13, 1995, in reliance upon defendants' August 8 announcement. Plaintiff further alleges that Turek's statements were materially false and misleading because: (1) shipments to Motorola were not "back on schedule"; (2) reduced orders from Motorola and other key customers were not "temporary"; and (3) Turek failed to state that M-Wave had reduced or intended to reduce its staff because of lower order and shipment volumes. Plaintiffs allege that defendants had knowledge of and/or were reckless in not knowing the falsity of the alleged material misstatements, and, as a result of their reliance on the statements, they acquired the stock at artificially inflated prices. Plaintiff further alleges that it was damaged by the reduction of the stock price resulting from the October 18 press release, which contradicted the statements on August 18.
On November 17, 1995, plaintiff filed this putative class action against defendants, alleging violations of Sections 10(b) and 20 (a) of the Securities Exchange Act of 1934. Defendants have moved to dismiss plaintiff's complaint for failure to state a claim.
Motions to dismiss that test the legal sufficiency of a complaint are granted when the plaintiff "can prove no set of facts entitling it to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). In reviewing a motion to dismiss, all facts alleged in the complaint and any inferences reasonably drawn therefrom must be viewed in the light most favorable to the plaintiff. Caldwell v. City of Elwood, 959 F.2d 670, 671 (7th Cir. 1992).
SEC Rule 10b-5, promulgated under section 10(b) of the Securities Exchange Act of 1934, prohibits the making of any untrue statement of material fact or the omission of a material fact that would render statements made misleading in connection with the purchase or sale of any security. 17 C.F.R. sect. 240.10b-5. To state a valid Rule 10b-5 claim, a plaintiff must allege that the defendant, (1) made a misstatement or omission, (2) of material fact, (3) with scienter, (4) in connection with the purchase or sale of securities, (5) upon which the plaintiff relied, and (6) that reliance proximately caused plaintiff's injuries. Stransky v. Cummins Engine Co., 51 F.3d 1329 (7th Cir. 1995). Defendants assert that plaintiff fails to allege a misstatement or omission of material fact, scienter, and proximate causation.
1. Misstatement or Omission of Material Fact
To establish liability under SEC Rule 10b(5), the plaintiff must prove that in connection with a securities transaction, the defendant either made a false statement of material fact or failed to make a statement of material fact, thereby rendering the statements that were in fact made misleading. Searls v. Glasser, 64 F.3d 1061, 1065 (7th Cir. 1995). Whether a statement is material depends on how it affects an investor's perception of the security. Id. If the court determines that there is a substantial likelihood that disclosure of the information would have been viewed by the reasonable investor to have significantly altered the total mix of information, the statement is material. Basic, Inc. v. Levinson, 485 U.S. 224, 231-232, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988). Projections and forecasts that are not the type subject to objective verification are rarely actionable under Rule 10b-5. Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1132 (7th Cir. 1993), cert. denied, U.S. , 127 L. Ed. 2d 78, 114 S. Ct. 883 (1994). A defendant providing an earnings projection, however, violates Rule 10b-5 where it "ignores facts seriously undermining the accuracy of the forecast." Marx v. Computer Sciences Corp., 507 F.2d 485, 490 (9th Cir. 1974).
Defendants argue that plaintiff has not alleged that they made a material misrepresentation or omission because the statements made were "merely opinions about the future" or "general predictions" that were not actionable misstatements. Defendants further assert that the alleged misstatements are not actionable because they lacked specificity.
The statement that forms the basis of plaintiff's securities fraud claim is as follows:
We previously announced that the lower order level from Motorola would have an impact on quarterly earnings . . . Temporary situations like this aren't uncommon, and shipments to Motorola are already back on schedule during the third quarter of 1995.