to reflect projected increases in its raw material costs or limitations on its production capabilities in a projection of earnings. The defendants point to Judge DuBois's comment, in the course of dismissing the plaintiffs' claims, that the plaintiffs had done "nothing more than identify issues which are properly the concern of management in the day to day operation of the corporation." Id. at *9.
Read in context, it is apparent that Judge DuBois's observation is not applicable to this case. His remark was made in the course of finding that the plaintiffs had not presented evidence indicating that the earnings projections at issue had been materially false when made. See id. at *9-*10. The remark referred, therefore, to the expectation that, when a court evaluates the strength of the plaintiffs' evidence, management's evaluations of operational considerations will be entitled to some deference. At a later stage of this case, the plaintiffs will of course be required to come forward with evidence indicating that any omissions from C-COR's statements amounted to more than "mundane operational details," and in doing so they will have to overcome that deference to the assessments of management. For the present, however, they have made allegations sufficient to survive a motion to dismiss.
III. Federal Rule of Civil Procedure 9(b)
The plaintiffs make conclusory allegations that the January press release was false or misleading because C-COR knew the substance of the later press release at the time that the first one was issued. Under Federal Rule of Civil Procedure 9(b), "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." The defendants do not raise Rule 9(b) in their motion to dismiss; however, the court will consider on its own initiative whether the complaint meets its requirements.
The courts of appeals have differed in their interpretations of Rule 9(b). Some, like the Second Circuit, read it to require plaintiffs to allege specific facts that give rise to a "strong inference" that the defendants possessed fraudulent intent. See, e.g., Stern v. Leucadia National Corp., 844 F.2d 997, 1004 (2d Cir.), cert. denied, 488 U.S. 852, 102 L. Ed. 2d 109, 109 S. Ct. 137 (1988). Others, like the Ninth Circuit, conclude that the language of Rule 9(b) imposes no duty to allege facts from which intent can be inferred, but does require the plaintiff to allege facts suggesting that the allegedly fraudulent statements were false when made. See In re Glenfed, Inc. Securities Litigation, 42 F.3d 1541, 1546-49 (9th Cir. 1994). In a recent opinion I applied the latter standard. See In re Valuevision International Inc. Securities Litigation, 896 F. Supp. 434, slip op. at 26-28 (E.D. Pa. 1995).
The plaintiffs appear to have alleged only one fact which may, if established by evidence, be thought to show that the January press release was false when issued; they allege that C-COR's chief executive officer, Perry, sold between fifteen and twenty percent of his holdings between February 16 and February 23, 1995 -- after the January press release and the February Form 10-Q became public and before the March press release was issued. This allegation would, if proved, tend to give rise to an inference that Perry did not believe the statements in the January press release and February Form 10-Q when they were released, suggesting in turn that they were false when made. See In re Apple Computer Securities Litigation, 886 F.2d 1109, 1117 (9th Cir. 1989), cert. denied, 496 U.S. 943, 110 L. Ed. 2d 676, 110 S. Ct. 3229 (1990) ("Insider trading in suspicious amounts or at suspicious times is probative of bad faith and scienter."). The trades are alleged to have occurred roughly a month after the January press release, some two weeks after the February 10-Q filing, and over a month before the March press release. Given the length of the intervals between the mid-January press release, the mid-to-late February trades, and the late March press release, this case is, at this initial pleading stage, far from being as convincing as other cases involving allegations of insider trading, in which the alleged trades occurred within days of public announcements affecting the firm's stock price. See, e.g., Lilly v. State Teachers Retirement System, 608 F.2d 55, 56 (2d Cir. 1979), cert. denied, 446 U.S. 939, 64 L. Ed. 2d 792, 100 S. Ct. 2159 (1980) (nine-day interval between secondary offering and announcement). However, the periods involved are sufficiently brief that, at least without further explanation, they raise an inference (which is, of course, subject to rebuttal) that Perry's sales were made with the knowledge that the January press release was misleading.
Finally, it may be noted that the complaint alleges, without supporting detail, that the defendants "knew or recklessly disregarded the facts that C-COR was experiencing shortages in components, extended test times for products before they could be shipped, delays in development of products, and increased costs associated with its two new manufacturing plants." Complaint, P 26. One may surmise that the complaint's failure to provide any supportive concrete allegations is traceable, at least in part, to the fact that detailed information on such matters would tend to be within the exclusive purview of management -- i.e., the defendants.
Under Shapiro v. UJB Financial Corp., however, to avoid dismissal, plaintiffs alleging securities fraud must "delineate at least the nature and scope of plaintiffs' effort to obtain, before filing the complaint, the information needed to plead with particularity." 964 F.2d at 285. The complaint provides no information whatsoever of this type. As Shapiro explains, "This requirement is intended to ensure that plaintiffs thoroughly investigate all possible sources of information, including but not limited to all publicly available relevant information, before filing a complaint." Id. This court's finding that the plaintiffs' allegation as to Perry's stock sales suffices to meet the requirements of Rule 9(b) does not render this requirement irrelevant: an investigation of the type contemplated by Shapiro might well have disclosed information tending to negate the inference arising from Perry's alleged stock sales, information which might have led them not to bring this action. The court will grant the plaintiffs leave to file an amended complaint that concisely sets forth the scope of the investigation that they have conducted into the allegations that they make in paragraph 26 of their complaint. Because the plaintiffs may have been under the mistaken impression that their allegation as to Perry's stock sales sufficed to satisfy Shapiro, they will also be allowed a brief time in which to conduct such an investigation, if they have not already done so. Once an amended complaint is filed, the court will evaluate it for compliance with Shapiro 's requirements.
The defendants also argue that, if the plaintiffs' claims against C-COR under the federal securities laws are dismissed, the plaintiffs' related claims against Perry and their claims under Pennsylvania law should suffer the same fate. Those arguments are moot, because the court has allowed the plaintiffs' federal claims against C-COR to go forward. This is, of course, with the proviso, set forth above, that the plaintiffs must file an amended complaint satisfying the requirements of Shapiro.
An appropriate order follows.
For the reasons set forth in the opinion filed herewith, it is hereby ORDERED that:
1. To the extent that the defendants' motion to dismiss seeks the dismissal of the plaintiffs' claims based upon C-COR's February Form 10-Q, that motion is GRANTED. In all other respects, the motion is DENIED.
2. The plaintiffs shall, by February 1, file an amended complaint describing their efforts to obtain the information needed to plead the material in P 26 of their complaint with particularity, as discussed more fully in the accompanying opinion. Their description shall be formulated concisely and non-repetitively, and shall list in detail the sources of information that they have consulted.
Louis H. Pollak, J.
December 28, 1995