Independent Financial Analyst's Reports and the "Post-Publication Ratification Theory": Is a Company Liable for Voluntary Circulation of a Favorable Report?
Jack E. Karns*
Introduction
There is no area of law creating more controversial questions than the feverish pandering by corporations to impress individual financial analysts of the firm's vitality and financial strength. The attention paid to the reports filed by these analysts often holds the fate of a company's stock in the balance, and this point is not lost on corporate officers and directors. The end result of this corporate courting ritual is the re-publication of a financial report that is extremely favorable relative to the company's investment potential, so much so, that corporate insiders cannot resist trumpeting the good news to all who will listen or who might have even the slightest inclination of parting with an investment dollar. Accordingly, companies are not shy about circulating reprints of these reports and may even purchase them from analysts' investor newsletters. The financial reports then make their way to potential investors as part of investment packets.
The question that now arises is whether the company is liable for the substance contained within one of these favorable analyst reports. Several federal court decisions from the Northern District of California have held that the re-circulation of the financial report constitutes a "post-publication ratification" of the report itself,(1) thereby making the firm responsible for the information contained therein pursuant to the federal securities laws.(2) Liability in this instance relies principally on the "entanglement doctrine" which states that when a public company becomes so involved in the preparation of the financial report that it must stand behind the report as though the report were its own.(3) This liability accrues under Section 10(b) of the Securities Exchange Act of 1934,(4) and, of course, Rule 10(b)(5) as well as applicable state law.
There is no question that dealing with securities analysts is a difficult undertaking and presents certain risks for the corporate enterprise. The court in S.E.C. v. Bausch & Lomb Inc.(5) compared the relationship between independent securities analysts and corporations as tantamount "to a fencing match conducted on a tightrope."(6) Notwithstanding this potential downside, there is a tremendous impetus and upside to allowing public companies to convey positive financial information about the firm especially when that information is gathered, compiled, and analyzed by securities professionals. Favorable financial reports are an extremely effective way for a company to make itself stand apart from its competitors and to establish its position in the market as warranting extra attention from potential investors. It must be with some trepidation, though, that a company develop too close a relationship with a financial analyst who has issued a favorable report.(7) Despite economic theories, such as the "efficient market" model that would encourage and foster this very relationship, the corporate firm must be cognizant of an ever increasing attitude and opinion that companies incur liability under the federal securities laws for such reports even when the firm had no direct involvement in the report's genesis.(8) A credible defense is difficult to muster when the subject corporation has openly displayed, distributed, and trumpeted the report in question as evidence of the vitality and public market confidence in the investment product.(9)
This Article traces the development of the "entanglement theory" from the Elkind v. Liggett & Myers, Inc.(10) case and considers its role in the development of the current theory referred to as the "post-publication ratification" doctrine.(11) The Northern California line of cases emanating from the Silicon Valley is then reviewed in order to set the stage for acceptance of this new liability theory by the Securities and Exchange Commission (SEC).(12) Finally, some comments are offered regarding the efficacy of this new doctrine in light of the increasing commercialization and over-emphasis on marketing that is being placed on the selling of investment products, especially those involving new start-up companies, as well as the steps companies can take to avoid possible liability.(13)
The Entanglement Theory
The leading "entanglement theory" case is Elkind v. Liggett & Myers, Inc.,(14) a 1980 decision by the Second Circuit of the United States Court of Appeals. In Liggett, a class action shareholder suit was filed alleging that corporate officers disclosed certain material information to individual financial analysts and that the failure to make this information public resulted in significant damage.(15) In this case it was alleged that the company failed to release figures showing a substantial downturn in earnings or information to correct erroneous projections made by analyst reports that the company had, in fact, fostered.(16) The disclosure of the material inside information to these financial analysts resulted in the sale of Liggett stock by investors who had received the information, and shareholders who had not been similarly advantaged filed the class action suit.(17)
The Liggett court held that it is possible for a public company to become so involved in the preparation of a financial analyst's report that the projections contained therein create a duty on the part of the company to correct any material errors.(18) The company becomes "entangled" in the preparation of the report and firm officials are viewed as having made an "implied representation" that either the information contained in the report is a true reflection of the company's position or, more importantly, that the information is true.(19) For all practical purposes the report becomes less analysis and more material fact which the firm now has an obligation to publicly disclose or find itself in violation of Section 10(b) of the Securities and Exchange Act of 1934,(20) as well as Rule 10(b)(5).
The Second Circuit held that the non-public information which was revealed on July 10, 1972, was not material and, therefore, there could be no liability.(21) And although the court held that the disclosure tip that was made one week later was sufficient to establish a finding of materiality,(22) it held that the plaintiffs' total recovery ought to be limited to "a pro rata portion of the [total] tippee's gain."(23)
What is most important about the Liggett case is that despite ruling that the company officials had not by their activities made any implied representation that reflected the company's views or that the information was correct, the court went on to issue a strict admonition to any corporate official contemplating such action.(24) The court stated "that corporate pre-release review of the reports of analysts is a risky activity, fraught with danger."(25) The court concluded that:
A company which undertakes to correct errors in reports presented to it for review may find itself forced to choose between raising no objection to a statement which, because it is contradicted by internal information, may be misleading and making that information public at a time when corporate interests would best be served by confidentiality. Management thus risks sacrificing a measure of its autonomy by engaging in this type of program.(26)
Following the 1980 decision in Liggett, the federal courts developed a two-part test establishing when a corporation would be liable for reports published by outside analysts.(27) As previously stated, if a plaintiff could prove that a company had "entangled" itself in the financial forecast regardless of whether or not it had prepared the report, the burden of proof would be sufficiently carried to maintain corporate liability.(28) On the other hand, a plaintiff could also demonstrate that the company actually knew that the analyst's report or statements were not true or not reasonable.(29) This latter portion of the two-part test also requires that the plaintiff establish and prove that the firm failed to disclose this particular information to investors.(30)
The "entanglement theory" did not necessarily entertain the possibility that a company would actually purchase and re-circulate copies of a favorable financial report. Rather, this theory posited simply that the company's involvement in the creation of the report was, in and of itself, sufficient to establish corporate liability. With increasing competition in the marketplace, it is hardly surprising that firms, especially start-up companies, now see the advantage in actually re-publishing these favorable forecasts as part of their effort to woo potential investors. Although this question was not specifically addressed by the line of cases spawned by Liggett, it should come as no surprise that federal courts have now demonstrated a willingness to extend the Liggett rationale to include a "post-publication ratification" of the favorable report by the company.(31) It is also apparent that these cases have emanated from Northern California due to the concentration of high technology start-up companies in that area.
The Northern California Case Line
A. In re RasterOps Corp. Securities Litigation
The "post-publication ratification doctrine" had its genesis in In re RasterOps Corp. Securities Litigation,(32) a case that involved a company that manufactured and marketed color imaging products for personal computers and workstations with its corporate shares priced at twelve dollars each.(33) The per share stock price reached a high of twenty-nine dollars and seventy five cents, but fell sharply in October 1991, when RasterOps reported that first quarter corporate earnings would not meet previous expectations.(34) By November 1990, the stock price had plummeted to a low of ten dollars per share.(35) A class action complaint was filed against the company in June 1992, an action that included both the corporation, and its directors and officers as defendants.(36)
The RasterOps saga began with a first decision on January 6, 1993, by District Court Judge Whyte of the Northern District of California.(37) In that ruling, the court reviewed a 110 page complaint and dismissed the plaintiffs assertion that the defendants had been able to inflate the price of RasterOps stock, trade their shares in the company while the price was at its peak, and were therefore, responsible or liable for insider trading profits.(38)
In the next RasterOps case in 1994, the plaintiff alleged that the issuing company distributed copies of the analyst's reports to potential investors.(39) On motion to dismiss the third amended complaint,(40) the trial court ruled that the act of circulating the reports constituted an "implied representation" that reflected the company's views or reflected a position that the information in the report was accurate.(41) When the court failed to dismiss the case the company attempted to avoid liability by taking the position that it was merely a means of distribution of the information contained in the report, and further, that the re-circulation or post-publication of the information in no way suggested that the company endorsed the report.(42) The court in the RasterOps case refused to accept the argument that the company was a mere "mailcarrier," and stated matter of factly that the firm took a position that it "agreed with the forecasts contained in the reports."(43)
Of significant importance to the development of the "post-ratification doctrine" was the court's statement that "[e]xplicit ratification" was not required in order to establish the company's liability for the information.(44) Rather, any message, implied or otherwise, accompanying a re-circulated analyst report would obviously be construed by any investor as a direct solicitation and suggestion that the firm would continue to do equally well in subsequent years.(45)
B. In re Cypress Semiconductor Securities Litigation
The In re Cypress Semiconductor Securities Litigation(46) case was decided on June 6, 1995, and the opinion was issued by Judge Aguilar.(47) This case involved a class action composed of investors who claimed that a securities fraud had been perpetrated by Cypress Semiconductor Corporation with regard to its sale of stock between August 19, 1991 and April 14, 1992.(48) The defendants moved for summary judgment, and even though District Court Judge Aguilar held that the investors had failed to state a cause of action,(49) nevertheless, he upheld the post-publication ratification doctrine as originally set forth in RasterOps third amended complaint.(50)
Cypress Semiconductor was in the business of manufacturing and selling semiconductor chips used in computers and other telecommunications equipment.(51) The company's chief executive officer founded the company in 1982, and four years later it went public.(52) The firm experienced dramatic growth, increasing revenues in 1986 from fifty-one million dollars to two hundred eighty-five million dollars in 1991.(53) Unfortunately, this apparent period of prosperity ended with a very poor 1991 fourth quarter, and a similarly disappointing 1992 first quarter.(54) Overall revenues and earnings fell considerably short of the internal projections that the company had made with regard to its own projected growth pattern, and when the company reported these disappointing results, the stock price dropped dramatically.(55)
Interestingly, Cypress Semiconductor went on to become a very successful company, and in fact, generated 1994 revenues exceeding four hundred six million dollars.(56) Despite this phenomenal growth, the class action plaintiffs in this particular case based their allegations on the revenue and earnings forecast of the fourth quarter of 1991 and first quarter of 1992.(57) The plaintiffs argued that the company should have known that its projections were not realistic, and that they were in fact fraudulent because of this scienter element.(58) They argued that Cypress Semiconductor was liable to all class investors based upon projections that were published in various newspaper articles and independent financial analysts' reports.(59) Cypress Semiconductor, it was argued, had disseminated internal projections to various securities analysts and to other media, and in turn, these projections were communicated directly to the investing public.(60) After analyzing the summary judgment standard to be applied in the case,(61) Judge Aguilar cast a discerning eye toward the allegations raised regarding the statements in the independent financial analysts' reports.(62)
These reports contained the low revenue and earnings projections for late 1991 and 1992,(63) and some of them even purported that the information had come from corporate insiders despite a lack of attribution.(64) The reports came from such noted firms as Goldman Sachs, Merrill Lynch, Prudential Securities, and PaineWebber.(65) Standing alone, the analysts' reports were ruled to be inadmissable hearsay insofar as they were offered to demonstrate that Cypress Semiconductors' officers were responsible for the statements quoted in the reports.(66) However, the court held that in reliance on the Liggett case, Cypress Semiconductor could be held liable for the statements contained in the analysts' reports if the company was "`entangled'" with the forecast to such a degree that the predictions could be attributable to the firm itself.(67)
The Cypress Semiconductor court acknowledged that even though the Ninth Circuit had not yet addressed the efficacy of the post-publication ratification doctrine, several district court judges had adopted the entanglement theory as set forth in Liggett.(68) The entanglement theory was summarized and the court paid particular attention to the language in Liggett which noted that the officials of any company could, by and through their activity, make "`implied representation[s]'" that certain information which they had the opportunity to review was correct, or at least did not contradict the company's position.(69)
More importantly, Judge Aguilar noted the distinction between "pre-publication entanglement" and "post-publication ratification" activities.(70) Despite the fact that the Liggett case focused on pre-publication entanglement, such involvement could occur both before and after the information had been published. Citing RasterOps, Judge Aguilar distinguished post-publication ratification as occurring "when a company conveys the suggestion that the analysts' forecasts are accurate or at least in accordance with its views."(71) With regard to the distribution of the independent analysts' reports, the position taken by the court was that potential investors could view them as "implied representation[s]" as envisioned pursuant to the Liggett opinion, and therefore, believe them to be accurate.(72) In these circumstances, and in direct contrast to the pre-publication entanglement theory, enterprise "liability does not depend upon imputing the analysts' statements to the company," but instead viewing the corporation as having made "implied representation[s] that the analysts' forecasts are accurate."(73) The court acknowledged this to be "a subtle, yet important distinction between pre-publication adoption and post-publication ratification," but held this subtlety to be actionable under the appropriate circumstances.(74)
Focusing on specific allegations that Cypress Semiconductor ratified the analysts' reports post-publication, the complaint pointed to the distribution of several independent analysts' reports to shareholders by Cypress Semiconductor's chief financial officer.(75) The issue that would prove to be the undoing of the plaintiffs' case was the lack of evidence establishing reliance within the entire securities market sufficient to affect the stock price, as opposed to a minor mailing of reports to merely two shareholders.(76) Judge Aguilar rejected "the fraud on the market theory" put forth to establish this reliance because there had not been a mass mailing or that Cypress Semiconductor had in any way informed the marketplace of the information contained in the distributed reports.(77) To be sure, there was an endorsement by Cypress Semiconductor, at least as to the two shareholders who received these reports, that the firm was allegedly endorsing the comments contained therein.(78) However, the plaintiffs failed to carry the larger, and more critical burden of establishing evidence to demonstrate that independent analysts' reports had been used by Cypress Semiconductor post-publication to defraud the securities market.(79)
Despite granting summary judgment dismissal regarding all arguments relating to the post-publication ratification theory, Judge Aguilar's analysis and acknowledgment of the relationship of the theory relative to the Liggett case, amounted to undeniable judicial recognition of this new doctrine.(80) His analysis also constituted judicial notice of the acceptance of the logical extension of the Liggett "implied representation" theory to encompass post-publication ratification if a plaintiff could demonstrate compelling evidence that a fraud on the market had been committed.(81)
The opinion in Cypress Semiconductor was ultimately upheld by the Ninth Circuit on April 28, 1997. In Eisenstadt v. Allen,(82) the Ninth Circuit Court of Appeals did so without any express comment, recognition of, or denial of a separate and distinct post-publication ratification liability theory.(83) The court merely said that to hold the issuer liable for an independent analyst's report projections, it must be proven that the issuer provided misleading information to the analyst.(84) This statement is not really at odds with the post-publication ratification doctrine, since most independent analysts rely on information and earnings projections published by a company in making their own conclusions. Start-up companies are almost certainly not going to disclose in the Management Analysis and Discussion (MD&A) section any information that might be construed in a pejorative fashion. Consequently, it is logical to view the post-publication ratification doctrine as set forth in the Silicon Valley case line as a form of post-publication entanglement theory, just accomplished impliedly as opposed to explicitly feeding the analyst information from which to draw incorrect conclusions. Stated more simply, post-publication implied entanglement was the logical successor to pre-publication express entanglement as recognized in Liggett. But whatever the semantics, the SEC was quick to accept judicial recognition of what it termed the "post-publication adoption" theory of liability, as opposed to the classic pre-publication entanglement theory as contemplated by Liggett.(85)
C. Strassman v. Fresh Choice, Inc.
The final case in the Silicon Valley trilogy authored by Judge Aguilar was Strassman v. Fresh Choice, Inc.,(86) decided on December 7, 1995.(87) This case involved the Fresh Choice restaurant chain, the action being brought when the stock of the company dropped from thirty-two dollars a share to a low of nine dollars fifty cents per share.(88) Although giving great deference to the pre-publication entanglement doctrine as contained in Liggett, Judge Aguilar, clearly emboldened by the previous decisions in RasterOps and Cypress Semiconductor, spent considerable time elaborating on the theory that he now referred to as the "post-publication ratification" theory of liability.(89) In Fresh Choice, the plaintiffs were held to have failed to plead with any particularity that the third party analysts' reports "were circulated by the Corporate Defendants, which Defendant circulated these reports, nor to whom these reports were circulated."(90) Plaintiffs allegations stated that the company had sent these "reports to `inquiring members of the financial press, potential investors and current shareholders of Fresh Choice.'"(91) Judge Aguilar ruled this to be a conclusory allegation and insufficient under Rule 9(b) to state a litigable claim.(92)
More importantly though, Judge Aguilar dismissed this particular allegation with "LEAVE TO AMEND" giving the plaintiffs thirty days to amend their complaint with particularity regarding which reports were circulated by the company, who was specifically responsible for circulation, and most importantly, to whom the reports were actually delivered.(93) To reinforce his commitment to this newly created judicial doctrine, Judge Aguilar stated:
In addition to the pre-publication entanglement described [previously in the opinion], this Court has held that a company may also be liable if it ratifies an analysts' report after the report has been published . . . .
[U]nder the pre-publication entanglement theory, liability depends on whether the analysts' statements may be imputed to the company. However, under the post-publication ratification theory, liability rests on the company's implied representation that the analysts' forecasts are accurate.(94)
It is advisable not to read too much into the dismissal by Judge Aguilar of plaintiffs' post-publication ratification allegations in the Fresh Choice case, since similar dismissals had occurred in RasterOps until plaintiffs amended their complaint sufficient to plead with particularity the allegations necessary to support a cause of action under this new doctrine.(95)
SEC Adoption of the Post-Publication Ratification Doctrine
At the present time, the most important development relative to the post-publication ratification doctrine has been the acceptance and recognition of the theory by the SEC.(96) On December 22, 1997, the SEC issued an Order pursuant to § 21c of the Securities Exchange Act of 1934 in the Presstek case.(97) Presstek is a Delaware corporation headquartered in New Hampshire where it develops graphic arts industry products and technology.(98) Primary sales revenue is generated by virtue of its relationship to Heidelberger Druckmaschinen A.G. (Heidelberg), which is a German printing press manufacturer.(99) Presstek sells certain printing press equipment and technology to Heidelberg which is then installed in the German manufacturer's own presses.(100) The end products are then sold commercially.(101)
In February 1997, Presstek had over fifteen million shares of outstanding common stock registered with the SEC and listed on the NASDAQ.(102) During the period between 1994-1996, Presstek issued a number of false or misleading statements concerning its sales and business projections as well as making widespread distribution of third party analysts' reports that similarly contained this false information.(103) Much of the misleading disclosures occurred in November 1995, this SEC action was taken as a result of the fact that a large number of investors had taken short positions in Presstek in anticipation that the company stock would fall in price when Presstek encountered business difficulties with its primary commercial partner, Heidelberg.(104) These anticipated technical difficulties centered on a particular press called the "Quickmaster," which is manufactured by Heidelberg and incorporated certain Presstek graphic arts technology and equipment items.(105) The Quickmaster prototype was introduced in 1995 and received much customer interest, however, by November of the same year it was determined that technical shortcomings would slow commercial production significantly.(106) Resulting shipments of Presstek technology and component parts to Heidelberg had to be seriously reduced for the year 1996.(107)
Recognizing the disastrous consequences that would be forthcoming in the market, Presstek sources unfortunately issued a press release on November 7, 1995, in which the company stated that "`industry sources'" had stated that Heidelberg had sold more than five hundred Quickmaster presses.(108) This particular statement was patently false, and the press release in no way disclosed the reality or the degree of technical problems experienced at that time with the development of the Quickmaster press and the resultant commercial production delays.(109) Not too surprisingly, on November 7th, the day of the press release, Presstek stock gained ten percent closing at a value increase of five dollars per share.(110)
Presstek also sells a laser imaging unit referred to as the "`Pearlsetter'" which uses what is referred to as a "'computer-to-plate' technology."(111) Presstek's founder and chairman, Robert Howard, also permitted false and misleading material information about projected Pearlsetter sales to be distributed to customers in late November 1995.(112) These public pronouncements essentially "adopted [earnings] projections which were materially inconsistent with its non public internal projections" and calculations.(113) Again, on November 27th, immediately following the release of a research analyst's report, Presstek stock gained an additional ten dollars per share.(114)
The actions by Presstek mentioned above are easily encompassed by the "entanglement theory" as set forth in the Liggett case. Unfortunately for Presstek, the company did not stop there. Presstek distributed thousands of copies of selected "editions of the Cabot Market Letter . . . during 1994 and early 1995."(115) Presstek was named Cabot's "`Stock of the Month'" in a number of these letters and several of them predicted 1995 first quarter share earnings and total earning forecasts that clearly exceeded Presstek's internal projections dramatically.(116) Despite the inconsistencies between the internal projections and those set forth in the Cabot News Letter, Chairman Howard ordered widespread dissemination of the Cabot letters via its internal mailing lists and for inclusion in the company's potential investor packet.(117) Presstek also had no pre-publication entanglement with the Cabot analysts in the preparation of the news letters that would prove to be misleading to the consuming public.(118)
The SEC had little trouble in finding that the misleading press releases and active involvement of Presstek in distributing misleading letters clearly came under the umbrella of the Liggett case.(119) The Commission then turned its attention to what it referred to as the "Post- Publication Adoption" theory as applied to those analyst reports disseminated by the company, such as the Cabot News Letter.(120) The agency stated, "[a]n issuer may also be liable for false statements contained in a third-party report if it adopts, expressly or impliedly, the statements after they are published, even if management had no role in preparing the reports."(121) The Commission went on to say that the actual adoption occurred at the point when the company conveyed the suggestion that the forecasts contained in the third party analysts report were accurate, or at a minimum, did not contradict internal projections.(122)
The Commission clearly distinguished the post-publication adoption of independent third party analysts' reports from pre-publication entanglement theory situations which required evidence of the company's involvement relative to the preparation of the report in question.(123) The SEC also was careful to state that the pre-publication entanglement and post-publication adoption liability theories have not been clearly distinguished in a number of judicial decisions, and further, that certain decisions have even suggested that pre-publication entanglement in the preparation of the report is necessary in order to hold an issuing firm liable for the false or misleading statements contained in the report.(124) Most importantly, though, the Commission, in carefully chosen language, sided with those courts acknowledging a distinction between these two theories.(125) The SEC order stated:
under certain circumstances an issuer that disseminates false third party reports may adopt the contents of those reports and be fully liable for the misstatements contained in them, even if it had no role whatsoever in the preparation of the report. If an issuer knows, or is reckless in not knowing, that the information it distributes is false or misleading, it cannot be insulated from liability because management was not actively involved in the preparation of that information.(126)
There can be little doubt that the SEC was acting to give Judge Aguilar's initial recognition of this theory more prominence in the judicial arena in the hope that the distinctions between the two theories would be further defined by additional court decisions.
Conclusion
With the RasterOps case clearly acknowledging the "post-ratification theory" pursuant to the Liggett case, at least three other cases have followed a similar rationale.(127) These opinions are increasingly articulate in differentiating the "entanglement doctrine" from the "post-ratification adoption doctrine" and clearly hold that re-circulated reports are comparable to a company expressing its "comfort" with an analyst's projections.(128) This practice has been commonplace, but has taken a new turn with the increased interest in re-publishing favorable reports. For now, the "post-publication ratification" doctrine holds that "liability rests on the company's implied representation that the analysts' forecasts are accurate."(129) The RasterOps line of cases must be watched carefully to balance the risk with the reward of this particular practice.
For start-up companies, the hazards are particularly acute, and attention should be paid to whether the independently prepared material is consistent with that which the company has generated internally. The RasterOps case line clearly demonstrates that investors will analyze information and compare it with actual entity performance on a quarter-by-quarter basis. Even one small dip or inconsistency may lead to a class action suit by the overly aggressive investor not content to give the market an opportunity to adjust or impact the per share price. Worse yet is the notion that such litigation may be planned even before the shares are purchased. Companies should heed the warnings signaled by the RasterOps case line and take care in not disseminating any independent analyst report unless it is both consistent as to the company's projections and the firm's policy on marketing its stock.
* Professor of Business Law, East Carolina University. LL.M. (Taxation), 1992, Georgetown University; J.D., 1981, Tulane University; M.P.A., M.S., 1974, B.A., 1973, Syracuse University.
1. See, e.g., In re Cypress Semiconductor Sec. Litig., 891 F. Supp. 1369 (N.D. Cal. 1995), aff'd sub nom. Eisenstadt v. Allen, 113 F.3d 1240 (9th Cir. 1997), full text available in No. 95-16255, 1997 WL 211313 (9th Cir. Apr. 28, 1997); Strassman v. Fresh Choice, Inc., No. C-95-20017 RPA, 1995 WL 743728 (N.D. Cal. Nov. 18, 1996); In re RasterOps Corp. Sec. Litigation, No. C-93-20349 RPA (EAI), 1994 WL 618970 (N.D. Cal. Oct. 31, 1994). All of these decisions were rendered by District Judge Aguilar.
2. See In re Cypress Semiconductor, 891 F. Supp. at 1377.
3. See id. at 1376-77; see also Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 162-64 (2d Cir. 1980). It has also been held that a defendant may become entangled with a "report prior to or after its publication." In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086, 1097 (N.D. Cal. 1994), aff'd, 95 F.3d 922 (9th Cir. 1996).
4. Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78(b), prohibits the use of mails or interstate commerce facilities for any "manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." Id. A 10(b) claim requires demonstration that a false statement or the failure to make a statement was made with scienter, that it was material, and that it caused damage. See Strassman, 1995 WL 743728, at *3-4.
7. See infra notes 14-17 and accompanying text.
8. See John C. Coffee, Jr., Disclosures to Analysts are Risky, Nat'l L.J., Feb. 1, 1993, at 20.
9. The SEC has been quick to validate the "post-publication ratification" adoption theory:
Presstek regularly distributed editions of the Cabot letters together with its own materials, knowing that the Cabot materials included forecasts of annual financial performance and earnings assumptions for a particular product that exceeded its own. Given that Presstek had deliberately declined to release its own projections or earnings assumptions, there was no corporate information in the market to compete with the inaccurate information in the Cabot report. Under these circumstances, investors would reasonably infer that Cabot's information bore Presstek's endorsement.In re Matter of Presstek, Inc., No. 3-9515, 1997 WL 784548 (S.E.C.), at *12 (Dec. 22, 1997).
10. 635 F.2d 156 (2d Cir. 1980); see also infra notes 14-26 and accompanying text.
11. See supra notes 1-4 and accompanying text.
12. See infra notes 31-95 and accompanying text; see also Presstek, 1997 WL 784548 (S.E.C.), at *9-10.
13. See infra notes 96-128 and accompanying text.
14. 635 F.2d 156 (2d Cir. 1980).
15. See id. at 159-62. The court noted that regardless of attendant risks, these "meetings and discussions with analysts serve an important function in collecting, evaluating and disseminating corporate information for public use." Id. at 165 (footnote omitted).
17. See id. at 160-62. The court noted that two "tips" emanated from the firm that were contra to internal downward projections. As the court stated, "[d]espite the company's outward appearance of strength, Liggett's management was less sanguine intramurally." Id. at 160.
18. See id. at 163. The court stated:
the possibility that management was indulging in Delphic pronouncements intended to give the false impression that all was well without stating any untrue facts. The misleading character of a statement is not changed by its vagueness or ambiguity. Liability may follow where management intentionally fosters a mistaken belief concerning a material fact, such as its evaluation of the company's progress and earnings prospects in the current year.Id. at 164 (footnote omitted).
21. See Liggett, 635 F.2d at 166-67. The company's salvation was the fact that it had maintained a corporate policy of not commenting on earnings projections that emanated from external sources. See id. at 164 & n.13.
23. Id. at 173. The absence of scienter with regard to one of the tips was an important factor in the court's conclusion. See id. at 167-68.
27. See In re Caere Corporate Sec. Litig., 837 F. Supp. 1054, 1059 (N.D. Cal. 1993); In re Verifone Sec. Litig., 784 F. Supp. 1471, 1487 (N.D. Cal. 1992).
28. See Liggett, 635 F.2d at 163.
31. Perhaps the most important passage from the Liggett case that would be used by Judge Aguilar to recognize the "post-publication ratification doctrine" as a theory separate and distinct from the "entanglement theory" provided:
We have no doubt that a company may so involve itself in the preparation of reports and projections by outsiders as to assume a duty to correct material errors in those projections. This may occur when officials of the company have, by their activity, made an implied representation that the information they have reviewed is true or at least in accordance with the company's.Id. (emphasis added).
32. No. C-93-20349 RPA (EAI), 1994 WL 618970 (N.D. Cal. Oct. 31, 1994); see also RasterOps Corp. Sec. Litig., [1994-95 Transfer Binder] Fed. Sec. L. Rep. (CCH) 98,467 (N.D. Cal. Oct. 31, 1994).
33. See RasterOps, 1994 WL 618970, at *1.
37. No. C-92-20349 RMW (EAI), 1993 WL 183510 (N.D. Cal. Jan. 6, 1993).
39. See RasterOps, 1994 WL 618970, at *3.
41. Id. at *3; see also Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1989); In re Syntex Sec. Litig., 855 F. Supp. 1086, 1097 (N.D. Cal. 1994), aff'd, 95 F.2d 922 (9th Cir. 1996).
42. See RasterOps, 1994 WL 618970, at *3.
46. 891 F. Supp. 1369 (N.D. Cal. 1995), aff'd sub nom. Eisenstadt v. Allen, 113 F.3d 1240 (9th Cir. 1997), full text available in No. 95-16255, 1997 WL 211313 (9th Cir. Apr. 28, 1997).
52. See Cypress Semiconductor, 891 F. Supp. at 1371.
58. See Cypress Semiconductor, 891 F. Supp. at 1372.
64. See Cypress Semiconductor, 891 F. Supp. at 1376.
67. Id. at 1376-77 (quoting Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980)). This liability would extend even to those quotes which were purported to have been made by a specific Cypress Semiconductor officer or director as opposed to establishing a direct link or tract to the quoted individual. See id.
68. See id. at 1377 (citing Seagate Tech. II Sec. Litig. [1994-1995 Tr. Binder] Fed. Sec. L. Rep. (CCH) Para. 98,530, at 91583 (N.D. Cal., Feb. 8, 1995); In re Syntex Corp. Sec. Litig., 855 F. Supp 1086, 1096-97 (N.D. Cal. 1994), aff'd, 93 F.3d 922 (9th Cir. 1996); In re Caere Corp. Sec. Litig., 837 F. Supp. 1054, 1059 (N.D. Cal. 1993); and Alfus v. Pyramid Tech. Corp. 764 F. Supp. 598, 603 (N.D. Cal. 1991)).
69. Cypress Semiconductor, 891 F. Supp. at 1377.
75. See Cypress Semiconductor, 891 F. Supp. at 1378.
81. Cypress Semiconductor, 891 F. Supp. at 1377-78.
82. 113 F.3d 1240 (9th Cir. 1997), full text available in No. 95-16255, 1997 WL 211313 (9th Cir. Apr. 28, 1997).
85. In re Presstek, Inc., No. 3-9515, 1997 WL 784548 (S.E.C.), at *9 (Dec. 22, 1997).
86. No. C-95-20017 RPA, 1995 WL 743728 (N.D. Cal. Dec. 7, 1995).
90. Id. at *12 (citation omitted).
91. Id. (quoting Plaintiffs' First Amended Complaint, at 45).
92. See Fresh Choice, 1995 WL 743728, at *12.
96. See supra note 85 and accompanying text.
97. In re Presstek, Inc., No. 3-9515, 1997 WL 784548 (S.E.C.), at *1 (Dec. 22, 1997).
102. See Presstek, 1997 WL 784548, at *1.
108. Presstek, 1997 WL 78458, at *2.
114. See Presstek, 1997 WL 784548, at *2.
119. See id. at *8-12. The SEC quoted verbatim the "`implied representation'" provision of the Liggett case. Id. at *9 (quoting Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980)); see also supra note 19.
120. Presstek, 1997 WL 784548, at *8-12.
122. See id. at *9 (citing In re Cypress Semiconductors Sec. litig., 891 F. Supp. 1369, 1377 (N.D. Cal. 1995), aff'd sub nom. Eisenstadt v. Allen, 113 F.3d 1240 (9th Cir. 1997), full text available in No. 95-16255, 1997 WL 211313 (9th Cir. Apr. 28, 1997)).
124. Id. at *10 (citing Eisenstadt, 1997 WL 211313, at *14).
126. Presstek, 1997 WL 784548, at *10.
127. See, e.g., Strassman v. Fresh Choice, Inc., No. 20017 RPA, 1995 WL 743728 (N.D. Cal. Dec. 7, 1995); In re Cypress Semiconductor Sec. Litig., 891 F. Supp. 1369 (N.D. Cal. 1995); Stack v. Lobo, No. 95-2049SW, 1995 WL 241448 (N.D. Cal. Apr. 20, 1995).
128. Strassman, 1995 WL 743728, at *11-12; Cypress Semiconductor, 891 F. Supp. at 1376-78; Stack, 1995 WL 241448, at *8-9.