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IN RE CAERE CORPORATE SECS. LITIG.

November 18, 1993

In re CAERE CORPORATE SECURITIES LITIGATION; This Order Relates To: ALL ACTIONS


The opinion of the court was delivered by: SPENCER WILLIAMS

 Plaintiffs in this action are a class of individuals who purchased the common stock of Caere Corporation (hereafter "Caere"), a publicly-traded manufacturer of information recognition software and systems, between December 8, 1992, and April 5, 1993, (hereafter "the class period"). PP 3(c), 6-7, 23-24. *fn1" Defendants are officers and directors of Caere who sold shares of Caere's common stock during the class period, as well as Caere itself. PP 7-13.

 On July 2, 1993, Plaintiffs filed an Amended Class Action Complaint, alleging that Defendants violated Section 10(b) of the Securities and Exchange Act of 1934 (hereafter "the Exchange Act"), Securities and Exchange Rule 10b-5 (hereafter "Rule 10b-5"), *fn2" and California law. P 3(a). Plaintiffs' central allegations are that (1) Defendants made misleading statements to the public designed to inflate Caere's share price, PP 1-2, 17, 33-36, 43-46, 49; (2) Defendants adopted certain overly optimistic statements made by independent stock analysts, and hence the analysts' misleading forecasts should be treated as if they had been made by Defendants themselves, PP 2, 18-19, 38-42, 48; (3) Defendants failed to disclose certain negative, non-public information about Caere's condition and earnings prospects, PP 1-2, 19-22; (4) Plaintiffs bought shares of Caere's common stock while the price was inflated, P 6; and (5) Plaintiffs suffered substantial losses when Caere's share price plummeted after the market learned that Caere's business outlook was not as positive as Defendants had portrayed, P 6.

 Defendants filed a motion to dismiss the Amended Complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b) (6) on the grounds that (1) none of Defendants' statements were misleading under Rule 10b-5; (2) Defendants did not adopt the analysts' statements, and hence cannot be held liable for them under Rule 10b-5; (3) Defendants had no duty to disclose negative information about Caere's business prospects under Rule 10b-5; (4) because the federal claims under Rule 10b-5 should be dismissed without leave to amend, the Court should also dismiss the state law claims; (5) in the alternative, regarding the state law claims, Plaintiffs failed to adequately plead reliance; and (6) Plaintiffs' state law negligent misrepresentation claim should be dismissed with prejudice, since Defendants' statements cannot give rise to such a claim as a matter of law.

 Having carefully reviewed the Amended Complaint, all of the relevant facts and law, the materials submitted by the parties and the arguments of counsel, the Court (1) DISMISSES Plaintiffs' Rule 10b-5 allegations regarding the analysts' forecasts WITH LEAVE TO AMEND; (2) DISMISSES Plaintiffs' remaining Rule 10b-5 claims WITHOUT LEAVE TO AMEND; (3) DISMISSES Plaintiffs' state law negligent misrepresentation claim WITHOUT LEAVE TO AMEND; and (4) DISMISSES Plaintiffs' remaining state law claims WITH LEAVE TO AMEND.

 LEGAL STANDARD

 In considering a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the district court must assume that all the facts alleged in the complaint are true. Sun Savings and Loan Ass'n v. Dierdorff, 825 F.2d 187, 191 (9th Cir. 1987). Furthermore, all allegations must be construed in the light most favorable to the plaintiff, and all doubts must be resolved in favor of the plaintiff. Jenkins v. McKeithen, 395 U.S. 411, 421, 23 L. Ed. 2d 404, 89 S. Ct. 1843 (1969), reh'g denied, 396 U.S. 869, 24 L. Ed. 2d 123, 90 S. Ct. 35 (1969). A complaint should not be dismissed without leave to amend under Rule 12(b)(6) unless it appears that the plaintiff would not be entitled to the relief he seeks under any set of facts that could be proved. Fidelity Financial Corp. v. Fed. Home Loan Bank, 792 F.2d 1432, 1435 (9th Cir. 1986), cert. denied, 479 U.S. 1064, 93 L. Ed. 2d 998, 107 S. Ct. 949 (1987).

 DISCUSSION

 A. None of the Defendants' Statements Were Misleading Under Rule 10b-5

 Plaintiffs contend that Defendants mislead the market by making overly optimistic statements regarding Caere's revenue and earnings prospects for the first quarter of 1993. Specifically, Plaintiffs point to (1) a November 9, 1992, press release and two similar press releases made in December 1992 and January 1993, which announced the introduction of new products, touted them as technological advancements, called Caere a market leader in its field, and quoted Caere's Chief Operating Officer as saying that Caere was "well-positioned" for growth, PP 34-36, 43-44; (2) a January 25, 1993, press release in which Caere announced its 1992 financial results, stated that 1992 had been an "exciting year," that Caere's revenues and earnings had reached "record levels" in 1992, and that Caere had "expanded beyond [its] traditional markets" in 1992, PP 45-46; and (3) Caere's 1992 annual report, which announced "continuing strong sales" for 1992, P 50.

 According to Plaintiffs, these statements were misleading because Defendants knew that (1) Caere had oversupplied its distributors in 1992, and therefore Caere's first quarter 1993 earnings and revenues would be depressed, since the distributors would be able to fill orders from inventory purchased in 1992 rather than ordering new products from Caere in 1993; (2) product shipments would decline significantly during the first quarter of 1993 because of softening demand for Caere's key products; (3) Caere was offering "incentives" to its distributors that would adversely affect first quarter 1993 earnings; (4) Caere had committed to significant fixed overhead in order to support substantial sales, maintenance and manufacturing operations; (5) Caere's marketing expenditures had increased significantly; and (6) Caere's systems for determining and forecasting its financial performance were inadequate. PP 1, 55.

 Projections and general expressions of optimism can be actionable under Rule 10b-5. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989), cert. denied, 496 U.S. 943 (1990). A statement of optimism contains at least three implicit factual assertions: (1) that the statement was genuinely believed by the person making it; (2) that there was a reasonable basis for the statement; or (3) that the speaker was not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement. Id. Such statements are actionable under Rule 10b-5 to the extent that one of these implied factual assertions was inaccurate. Id.

 In considering whether the market was misled by a particular statement of optimism, courts should keep in mind that "professional investors, and most amateur investors as well, know how to devalue the optimism of corporate executives, who have a personal stake in the future success of the company." In re Verifone Sec. Litig., 784 F. Supp. 1471, 1481 (N.D. Cal. 1992) (citing Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 515 (7th Cir. 1989)).

 Plaintiffs' allegations must be rejected for three reasons: First, Defendants' statements are too vague to constitute actionable fraud. See Rogal v. Costello, [1992-93 Tr. Binder]Fed. Sec. L. Rep. (CCH) P 97,245, at 95,093-94 (N.D. Cal. Oct. 8, 1992) (representation by management that "indicated a more positive outlook for the June quarter" and that there was an "apparent upswing" in the buying intentions of U.S. customers too vague to be actionable). Second, most of Defendants' statements relate only to past events, such as Caere's 1992 financial results. Statements regarding past events contain no implicit prediction that those events or conditions will continue in the future. In re Convergent Technologies Sec. Litig., 948 F.2d 507, 513 (9th Cir. 1991); Verifone, 784 F. Supp. at 1481; In re Syntex Corp. Sec. Litig., No. 92-20548 SW, slip op. at 15 (N.D. Cal. Sept. 1, 1993). *fn3" Third, the few statements which could be construed as forward-looking relate only to Caere's long-term prospects. Even if Defendants were aware of facts suggesting that Caere's first quarter 1993 earnings might be depressed, they easily could have "genuinely believed" that Caere's ...


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