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SCHWARTZ v. SYSTEM SOFTWARE ASSOCS.

February 12, 1993

LYNNE A. SCHWARTZ, Plaintiff,
v.
SYSTEM SOFTWARE ASSOCIATES, INC., ROGER E. COVEY, AND DAVID L. HARBERT, Defendant.



The opinion of the court was delivered by: BRIAN BARNETT DUFF

MEMORANDUM OPINION

 This case comes before the court on Defendants' motion for summary judgment. Defendants argue that Plaintiff has not put forth any evidence to support her claim of "fraud on the market," and that merely asserting that the Defendants' affidavits are not credible is insufficient to withstand a summary judgment motion. Plaintiff, in turn, asserts that the Defendants' own written internal profit forecasts demonstrate that the public announcement at issue here was deliberately false and misleading. For the reasons discussed below, Defendants' motion for summary judgment is granted in part and denied in part. Furthermore, the court sua sponte dismisses Plaintiff's common law fraud claim.

 BACKGROUND

 Defendant System Software Associates, Inc. ("SSA") develops and sells computer software to companies around the world. Its common stock is publicly traded on the NASDAQ National Market System, where it is followed and rated by a number of different security analysts. *fn1"

 In November of 1990, SSA adopted a budget for fiscal year 1991 in which it set earnings goals of $ .39/share in the first quarter and $ 2.55 for the entire fiscal year. On numerous occasions during the first quarter of fiscal 1991 (November 1, 1990 - January 31, 1991), Defendant Covey, SSA president and chairman of the board, prepared computerized profit "forecasts" for both the quarter and year. SSA acknowledges that such forecasts were prepared on 1/2/91, 1/26/91, 1/27/91, and 1/28/91. While SSA asserts that these forecasts were strictly for internal usage, Plaintiff astutely notes that SSA must have been relying on some forecast when it advised the market about SSA's earnings estimates. *fn2"

 According to SSA, the "forecasts" prepared on 1/2/91 and 1/27/91 were not really forecasts, but rather "what if simulations" based upon hypothetical assumptions about revenues and expenses. In contrast, the "forecasts" prepared on 1/26/91 and 1/28/91 are purported by SSA to be predictions of actual quarterly and annual results. Although Covey's affidavit supports SSA's distinction between the purported "simulations" and the purported "real forecasts", Plaintiff notes that the "simulations" are not labelled "simulations." Rather, like the purported "real forecasts," the "simulations" are labelled "forecast" and have the same format as the "real forecasts". Furthermore, the simulations were prepared using sales numbers from the field (as were the "real forecasts"), and were distributed in the same manner as the "real forecasts". In fact, the 1/2/91 "simulation" was prepared based upon the 12/28/90 best estimates of "most likely" sales figures from the field.

 The alleged distinction between the "real forecasts" and the "simulations" is important because of the different profit predictions contained in these forecasts. The 1/2/91 and 1/27/91 "simulations" predicted first quarter profits of $ 0.25 and $ 0.29 per share respectively; the 1/26/91 and 1/28/91 "real forecasts" predicted first quarter profits of $ 0.34 and $ 0.35 per share respectively.

 On January 14, 1991, Scott Smith, a stock analyst at Donaldson, Lufkin & Jenrette who followed SSA, downgraded his rating of SSA's common stock from "neutral" to "unattractive." After Smith's downgrade, the trading price of SSA's common stock on January 14, 1991 dropped from its opening price of 28 to a closing price of 26 1/2.

 As a result, a Dow Jones reporter called Defendant Harbert, who was then SSA's chief financial officer, to inquire about the stock price decline. Based upon that telephone conversation, an article appeared on the Dow Jones news wire on January 14, 1991, in which it was reported that "Harbert says there isn't any internal development to account for the stock's decline." Furthermore, reported the article, "Harbert says the company is comfortable with the middle of the Street range of fiscal 1991 earnings estimates, which he places at about $ 1.85 to $ 1.90 a share. He notes estimates range from $ 1.70 to about $ 2 a share." (Dow Jones Article dated January 14, 1991). This announcement halted the drop in the stock price and was a prelude to a sharp climb in the weeks that followed.

 At the time Harbert made his statement to the Dow Jones reporter, he was aware of all key developments within SSA relating to SSA's outlook for the fiscal year 1991 and its first quarter as a result of his position at SSA.

 On February 19, 1991, SSA released its results for the first quarter of fiscal 1991 -- earnings per share of $ .31. This figure included a $ 0.09 per share non-recurring item attributable to a change in SSA's commission structure. The actual earnings per share were therefore $ .22, only slightly below the $ .25/share predicted in the 1/2/91 "simulation", but significantly below the purported "real forecast" on 1/26/91 and 1/28/91. SSA adopted the change in commission structure on January 4, 1991, but the impact of the change was not calculated until just before SSA's quarterly results were released on February 19, 1991. In that quarterly report, SSA also stated that it expected to have a weak second quarter. SSA's stock plunged 30% in two days after the release of these results.

 Plaintiff subsequently brought this action in which she argues that while Harbert's January 14 statements had the desired effect (stopping the January 14, 1991 price drop), they ultimately defrauded persons who purchased SSA stock between January 14, 1991 and February 19, 1991. In particular, Plaintiff alleges as follows:

 
"Each Defendant knew or recklessly disregarded the fact that the acts and practices, misleading statements, and omissions particularized herein would adversely affect the integrity of the market of System Software common stock, and artificially inflate the price of such securities . . . Defendants Covey and Harbert . . . by reason of their management positions and, as to Defendant Covey, his ownership of a sizeable number of shares in System Software and ...

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