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United States District Court, Northern District of Illinois, Eastern Division

February 5, 2002


The opinion of the court was delivered by: Elaine E. Bucklo, United States District Judge.


Charles Grimes brings this Rule 10b-5 securities fraud class action against Navigant Consulting ("Navigant"), a consulting company in which he owns 1.8 million shares, about half a million of which were purchased in the class period.*fn1 The gravamen of his complaint is that, in 1999, Navigant defrauded investors by tailing to disclose that it had used an improper accounting method that inflated the value of its stock. Grimes sued in the District of Delaware on behalf of himself and the class of all persons who purchased Navigant stock between May 6, 1999, and January 24, 2000.*fn2 Navigant moved to transfer venue to this court, and Grimes concurred. Navigant moves to dismiss, and I grant the motion.


According to Grimes' complaint, which I accept as true for the purposes of this motion, Navigant acquired four companies in the first quarter of 1999, which transaction it accounted for by using a "pooling of interests" method of accounting (the "pooling method"). This method is intended for use in a situation where shareholders in two separate corporations that merge or otherwise combine become shareholders in the surviving firm. Certain conditions must be satisfied for the use of the pooling method to be proper, including that there be no "planned" transactions when one company acquires another, such as the subsequent reacquisition of the stock issued to effect the transaction. The SEC, in its Staff Accounting Bulletin No. 96 of March 19, 1996, established a presumption that stock issued within six months of the original transaction is part of the plan of acquisition. Several executives of Navigant were involved in such transactions in July and August 1999, including vice president of corporate development Stephen J. Denari, general counsel and secretary Charles Demirjian, and chairman and CEO Robert Maher. For example, on July 2, 1999, Denari used a note to purchase almost $10 million of Navigant stock from a shareholder of one of the entities Navigant had acquired; in August, that note was repaid with a $10 million loan that Maher took out from Navigant, representing this falsely as a loan to acquire real estate. Maher himself paid back the loan by surrendering about a half million Navigant shares to the company.

Meanwhile, Navigant had been touting its "record results" for the first quarter of 1999 in press releases and 10Q filings with the SEC, and was rated highly by analysts, Grimes says, in part because of its use of the pooling method. In August 1999, after the transactions that made the pooling method inappropriate, Navigant made similar statements about its second quarter performance to the press and the SEC. Its stock quintupled in value from about $11 a share at the time of the IPO to a high of $54 a share.

But in October, the Center for Financial Research and Analysis and Barrons (October 25, 1999) published articles raising questions about Navigant's accounting methods. Navigant stock dropped from about $40 a share on October 20 to about $24 a share on October 26. On November 3, 1999, Navigant announced "record" results for the third quarter, and made similar statements in its 10Q filing of November 16. On November 22, 1999, Navigant reported that Maher had "resigned under pressure," and that Denari and Demirjian had been fired after the Directors found that they had engaged in inappropriate transactions. Although Navigant continued to deny that there was any problem with its use of the pooling method, it announced that outside auditors were reviewing its propriety. In its motion to dismiss, Navigant asks me to consider the fact that the press release of November 22, 1999, stated that:*fn3

[i]f any of the business combinations were to be recharacterized as purchases rather than poolings of interests, such change would not have any material impact on the company's cash flows or "cash earnings' during or after fiscal 1999. The effect on the company's reported net income in prior quarters would depend upon the significance of the affected transactions.

On November 23, Navigant stock dropped by half, to $13.50 a share on the NYSE.

Mr. Grimes began purchasing Navigant shares on November 26, 1999. He states that he relied upon Navigant's statements that (1) the pooling method had been properly used as well as that (2) any change in accounting methods would not affect cash earnings in fiscal 1999 or after. In a press release of January 24, 2000, the Directors announced that they had instructed management to restate financial statements to account for the acquisitions as purchases rather than poolings.

On Monday, January 24, Navigant's stock closed, at 11.3125, up from its close on Friday, January 20, 2000, at 9.9375, trading at three times the volume as well. It continued to trade at over 11.3 through at least January 26, 2000. In addition, in his own certification statement, Grimes says that on January 24, 2000, he bought 113,500 shares of Navigant at 10.39, up from the 9.211 per share he paid on December 14, 1999, and indeed up from anything he had paid for Navigant stock over the previous 45 days.*fn4


On a motion to dismiss for failure to state a claim upon which relief can be granted under Fed.R.Civ.P. 12(b)(6), I accept all well-pleaded factual allegations in the complaint as true and draw all inferences in favor of the plaintiff. Henderson v. Sheahan, 196 F.3d 839, 845 (7th Cir. 1999). Dismissal is only appropriate where it appears beyond doubt that the plaintiff can prove no set of facts to support his claim. Id. at 846. To show a violation of Rule 10b-5 of the Securities Exchange Act, 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5, the plaintiff must demonstrate that: "(1) the defendant made a false statement or omission (2) of material fact (3) with scienter (4) in connection with the purchase or sale of securities (5) upon which the plaintiff justifiably relied (6) and that the false statement proximately caused the plaintiff's damages." Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d 645, 648 (7th Cir. 1997).


Navigant argues that Grimes has failed to comply with the heightened pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78j(b), 78u-4(b)(2); 17 C.F.R. § 240.10b-5, that a plaintiff must plead scienter by alleging facts giving rise to strong inference of recklessness. The complaint "shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4 (b)(1); in addition, to allege scienter sufficiently, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." § 78u-4(b)(2).

In his complaint, Grimes claims that Navigant:

(1) materially misrepresented its financial condition by making false and misleading financial statements;

(2) failed to disclose in a timely way the fact that it had made loans to Maher and other members of the old management team, and the circumstances surrounding those loans, and that Maher had repaid his loan with stock rather than cash;

(3) failed to disclose that throughout 1999 it had improperly utilized the "pooling method" of accounting in connection with certain acquisitions that it had made in the first quarter of that year.

Navigant contends, first, that Grimes pleaded no facts showing that Navigant's new management team was cognizant that the pooling method was inappropriate, and therefore had motive or opportunity. However, Navigant, not the new management team, is the defendant. Navigant also says that it would have been irrational to have made the disclosures about the shady deals that are part of the evidence for fraud. However, Barron's blowing the whistle on Navigant's dubious accounting practices in October 1999 reasonably explains the content and timing of the November 22 press release. Next, Navigant argues that Grimes has not pleaded facts showing that Navigant's prior period financial statements were knowingly false when issued. But, according to the complaint, Maher's management team engaged in a series of doubtful stock acquisitions paid for by shady loans announced under false pretenses, and repaid with remissions of Navigant's own stock, all within the time period that ruled out the use of the pooling method. The misconduct apparently was bad enough that Maher's management team had to be fired, and that could create an inference of knowledge. Finally, Navigant argues that the facts as pleaded do not show that it improperly accounted for the transactions at issue during the first two quarters of 1999, because the events that made that method inappropriate occurred only later, in the third quarter of 1999. However, the supposed subsequent wrongful transactions could give rise to an inference that they were part of the plan of acquisition, and if they were, then the earlier transactions would not be innocent in view of the later ones. Moreover, this argument does not rebut Grimes' charge that Navigant committed securities fraud in the third quarter.

With regard to (3), Grimes' allegations about the improper use of the pooling method, the pleading requirements are satisfied. This is not the case, however, with (1). It is not clear from the complaint precisely what the false statements or suppressions were, apart from those connected with the improper accounting method, or just how Navigant materially misrepresented its financial position beyond saying that it could use the pooling method and was doing well. I conclude that (1) says no more than (3), and there is no additional factual basis alleged under or on the basis of which Grimes could sue for anything additional.

Grimes may not sue on any matter relating to (2), the lies and coverups that he alleges were involved with the loan to Maher. Grimes' own class certification statement reveals that his purchases of Navigant stock in the class period began on November 26, 1999, and he states in his complaint that Navigant had disclosed the facts about the questionable loans no later than November 22, 1999. Once the relevant information has been disclosed, there is no fraud, and, as a matter of law Grimes may not sue on frauds alleged to to have been disclosed days before he bought the stock, and after the market had absorbed the information, here, by cutting the value of the stocks by about half before Grimes bought them. The loss in value of Grimes' Navigant shares between November 26, 1999, and January 24, 2000*fn5 cannot be attributed to misconduct that was already disclosed and which the market had already taken into account. All that remains are the misrepresentations Grimes alleges around the pooling method.


The central issue is the materiality of those misrepresentations. Whether a statement is material "depends on how it affects an investor's perception of the security. 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." Searls v. Glasser, 64 F.3d 1061, 1065-1066 (7th Cir. 1995) (citing Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)). The issue is whether there is a "substantial likelihood that a reasonable shareholder would consider (them) important . . ." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). Materiality is normally a "contextual, fact-specific . . . inquiry." Stransky v. Cummins Engine Co., Inc., 51 F.3d 1329, 1333 (7th Cir. 1995), and so materiality "is typically an issue to be resolved by the finder of fact." Id. (citing TSC Indus., 426 U.S. at 450).

Navigant argues that the purported misrepresentations charged here are immaterial as a matter of law because they did not affect the price of Navigant shares when they were fully disclosed on January 24, 2000. Navigant refers me to Third Circuit law, under which a disclosure that does not move the market is not material as a matter of law.*fn6 I conclude that this argument is correct.

The theory underlying this rule implicates the efficient market hypothesis, according to which, in a properly operating market, "information important to reasonable investors . . . is immediately incorporated into the stock price." Oran v. Stafford, 226 F.3d 275, 282 (3d Cir. 2000):

As a result, when a stock is traded in an efficient market, the materiality of disclosed information may be measured post hoc by looking to the movement, in the period immediately following disclosure, of the price of the firm's stock. . . . If a company's disclosure of information has no effect on stock prices, "it follows that the information disclosed . . . was immaterial as a matter of law.

Id. Navigant argues that the misinformation about its financial situation and its improper use of the pooling method must have been immaterial, because its stock rose rather than fell, after January 24, 2000, when it issued the press release stating that its financial statements would be changed to reflect the acquisitions as purchases. It asks me to take judicial notice of the stock prices, which it offers in an appendix, and is derived from Yahoo! Finance (Historical Quotes). See (accessed Sept. 25, 2001) (entered date range and ticker symbol).

I may take judicial notice of an "adjudicative fact that is both `not subject to reasonable dispute' and either 1) `generally known within the territorial jurisdiction of the trial court' or 2) `capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.'" General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1081 (7th Cir. 1997) (citing Fed.R.Evid. 201(b)); see also Hennessy v. Penril Datacomm Networks, Inc., 69 F.3d 1344, 1354 (7th Cir. 1995) ("In order for a fact to be judicially noticed, indisputability is a prerequisite."). Although great caution is called for in deciding to take judicial notice, published stock quotes fall into the second category, as indisputable facts derived from sources the accuracy of which cannot reasonably be questioned. The Second Circuit has held that "the district court may take judicial notice of well-publicized stock prices without converting the motion to dismiss into a motion for summary judgment." Ganino v. Citizens Utilities Co., 228 F.3d 154, 167 n. 8 (2d Cir. 2000). Citing Wright and Miller, the Seventh Circuit has stated that I may take judicial notice of the following without converting a motion to dismiss to a summary judgment notion: "`matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint.'" General Elec. Capital Corp., 128 F.3d at 1080 to 128 F.3d 1074, 1081 (7th Cir. 1997) (citing 5A Wright & Miller, Fed. Prac. & Proc. § 1357, at 299 (2d ed. 1990)).

The list of historical stock quotations is not a matter of public record, but it is an item appearing in the record of the case, here in Navigant's Appendix. Moreover, the Seventh Circuit has cited with approval a Second Circuit case stating that "[i]n determining the adequacy of a claim under Rule 12(b)(6), consideration is limited to the facts stated on the face of the complaint . . . and to matters of which judicial notice may be taken." Henson v. CSC Credit Servs., 29 F.3d 280, 284 (7th Cir. 1994) citing Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991)). Like several other courts in this District, therefore, I conclude that published stock prices are among those matters, at least if they are in the record before me. See FMC Corp. v. Boesky, 727 F. Supp. 1182, 1196 n. 17 (N.D. Ill. 1989) (Williams, J.) ("[I] may take judicial notice of stock prices pursuant to Federal Rule of Evidence 201(f) when ruling on this [rule 12(b)(6)] motion."); see also LaSalle v. Medco Research, Inc., No. 93 C 5381, 1994 WL 535106, at *10 (N.D. Ill. Sept. 30, 1994), rev'd on other grounds by 54 F.3d 443 (7th Cir. 1995); In re Healthcare Compare Corp. Sec. Litig., No. 93 C 1970, 1993 WL 616683, at *13 (N.D. Ill. Nov. 19, 1993) (Bobrick, M.J.).*fn7 Alternatively, in Grimes' certification statement, attached to his complaint, he lists the prices he paid for the stock at issue in the period in question. As explained in note 3 above, this is a judicial admission.

Either way I take into account the stock prices before and after Navigant's announcement of January 24, 2000, they did not fall but rose when Navigant disclosed its accounting errors. Under the Third Circuit "move the market" rule, that means that any misrepresentations or omissions pertaining to the improper use of the pooling method were immaterial as a matter of law. Thus, even if the disclosures in November, 1999 were imperfect, the failure to disclose was immaterial as a matter of law.


Navigant's motion to dismiss is granted.


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