The opinion of the court was delivered by: Judge James B. Zagel
MEMORANDUM OPINION AND ORDER
This is a securities fraud class action. Defendants Corn Products International, Inc. ("Corn Products") and Samuel C. Scott ("Scott") seek dismissal of the complaint for failure to meet the heightened pleading requirements that apply in such cases. See Makor Issues & Rights, Ltd. v. Tellabs, Inc. 437 F.3d 588 (7th Cir. 2006). For the purpose of this motion, the facts are not complicated and the claims are not based on arcane principles of corporate governance or accounting.
Corn Products refines corn (by grinding and milling it) into various products, such as high-fructose corn syrup, corn syrup and dextrose, which it sells to companies for use in the manufacture of products including candy, chewing gum, soft drinks and other foods. Corn is the largest raw material cost. Other significant costs include energy to run the mills, storage and shipping. Corn Products hedges against the risk of upward fluctuations in the cost of corn so its future costs are known well in advance. It also knows in advance the price it will get for high-fructose corn syrup (one of its principal sweetener products) because in the first quarter of each year it usually negotiates the price its United States customers will pay for the year ahead. Canadian customers negotiate prices earlier in the fall.
Almost all high-fructose corn syrup is made in this country by four large companies in the Midwest; their products are essentially fungible. All of the companies in this business make a substantial capital investment in refining equipment. Law prohibits the producers from agreeing amongst themselves to set a minimum price, so competition is stiff. Presumably the lowest-cost producer offers the best price and the other producers have to meet it and live with their higher costs (and lower profit margins).
The fall 2004 hedging against the cost of corn did not work well for Corn Products in 2005. Corn prices had fallen by the time the U.S. prices were to be set and customers wanted prices that reflected the price of corn at the time of the negotiations. Other things went wrong as well. The company had produced a large amount of product in the last quarter of 2004 and had to pay to store the large amount of excess product. There were also manufacturing failures at its largest U.S. plant in January 2005. All of these circumstances were considerably worse for Corn Products during the early months of 2005 than they had been in prior, comparable periods.
Defendants do not challenge the basis of these assertions.*fn1
Nor do they appear to challenge the proposition that the highest level of management knew of these problems. The challenge to the complaint is based, mostly, upon contentions that Corn Products' statements to the market about its financial status are not actionable under the securities law. Corn Products argues that the alleged fraudulent assertions are not misleading because the statements: (1) were directed to the projected performance for the entire 2005 year, while the problems were only first quarter 2005 problems; (2) constituted mere puffing; and (3) were forward-looking statements protected by a safe harbor in the law. Defendants also argue that the allegations of loss causation are inadequate.
Cases like these turn on what the company told the public. On January 25, 2005, Corn Products issued a press release saying: "Corn Products International expects to see continued improvement over its 2004 performance . . . ." In the conference call with analysts that usually follows such releases the company said:
We are again not in a position to advise a quantified outlook for 2005. However, we can provide some directional comments about what we expect will be another solid year of EPS growth. In North America, we look forward to another improving year . . . . Clearly, we have higher energy costs to contend with on the cost side . . . we [are] not ready yet to quantify 2005. We expect after a very good 2004, to deliver an even-better 2005.
It Corn Products' practice to prepare "monthly books" for its executives, including the CEO (a defendant here) and the CFO. These reports contained financial results and other information that company officers discussed during a meeting the second week of each month. After the February officers' meeting the company released another statement. This February 22, 2005 press release said:
[Corn Products] today stated that it has substantially completed contracting for its U.S. business. The Company expects that its U.S. sweetener prices will increase in the low-single-digit range in 2005. We believe that the price increase will be sufficient to offset higher energy costs in the U.S. business. As a result, the Company expects its U.S. business to see improving operating margins in 2005 and to have another year of improvement on its return on capital.
The company had a policy of not offering quarterly guidance to the public or the analysts, so this statement included no predictions about the first quarter of 2005. The statement did not refer to the bad hedge on corn prices, the manufacturing problems or the unusually high freight and storage costs.
On April 5, 2005, Corn Products issued another, much darker, press release. It said:
[Corn Products] expects first-quarter diluted earnings per share (EPS) to decline 35 percent to 40 percent from the first quarter of 2004, due primarily to a combination of three factors that affected the ...