analysts and the media,


   2
    Used here, “year-over-year increase” means an increase from the previous year’s third fiscal
quarter to the pertinent third fiscal quarter. This concept is different from an increase from one
fiscal quarter to the next fiscal quarter that immediately, temporally follows.

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Defendant McDonald attributed part of the announced decline in new orders to the

absorption of inventory by MSOs. After these announcements, S-A’s stock price

fell steeply.

       The last of the alleged “corrective disclosures” was made on 16 August

2001 -- the end of the purported class period -- when S-A filed its Form 10-K for

fiscal year 2001 with the SEC. The 10-K reported reduced demand for S-A’s

products and noted the impact of customers having accumulated inventory. In a

related press release, Defendant Haislip stated that S-A anticipated adverse

impacts in the next fiscal year and attributed the decline in demand for S-A

products to the slowing economy and to the effect of a correction in customer

inventory levels. After these announcements, S-A’s stock price again fell steeply.

       The district court denied Defendants’ motion to dismiss under Federal Rule

of Civil Procedure 12(b)(6) and Rule 9(b) of the PSLRA (requiring the pleading of

fraud with particularity); allowed discovery; and then granted Defendants’ Motion

for Summary Judgment. The summary judgment was based on Plaintiffs’ having

failed to demonstrate a genuine issue of material fact about “loss causation.” The

district court explained that Plaintiffs’ failure “to disentangle the effect of the new

information regarding customer inventory levels from S-A’s new, negative

characterization of how industry-wide trends were affecting it specifically” was

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“fatal” to Plaintiffs’ case: “the record evidence provides no method by which a

jury can determine how much, if any, of Plaintiffs’ loss is attributable to

Defendants’ failure to disclose its [sic] alleged channel stuffing activities.”



                                    DISCUSSION



      “Private federal securities fraud actions are based upon federal securities

statutes and their implementing regulations,” as interpreted by the courts. And

“[i]n cases involving publicly traded securities and purchases or sales in public

securities markets, the action’s basic elements include: (1) a material

misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a

connection with the purchase or sale of a security; (4) reliance . . . ; (5) economic

loss; (6) ‘loss causation,’ i.e., a causal connection between the material

misrepresentation and the loss.” Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627,

1631 (2005) (citations omitted) (emphasis omitted); see also Mizzaro v. Home

Depot, Inc., 544 F.3d 1230, 1236-37 (11th Cir. 2008).

      The district court determined that Plaintiffs had presented genuine issues of

material fact on all of the required elements of their claim, except for “loss

causation.” While a genuine issue of material fact must exist for each element of a

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claim to overcome a motion for summary judgment, we need only address the

“loss causation” element here because our decision on that element -- reviewing

the record de novo -- determines the outcome of this case.

        About “loss causation” in fraud-on-the-market cases (like this case), we

have said that “[t]he loss causation element of a Rule 10b-5 claim requires that the

defendant’s fraud be both the but-for and proximate cause of the plaintiff’s later

losses[:]” at least a “‘substantial’ or ‘significant contributing cause.’”3 FindWhat

Investor Group v. FindWhat.com, 658 F.3d 1282, 1309 (11th Cir. 2011) (quoting

Robbins v. Kroger Properties, Inc., 116 F.3d 1441, 1447 (11th Cir. 1997)). This

principle means that, where plaintiffs in fraud-on-the-market cases attempt to

demonstrate loss causation circumstantially by identifying a “corrective

disclosure” and “showing that the stock price dropped soon after the corrective

disclosure,” plaintiffs must also “eliminat[e] other possible explanations for this

price drop, so that the factfinder can infer that it is more probable than not that it


   3
     A “fraud on the market” theory of causation in securities cases is based on the idea that the
pertinent securities market is “efficient” and properly prices in -- that is, takes right account of --
all available material information for the prices of its securities. In such a market, a material
misrepresentation disseminated into the market will be translated into the price of all relevant
securities. Likewise, when the misrepresentation is revealed for its true nature, the market will
remove the effect of the misrepresentation from the price of the relevant securities. In the case of
misrepresentations that positively impacted on the price of certain securities, the later revelation
will cause a drop in price and a loss for anyone who purchased the securities when the price was
elevated based on the positive misrepresentation. For further background, see FindWhat, 658
F.3d at 1309-10.

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was the corrective disclosure -- as opposed to other possible depressive factors --

that caused at least a ‘substantial’ amount of the price drop.” Id. at 1311-12.

      The press releases and interviews that Plaintiffs have identified as

presenting the “corrective disclosures” in this case include multiple pieces of non-

fraud-related information (for example, the uncertain economic climate, reduced

marketing by S-A’s customers, unexpectedly slow deployment of interactive

digital cable services) that qualify as “other possible depressive factors”:

revelations not about the supposed “channel stuffing.” The other factors could

have caused some amount of the identified price drop. Absent sufficient

disaggregation of the relative price effects of these different pieces of information,

no fact-finder would be able to determine that the revelation of the supposed

“channel stuffing” activities in this case satisfied the pertinent causation

requirement.

      In opposing summary judgment, Plaintiffs offered the expert report and

deposition of Dr. Scott Hakala. Dr. Hakala’s report included an “event study” and

other analysis that attempted to disaggregate the effects of some of the

confounding factors.

      Dr. Hakala sufficiently accounted for “industry-wide” confounding factors

-- such as the general slowing economy and the reduced digital marketing efforts

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made by cable operators during the slower summer vacation period -- through the

use of an industry index and his analytics. In effect, he separated (and dropped out

of pricing consideration) S-A statements -- in their entirety (that is, information

related to the supposed fraud, as well as other information affecting stock price) --

from general industry factors. And then Dr. Hakala concluded that general

industry factors alone could not explain the price decline. But he did not

dissaggregate (and made no attempt to dissaggregate) the impact of Defendants’

statements that accurately presented the industry-wide factors that had -- in fact --

specifically impacted on S-A during the fourth fiscal quarter.

      S-A’s new, negative characterization of how industry-wide trends and the

generally slowing economy were affecting it specifically during the fourth fiscal

quarter of 2001 was new information when released to the market in July 2001 and

August 2001: confounding information. And analyst reports that came out after

pertinent releases included at least some discussion of this new impact of industry

trends and the weakened economy on S-A. Given that the impact of this new,

confounding information -- an “other possible depressive factor” -- was not

disaggregated at all by Plaintiffs, no basis exists in the record by which any fact-




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finder could sufficiently determine that the revelation of the supposed “channel

stuffing” in this case satisfied the pertinent causation requirement.4



                                        CONCLUSION



       We see no reversible error. Plaintiffs have failed to eliminate sufficiently

other possible explanations for the identified price drop. We therefore conclude

no genuine issue of material fact exists on “loss causation” -- a required element of

Plaintiffs’ claim -- and AFFIRM the grant of summary judgment to Defendants.

       AFFIRMED.




   4
     For the first time on appeal, Plaintiffs advance the argument that the new, negative
characterization of how industry-wide trends and the slowing economy were affecting S-A
specifically during the fourth fiscal quarter of 2001 was actually part and parcel with the
revelation of the supposed “channel stuffing” activities; they say the new, negative
characterizations need not be disaggregated because they are part of the revelation of the fraud.
This argument -- that S-A’s talk about industry trends impacting negatively on S-A specifically
was a “new characterization” that was part of the fraud disclosure -- was not put to the district
court. The district judge’s job is to decide the case actually presented, based on the arguments
actually and properly presented. District judges are not obliged to tweezer out or imaginatively
to reframe the parties’ arguments. Because this argument was first raised on appeal and was not
presented to the district court at summary judgment, we will not consider it now. See, e.g.,
Ledford v. Peeples, 657 F.3d 1222, 1258 (11th Cir. 2011).

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