Backman v. Polaroid Corp.

Bownes, Circuit Judge, and Alrich and Gibson,*fn* Senior Circuit Judges.*fn**

BOWNES, Circuit Judge.

This is an appeal from a judgment entered on a jury verdict in favor of plaintiff classes against Polaroid Corporation ("Polaroid"). The class action was brought by certain stockholders of Polaroid and holders of call options on Polaroid stock alleging that the market price of Polaroid securities was artificially inflated during the period January 11, 1979 through February 22, 1979 as a result of Polaroid's violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Specifically, plaintiffs claim that Polaroid breached a duty to disclose adverse, material information concerning sales difficulties with Polavision, Polaroid's instant motion picture system. After a bifurcated trial, the jury returned a verdict against Polaroid in the liability phase, and found an inflation factor of $9.75 per share in the damages phase. The trial judge denied the plaintiffs' motion for prejudgment interest and entered judgment on the verdict. Polaroid now appeals from the jury's determinations as to liability and damages, claiming various errors in the jury instructions and insufficient evidence to support the verdict. Plaintiffs appeal from the denial of prejudgment interest.

I. FACTS AND PROCEDURAL HISTORY

Polaroid is a manufacturer of instant photographic and light polarizing products based in Cambridge, Massachusetts, with international sales that exceeded $1.3 billion in 1978. In the spring of 1978, Polaroid began national sales of its much-heralded instant motion picture system, Polavision. Polaroid introduced Polavision with a multi-million dollar advertising campaign in March, 1978, and as of that time, projected worldwide sales of 200,000 units in 1978.

The facts that form the heart of this dispute began with the issuance of Polaroid's Third Quarter Report to Stockholders on November 5, 1978. The bulk of that report spoke in glowing terms of the successful year Polaroid was having in 1978. Fueled by instant camera and film sales, Polaroid was posting record earnings in 1978, and its Third Quarter Report emphasized Polaroid's booming sales and record manufacturing output. Three brief statements in this report, however, indicated difficulties in Polavision sales. These statements acknowledged that Polaroid's cost of sales had increased, in part, due to "substantial expenses associated with Polavision."

These "substantial expenses" resulted from Polavision sales that were well below initial projections. The lower than expected sales caused Polaroid, in October, 1978, to instruct its Austrian supplier, Eumig, first to reduce its production of Polavision units, and then in November, 1978, to cease production entirely, at least until excess inventory was depleted. Polaroid also requested that Eumig keep information about the production cut secret from the public.

The effect of these low Polavision sales on earnings began to be quantified, albeit tentatively, as early as December, 1978. On December 4, 1978, an internal Polaroid reporting document entitled Forecast 11 was circulated to the Management Executive Committee. The report was based on 10 months actual sales and a forecast for November and December. In Forecast 11, the Polavision sales projection for 1978 dropped to 97,000 units, down from 100,000 projected in October and the 200,000 projected in February. Also, the preliminary earnings estimate for the fourth quarter was calculated to be $1.37 per share, lower than most market analysts were predicting.

The next internal report, Forecast 12, was circulated on January 15, 1979. Forecast 12 was based on 11 months actual sales and an estimate for December, 1978 that was calculated, in part, from early December results. Its preliminary earnings calculation estimated fourth quarter earnings to have been $1.31 per share, one cent less than the final, audited figure of $1.32 per share ultimately calculated. Forecast 12 also reflected the need to take an additional reserve for Polavision expenses in the fourth quarter. A $6.8 million reserve was taken on February 1.

At approximately the same time as these events were occurring, the Rowland Foundation, a charitable organization run by Dr. Edwin Land, Polaroid's founder, decided to sell 300,000 shares of Polaroid stock. A draft press release announcing the sale was given to Richard DeLima, Polaroid's in-house general counsel, on the morning of January 9 by Julius Silver, a Polaroid vice-president and director who also acted as attorney for the Rowland Foundation. The press release, printed on Rowland Foundation stationery, was issued by Polaroid's public relations department in the late afternoon of January 9. The release announced as one of the reasons for the sale the desire to diversify the Foundation's assets and free up funds for new pursuits. It also mentioned the impending retirement of Dr. Land as Chairman and Chief Executive Officer of Polaroid. The sale of stock took place on January 11, at a price of $52 per share, for a total of $16 million.

Approximately five weeks later, after the close of the market on February 22, 1979, Polaroid issued a press release announcing its 1978 earnings. The release reported a 26% earnings gain for all of 1978, and earnings per share of $1.32 in the fourth quarter. Concerning Polavision, the press release announced:

The Company's 1978 record earnings were achieved notwithstanding manufacturing costs and marketing expenses substantially in excess of revenues from the Polavision program. This program is expected to continue to make significant demands on cash and earnings in 1979.1

The market reaction to this release was quite pronounced. Between February 22 and March 1, the price of Polaroid's common stock dropped from $49.625 to $39.875, a difference of $9.75. It then stabilized at this level.

The named plaintiffs represent two certified classes of persons who purchased (1) Polaroid common stock or (2) call options on Polaroid common stock during the period January 11, 1979 through February 22, 1979 (the "Class Period"), and who held such securities as of the close of trading on February 22, 1979. Plaintiffs allege that the market price of Polaroid securities was artificially inflated during the class period as a result of Polaroid's violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.2 Specifically, plaintiffs claim that Polaroid knowingly or recklessly breached a duty to disclose adverse material facts concerning sales difficulties with Polavision; that Polaroid's failure to disclose these facts artificially inflated the price of Polaroid securities; and that plaintiffs, having relied on Polaroid's conduct, consequently suffered damages when the information eventually was released and resulted in a sharp decline in the price of Polaroid's securities.

Plaintiffs base their allegations on several grounds. First, plaintiffs claim that Polaroid's Third Quarter Report was misleading because Polaroid buried an extremely brief mention of "substantial" Polavision expenses within an otherwise glowing summary of 1978 earnings to date. Plaintiffs argue that this de-emphasis of Polavision difficulties was misleading, and triggered a duty to disclose adverse facts. Second, plaintiffs allege that Polaroid's November instructions to its Austrian supplier to cease Polavision production as well as Polaroid's reasonably certain preliminary calculations of lower than expected fourth quarter earnings (Forecasts 11 and 12) constituted adverse material facts that Polaroid was under a duty to disclose to prevent its Third Quarter Report from being misleading. Finally, plaintiffs claim that Polaroid was intricately involved with the press release announcing the Rowland Foundation's sale of stock, and that it was materially misleading for Polaroid not to include in that press release some mention of the difficulties with Polavision, when reasonable investors would be trying to assess such a large sale of stock for any implications it might reveal about Polaroid's financial health. Plaintiffs argue that this conduct on the part of Polaroid constituted a knowing or reckless breach of a duty to disclose material adverse facts that resulted in harm to the plaintiffs when the adverse information became known and triggered a sharp decline in the price of Polaroid securities.

Polaroid responds to the plaintiffs' allegations by arguing, first, that it never uttered any misleading statements or engaged in any other conduct that would trigger a duty to disclose. Second, if there was a duty to disclose, Polaroid claims that it did not breach this duty with scienter. Finally, Polaroid argues that extensive press coverage of the potential for difficulties in Polavision sales rendered any information that Polaroid may have withheld immaterial. For these reasons, Polaroid claims that plaintiffs have failed to prove the essential elements of securities fraud.

At the liability phase of the bifurcated trial, Polaroid moved for a directed verdict after the close of plaintiffs' presentation. This motion was denied. The jury returned a verdict in favor of the plaintiffs and answered special interrogatories finding that Polaroid had knowingly or recklessly breached a duty to disclose material adverse facts known to it prior to January 11, 1979, and that plaintiffs had suffered a loss causally related to Polaroid's conduct. After the trial on damages, the jury found that for each day of the class period, the price of Polaroid common stock was inflated by $9.75 above its true value. The trial judge denied plaintiffs' post-trial motion for prejudgment interest and entered judgment accordingly. The trial judge also subsequently denied Polaroid's motions for judgment n.o.v. or, alternatively, for a new trial.

Polaroid now appeals from the jury's verdict on liability and damages, claiming that the trial judge committed reversible error in his instructions to the jury on each of the legal elements of securities fraud, and that there was insufficient evidence as a matter of law to support the jury's verdict.3 The plaintiffs cross-appeal the trial judge's denial of their motion for prejudgment interest.

For purposes of clarity in our discussion, we organize our consideration of these issues according to the legal elements of securities fraud, discussing first the correctness of each jury instruction and then the sufficiency of the evidence. For the reasons discussed below, we vacate the judgment and remand for a new trial.

II. DUTY TO DISCLOSE

A. Jury Instruction.

Polaroid's first challenge is to the trial judge's instruction to the jury on the duty to disclose. Polaroid argues that it cannot be held liable for the withholding of material information absent a finding that it had a duty to disclose such information. Polaroid contends that the inquiry into the existence of any duty to disclose must be kept distinct from the inquiry into the materiality of any information that may have been withheld. Phrased another way, duty to disclose and materiality are distinct elements of any claim of securities fraud, and must not be equated.

Polaroid contends that the trial judge committed reversible error by equating the elements of duty to disclose and materiality in his instruction to the jury. In reviewing this instruction, we must keep in mind that:

'As long as the judge's instruction properly apprises the jury of the applicable law, failure to give the exact instruction requested does not prejudice the objecting party . . . On appeal, the charge must be examined as a whole; portions of it are not to be treated in isolation.'

Mello v. K-Mart Corp., 792 F.2d 1228, 1234 (1st Cir. 1986) (quoting Service Merchandise Co. v. Boyd Corp., 722 F.2d 945, 950 (1st Cir. 1983)); see also Joia v. Jo-Ja Service Corp., 817 F.2d 908, 912 (1st Cir. 1987), cert. denied, 484 U.S. 1008 (1988); Almonte v. Nat'l Union Fire Ins. Co., 787 F.2d 763, 767 (1st Cir. 1986).

Our review of the judge's instruction, examined as a whole, compels a finding that it was erroneous. We acknowledge that at the beginning of his instruction on the elements of securities fraud, the judge appeared to treat the duty to disclose as a distinct inquiry. Thus, he instructed the jury that:

If the failure to disclose a material fact when there was a duty to disclose it is accompanied by an intention to defraud or is characterized by recklessly disregarding a known risk of misleading the security-purchasing public, then a cause of action has been stated. (emphasis added).

He also instructed the jury that: "You have to determine in this case whether there was a duty to disclose a material fact on the part of Polaroid Corporation prior to January 11, 1979."

In the later portions of his instruction, however, the trial judge blurred beyond recognition any distinction between materiality and the duty to disclose. For example, he instructed the jury that if Polaroid possessed material facts, then "good faith" could call upon Polaroid to make a disclosure. Specifically, he stated:

You have to determine whether there were facts which were known by Polaroid which Polaroid should have recognized would affect the risk of persons about to purchase stock or options to buy stock. You have to decide whether that knowledge would affect the risk to the extent that good faith then called upon Polaroid to make a disclosure. (emphasis added).

More significantly, in his explanation of a special interrogatory on the existence of a duty to disclose, the trial judge instructed the jury that if Polaroid possessed material facts, "then you may find that there was a duty to disclose." He stated:

Secondly, did Polaroid have a duty to disclose those facts? And I've said to you -- and one of these questions is a tiny bit redundant -- that if those facts were material, if they were of importance to investors in determining whether to buy or to sell, then you may find that there was a duty to disclose.

By equating materiality with the duty to disclose, the trial judge's instruction to the jury contravened the accepted principle that materiality and duty to disclose are distinct elements of any allegation of securities fraud. In Roeder v. Alpha Industries, Inc., 814 F.2d 22, 26 (1st Cir. 1987), we stated explicitly that:

The materiality of the information claimed not to have been disclosed, however, is not enough to make out a sustainable claim of securities fraud. Even if information is material, there is no liability under Rule 10b-5 unless there was a duty to disclose it.

Thus, there is no affirmative duty to disclose material information just because it is material to an investor; other events must trigger a duty to disclose before there can be liability for the withholding of material facts. See id. at 27; see also Basic, Inc. v. Levinson, 108 S. Ct. 978, 987 n.17 ("Silence, absent a duty to disclose, is not misleading under Rule 10b-5."); Chiarella v. United States, 445 U.S. 222, 235 (1980); Starkman v. Marathon Oil Co., 772 F.2d 231, 238 (6th Cir. 1985) ("[The] established view is that a 'duty to speak' must exist before the disclosure of material facts is required under Rule 10b-5."), cert. denied, 475 U.S. 1015 (1986); Staffin v. Greenberg, 672 F.2d 1196, 1202 (3d Cir. 1982). We find that the judge's instruction to the jury, considered as a whole, erroneously equated the duty to disclose with materiality. This error prevented the jury from properly inquiring into the existence of a duty to disclose, an essential and distinct element of any securities fraud claim.

Most likely as a result of his equating materiality with the duty to disclose, the judge also failed to instruct the jury as to what set of facts would trigger a duty to disclose on the part of Polaroid. In Roeder, we identified three situations that could trigger a duty to disclose: 1) when a "corporate insider trades on confidential information," 2) when a corporation has made "inaccurate, incomplete, or misleading prior disclosures," and 3) when a statute or regulation requires disclosure. Roeder v. Alpha Industries, Inc., 814 F.2d at 26-27; see also Staffin v. Greenberg, 672 F.2d at 1203-04 (identifying insider trading and misleading statements as the two contexts that trigger a duty to disclose).

Perhaps anticipating the application of Roeder, plaintiffs advocate a more flexible approach to the duty to disclose inquiry, arguing that the triggering events should not "rigidly" be limited to the three factors discussed in Roeder. In support of their position, plaintiffs cite a number of cases applying a looser five element inquiry that examines: 1) the relationship between the plaintiffs and the defendant, 2) the parties' relative access to the information to be disclosed, 3) the benefit the defendant derived from the purchase or sale, 4) the defendant's awareness of the plaintiffs' reliance on the defendant in making investment decisions, and 5) the defendant's role in initiating the purchase or sale. See, e.g., Jett v. Sunderman, 840 F.2d 1487, 1493 (9th Cir. 1988); Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1043 (11th Cir. 1986), cert. denied, 480 U.S. 946 (1987); Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 813 (9th Cir. 1981), overruled on other grounds, 823 F.2d 1349 (9th Cir. 1987); Spectrum Financial Companies v. Marconsult, Inc., 608 F.2d 377, 381 (9th Cir. 1979), cert. denied, 446 U.S. 936 (1980).

Our examination of these cases reveals that the facts involve claims based on special fiduciary obligations that are alleged to have arisen between two previously unrelated parties. For example, in Spectrum Financial Companies v. Marconsult, Inc., 608 F.2d 377, the Ninth Circuit applied the flexible five element inquiry in a suit brought by the general partner of two limited partnerships against an accounting firm alleging that the accounting firm had concealed or failed to disclose adverse material information concerning the shaky foundations of a company in which the general partner had invested. The court applied the five element inquiry to determine if the relationship between the accounting firm and the general partner was sufficient to support a duty to disclose on the part of the firm. See Spectrum Financial Companies v. Marconsult, Inc., 608 F.2d at 381-82.

Similarly, in Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, the Eleventh Circuit applied the five element inquiry in a suit brought by an investor in a limited partnership against an accounting firm that allegedly had omitted to disclose material facts necessary to make its prior reports not misleading. Again, the focus of the inquiry was on determining whether the circumstances of the relationship supported the existence of a duty to disclose on the part of the firm. See Rudolph v. Arthur Andersen & Co., 800 F.2d at 1043; see also Jett v. Sunderman, 840 F.2d at 1493; Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646, 653-54 (9th Cir. 1988).

In cases such as these, courts are trying to determine whether the nature of the relationship that has arisen between two previously unrelated parties is sufficient to support a duty to disclose. This appears to be a threshold inquiry -- one that comes before any examination of misrepresentations or misleading conduct by the defendant. It is not clear to us that courts applying the five element inquiry do not also require some misleading conduct on the part of the defendant to ground liability for failure to disclose. In fact, the cases we have reviewed employing the five element inquiry all involve allegations of misrepresentation or a failure to state material facts necessary to make other statements not misleading. See, e.g., Rudolph v. Arthur Andersen & Co., 800 F.2d at 1043. Thus, we are not persuaded that the five element inquiry, even in the contexts in which it is employed, necessarily is intended to displace the three triggering factors articulated in Roeder.

Even if displacement is intended, however, we decline to apply that analysis to the factual context before us. The application of this type of analysis to the formal relationship that necessarily is created between shareholder and corporation would present a grave danger of turning the duty to disclose question into an empty inquiry. The essential purpose of the five element inquiry is to delve into the nature of the relationship that has arisen between two previously unrelated parties. However, in the shareholder-corporation context, there typically is no question as to the nature of the parties' relationship. The relationship is established as a matter of law when the shareholder initially purchases her shares. To employ the five element inquiry in this context, in a manner that emphasizes relationship as creating a duty of disclosure, would result in corporations' virtually always having a duty to disclose. It is apparent that as between a corporation and its shareholders, elements one, two, and four4 of the five elements articulated in Rudolph will always support a duty to disclose in the shareholder-corporation context.

To avoid making the duty to disclose an empty inquiry in the shareholder-corporation context, we reaffirm the language in Roeder listing the three circumstances that can trigger a duty to disclose as: 1) when a "corporate insider trades on confidential information," 2) when a corporation has made "inaccurate, incomplete, or misleading prior disclosures," and 3) when a statute or regulation requires disclosure. Roeder, 814 F.2d at 26-27; see also Starkman v. Marathon Oil Co., 772 F.2d at 238 (holding, in a suit by a shareholder against a corporation, that the duty to disclose is triggered by a misstatement of material facts or the omission of facts necessary to make prior statements not misleading); Staffin v. Greenberg, 672 F.2d at 1204 (holding, in a suit by a shareholder against a corporation, that the duty to disclose is triggered only by insider trading or misleading public statements). The factfinder must determine that one of these three triggering events occurred to find that a duty to disclose arose. Finally, we note that implicit in this last statement is the principle that the duty to disclose is an issue properly determined by the trier of fact. See, e.g., Spectrum Financial Companies v. Marconsult, Inc., 608 F.2d at 381; Stephenson v. Calpine Conifers II, Ltd., 652 F.2d at 814.

B. Sufficiency of the Evidence.

In addition to its challenge to the jury instruction, Polaroid also contends that there was insufficient evidence as a matter of law to support the existence of a duty to disclose. Any analysis of the sufficiency of the evidence must begin by noting the deference that is due a jury's verdict. A jury verdict must be upheld "unless the evidence and accompanying inferences 'point so strongly and overwhelmingly in favor of the movant that a reasonable jury could not have arrived at [the] conclusion' actually reached." Rodriguez v. Montalvo, 871 F.2d 163, 165 (1st Cir. 1989) (quoting Insurance Co. of North America v. Musa, 785 F.2d 370, 372 (1st Cir. 1986)). "A new trial should be granted only where the court is convinced that the jury verdict was a 'seriously erroneous result' and where denial of the motion will result in a 'clear miscarriage of justice.'" Chedd-Angier Production Co. v. Omni Publications International, Ltd., 756 F.2d 930, 934 (1st Cir. 1985) (quoting Coffran v. Hitchcock Clinic, Inc., 683 F.2d 5, 6 (1st Cir. 1982)).

Because of the deficiencies in the jury instruction in this case, we do not feel that the jury can be said to have properly rendered a verdict on the issue of duty to disclose. Thus, our analysis of Polaroid's argument should be more akin to the consideration of a motion for a directed verdict. This conclusion, however, does not result in any lessening in the standard of review: we may find for Polaroid only if we conclude that no reasonable jury, on the basis of the evidence presented, could determine that a duty to disclose arose on the part of Polaroid. See, e.g., Fact Concerts, Inc. v. City of Newport, 626 F.2d 1060, 1064 (1st Cir. 1980), vacated on other grounds, 453 U.S. 247 (1981); 5A Moore's Federal Practice P50.07[2] (1989). For the reasons discussed below, we find that Polaroid has failed to meet its burden on this issue.

Plaintiffs base their argument in favor of a duty to disclose on allegations that Polaroid uttered misleading statements or failed to disclose facts necessary to make prior statements not misleading. If sufficient evidence exists to support these allegations, then under Roeder, such conduct would trigger a duty to disclose. See Roeder v. Alpha Industries, Inc., 814 F.2d at 27.

In analyzing the sufficiency of the evidence, we start with Polaroid's Third Quarter Report, issued on November 5, 1978. Plaintiffs claim that the report's optimistic discussion of 1978 earnings, when combined with its exceedingly brief mention of substantial Polavision expenses, created a misleading impression because of its de-emphasis of problems with Polavision. In essence, plaintiffs contend that, because Polavision was a much-heralded product and important to Polaroid's future performance, a reasonable jury could find it misleading for Polaroid to have relegated its "disclosure" of Polavision's problems to a brief mention in an otherwise glowingly optimistic report to shareholders. Cf. Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 164 (2d Cir. 1980) (acknowledging that even if there were no statement of an untrue fact, a company's issuance of rosy, optimistic statements could be deemed misleading if internal company reports were less optimistic).

We acknowledge that "[when] a corporation does make a disclosure -- whether it be voluntary or required -- there is a duty to make it complete and accurate."5 Roeder v. Alpha Industries, Inc., 814 F.2d at 26; see also Staffin v. Greenberg, 672 F.2d at 1203-04. It is not always enough that the disclosure is literally accurate in what it says. The context in which a disclosure appears can be crucial in a determination as to whether the disclosure was adequate or misleading. Thus, the nuances of what a disclosure emphasizes versus what it glosses over can render even a factually accurate disclosure misleading in an overall sense. See, e.g., Isquith v. Middle South Utilities, Inc., 847 F.2d 186, 201-03 (5th Cir.), cert. denied, 109 S. Ct. 310 (1988); Greenapple v. Detroit Edison Co., 618 F.2d 198, 205, 210 (2d Cir. 1980).

Applying this analysis to the facts at hand, we perceive the argument that plaintiffs are attempting to make with respect to the Third Quarter Report. If this were the only evidence that plaintiffs put forth, however, we would have substantial reservations as to its sufficiency. Polaroid was having a highly successful year in 1978 and, at the time the report was drafted, the extent of Polavision difficulties and the magnitude of the impact these difficulties would have on earnings were not fully realized. Thus, Polaroid arguably was justified in having a predominantly "glowing" shareholders report. Furthermore, Polaroid did include mention of Polavision expenses in its report, and plaintiffs cannot contend that there was anything inaccurate about this statement. Thus, plaintiffs' argument becomes one of nuance -- that even though Polaroid was literally accurate in its disclosures, it had a duty to emphasize Polavision difficulties more heavily. We feel that this argument, to a large extent, is motivated by what happened in hindsight, and we would have grave doubts about its sufficiency if it stood alone.

The argument, however, does not stand alone. Plaintiffs also contend that, even if the Third Quarter Report's brief mention of substantial Polavision expenses was not misleading at the time of its issuance, the report became misleading once Polaroid knew later in November that it had to stop Polavision production by its manufacturer, Eumig, and once Polaroid assembled preliminary earnings estimates indicating that fourth quarter earnings were running beneath expectations.

For us, it is this argument that tips the balance (on an otherwise exceedingly close question) in favor of finding sufficient evidence to let the case go to the jury. Quite apart from the issue of whether the Third Quarter Report was misleading at the time of its issuance, a duty to disclose can arise if a company possesses material facts that must be released in order to render for prior statements not misleading. See Greenfield v. Heublein, Inc., 742 F.2d 751, 758 (3d Cir. 1984) (stating that "if a corporation voluntarily makes a public statement that is correct when issued, it has a duty to update that statement if it becomes materially misleading in light of subsequent events"), cert. denied, 469 U.S. 1215 (1985); see also Roeder v. Alpha Industries, Inc., 814 F.2d at 27 (noting that "inaccurate, incomplete, or misleading prior disclosures" can create a duty to disclose); Starkman v. Marathon Oil Co., 772 F.2d at 238 (noting that Rule 10b-5 prohibits the omission of material facts necessary to make other statements not misleading). Applying this principle, we find that even if the optimistic Third Quarter Report was not misleading at the time of its issuance, there is sufficient evidence to support a jury's determination that the report's relatively brief mention of Polavision difficulties became misleading in light of the subsequent information acquired by Polaroid indicating the seriousness of Polavision's problems. This subsequent information included Polaroid's assembly of preliminary earnings figures revealing that fourth quarter earnings were running beneath expectations.6 Most significantly, it also included Polaroid's decision to reduce and then stop Polavision production by its Austrian manufacturer, Eumig, and its instruction to its Austrian supplier to keep this production cutback secret. We feel that a reasonable jury could conclude that this subsequent information rendered the Third Quarter Report's brief mention of Polavision expenses misleading, triggering a duty to disclose on the part of Polaroid.

Plaintiffs posit as additional misleading conduct Polaroid's involvement with the January 9 press release announcing the Rowland Foundation's sale of Polaroid stock. To review the facts briefly: Polaroid's in-house general counsel was given and consulted about a draft version of the press release by Rowland's attorney several hours before the release eventually was disseminated by Polaroid's public relations department. Plaintiffs contend that this involvement by Polaroid, when combined with the release's failure to make any mention of Polavision's difficulties, constitutes misleading conduct by Polaroid sufficient to trigger a duty to disclose. Polaroid responds by disputing the extent of its involvement and by arguing, in the alternative, that Rowland's sale of stock had nothing to do with Polavision's difficulties, and thus the release was under no obligation to make mention of these difficulties.

We find that the facts surrounding the dissemination of the press release are sufficient to support a jury's determination that Polaroid was substantially involved with the release. Polaroid was consulted about the release in advance, it disseminated the release through its own public relations department, and it acknowledged itself that the release had "Polaroid implications."

As with plaintiffs' first argument, however, we have significant reservations about whether this conduct by Polaroid, standing alone, would be sufficient evidence to support a finding that Polaroid engaged in misleading behavior. We recognize that when the founder of Polaroid, Dr. Land, announces plans to sell $16 million worth of Polaroid stock held by his charitable foundation, reasonable investors will be trying to analyze the sale to fathom its underlying motivations. In particular, investors will be looking for indications as to Polaroid's financial health. Because Polaroid must have known that investors would be trying to evaluate Dr. Land's sale of $16 million of stock for any signals concerning Polaroid's financial health, some might find it less than forthcoming for the press release not to have at least mentioned Polavision's difficulties so that the investing public could assess for themselves the reasons behind the sale.

Yet, we also must note that Rowland's stated reasons for selling the stock had absolutely nothing to do with Polaroid's financial health, and plaintiffs have not directly challenged the sincerity of these stated reasons. As a result, the release arguably was not obligated to mention Polavision's difficulties.

For these latter reasons, if this conduct constituted the only evidence put forth by plaintiffs, we would have substantial reservations about its sufficiency. However, this conduct does not stand alone, but rather must be considered together with the other events specified by the plaintiffs -- in particular, Polaroid's instructions to its Austrian supplier to keep the Polavision cutback secret. When Polaroid's pattern of behavior is thus considered as a whole, we feel that sufficient evidence exists to support a jury's determination that Polaroid issued misleading statements, or failed to disclose information necessary to make prior statements not misleading.7 Accordingly, we conclude that sufficient facts exist to support a jury's finding that a duty to disclose on the part of Polaroid was triggered.8

III. SCIENTER

A. Jury Instruction.

Polaroid challenges the jury instruction on scienter on three grounds. First, Polaroid challenges the judge's instruction that recklessness is sufficient to constitute scienter, correctly pointing out that the First Circuit has not yet explicitly adopted the recklessness standard in the 10b-5 context. Second, Polaroid contends that it was reversible error for the judge to fail to instruct the jury explicitly that if Polaroid acted in good faith, this good faith was a defense to the charge of scienter. Finally, Polaroid argues that it similarly was reversible error for the judge not to instruct the jury that if Polaroid's conduct was motivated by its good faith business judgment, this, too, was a defense to the charge of scienter. We consider each of these arguments in turn.

1. Recklessness.

In Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), the Supreme Court expressly defined the scienter requirement in actions brought for securities fraud. The Court held that negligent conduct by the defendant is not sufficient to ground liability for securities fraud; there must be scienter, which the Court defined as an intent to deceive, manipulate, or defraud. See id. at 193. In articulating this standard, the Court expressly declined to address the issue of whether recklessness is sufficient to meet the scienter requirement. See id. at 193 n.12; see also Herman & MacLean v. Huddleston, 459 U.S. 375, 378 n.4 (1983) (noting the express reservation of the question whether recklessness meets the scienter requirement of Hochfelder).

Since Hochfelder, eight circuit courts of appeals have considered the issue and accepted recklessness as sufficient to meet the scienter requirement in actions brought for securities fraud. See, e.g., Van Dyke v. Coburn Enterprises, Inc., 873 F.2d 1094, 1100 (8th Cir. 1989) (noting that the Second, Third, Fifth, Seventh, Ninth, Eleventh, and D.C. Circuits have adopted the recklessness standard, and doing so itself); see also Burgess v. Premier Corp., 727 F.2d 826, 832 (9th Cir. 1984); Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1044-45 (7th Cir.), cert. denied, 434 U.S. 875 (1977); Xaphes v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 600 F.Supp. 692, 693-94 (D.Me. 1985). Although we have not thus far expressly adopted the recklessness standard in the 10b-5 context, we previously have assumed its sufficiency without deciding the matter. See Hoffman v. Estabrook & Co.., 587 F.2d 509, 516 (1st Cir. 1978) (assuming the sufficiency of recklessness to ground liability under Rule 10b-5, and upholding the district court's finding that the defendant's conduct did not constitute recklessness); Cook v. Avien, Inc., 573 F.2d 685, 692 (1st Cir. 1978) (same). In addition, we have upheld the sufficiency of recklessness to impose liability for fraud in closely analogous contexts. See Cleary v. Perfectune, Inc., 700 F.2d 774, 777 (1st Cir. 1983) (approving a recklessness standard in a 10b-5 cause of action for aiding and abetting); First Commodity Corp. of Boston v. Commodity Futures Trading Comm'n., 676 F.2d 1, 7 (1st Cir. 1982) (upholding recklessness as sufficient to impose liability for fraud in foreign futures transactions, resting decision, in part, on extensive caselaw in the 10b-5 context that has allowed recklessness to establish scienter).

We now explicitly join our fellow circuits in accepting recklessness as sufficient proof of scienter in 10b-5 causes of action for securities fraud. We are persuaded by the Seventh Circuit's reasoning in Sundstrand Corp., written soon after Hochfelder, that the Supreme Court gave no indication it intended its rejection of negligence in the 10b-5 context to divorce the interpretation of Rule 10b-5 from its roots in the common law of fraud and deceit, where recklessness was sufficient to ground liability. See Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d at 1044. We define acts as reckless for 10b-5 purposes if they are:

'so highly unreasonable and such an extreme departure from the standard of ordinary care as to present a danger of misleading the plaintiff to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'

Hoffman v. Estabrook & Co., 587 F.2d at 517 (quoting Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977).

The court below instructed the jury that recklessness was sufficient to ground liability for securities fraud, and he defined recklessness as "conduct which is engaged in despite an obvious danger of misleading the people who are not totally informed." Although this instruction does not precisely parallel the definition we presented above, we need only inquire whether the instruction, as a whole, properly apprises the jury of the applicable law. See Mello v. K-Mart Corp., 792 F.2d at 1234. This instruction meets that standard, and thus we find no error in the jury instruction on recklessness.

2. Good-Faith Defense.

Polaroid's second challenge to the scienter instruction is that it was reversible error for the judge not to have instructed the jury explicitly that if Polaroid's actions were performed in good faith, this good faith constituted a defense to the charge of scienter.

It is undisputed that good faith is a defense to scienter in actions for securities fraud. In Hochfelder, the Supreme Court stated clearly that "[there] is no indication that Congress intended anyone to be made liable for [securities fraud] unless he acted other than in good faith." Ernst & Ernst v. Hochfelder, 425 U.S. at 206. In Hoffman, we stated explicitly that it would be "manifestly incorrect" to rule that "good faith" was not a defense to an action for securities fraud. Hoffman v. Estabrook & Co., 587 F.2d at 513 n.7; see also SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968) (holding that Rule 10b-5 was not violated if the defendant acted in good faith), cert. denied, 394 U.S. 976 (1969).

Given the clear caselaw upholding the good-faith defense, the issue presented here is whether it was reversible error for the trial judge not to have explicitly instructed the jury on the good-faith defense, or rather, whether this defense was implicit in the instruction that was given. We find that the concept of a good-faith defense is implicit in any instruction as to intentional deception, because a defendant cannot intend to deceive if she acted in good faith. The existence of a good-faith defense, however, is not necessarily implicit in any instruction as to reckless deception. It is possible for a defendant to be objectively reckless -- to disregard a danger that would be obvious to the ordinary person -- and still act in subjective good faith. Even in such instances, the legislative history of Section 10(b) supports the conclusion that subjective good faith is still a defense. As the Seventh Circuit stated in Sundstrand, "if a trial judge found, for example, that a defendant genuinely forgot to disclose information or that it never came to his mind, etc., this . . . would defeat a finding of recklessness even though the proverbial 'reasonable man' would never have forgotten." Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d at 1045 n.20. Because the concept of a subjective good faith defense cannot be said to be implicit in any jury instruction that merely defines recklessness, we hold that it was error for the trial judge not to have instructed the jury explicitly on the good-faith defense.9

3. Business Judgment.

Polaroid's final challenge to the instruction on scienter is that it was reversible error for the trial judge not to have instructed the jury explicitly that if Polaroid's conduct was the result of good-faith business judgment, this was a defense to scienter. Polaroid bases this challenge on the theory that a corporation's business judgment concerning what is in the company's best financial interests properly governs the timing of disclosures, and if Polaroid's actions were governed by such business judgment, this would be a defense to scienter.

We refuse to accept any theory of a business judgment defense to scienter that extends beyond the contours of the good-faith defense discussed above. While the timing of material disclosures may normally be governed by the business judgment of a corporation, this business judgment must operate within the constraints of the Securities and Exchange Commission's affirmative disclosure requirements, and the rules against insider trading and the issuance of misleading statements. See, e.g., SEC v. Texas Gulf Sulphur Co., 401 F.2d at 850 n.12. We have stated previously that "[the] securities laws do not operate under the assumption that material information need not be disclosed if management has reason to suppress it." Roeder v. Alpha Industries, Inc., 814 F.2d at 25. Once a corporation runs afoul of one of Roeder's three disclosure-triggering factors, a duty to disclose arises that displaces any business judgment to the contrary. Cf. Flamm v. Eberstadt, 814 F.2d 1169, 1176 (7th Cir.) (noting that although business judgment often properly governs the timing of disclosures, once a company starts disclosing, it has "a duty not to lie"), cert. denied, 484 U.S. 853 (1987). Thus, to the extent that Polaroid advocates the existence of a business judgment defense that is distinct from and extends beyond the good-faith defense previously discussed, we reject it. The only way that business judgment can serve as a defense to scienter is if it falls within the concept of good faith. For this reason, it was not error for the trial judge to decline to instruct the jury on a business judgment defense.

B. Sufficiency of the Evidence.

As it argued with respect to the duty to disclose, Polaroid also contends that there was insufficient evidence as a matter of law to support a finding that it acted with the necessary scienter. We concluded earlier that Polaroid's pattern of behavior, considered as a whole, provides sufficient basis for a reasonable jury to find that Polaroid engaged in misleading conduct. In particular, we reasoned that a jury could conclude that the Polavision production cutbacks at Eumig together with Polaroid's preliminary calculations of lower than expected fourth quarter earnings constituted adverse facts that Polaroid had a duty to disclose in order to prevent its Third Quarter Report from being misleading.

The same facts also furnish sufficient evidence to support a finding of scienter. These facts showed that Polaroid knew that difficulties with Polavision sales were actually occurring, and were worse than expected. Market analysts had been predicting only the likely occurrence of Polavision problems, and their predictions turned out to underestimate substantially the extent of the problems. Polaroid, on the other hand, possessed concrete information about the actual existence and extent of the difficulties. Such hard facts have an obvious significance for investors; they represent reality -- what is happening -- as opposed to analysts' mere predictions. If a jury were to find that Polaroid had a duty to disclose this information, it also could determine that the failure to disclose facts of such obvious significance to investors constituted a reckless disregard of an obvious risk of misleading investors, especially in light of the way this information ran counter to the brief mention of Polavision's difficulties in the Third Quarter Report. This would be sufficient for a finding of scienter.

Even more significantly, however, Polaroid's explicit instruction to its Eumig manufacturer to keep secret the news of the cutback in Polavision production would support a jury's finding of scienter. This instruction was an intentional attempt by Polaroid to cover up news of lower than projected Polavision sales. While it is possible that Polaroid's motivation for this instruction was to protect Polavision sales rather than to deceive or mislead Polaroid investors, this is a determination for the trier of fact to make. A jury reasonably could determine that Polaroid's instruction to keep the Eumig production cutback secret constituted a reckless disregard of an obvious risk of misleading investors. For this reason, we conclude that sufficient evidence exists to support a finding of scienter.

IV. MATERIALITY

A. Jury Instruction.

In his instruction to the jury, the trial judge defined a material fact as "one that an investor would consider important in deciding whether or not to purchase stock." Polaroid challenges the instruction on materiality as fatally flawed because of its failure to state explicitly that the materiality of any information withheld by Polaroid must be assessed according to whether its release would significantly alter the total mix of information available to the market. According to Polaroid, if information was already widely available to the market through analysts' reports or other sources, then Polaroid's failure to disclose that information could not be material because such nondisclosure would not significantly alter the total mix of information available. Polaroid claims that the trial judge's failure explicitly to instruct the jury on this notion of "total mix" rendered his instruction fatally flawed.

It is clear from our review of securities law that the concept of "total mix" usually is factored into any determination of materiality.10 In Basic, Inc. v. Levinson, 108 S. Ct. 978, the Supreme Court stated that for a fact to be material, "'there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available.'" Basic, Inc. v. Levinson, 108 S. Ct. at 983 (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). However, just prior to this explanation of materiality, the Basic Court also stated that "'[an] omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.'" See id. (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. at 449).

That the Supreme Court used both types of phrasing indicates that it did not see a major difference between the two ways of articulating the materiality standard. Nor do we perceive a meaningful difference. An instruction to a jury that defines a fact as material if an investor would consider it important implicitly incorporates the notion of "total mix," because the reasonable investor would not consider withheld information to be important if it were already widely known to the market. For this reason, we find no prejudicial error in the trial judge's failure below to include explicitly in his jury instruction the "total mix" factor. His instruction essentially followed the second, alternative phrasing of the materiality standard articulated in Basic, and thus more than adequately conveyed to the jury the essence of the law. See Roeder v. Alpha Industries, Inc., 814 F.2d at 25 (defining information as material if "'a reasonable investor might have considered [it] important in the making of [the investment] decision.'") (quoting Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972)).

B. Sufficiency of the Evidence.

Polaroid accompanies its challenge to the jury instruction with three challenges to the sufficiency of the evidence on this issue. First, Polaroid argues that information concerning difficulties with Polavision was widely available to the market through analysts' reports and other press coverage, thereby rendering any information held by Polaroid immaterial as a matter of law. Second, Polaroid contends that the preliminary earnings figures contained in Forecasts 11 and 12, and relied upon by plaintiffs as evidence of information withheld, were immaterial as a matter of law because they constituted mere forecasts. Finally, Polaroid challenges the trial court's admission of evidence relating to earnings reports that were not formally circulated within Polaroid until after January 11, 1979, and conduct that was not taken by Polaroid until after January 11. Polaroid claims that its nondisclosure of this information cannot be used to support liability because the information did not exist until after the start of the class period. We consider each of these arguments in turn.

1. The Significance of Widespread Analysts' Reports.

Polaroid contends that the widespread discussion by market analysts of potential difficulties with Polavision sales rendered any information withheld by Polaroid immaterial as a matter of law. Specifically, Polaroid argues that because of the extensive analyst coverage, any disclosure by Polaroid would not have significantly altered the total mix of information available.

The significance of extensive press coverage in any materiality inquiry depends on the nature of the legal theory relied upon by the plaintiffs as well as the focus and intensity of the coverage itself. There are two types of legal theories on which plaintiffs potentially could base their action for securities fraud. Under a fraud on the market theory, plaintiffs could claim that they "indirectly" relied on Polaroid's conduct by "relying on the integrity of the stock price established by the market." In re Apple Computer Securities Litigation, 886 F.2d 1109, 1113-14 (9th Cir. 1989). Alternatively, plaintiffs could claim actual, "direct" reliance by showing concrete "individual reliance" on Polaroid's conduct. See id. at 1113.

If plaintiffs are relying on a fraud on the market theory, the defendant's failure to disclose material information "may be excused where that information has been made credibly available to the market by other sources." Id. at 1115. Such excusal of nondisclosure will only take place where the press has transmitted the information to the public with the "degree of intensity and credibility" necessary to counterbalance the corporation's one-sided representations. Id. at 1116.

If the plaintiffs are alleging actual reliance on the corporation's conduct, however, and not arguing fraud on the market, then "[ordinarily], omissions by corporate insiders are not rendered immaterial by the fact that the omitted facts are otherwise available to the public. Where a plaintiff alleges actual reliance on a particular statement, it does not matter that the market is aware of the facts necessary to make the statement not misleading." Id. at 1114 (citations omitted).

It is unclear to us from the record below on which theory this case was decided. The plaintiffs, in their closing argument, presented to the jury the concept of reliance on the integrity of the market. They also requested an explicit jury instruction on fraud on the market, but did not receive it. Rather, the trial judge instructed the jury to determine whether the plaintiffs, in fact, "reasonably relied upon the conduct of the defendant." The trial judge did not proceed to define "reliance" any further, leaving it unclear whether indirect reliance on the integrity of the market would be sufficient, or whether the jury must find actual reliance on specific conduct of Polaroid.

Because the significance of extensive analyst coverage on any determination of materiality typically rests on the nature of the legal theory relied upon by plaintiffs, the ambiguity below concerning the legal theory presented to the jury hinders us in our examination of the materiality issue. The ambiguity, however, is not a crippling hindrance because of our finding that the information withheld by Polaroid did not merely duplicate information already discussed by market analysts and the press. At best, market analysts had predicted the likely occurrence of problems with Polavision sales. Plaintiffs, however, are not basing their claim of materiality on assertions that Polaroid should have discussed early concerns about likely problems with Polavision sales. Rather, plaintiffs contend that once Polaroid began compiling concrete evidence in their preliminary earnings reports that actual sales problems were occurring, Polaroid had a duty to disclose this information. Phrased another way, no one disputes that market analysts widely were predicting that Polavision would be a drag on Polaroid's earnings. At best, however, these were predictions; the analysts could not and did not have any idea as to the extent of the drag. This lack of knowledge is clearly illustrated by the degree to which the analysts' predictions of fourth quarter earnings overestimated the earnings that actually were achieved. Analysts were uniformly predicting fourth quarter earnings in the $1.47 to $1.57 range, whereas actual earnings were $1.32.

Polaroid, by comparison, had concrete information concerning the actual extent to which Polavision sales were lower than projected. Polaroid knew that Polavision production had ceased, at least temporarily, at the Eumig plant. Polaroid also possessed Forecasts 11 and 12, which quantified the greater than expected extent to which Polavision was eating into Polaroid's overall earnings. It is this concrete information that plaintiffs claim was material and contend that Polaroid had a duty to disclose.

We agree that this type of concrete information clearly would be considered important by the reasonable investor, notwithstanding extensive discussion by analysts and the press of the likely occurrence of Polavision difficulties. Hard facts indicating that lower than projected sales actually are occurring clearly constitute material information vis-a-vis mere predictions by analysts of the likelihood of sales difficulties. Thus, even if plaintiffs' theory were fraud on the market, the widespread availability of analysts' reports 'predicting the likelihood of Polavision problems does not render immaterial as a matter of law the factual information that plaintiffs allege Polaroid improperly withheld.

2. The Materiality of Forecasts.

Polaroid next contends that even if the information it possessed would have had importance for the reasonable investor, virtually all of this information constituted mere forecasts and projections that were immaterial as a matter of law. Specifically, it argues that the preliminary earnings information contained in Forecasts 11 and 12 was comprised of unaudited internal forecasts of what earnings were projected to be, and the calculations were not of sufficient certainty to constitute material information.

The legal standards governing the materiality of earnings forecasts and projections, and the consequent disclosure obligations with respect to this information, are an issue on which different circuits have reached varying results. Some circuits have held that internal projections and forecasts rise to a sufficient level of materiality only when they have been calculated with substantial certainty. If the figures are highly tentative or speculative, then there is insufficient materiality and consequently there can be no disclosure obligation. See. e.g., Starkman v. Marathon Oil Co., 772 F.2d at 241-42; James v. Gerber Products, Co., 587 F.2d 324, 327 (6th Cir. 1978). Other circuits have adopted the more rigid position that generally there is no duty whatsoever for corporations to disclose internal forecasts or projections. See Panter v. Marshall Field & Co., 646 F.2d 271, 292 (7th Cir.), cert. denied, 454 U.S. 1092 (1981); Mendell v. Greenberg, 612 F.Supp. 1543, 1550 (S.D.N.Y. 1985); see also Walker v. Action Industries, 802 F.2d 703, 707-09 (4th Cir. 1986) (reviewing the various circuits and discussing how they have decided the issue differently), cert. denied, 479 U.S. 1065 (1987). The Supreme Court specifically has declined to address the materiality of earnings forecasts or projections, see Basic, Inc. v. Levinson, 108 S. Ct. at 984 n.9, although it has cautioned against applying bright-line rules and rigid formulas that designate a single act or occurrence as dispositive of materiality. See id. at 985-86.

The Court's caution against the application of any rigid formulas to the fact-specific issue of materiality seems, to us, to argue in favor of the more flexible approach that bases the determination of materiality on whether the earnings forecasts and projections were calculated with substantial certainty. We need not decide the issue today, however, for we conclude that, no matter what the background rule governing the materiality of earnings projections, it is "axiomatic that once a company undertakes partial disclosure of such information there is a duty to make the full disclosure of known facts necessary to avoid making such statements misleading." Panter v. Marshall Field & Co., 646 F.2d at 292. In Panter, the Seventh Circuit found that a corporation's December report making public the company's earnings for the nine months ending October 31 constituted such a partial disclosure, creating a duty for the company to disclose any "reasonably certain" financial projections as to the remainder of the fiscal year necessary to make its disclosures not misleading.

We find the same reasoning persuasive in this matter. As in Panter, Polaroid's Third Quarter Report constituted a partial disclosure of earnings information, thereby creating a duty to disclose any reasonably certain financial estimates pertaining to the remainder of the fiscal year necessary to make the Third Quarter Report not misleading. This conclusion necessitates two further inquiries: 1) were the financial estimates presented in Forecasts 11 and 12 calculated with reasonable certainty, and 2) was the disclosure of this information necessary to make the Third Quarter Report not misleading?

We answer both these questions in the affirmative. First, we conclude that there is sufficient evidence for a jury to determine that the calculations in Forecasts 11 and 12 were reasonably certain. Although Polaroid has consistently labeled these internal reports "forecasts," we are not dealing with pure projections that were made in advance without the benefit of concrete information. Forecast 11 was not circulated until December 4, 1978, and its calculations were based on actual, initial fourth quarter information. Forecast 12 was assembled in January, after the end of the fourth quarter, and was based on even more complete information. While it is true that more auditing work needed to be done on Forecast 12 to create a final, polished report, its calculations were based on actual information from the fourth quarter, and its earnings calculation of $1.31 per share was only one cent lower than the final, audited fourth quarter earnings figure of $1.32 per share.

Second, as we have discussed earlier, we conclude that a jury reasonably could find that disclosure of the earnings calculations in Forecasts 11 and 12 was necessary to avoid making the Third Quarter Report misleading. These calculations constituted concrete evidence of the extent of actual sales difficulties with Polavision. In light of the Third Quarter Report's brief mention of Polavision expenses, a jury reasonably could find that disclosure of Polaroid's fourth quarter earnings calculations was necessary to render the de-emphasis of Polavision's problems in the Third Quarter Report not misleading. For these reasons, we reject Polaroid's assertion that its preliminary earnings reports were immaterial as a matter of law.

3. Admission of Post-January 11 Conduct.

Polaroid's final challenge is to the trial court's admission of evidence to prove materiality that Polaroid claims did not come into existence until after the start of the class period on January 11. Specifically, Polaroid objects to the admission of evidence concerning: 1) Forecast 12, circulated internally on January 15; 2) a $6.8 million Polavision reserve for 1978 taken on February 1; 3) a $22 million Polavision reserve for 1979 dated January 23; and 4) a summary of retail sales dated January 22.

It is clear that if this information was not known to Polaroid until after the class period began, then it cannot be used as evidence of material information that Polaroid withheld as of the start of the class period. We do not believe, however, that the official date that an action was taken or that a report was published necessarily corresponds to the date on which Polaroid was aware of the information. For example, even though Forecast 12 was not officially circulated until January 15, plaintiffs introduced testimony that information contained in that report was compiled and known to Polaroid prior to the official date of circulation. Similar testimony was introduced to show Polaroid's pre- January 11 knowledge of the need to take substantial Polavision reserves, even though these actions were not officially taken until after January 11.

Furthermore, we are not convinced that all of this evidence was admitted for the sole purpose of showing material facts that were withheld by Polaroid as of January 11. Some of it apparently was introduced to lay a basis for the jury to draw inferences as to Polaroid's state of mind in late 1978 and early 1979 with respect to Polavision's prospects. If this was its purpose, the fact that some of the actions were not officially taken until shortly after January 11 seems less problematic. For these reasons, we conclude that it was not error for this evidence to have been admitted.

4. Summary.

Our analysis of the materiality evidence illustrates that sufficient evidence existed for a jury to conclude that Polaroid possessed concrete facts about actual Polavision sales difficulties -- facts that a jury could determine were calculated with reasonable certainty. Furthermore, sufficient evidence existed for a jury to determine that these facts, revealing the actual extent of Polavision's difficulties, constituted material information when compared with analysts' mere predictions concerning the likelihood of Polavision problems.

V. DAMAGES

A. Jury Instruction.

Polaroid claims that the jury instruction on damages erroneously omitted any explicit instruction requiring that for damages to be awarded, they must have been proximately caused by Polaroid's culpable conduct. Polaroid acknowledges that during the liability phase of the trial, the judge did instruct explicitly on the notion of proximate causation, requiring the jury to find "a causal relationship between [plaintiffs'] loss and Polaroid's fraudulent behavior." Polaroid claims that it was prejudicial error for the judge not to have repeated this instruction during the damages phase.

The damages instruction actually given by the judge told the jury to determine "the difference in each day of the class period between the amount that these people [the plaintiffs] paid for a share of stock and the amount that they should have paid." Polaroid contends that this instruction allowed the jury to factor into damages the impact that intervening causes or nonfraudulent conduct may have had on the stock price. We are not persuaded. The jury that determined the damages issue had sat through a two week trial focused on the issue of Polaroid's fraudulent conduct. The same jury had been explicitly instructed during the liability phase that any loss claimed by plaintiffs must have been causally related to Polaroid's fraudulent behavior. We conclude that this jury, when instructed to calculate the difference between what the plaintiffs paid for a share of stock and what they should have paid, would find it implicit in this instruction that the question of what the plaintiffs should have paid meant: what should they have paid but for Polaroid's fraudulent conduct. Thus, we find that no reversible error occurred from the judge's failure to repeat explicitly the earlier instruction on proximate cause.

B. Sufficiency of the Evidence.

Polaroid challenges the sufficiency of the evidence relating to damages on three grounds. First, Polaroid labels prejudicially defective the hypothetical question that formed the basis of the damages estimate presented by the plaintiffs' expert. Second, Polaroid claims that the plaintiffs' expert failed to consider the effects of intervening causes on Polaroid's stock price in arriving at the damages estimate he presented in his testimony. Because the jury appears to have accepted the testimony of the plaintiffs' expert in its entirety, Polaroid argues that these two flaws in his reasoning undercut the sufficiency of the evidence to support the damages determination. Finally, Polaroid contends that the formula used by the court in its judgment to arrive at an inflation factor for plaintiff stockholders is flawed because it awards certain stockholders more than their actual damages. We consider each of these arguments in turn.

1. The Hypothetical Question.

Plaintiffs' expert, in calculating the amount by which Polaroid's stock was artificially inflated by its conduct, was asked to assume that Polaroid had a duty to disclose:

1) That Polaroid had manufacturing costs and marketing expenses substantially in excess of revenues from the Polavision program; 2) that the Polavision program is expected to continue to make significant demands on cash and earnings in 1979; and 3) that the preliminary unaudited results of the fourth quarter of 1978 would be approximately $1.32 a share and for all of 1978 approximately $3.60 per share.

The expert based his calculation of a $9.75 per share inflation factor on his estimate of the effect that the disclosure of each of these elements would have had on stock price.

Polaroid challenges each of the elements of this assumed hypothetical, contending that the first "omission" had been disclosed in its Third Quarter Report, that the second was known to the public through analysts' reports, and that the third did not exist as of the January 11 start of the class period because Forecast 12, in which these earnings figures were contained, was not officially circulated until January 15. Because of these alleged defects in all three of the assumptions that underlay the expert's calculations, Polaroid contends that insufficient evidence exists to support the $9.75 inflation factor testified to by the expert and arrived at by the jury. Furthermore, Polaroid argues that if even one of these elements is insufficient as a matter of law to support a damages finding, then the entire damages determination must be vacated because the jury was not asked to and did not indicate on which of these elements it rested its damages finding. Vacating the entire award is therefore required, Polaroid argues, because the jury conceivably could have rested its entire determination on the one element that is insufficient as a matter of law. See Turner v. Johnson & Johnson, 809 F.2d 90, 95 (1st Cir. 1986); Farley Transp. Co. v. Santa Fe Trail Transp. Co., 786 F.2d 1342, 1352 (9th Cir. 1986).

We need not consider this last assertion by Polaroid because of our conclusion that each of the three elements in the expert's hypothetical was sufficient to be properly factored into the jury's damages determination. In effect, Polaroid's challenges to the hypothetical merely repeat challenges that it previously made to the sufficiency of the evidence supporting the duty to disclose and materiality. We already have discussed our reasons for rejecting these challenges, and we incorporate that discussion here, without repeating it.

2. Intervening Causes.

Polaroid also contends that the plaintiffs' expert failed to account for intervening causes of the decline in Polaroid's stock price, and argues that the proper consideration of these causes would necessarily lower the stock's inflation factor below the $9.75 awarded by the jury.

We agree with Polaroid that the effect of any intervening causes on its stock price should be subtracted from the inflation factor attributed to its conduct. See Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 49 & n.22 (2d Cir.), cert. denied, 439 U.S. 1039 (1978); Blackie v. Barrack, 524 F.2d 891, 909 (9th Cir. 1975), cert. denied, 429 U.S. 816 (1976). Our review of the evidence, however, must be limited to an inquiry into whether the plaintiffs' expert failed to consider an intervening cause that he should have considered as a matter of law. Put another way, much deference is due the jury's evaluation of the extensive direct testimony and cross-examination that occurred at trial concerning the issue of intervening causes, and we may vacate the jury's determination only if an error was committed as a matter of law. See Rodriguez v. Montalvo, 871 F.2d 163, 165 (1st Cir. 1989).

After reviewing the evidence, we are unable to find such an error. Polaroid's strongest argument is that it was erroneous as a matter of law for the plaintiffs' expert not to have subtracted from his $9.75 inflation factor the general decline that took place in the Standard & Poors 400 ("S&P 400") at the same time. Polaroid contends that movements in the S&P 400 reflect trends in general economic conditions that affect Polaroid's stock price but are not attributable to Polaroid's conduct. Because the S&P 400 was declining at the same time that Polaroid's stock price was tumbling after the February 22 release, Polaroid argues that some portion of the $9.75 drop in its stock price is due to the decline in the S&P 400, and thus the plaintiffs' expert erred in not subtracting the S&P 400's decline from his $9.75 figure. At first glance, this seems a persuasive argument. The plaintiffs' expert, however, testified at length as to the reasons for his treatment of the S&P 400. In the absence of clear error, we are reluctant to second-guess the jury's evaluation of this testimony, which they apparently found credible. Furthermore, our own research has uncovered at least one reason for not factoring in the decline of the S&P 400: if the S&P 400 is a broad-based index dissimilar in nature to the Polaroid securities at issue here. See Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d at 49 n.22. For all of these reasons, we cannot say that the plaintiffs' expert erred as a matter of law in his treatment of the S&P 400 or any other intervening causes.

3. The Trial Court's Damages Formula for the Stockholder Class.

The class of stockholders entitled to damages was defined as those persons who purchased Polaroid common stock between January 11 and February 22, 1979, inclusive, and who held that stock at the close of business on February 22.11 In his final judgment, the trial judge stated that the measure of these stockholders' damages was "the difference between the purchase price per share (including commissions) and the sales price per share (including commissions), but in no event more than $9.75 per share." He based this formula on the jury's determination that the $9.75 price decline that took place in Polaroid's stock from February 23 through March 1, 1979 reflected the amount by which the stock price was artificially inflated during each day of the class period as a result of Polaroid's fraudulent conduct.

Polaroid challenges this formula as erroneously awarding more than actual damages to those stockholders who held their stock as of February 22, but sold it prior to March 1. It argues that the proper measure of damages should be the difference between the closing price per share of Polaroid stock on February 22, 1979, and the sales price per share, but in no event more than $9.75 per share.

Section 28(a) of the Securities Act, 15 U.S.C. § 78bb(a), clearly limits damages in a securities action to "actual damages." Thus, in an action for securities fraud, each purchaser recovers the difference between the inflated price paid and the true value actually received. However, if when the stock is resold, it still has an inflated price, the seller's damages from the defrauding party must be "diminished by the inflation he recovers from his purchaser." Blackie v. Barrack, 524 F.2d at 908-09. This limitation is necessary to prevent the plaintiff from recovering more than the actual damages suffered. See id.

Applying this "actual damages" principle to the facts at hand, we agree with Polaroid that the trial judge's measure of damages allows stockholders who sold their stock prior to March 1 to recover more than their actual damages suffered. This conclusion is best explained with an example. Consider a hypothetical investor who purchased Polaroid stock on January 12 at a price of $52 per share. Polaroid introduced evidence showing that the price of its stock trended downward during the class period, so assume our hypothetical investor's stock was valued by the market at $50 per share on February 22. At the close of the market on February 22, Polaroid made its "overdue" disclosures, causing its stock to decline by $6.625 per share on February 23, and then by an additional $3.125 over the period until March 1. Thus, Polaroid's stock was valued at $43.375 (50 - 6.625) at the close of market on February 23, before reaching its true value of $40.25 (50 - 9.75) on March 1.12

Now assume that our investor sold her stock at the close of market on February 23, at the price of $43.375 per share. Of the full $9.75 inflation factor in the stock price, only $6.625 has been squeezed out as of February 23. The stock, valued at $43.375, still is inflated by $3.125 above its true value of $40.25. By selling on February 23, our hypothetical investor benefitted from this partial inflation factor of $3.125 per share when she sold her stock. To prevent her damages award from reflecting any of this partial inflation and thus to prevent her from recovering more than actual damages, her damages should be limited to $6.625 per share, which is the difference between the stock's $50 closing price on February 22 and its $43.375 sales price on February 23. The trial judge's measure of damages, however, would allow her to recover her initial January 12 purchase price of $52 minus her $43.375 sales price, for a total of $8.625 per share. This constitutes an improper award of an amount greater than actual damages. To prevent this occurrence, we agree with Polaroid that the proper measure of damages should be the difference between the closing price per share of Polaroid stock on February 22, and the sales price per share, but in no event more than $9.75 per share.

VI. PREJUDGMENT INTEREST

Plaintiffs and Polaroid raise a host of issues, both procedural and substantive, concerning the trial judge's denial of the plaintiffs' motion for prejudgment interest. Because of the nature of our disposition of this case, we discuss only one of these issues -- the substantive question of whether the trial judge erred in ruling as a matter of law that he lacked the authority to award prejudgment interest because the plaintiffs had failed to request a jury instruction on prejudgment interest. The judge based this ruling on First Circuit precedent holding that in jury-tried actions brought under federal statutes that are silent on the question of prejudgment interest, the plaintiff waives the issue of prejudgment interest if she fails to request a jury instruction on the matter.

There is no dispute that the federal statutes involved here are silent on the question of prejudgment interest and that plaintiffs failed explicitly to request a jury instruction on the matter. The sole question is thus whether First Circuit precedent required that the trial judge deny a post-verdict motion for prejudgment interest in such a context.

Our review of First Circuit precedent supports the lower court's ruling on prejudgment interest. In a variety of differing contexts, we repeatedly have stated that the decision to award prejudgment interest lies within the sole province and discretion of the jury. See, e.g., Carey v. Bahama Cruise Lines, 864 F.2d 201, 208 n.6 (1st Cir. 1988); Robinson v. Watts Detective Agency, 685 F.2d 729, 741 (1st Cir. 1982), cert. denied, 459 U.S. 1105 (1983); Furtado v. Bishon, 604 F.2d 80, 98 (1st Cir. 1979), cert. denied, 444 U.S. 1035 (1980); Robinson v. Pocahontas, Inc., 477 F.2d 1048, 1052-53 (1st Cir. 1973). We also have stated that where a plaintiff does not request prejudgment interest from the jury, she is "barred from subsequently seeking it from the judge." Kolb v. Goldring, Inc., 694 F.2d 869, 875 (1st Cir. 1982); see also Segal v. Gilbert Color Systems, Inc., 746 F.2d 78, 83-84 (1st Cir. 1984).

Plaintiffs attempt to distinguish these cases on the ground that most of them involved unliquidated, continuing, or inchoate damages claims. Plaintiffs argue that in such contexts, we have refused to allow post-verdict awards of interest because of the fear that the jury may already have factored interest into its damages award. According to plaintiffs, however, this rationale is not applicable to a federal securities claim, such as that presented here, which typically involves a jury's specific findings concerning actual economic losses that were fixed as of a certain date. In this context, plaintiffs contend, there is no danger that a judge's post-verdict award of interest will duplicate any aspect of the jury's damages award. Consequently, it is appropriate for judges to have the authority to award prejudgment interest on plaintiff's motion after a jury verdict.

We recognize that other circuits have acknowledged a trial court's authority to make post-verdict awards of interest in cases where the damages were readily ascertainable or liquidated prior to trial. See, e.g., U.S. Industries, Inc. v. Touche Ross & Co., 854 F.2d 1223, 1256-57 (10th Cir. 1988) (overturning, as an abuse of discretion, the trial judge's denial of prejudgment interest on a post-verdict motion in a federal securities action); Grogan v. Garner, 806 F.2d 829, 838-39 & n.14 (8th Cir. 1986) (affirming the trial judge's grant of prejudgment interest on a post-verdict motion in a federal securities action). None of the cases in this circuit, however, have indicated any such limitation on our consistent requirement that plaintiffs submit the issue of prejudgment interest to the jury or be barred from raising it later. Indeed, in Segal v. Gilbert Color Systems, Inc., 746 F.2d 78, we expressly rejected any attempt to limit our prejudgment interest rule to situations involving unliquidated damages claims. Rather, we cited Kolb v. Goldring, 694 F.2d 869, a case involving purely economic losses in the nature of back pay and fringe benefits, for the clear proposition that if a plaintiff does not request prejudgment interest from the jury, she is barred from seeking it subsequently from the judge. See Segal v. Gilbert Color Systems, Inc., 746 F.2d at 83-84.

This case does not present a situation conducive to reconsidering this line of precedent. We hold that the trial judge committed no error when he held that the plaintiffs' failure to request prejudgment interest from the jury barred them from subsequently seeking it from the judge.

VII. STRING OF OPTIONHOLDERS

The final issue raised on appeal involves Polaroid's challenge to the district court's decision granting the class of optionholders standing to sue Polaroid under Rule 10b-5. See Backman v. Polaroid, 540 F.Supp. 667, 669 (D. Mass. 1982). According to Polaroid, "[because] a call option on the common stock of Polaroid is not a security issued by Polaroid, and because the mere purchase of a call option on Polaroid stock does not establish any relationship between the purchaser and Polaroid, such purchasers lack standing to sue Polaroid under Section 10(b) and Rule 10b-5." Brief for Appellant at 49.

A call option on common stock is a contract between two parties that gives the purchaser of the option the right to buy from the seller a specified amount of common stock at a fixed price (the exercise price) at any time prior to the expiration date of the option. A premium is paid for this option, and the option contract is worth more or less than the premium depending upon the direction of the market price of the underlying common stock relative to the exercise price. "The market price for options is directly responsive, therefore, to changes in the market price of the underlying stock, and to information affecting that price." Deutschman v. Beneficial Corp., 841 F.2d 502, 504 (3d Cir. 1988), cert. denied, 109 S. Ct. 3176 (1989); see also Laventhall v. General Dynamics Corp., 704 F.2d 407, 410 (8th Cir.), cert. denied, 464 U.S. 846 (1983); Tolan v. Computervision Corp., 696 F.Supp. 771, 774 (D. Mass. 1988).

Relatively few courts have considered the issue of optionholders' standing to sue under Rule 10b-5. In Laventhall v. General Dynamics Corp., 704 F.2d 407, the Eighth Circuit denied optionholders standing to sue a corporation on a claim of insider trading. Although the court acknowledged that options are securities within the meaning of Section 10(b) and Rule 10b-5, it relied heavily on language from Chiarella v. United States, 445 U.S. 222, 228 (1980), stating, in an insider trading case, that:

[One] who fails to disclose material information prior to the consummation of a transaction commits fraud only when he is under a duty to do so. And the duty to disclose arises when one party has information 'that the other [party] is entitled to know because of a fiduciary or other similar relation of trust and confidence between them.'

The Eighth Circuit found no such relationship of trust and confidence between optionholders and a corporation, observing that optionholders do not trade with the corporation or purchase any interest in it. The court concluded that this lack of any transactional nexus between an optionholder and a corporation prevented optionholders from having standing to sue. See Laventhall v. General Dynamics Corp., 704 F.2d at 411-13; see also Data Controls North, Inc. v. Financial Corp. of America, Inc., 688 F.Supp. 1047, 1049-50 (D.Md. 1988), aff'd without opinion, 875 F.2d 314 (4th Cir. 1989); Starkman v. Warner Communications, Inc., 671 F.Supp. 297, 304 (S.D.N.Y. 1987).

In Deutschman v. Beneficial Corp., 841 F.2d 502, the Third Circuit declined to extend the reasoning of Laventhall beyond the context of insider trading. The claim brought by optionholders in Deutschman alleged affirmative misrepresentations by the corporation, rather than insider trading. The plaintiffs alleged that they purchased options at prices that were "artificially inflated by the market's reliance on [the] defendants' misstatements." Deutschman v. Beneficial Corp., 841 F.2d at 504. Faced with this claim, the Third Circuit held that the issue of affirmative misrepresentations is distinct from the context of insider trading, and presents a situation where the reasoning of Laventhall and the language of Chiarella do not apply. Specifically, the court stated:

Chiarella and Dirks [v. Securities & Exchange Comm'n., 463 U.S. 646 (1983)] involve only the question of when outsiders and nonfiduciaries will be treated as insiders or fiduciaries for purposes of the affirmative duty to disclose or refrain from trading. The court in those cases declined to extend the duty to disclose or abstain to mere tippees who came into possession of otherwise undisclosed information. Nothing in those opinions, however, can be construed to require the existence of a fiduciary relationship between a section 10(b) defendant and the victim of that defendant's affirmative misrepresentation.

Id. at 506. With respect to the relevance of Laventhall, the Third Circuit concluded:

the Laventhall holding . . . is simply not relevant to the distinctive issue of affirmative misrepresentations affecting a market in securities. No Supreme Court case and no Court of Appeals case has ever imposed a transactional nexus requirement in a section 10(b) affirmative misrepresentation case.

Id. at 507. Based on this reasoning, the court upheld the standing of optionholders to sue on claims of affirmative misrepresentations. See also Tolan v. Computervision Corp., 696 F.Supp. at 775 (distinguishing Laventhall and upholding the standing of optionholders to sue on claims of misrepresentation); In re Digital Equipment Corp. Securities Lit., 601 F.Supp. 311, 315 (D.Mass. 1984) (stating that "[the] better rule is one that recognizes that optionholders have standing to sue for affirmative misrepresentations"). But see Bianco v. Texas Instruments, Inc., 627 F.Supp. 154, 161 (N.D. Ill. 1985) (stating that "[we] do not agree that the distinction between affirmative misrepresentation and nondisclosure calls for a different rule as to the standing of options traders to sue under § 10(b)").

We find the reasoning of the Third Circuit in Deutschman persuasive here. Although plaintiffs' arguments at trial had hints of insider trading claims with respect to Polaroid's involvement in the Rowland Foundation's sale of stock, their brief on appeal makes no mention of any insider trading allegations. Rather, plaintiffs' arguments on appeal focus on allegedly misleading statements by Polaroid that triggered a duty to disclose adverse material information. According to plaintiffs, this misleading conduct by Polaroid artificially inflated the price of both its stock and call options to purchase its stock.

Such claims of misleading statements are closely analogous to the misrepresentations at issue in Deutschman. We agree with the Third Circuit that, in this context, the analysis of the Laventhall court does not apply. Accordingly, we uphold the standing of optionholders to sue Polaroid.

Conclusion

There were three errors in the jury instructions: 1) the instruction equating the duty to disclose with materiality; 2) the failure to instruct the jury, under Roeder, on the events that properly could trigger a duty to disclose; and 3) the failure to instruct the jury explicitly on the good-faith defense to scienter. In addition, the trial judge erroneously used a damages formula that would award certain stockholders more than their actual damages suffered.

We find that there was sufficient evidence to support a finding of liability for securities fraud.

Judgment Vacated.

Dissent follows.

ALDRICH, Senior Circuit Judge, dissenting. It has been said that a nonconcurring judge often, by his dissent, does his cause a disservice. Either, in fulsomeness, he overstates what the court has decided, and may cause it to be so understood, or the opinion may point up what might otherwise have passed unnoticed. I take those risks, I hope guardedly, because the present decision threatens to charge a large number of "innocent corporate stockholders," Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 170 (2d Cir. 1980), a great deal of money for management conduct I believe beyond criticism, and, more important, passing from the particular to the general, permits finding a duty of disclosure substantially exceeding any case that I am aware of. The decision will raise problems for management across the board. This consequence will not disappear even if a new trial ends in defendant's favor, a result I think unlikely with defendant's case so substantially undercut.

I begin at the beginning, where plaintiffs planted a weed that, unchecked, was nourished in plaintiffs' summation, and, as this court has found, choked the charge. I believe, incidentally, that it firmly, as well as improperly, put the jury on plaintiffs' side from the outset. To mix metaphors, after plaintiffs' unchecked opening, and defendant's non-response, in the jury's mind defendant stood with two called strikes before the first pitch. This court first scorches that weed, but I believe its ultimate ruling substantially restores its vigor.

The twelve day trial began, as it ended, on the wrong foot. Plaintiffs' opening, though disclaiming any intent to "encroach" on the court's function to state the law, plainly proceeded to do so.1

The [federal] securities laws and particularly the one that we're dealing with in this case express a philosophy of full disclosure. The idea is that people who are buying or selling stock are entitled to have full disclosure of all the relative facts, the same way as when people are buying a house; you're entitled under the law to have full disclosure of what the facts are relative to the house. And if the owner of the house knows that the roof is leaking or that the basement leaks, they're supposed to tell you that before you buy the house. And that is a general philosophy under the federal security law that this case has been brought under.

This was a homespun, understandable, and appealing opening for a defendant's duty if it were a seller, but, of course, as the court holds, under the heading " Jury Instruction," a total overstatement of law as to this defendant's obligations. Roeder v. Alpha Industries, Inc., 814 F.2d 22 (1st Cir. 1987). Unaccountably, defendant acted as if it had never happened. Instead of asking the court for a correction, it did not even reply in its own opening. Rather, counsel said,

[The] evidence (sic) would show there is no obligation on the part of Polaroid to make public its projections or its forecasts or its analysis. What Polaroid promptly discloses is the facts. And the evidence will undisputably show they did that here.

They didn't benefit in any way by not putting out their facts. They didn't have the facts until February 21 and February 22, when they disclosed them.

Neither of these statements would fly, particularly the last sentence. It would only too clearly appear that defendant earlier knew many facts that it did not disclose, notably the increasingly poor showing and the halting of production that constitute the basis of the court's opinion. It would develop that defendant knew these facts by December and early January. It would also appear that defendant had a strong motive -- whether proper or not might be a question -- for "not putting out their facts." It felt that to advertise poor sales would be counterproductive. Apart from receiving an erroneous understanding of the law, if the jurors remembered these disclaimers throughout the case what credence would they give counsel? Defendant failed to say what it should have said, and said what it should not have.

Plaintiffs' summation continued in the same vein, asserting, without interruption, defendant's unlimited duty to disclose all facts the market would consider material. Thereafter the charge, though starting correctly by declaring a lesser duty, ultimately came to the same effect. The court properly holds this to have been error.

[There] is no affirmative duty to disclose material information just because it is material to an investor; other events must trigger a duty to disclose before there can be liability for the withholding of material facts.

However, it holds that a reasonable jury could find a duty, and orders a new trial.

Turning briefly to the evidence, when Polavision was launched, after an expensive advertising campaign, it failed, to a substantial degree, to do as well as expected. In October, 1978 the 200,000 figure internally projected in March for the year was reduced to 100,000, and by November to 97,000. The resulting overproduction caused Polaroid to notify its Austrian manufacturer at the end of October to suspend operations. The understanding was that "steps have been taken to ensure a quick new start-up of production on a reduced scale." Further, "There is the possibility of an increased production for 1980." There is no basis for plaintiffs to say that "by late October and early November, 1978 management knew that Polavision was a commercial failure." However, the Austrian supplier had a substantial contract claim, and at year end it was determined that a reserve should be set aside for Polavision losses. Ultimately Polavision was abandoned.

Meanwhile, on January 9, 1979 the Rowland charitable trust created by President Land's family announced the sale of 300,000 Polaroid shares, the sale being consummated on January 11. This announcement, hereinafter the release, had been reviewed by Polaroid, and the court, quite correctly, rejects the contention that this was a mere courtesy for which it had no responsibility. The release stated that the reasons for the sale were, primarily, substantially to increase income by diversity of investments, and, secondarily, to obtain funds for the creation of a scientific center. It is not now claimed that these reasons were false, or in bad faith. The complaint is that the release said nothing about Polavision.

Realizing that the broad basis on which they sought to go to the jury was wrong, plaintiffs now make a number of other contentions. Those that are not accepted by the court I pass over. There remains "misleading." In their brief, excluding subtitles and quotations, plaintiffs use this word thirty two times. Even at that they do not advance the hidden-ball contention the court seemingly attributes to them, that "Polaroid buried an extremely brief mention of 'substantial' Polavision expenses within an otherwise glowing summary of 1978 earnings to date." The narrative portion of the Report consisted of three and a half pages. On page one, after reciting broad increases in sales and earnings, as already stated, there appeared,

[The President] noted also that earnings continue to reflect substantial expenses associated with Polavision, Polaroid's new system of instant movies.

On the next textual page, under the heading "Nine Months 1978 Compared with Nine Months 1977," appears,

The ratio of cost of sales to net sales increased from 53% to 57% due primarily to an increase in the proportion of sales attributable to SX-70 products and to substantial expenses associated with Polavision.

On the next page, "Third Quarter 1978 Compared with Third Quarter 1977," appears,

The ratio of cost of sales to net sales increased from 55% to 56% due primarily to an increase in the proportion of sales attributable to SX-70 products and to substantial expenses associated with Polavision.

There was no occasion for this entry on the fourth page. Surely, physically, this was emphasis, not burial. What interested investor would not find it highly conspicuous?

As to misleading in substance, the court says it would have grave doubts about the sufficiency of plaintiffs' argument that the Report was required "to emphasize Polavision difficulties more heavily" had it stood alone. "However, it does not stand alone," referring to the principle that a statement may become misleading in the light of subsequent events, and so require correction. I address this one step at a time. The court's doubts as to initial misleading in the Report should not have existed at all. Misleading must mean misleading in fact, or by implication, within the terms of the disclosure and not mere omission of other facts that might be considered material by the market. The generalization that Polavision's earnings were in the red would have been clearly incomplete had the Report been an invitation to deal, where the statute imposes a broad duty of disclosure, but a voluntary disclosure sets, by its context, the degree of the duty. The Report did not purport to recite "Polavision difficulties." It would be extraordinary to say that when the Report stated that Polavision's earnings were in the red a duty was undertaken to say more, or that the statement was misleadingly incomplete because it did not. Mislead means to lead in the wrong direction, and incompleteness means within the terms of the disclosure.

The court proceeds that the jury could find "the report's relatively brief mention of Polavision difficulties became misleading in light of subsequent information acquired by Polaroid indicating the seriousness of Polavision's problem. This subsequent information included Polaroid's assembly of preliminary earnings figures revealing that fourth quarter earnings were running beneath expectations. Most significantly, it also included Polaroid's decision to reduce and then stop Polavision production by its Austrian manufacturer, Eumig, and its instruction to its Austrian supplier to keep this production cutback secret." (Emphasis the court's.)

I observe, first, that the "reduce" had occurred well before November, and that the "stop," as already noted, occurred in late October, and was a halt, and not thought of as a permanent stop. More immediately to the point, production had not been mentioned in the Report. It cannot be that a voluntary disclosure of negative earnings was misleadingly incomplete because of no mention of production. How, then, could it become misleading by failure to disclose subsequently discovered -- had it been such -- overproduction? That this was kept "secret" does not give it legal significance. Nonetheless, the court concludes, based on this secrecy and the declining earnings reports, "Polaroid's Third Quarter Report constituted a partial disclosure of earnings information, thereby creating a duty to disclose any reasonably certain financial estimates pertaining to the remainder of the fiscal year necessary to make the Third Quarter Report not misleading."

With respect, to say that a voluntary statement of a general nature became misleading for failure to add subsequent details in no way inconsistent measures duty by what the market would consider material, plaintiffs' principle that the court had earlier rejected. In simple fact, none of the subsequent events referred to by the court made the Report's statement misleading. Everything the court points to bears, at best, on the degree of lost earnings. The "partial disclosure as to earnings" was that they were negative. Since it was not said how much they were negative, unless not to say how much was misleading, the fact that later they were more negative could not cause it, to use the court's underlined verb, ante, to "become" such. In January the Report was as accurate, and complete, in what it said, and implied, as it was in November. Had there been a representation as to a better future, we would have a different case, but there was none such, nor does the court claim it. Rather, it is simply holding that when, even between regular quarterly reports, the undisclosed degree of negative earnings became additionally known, or larger, there arose a duty to announce specifics.

Regulated statements, such as a prospectus, must be complete in all material respects, and thus are misleading if they are not. But that a court can so enlarge, or permit a jury so to enlarge, a voluntarily assumed lesser duty places management in an impossible position. No volunteered general statement will be safe. Wanting to inform its stockholders of some product's current lack of success, but, for business reasons, not wishing to publicize the extent, management is in a no-win situation. If it decides to publish the mere fact, it will be faced with a subsequent obligation to supply details. If, to avoid this, it says nothing, but discloses some good news, then the good news without the bad will be misleading for incompleteness. It would take a Ulysses to navigate this Scylla and Charybdis.

This is not a humdrum case of mere evidentiary mistake, but one of broad importance. The court's approach to misleading incompleteness in a voluntary disclosure will instill apprehension in the heart of every preparer of stockholders' reports. I would reverse and order judgment for the defendant.

1. Polavision sales did not improve. Sales continued to drop and Polavision eventually was removed from the market.

2. Rule 10b-5 states: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5 (1988).

3. Polaroid also challenges the standing of optionholders to sue under Rule 10b-5. We consider this issue infra.

4. Element one looks to the relationship between the plaintiffs and the defendant. Element two examines the parties' relative access to the information to be disclosed. Element four examines the defendant's awareness of the plaintiffs' reliance on the defendant in making investment decisions. See, e.g., Rudolph v. Arthur Andersen & Co., 800 F.2d at 1043.

5. By "complete," we mean "complete enough so as not to be misleading." Staffin v. Greenberg, 672 F.2d at 1204.

6. We defer any discussion of Polaroid's challenge to the materiality of these preliminary earnings reports until our discussion of materiality, infra.

7. We acknowledge that the dissent has articulated persuasive arguments against this conclusion. Regardless of whether we agree with the dissent on the underlying merits, that is not the issue before us. Rather, we are constrained by the high threshold standard that governs whether evidence can be deemed insufficient as a matter of law. Based on these facts, considered in their entirety, we simply cannot categorically state that no reasonable jury could find that Polaroid engaged in misleading conduct triggering a duty to disclose.

8. In addition to its substantive arguments on the duty to disclose, Polaroid also contends, procedurally, that plaintiffs are barred from raising the issue of misleading statements on appeal because they did not present this theory at trial. According to Polaroid, plaintiffs relied solely on a nondisclosure theory at trial, and are therefore barred from raising the issue of misleading statements on appeal. We are not persuaded by Polaroid's argument. First, the issue of misleading statements is an integral part of any nondisclosure theory. As we have discussed, misleading statements are one of the factors that can trigger a duty to disclose. Thus, we see no contradiction between a nondisclosure theory at trial and an emphasis on allegedly misleading statements on appeal. Furthermore, in his closing argument to the jury, plaintiffs' counsel explicitly stressed the allegedly misleading nature of the Third Quarter Report, asking the jury to consider that the report made no mention of Polavision difficulties or the shutdown in production at the Eumig plant. We acknowledge that plaintiffs have emphasized the issue of misleading statements much more on appeal than they did at trial. We attribute this, however, to their anticipation of our reliance on Roeder. We do not find this change in emphasis to be an objectionable alteration of a legal theory advanced below.

9. Contrary to plaintiffs' contentions, we find that Polaroid did not waive its objections to the jury charge on scienter. Polaroid stated explicitly to the trial judge immediately after he gave his instructions to the jury and before the jury retired: "[our] principal objection to the scienter charge is that there was no mention of a good-faith defense." This objection was sufficient to meet the requirement of Fed.R.Civ.P. 51 that a party "[state] distinctly the matter objected to and the grounds of the objection." See, e.g., Kelly v. Schlumberger Technology Corp., 849 F.2d 41, 44 (1st Cir. 1988); Elwood v. Pina, 815 F.2d 173, 175 (1st Cir. 1987).

10. We note, however, that although the widespread availability of information on the market usually is factored into the materiality inquiry, it is not always dispositive of the issue. See infra.

11. There is also a class of optionholders involved in this action, but Polaroid is only disputing the damages measure employed with respect to the class of stockholders.

12. We have rounded actual numbers for ease of comprehension.

* Of the Eighth Circuit, sitting by designation.

** Since oral argument Judge Bownes has become a Senior Circuit Judge.

1. Counsel put it, one might say condescendingly, "I'll leave that for Judge McNaught to do . . . . Judge McNaught will explain the details." The judge made no attempt to stop plaintiffs' recital, let alone tell the jury that it was a gross overstatement.