The opinion of the court was delivered by: POLLAK
Presently before the court is the defendants' motion to dismiss for failure to state a claim upon which relief can be granted. The defendants in this case are C-COR Electronics, Inc. ("C-COR"), a Pennsylvania corporation engaged in the design and manufacture of electronic equipment used in communications networks, and Richard E. Perry, its chief executive officer and the chairman of its board.
The plaintiffs, James and Elizabeth McCarthy, purchased shares in C-COR on March 9, 1995 (shares which they may still own; the complaint is not clear on this point). The complaint alleges that the defendants made false or misleading statements that artificially increased the price of C-COR's shares at the time of the McCarthys' purchase, and that they thereby violated the federal securities laws and committed the Pennsylvania common-law tort of misrepresentation. The complaint is framed as a class action, on behalf of all those who purchased shares during the period when C-COR's share price was allegedly inflated.
As is usual in ruling on a motion to dismiss, the following account of the facts of this case assumes that the facts as stated in the complaint are true.
On January 17, 1995, C-COR issued a press release ("the January press release") discussing the firm's past and present earnings. In summarizing the figures for the second quarter of the firm's 1995 fiscal year -- which had ended on December 23, 1994 -- the press release noted that earnings per share had been almost double what they were for the previous year's second quarter. The release also discussed the firm's expansion plans, stating that "the State College move went smoothly during the annual holiday shutdown, and the Reedsville facility is currently being equipped so deliveries can begin in late January. We are hiring and training employees for that location now." Complaint, P 20. The press release then went on to discuss the firm's projected revenues and earnings, stating: "Looking ahead, we expect strong revenues for the second half of the year, although in the third quarter, the earnings are expected to reflect the start-up costs for Reedsville. We anticipate a strong fourth quarter and continue to have a record backlog." Complaint, P 21.
On February 6, 1995, C-COR filed a Form 10-Q with the Securities and Exchange Commission for its second quarter. The defendants stated in this filing (1) that expenses increased in the first six months of fiscal 1995 because of "efforts to ramp up C-COR's production capacity in fiscal 1995," (2) that "accounts receivable increased by $ 2,355,000 and inventories increased $ 5,339,000 over the first six months of fiscal year 1995," and (3) that inventory had increased "as a result of C-COR's ramp-up efforts to meet increased production demands as well as making 'strategic' investments in certain raw material parts which were forecast to be in short supply in the future." Complaint, P 23.
From February 16 through February 23, 1995, the chief executive officer of C-COR, Richard E. Perry, sold between fifteen and twenty percent of his holdings in the firm, some 20,000 shares, at prices ranging from $ 26.50 and $ 28.50 a share. Complaint, P 27. On March 9, 1995, the plaintiffs purchased 150 shares of C-COR common stock.
Then, on March 27, 1995, C-COR issued a press release ("the March press release") indicating that its revenues and earnings for the third quarter, which had ended on March 24, 1995 (but for which final figures were presumably not yet available), would be "lower than previously expected,"
and that "growth in revenues and earnings would be down due to reduced shipments because of component shortages, extended test times, development delays and start-up costs at C-COR's two new manufacturing plants." Complaint, P 28. The release also quoted Perry as stating that "our plants continue to face challenges in the production and testing areas." Id. At the close of the market on the day of the March press release, C-COR's stock had fallen $ 3.25 per share, to close at $ 19. Complaint, P 29. On March 31, 1995, the plaintiffs filed this action.
The plaintiffs assert that the January press release and the February Form 10-Q contained false and misleading statements, and omitted material facts, because at the time that they were released 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" which would prevent C-COR from achieving the growth in revenues and earnings projected in these statements. Complaint, P 26. (In other words, the plaintiffs allege that the defendants were aware of the substance of the March press release at the time of the January release and February filing.) The plaintiffs allege that, as a result of these misrepresentations, the price of C-COR's common stock was artificially inflated during the period between the two press releases. The plaintiffs assert that these misrepresentations violated section 10(b) of the Securities Exchange Act,
and Rule 10b-5.
They also make a claim against Perry directly as a "controlling person," under section 20(a) of the Securities Exchange Act, 15 U.S.C. 78t(a).
They further allege that the defendants have committed the Pennsylvania common-law tort of negligent misrepresentation.
The complaint is framed as a class action. The asserted class is that group of people who purchased C-COR common stock on the open market between January 17, 1995 (the date of the January press release) and March 24 (the last day of C-COR's third quarter, and the working day immediately preceding the issuance of the March 27 press release), and who suffered damages thereby. In other words, the members of this asserted class are all those allegedly harmed by having bought stock during the period in which C-COR's stock price was allegedly artificially high as a result of the January press release and February Form 10-Q filing.
II. Existence of a Claim under § 10(b)
A. Elements of a § 10(b) Claim
The Third Circuit recently restated the elements of a claim of securities fraud under § 10(b) and Rule 10b-5:
To state a claim under § 10(b) and Rule 10b-5, a private plaintiff must plead (1) a false representation of (2) a material (3) fact, (4) the defendant's knowledge of its falsity and his intention that the plaintiff rely on it, (5) the plaintiff's reasonable reliance on the representation, and (6) the plaintiff's resulting loss.
Shapiro v. UJB Financial Corporation, 964 F.2d 272, 280 (3rd Cir.), cert. denied, 506 U.S. 934, 121 L. Ed. 2d 278, 113 S. Ct. 365 (1992). A prediction, like that in the January Press Release, is a statement of "soft information," and can therefore be actionable. See In re Donald J. Trump Casino Securities Lit., 7 F.3d 357, 368 (3rd Cir. 1993), cert. denied, 510 U.S. 1178, 127 L. Ed. 2d 565, 114 S. Ct. 1219 (1994); Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 642 (3rd Cir. 1989); see also Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1094, 115 L. Ed. 2d 929, 111 S. Ct. 2749 (1991) (finding that statements of "soft information" can be actionable). COR's ...