MEMORANDUM AND ORDER
This case arises out of a stock for stock merger (the "Merger")between Cambridge Technology Partners (Massachusetts), Inc.("Cambridge") and Excell Data Corporation ("Excell"), whichclosed on August 31, 1998 (the "Closing Date"). After apost-closing drop in the price of Cambridge stock, certain formerExcell shareholders, including the plaintiff Leonard J. Pacheco(collectively, "Pacheco") sued, asserting claims againstCambridge for violation of Section 10(b) of the SecuritiesExchange Act of 1934 (the "Exchange Act") and for breach ofcontract, common law fraud, and negligent misrepresentation. OnJanuary 28, 1999, this Court granted Cambridge's motion todismiss the Exchange Act claim but denied the motion with respectto the common law claims. At the time, the Court indicated thatPacheco's remaining claims were "quite vulnerable to awell-pleaded motion for summary judgment." Cambridge hereattempts to exploit that vulnerability, while Pacheco moves forleave to file an amended complaint in an effort to revive theonce-dismissed Exchange Act claim.
II. Factual Background
Founded in 1991, Cambridge is a systems integration andconsulting firm based in Cambridge, Massachusetts. Its stock hasbeen publicly traded on NASDAQ since its initial public offeringin 1993. See Sims Aff. ¶ 1. From 1991 to 1997, the company wasan explosive success with revenues growing from $9,000,000 to$430,329,000 over the period. See id. ¶ 2. From 1993 throughthe close of the second quarter of 1998, Cambridge never missedanalysts' expectations. See id. ¶ 3.
During early 1998, Cambridge began negotiating for theacquisition of Excell. See Cambridge App. Ex. 11 at 32-42; Ex.12 at 15-19. The parties undertook extensive negotiationsregarding the merger. See O'Hare Aff. ¶¶ 3-6. Section 5.8 ofthe Merger Agreement contained a representation and warranty byCambridge that "[s]ince June 30, 1998, there has not been anymaterial adverse change in the Business Condition of Cambridge."Cambridge App. Ex. 7. The term "Business Condition" was definedas follows: "As used in this Agreement, `Business Condition' withrespect to any entity means the business, financial condition,results of operations, assets or prospects (as defined below). .. ." Id. at § 3.1. The term "prospects" was given the followingmeaning: "[P]rospects means events, conditions, facts ordevelopments that are known to Excell and that in the reasonablecourse of events are expected to have an effect on futureoperations of the business as presently conducted by Excell. . .." Id.
On August 27, 1998, an information statement was distributed toExcell shareholders disclosing the terms of the Merger (the"Information Statement"). See id. Ex. 8. The InformationStatement contained a three-page section describing twelve riskfactors that shareholders were encouraged to consider prior toapproving the Merger. See id. One section, entitled"Variability of Quarterly Operating Results," warned:
Variations in Cambridge's revenues and operating results occur from time to time as a result of a number of factors. . . . The timing of revenues is difficult to forecast because Cambridge's sales cycle is relatively long in the case of new clients and may depend on factors such as the size and scope of assignments and general economic conditions. Because a high percentage of Cambridge's expenses are relatively fixed, a variation in the timing of the initiation or the completion of client assignments, particularly at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter and could result in losses. . . . Operating results and liquidity may be adversely affected if market demand and revenues do not increase as anticipated.
Id. at 8-9. Pacheco executed an investor agreement (the"Investor Agreement") on August 31, 1998, in which he representedand warranted that he received and reviewed the InformationStatement; understood that his investment in Cambridge stockinvolved risk; consulted his own attorney, accountant orinvestment advisor regarding the Merger; and was either an"accredited investor" or was knowledgeable and experienced infinancial matters. See Cambridge App. Ex. 9. The InvestorAgreement also contained a provision that stated, "Cambridge hasmade available to you . . . the opportunity to ask questions andreceive complete and correct answers from representatives ofCambridge concerning the terms and conditions of the CambridgeCommon stock and to obtain any additional information relating tothe financial condition and business of Cambridge." Id. ¶ 4.
In early August, 1998, Cambridge convened a meeting of thecompany's top officers (the "Operating Committee"). Notes fromthat meeting indicate that among several issues constituting the"charter of the group" was the "Q3 and Q4 crisis — what can we doto deal with this?" Wolohojian Aff. Ex. 12. On August 10, 1998,the Operating Committee discussed a "[d]efinite demand problem."Id. On August 17, 1998, the Operating Committee notes reflectthat Bill Siebel was "scared to death about Q3" in someunspecified respect. Id. Ex. 16. On August 24, 1998, theOperating Committee notes state that Jim Sims ("Sims"), the ChiefExecutive Officer of Cambridge, believed there was a "demandproblem in every unit except Peter Chadwick," and that a"dramatic solution is needed before our next numbers release."Id. Ex. 14.
On August 26, 1998, Sims informed Pacheco that "(a) there werenot going to be any more surprises; (b) Cambridge would meetanalysts' expectations for the third quarter; and (c) the thirdquarter was going to be a great quarter." Compl. ¶ 5.10. Inaddition, at all times prior to August 31, 1998, Cambridge wasforecasting that it would hit $162,000,000 in revenues and $.25per share in earnings for the third quarter of 1998 (the "ThirdQuarter"). See Cambridge App. Ex. 10; Toscanini Aff. ¶¶ 9-11.
On August 27, 1998, Sims told Bruce Glazier of WellingtonManagement that the market's expectations for Cambridge were "toohigh" and that Cambridge's revenue growth rate would be closer to44-47% than the 50% previously predicted. See Cambridge App.Exs. 23-24. On August 31, 1998, a Cambridge representative phonedcertain analysts and institutional investors and provided similarinformation. See id. Exs. 23, 26-27.
On September 3, 1998, Sims met with a group of institutionalinvestors and stated that there was "uncertainty" regardingCambridge's present operations. See Sims Aff. ¶ 14. The nextmorning, he spoke with an analyst, Mark D'Anollfo ("D'Anollfo"),and reiterated his concerns. See id. ¶ 17. On September 4,1998, D'Anollfo downgraded Cambridge from a "Buy" to merely"Attractive." See Compl. ¶ 3.11. At the same time, D'Anollfolowered his Third Quarter revenue estimated from $160,000,000 to$156,000,000. See Cambridge App. Ex. 50. Also on September 4,Cambridge's stock dropped 22%, the largest one-day drop in thecompany's history.
Summary judgment is appropriate if, after reviewing the factsin the light most favorable to the nonmoving party, "thepleadings, depositions, answers to interrogatories, andadmissions on file, together with affidavits, if any, show thatthere is no genuine issue as to any material fact and that themoving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A party opposing a motion for summary judgment"is not entitled to build a case on the gossamer threads ofwhimsey, speculation and conjecture."Manganaro v. Delaval Separator Co., 309 F.2d 389, 393 (1st Cir.1962). Rather, "[t]here must be sufficient evidence supportingthe claimed factual dispute to require a trial to resolve theparties' different versions; the evidence manifesting the disputemust be substantial." Concord Auto Auction, Inc. v. Rustin,627 F. Supp. 1526, 1529 (D.Mass. 1986).
A. The Contract Claim
"In Massachusetts as elsewhere, absent ambiguity, contractsmust be interpreted and enforced exactly as written." Id. at1528. The obligation to enforce a contract according to its termsis even stronger where "the transaction is commercial, theprincipals practiced and represented by counsel, and the contract. . . clear"; in such a case, "it is far wiser for a court tohonor the parties' words than to imply other and further promisesout of thin air." Mathewson Corp. v. Allied Marine Indus.,Inc., 827 F.2d 850, 856 (1st Cir. 1987); see also Fowler v.Boise Cascade Corp., 948 F.2d 49, 56 (1st Cir. 1991) ("[C]ourtsshould not rewrite contracts, especially if the two contractingparties are two corporations acting at arms length.").
Cambridge contends that the plain and unambiguous language ofthe contract establishes that Cambridge made no representation orwarranty regarding its future "prospects." Section 5.8 of theMerger Agreement contained the warranty that "[s]ince June 30,1998, there has not been any material adverse change in theBusiness Condition of Cambridge." The term "Business Condition"was defined in Section 3.1 of the Agreement to mean the"business, financial condition, results of operations, assets orprospects (as defined below). . . ." The same section of theAgreement defined prospects as "events, conditions, facts ordevelopments that are known to Excell and that in the reasonablecourse of events are expected to have an effect on futureoperations of the business as presently conducted by Excell. . .." Thus, Cambridge argues that the Merger Agreement only imposeda duty of accuracy regarding "prospects" on Excell.1 Withouta corresponding duty on Cambridge, the company argues thatPacheco's breach of contract claim must fail because Pacheco onlyappears to challenge the fact that Cambridge failed to meetfinancial predictions regarding its performance for the ThirdQuarter.2 In Cambridge's view, these claims center onCambridge's "prospects" following August 31, 1998, not its"business, financial condition, or results of operations" as ofAugust 31, 1998. As such, Cambridge contends that it is entitledto summary judgment on the breach of contract claim.
Cambridge is correct. The language of the Merger Agreementplainly establishes a nonreciprocal obligation between theparties. Section 3.1 defines "Business Condition" to include"prospects," but immediately refers the reader to the specificdefinition of "prospects" that follows. The term "prospects" isthen defined only with respect to the expected performance ofExcell, not Cambridge. One may be tempted to view this as adrafting error, given that the generic term "Business Condition,"which applies to "any entity" and is used throughout theAgreement, is being defined in a section of the Agreement dealingspecifically with Excell's representations and warranties.Nevertheless, Section 3.1 also contains a definition for the term"Subsidiary" which appears immediately after the term "BusinessCondition" and immediately before the term "prospects." Thedefinition for "Subsidiary" expressly refers to "any corporationor other entity," demonstrating that the parties clearly knew howto draft a reciprocal definition. Thus, the fact that in the sameparagraph "prospects" was defined solely with reference to Excellsuggests that the parties were consciously allocating risks,rather than unwittingly drafting a nonreciprocal provision. Asthe First Circuit has emphasized, "[c]ourts should not attempt toaccomplish by judicial fiat what [a party] neglected to achievecontractually." Federal Deposit Ins. Corp. v. Singh,977 F.2d 18, 23 (1st Cir. 1992) (internal quotation omitted).
Moreover, Cambridge's construction of the Agreement comportswith the practical realities of the deal. "Material adversechange" provisions, or "MACs" as they seem to be known within themergers and acquisitions bar, are among the most heavilynegotiated portions of any business combination agreement. SeeRodrigo J. Howard, Allocating the Risks of Interim Changes: MACSand MAES in Recent Technology M & A Agreements, 1089P.L.I./Corp. 109, 113 (Dec. 1998). Moreover, "[t]he inclusion offuture `prospects' in the definition of a MAC . . . is often acontentious issue." Id. at 123. Given the volatile character ofhigh technology markets, due both to the rapidly changing natureof the industry itself and to the increasingly fickle anddramatic actions of the investing public, sellers within hightechnology mergers and acquisitions typically do not cover"prospects" in their warranties and representations. See id.("In technology company transactions, `prospects' are generallyomitted from the MAC . . . definition. . . ."); see alsoMichael J. Halloran & D. Stanley Rowland, Changes in MaterialAdverse Change Provisions in High Tech Deals, The M & A Lawyer,Mar. 1999 ("More exceptions are being grafted onto [MAC]provisions because of the high volatility experienced in stocktrading prices and in economic and market conditions. . . .").Viewed in this light, the nonreciprocal obligations of Cambridgeand Excell with respect to "prospects" in the Agreement'swarranty provision make eminent business sense.
Pacheco raises no serious opposition to this construction ofthe Agreement. Indeed, rather than contest this interpretation ofthe Agreement, Pacheco's opposition to summary judgment focuseson characterizing Cambridge's conduct. Pacheco argues thatCambridge failed to disclose actual material changes in itsbusiness condition, not forecasted ones. That is, Pachecocharacterizes Cambridge's failure to disclose as one involvingfacts that had already occurred, not prospects. Thus, because theexpress warranty of the Merger Agreement required Cambridge todisclose all material changes in its business, financialcondition, results of operations, or assets, Pacheco argues thatliability is at the very least a triable issue. See PachecoOpp'n Mem. at 3 ("All that is required [for liability] is that amaterial adverse change occurred during the Warranty Period.").
Pacheco's argument relies essentially upon three pieces ofevidence: (1) Cambridge's recognized revenue growth rate declinedfrom 19% for the first two months of Q298 to 1% for the first twomonths of Q398 (the Warranty Period); (2) Cambridge'stotal revenue growth rate declined from 20% for the first twomonths of Q298 to negative 7% for the Warranty Period; and (3)Cambridge's recognized revenue growth rate declined from 49% forthe first two months of Q397 to 32% for the Warranty Period.3None of this evidence makes out a breach of the warranty,however, because it is either immaterial as matter of law orrelates fundamentally to forward-looking "prospects" for whichCambridge incurred no warranty obligation.
The first two pieces of evidence which Pacheco uses to supportthe claim that Cambridge suffered declining revenue during theWarranty Period are immaterial as matter of law. It is unclearwhy Pacheco compares the Warranty Period with the first twomonths of the immediately preceding quarter rather than with thecomparable period from the previous year. Absent some evidencethat sequential comparison is especially probative forCambridge's business line, the ordinary comparison isyear-over-year. See Capri Optics Profit Sharing v. DigitalEquip. Corp., 950 F.2d 5, 10 (1st Cir. 1991). Thus, the Courtfocuses on Pacheco's third piece of evidence, that Cambridge'stotal revenue as tracked for the first two months of Q398declined precipitously from the same period for the previousyear.
Pacheco is correct to argue that during the Warranty Period,Cambridge's recognized revenue growth rate was 32% over theprevious year, not 57% as claimed by Cambridge. Cambridgeobtained the 57% figure by including within the Warranty Periodrevenues generated by Peter Chadwick, a computer consulting firmthat it acquired in the fourth quarter of 1997. As Pachecocorrectly argues, including those figures within the WarrantyPeriod while excluding them from the comparison period for 1997results in a stacked deck. Cambridge appears to concede as much,given its acknowledgment that SEC rules require reporting revenuewith both periods including the acquired entity's revenue. SeeWolohojian Aff. Ex. C at 192, 194. Thus, Pacheco is correct topoint out that recognized revenue for the first two months ofQ398 grew only 32% over the previous year, not 57% as claimed byCambridge.
Pacheco is also correct to point out that Cambridge's totalrevenue figures for the Warranty Period (as opposed to itsrecognized revenue figures) may have constituted evidence thatCambridge would miss Q398 projections. Cambridge argues that asof August 31, 1998 (the end of the Warranty Period) it hadachieved approximately 50% of its $162 million revenue estimatefor the entire quarter. This amount is very much in line withCambridge's historical mid-quarter results, thus leadingCambridge to argue that no material adverse change had occurredas of August 31, 1998. See Toscanini Aff. ¶ 7. As Pacheconotes, however, Cambridge only recognizes revenue upon thesigning of a contract. Thus, to obtain the full picture ofCambridge's mid-quarter performance, one must compare totalrevenue (both signed and unsigned agreements for the quarter todate) to projected revenue. This analysis shows that for theWarranty Period, Cambridge had only generated total revenuesequal to 53% of projected revenue for the quarter. By contrast,during the first two months of both Q198 and Q298 Cambridgegenerated total revenues equal to approximately 63% of the targetfor the quarter. See Pacheco Statement of Facts ¶ 31. Accordingto Pacheco, these figures "demonstrate that, as of August 31, thecompany was projecting it would generate less than $151 millionin Q3 revenues — $11 million short of the revenues Cambridge hadpreviously forecasted it would achieve and had led the public,[Pacheco]and Wall Street to expect." Pacheco Opp'n Mem. at 9.4
There are at least two reasons why Pacheco's view of theevidence, even if correct, does not suffice to avoid summaryjudgment. First, Pacheco has only demonstrated that (1)recognized revenue grew 32% for the Warranty Period over theprevious year, and (2) total revenue for the Warranty Periodcomprised a smaller percentage of projected quarter results thanin the same period for Q198 and Q298. The first fact demonstratesonly that Cambridge is being overzealous in its accounting nowin its pleadings, not that it must have disclosed evidence at thetime which indicated that Q398 results may only show a 32% growthrate at quarter's end. The second fact constitutes the same typeof sequential comparison that cannot be deemed material withoutsome predicate explanation of why sequential rather thanyear-over-year analysis is preferred. See Capri Optics, 950F.2d at 10.
Second, and more importantly, Pacheco has only demonstratedfacts that bear on the expected ability of Cambridge to meetthird quarter expectations; in other words, facts that bear onCambridge's "prospects." Pacheco appears to recognize as much inits opposition memorandum:
The decline in unsigned revenue is reflected in the company's own forecasts which were freely available to senior management. . . . These demonstrate that, as of August 31, the company was projecting it would generate less than $151 million in Q3 revenues — $11 million short of the revenues Cambridge had previously forecasted it would achieve and had led the public, [Pacheco] and Wall Street to expect.
Pacheco Opp'n Mem. at 9 (emphasis added). In essence, Pachecowants the Court to adopt a rule of law that would eviscerate thedistinction between accounting and forecasting. By the parties'express agreement, Cambridge's warranties only covered theaccuracy of representations about its current operations, not itsfuture prospects. The availability of internal projections thatsuggested end-of-quarter results might miss expectations bearsonly on the latter, non-warranted category of information.
It is a matter of universal business practice that accountingresults are maintained on a quarterly basis. The fact thatanalysts and the Street crave intra-quarterly information doesnot mean that companies such as Cambridge incur liability bymaintaining internal company projections that may differ fromexternal reports. As one court recently stated:
It is clear that Sybase generated countless budget summaries and reports as a way of tracking its financial condition. Sybase's various internal budget forecasts often yielded different numbers, because different managers and executives used different types of data and field information to compile these figures. Of all the internal budgets that it generated, Sybase maintains that its official internal forecast was contained in the Yellow Sheet internal budget summary. Plaintiffs have done nothing to controvert this contention, instead only charging that Sybase should have used other budget summaries that are, in plaintiffs' view, more accurate.
In re Sybase, Inc. Securities Litig., 48 F. Supp.2d 958, 962(N.D.Cal. 1999); see also In re Stac Electronics Sec. Litig.,89 F.3d 1399, 1411 (9th Cir. 1996) ("Any firm generates a rangeof estimates internally or through consultants. It may reveal theprojection it thinks best while withholding others, so long asthe one revealed has a `reasonable basis.'"). In this case, thereis not even a question whether Cambridge's official projectionsremained "reasonable" in light of mid-quarter information. Evenif the official projections did become unreasonable under thepertinent securities law standard,5 they would still bemisrepresentations only with respect to the "prospects" ofCambridge.6 As such, they are not covered by the warranty.
Put simply, the question in this case is whether a company'sinternal knowledge of likely difficulties in meeting futureearnings expectations bears on its "prospects" or its "results ofoperations." This Court rules that it bears on the former; thatis, the intra-quarterly information that Pacheco views asevidencing a material adverse change in Cambridge's currentbusiness condition instead must be conceived of as informationrelating only to Cambridge's ability to meet end-of-quarterexpectations, i.e., its "prospects." Any other construction wouldrender the word "prospects" meaningless and the parties' stylizeddrafting convention superfluous. Such judicial revision isunmerited in this case. See Baybank Middlesex v. 1200 BeaconProperties, Inc., 760 F. Supp. 957, 963 (D.Mass. 1991) (Caffrey,J.) ("[A] contract must not, whenever possible, be construed soas to render any of its terms meaningless."); Edmund WrightGinsberg Corp. v. C.D. Kepner Leather Co., 317 Mass. 581, 587,59 N.E.2d 253 (1945) ("It is a general rule in the constructionof contracts that whenever practicable every word shall be givensome effect.").
A similar situation was addressed in Goodman Mfg. Co. v.Raytheon Co., Civ. A. No. 98 Civ. 2774(LAP), 1999 WL 681382(S.D.N.Y. Aug.31, 1999). The plaintiff agreed to buy a whollyowned subsidiary of the defendant. The defendant represented andwarranted that there had been "no material adverse change in theBusiness Condition of [the subsidiary]," where the term "BusinessCondition" was defined to include "business assets or financialcondition." Id. at *13. The plaintiff argued that thesubsidiary's "future prospects" had changed during the warrantyperiod and that therefore the defendant breached the warrantyprovision. The court rejected the view that "Business Condition"as defined must include "future prospects":
As for plaintiff's theory that "future prospects" must be included in the definition of "financial condition," "business," or "assets," the parties failed to include such a meaning in the Agreement, and I decline the invitation to insert it by judicial construction. Since the parties limited the warranties and representations that make up the Agreement, I may not now change them but must instead hold [the plaintiff] to the deal it negotiated.
Id. at *14. Here the justification for keeping the definitionsof "Business Condition" and "prospects" distinct is evenstronger, given that the Agreement evinces a specific intentionby the parties to exclude future expectations with respect toCambridge.
For the foregoing reasons, Pacheco has failed to raise adispute of material fact with respect to the breach of warrantyclaim. The Court therefore ALLOWS Cambridge's motion for summaryjudgment as to the breach of warranty claim.
B. The Fraud and Misrepresentation Claims
Pacheco bases the fraud and negligent misrepresentation countson: (1) Cambridge's representation and warranty in the MergerAgreement that "[s]ince June 30, 1998, there has not been anymaterial adverse change in the Business Condition of Cambridge";and (2) several statements made by Sims on August 26, 1998 toExcell shareholders. See Compl. ¶¶ 5.10, 5.13. Cambridge arguesthat neither of these types of alleged misrepresentations cansupport a claim for fraud or misrepresentation.
1. Material Adverse Change in Prospects Between June 30 and August 31, 1998
In order for Pacheco to have a triable case of fraud based uponCambridge's representation that no "material adverse change inthe Business Condition of Cambridge" occurred between June 30 andAugust 31, 1998, Pacheco must demonstrate that the statement wasfalse. As described above, the term "Business Condition" did notinclude the "prospects" of Cambridge and, therefore, Pacheco'sfraud claims premised upon the warranty representation must failas matter of law.
Pacheco's fraud claims premised upon the warrantyrepresentation also fail because Pacheco has not demonstratedthat the nondisclosed information — even if not related to"prospects" of Cambridge — was material. In the Complaint,Pacheco charges that by August 26, 1998, Cambridge knew that"revenues for the third quarter of 1998 were not going to meetanalyst expectations — they would probably fall short by $5-6million." Compl. ¶ 5.12. To determine whether this factualallegation could constitute a "material adverse change," theCourt may look to the law governing "materiality" under theExchange Act. See Milton v. Van Dorn, 961 F.2d 965, 969 (1stCir. 1992) (holding that same Section 10[b] standard of"materiality" governed securities fraud, common law fraud, andbreach of contract claims).
Under that standard, a revenue shortfall of $5-6,000,000 ongross revenues of approximately $160,000,000 constituted only athree percent miss. Numerous cases hold similar shortfallsimmaterial as matter of law. See In re Convergent TechnologiesSec. Litig., 948 F.2d 507, 514 (9th Cir. 1991) (holdingimmaterial a ten percent quarterly revenue shortfall); Wenger v.Lumisys, Inc., 2 F. Supp.2d 1231, 1248-49 (N.D.Cal. 1997)(holding immaterial an eight percent quarterly revenue shortfalland a nine percent quarterly earnings shortfall); In re SiliconGraphics, Inc. Securities Litig., 970 F. Supp. 746, 766 (N.D.Cal.1997) (holding immaterial a five percent quarterly revenueshortfall); cf. Glassman v. Computervision Corp., 90 F.3d 617,633 (1st Cir. 1996) (noting that "minor drop of a few percent isnot adequate to support the claim that the difference in backloglevels between quarters was material").
Pacheco also alleges that, as of August 26, 1998, Cambridgeknew but concealed that its long-term growth prospects haddeclined from 50% to 40-45%. Numerous market analysts, however,had already pegged Cambridge's long-term growth at between40-50%, with some projecting growth between 40-45% before theClosing Date. See Cambridge App. Ex. 2 (chart summarizing Exs.12-35). Allegedly undisclosed information which the markethas already perceived is immaterial as matter of law. See Randv. Cullinet Software, Inc., 847 F. Supp. 200, 210 (D.Mass. 1994)(Wolf, J.) (market analysts "fully perceived" the allegedlyundisclosed information, thus rendering it immaterial);Pinkowitz v. Data General, Civ. A. No. 90-11854-Z, 1991 WL288829 at *3 (D.Mass. Dec.27, 1991) (Zobel, J.) (publicly knowninformation not actionable as matter of law); see also In reTseng Labs, Inc. Securities Litig., 954 F. Supp. 1024, 1029(E.D.Pa. 1996) (because information already disclosed in analystreports, "facts allegedly omitted by Defendants would already bereflected in the stock's price"); In re Cypress SemiconductorSecurities Litig., 891 F. Supp. 1369, 1379 (N.D.Cal. 1995)(alleged nondisclosure of information, already "crediblyavailable" to public through analyst reports, immaterial asmatter of law).
Moreover, "[a]n issuer is not required to `disclose interimoperating results for the quarter in progress whenever itperceives a possibility that the quarter's results may disappointthe market. . . . Reasonable investors understand that businessesfluctuate, and that past success is not a guarantee of more ofthe same. There is always some risk that the quarter in progressat the time of an investment will turn out for the issuer to beworse than anticipated.' It is only when `the issuer is inpossession of [hard] nonpublic information that the quarter inprogress will be an extreme departure from the range of resultswhich could be anticipated based on currently availableinformation' that disclosure might be required under thesecurities laws." Glassman, 90 F.3d at 632 n. 24 (quoting Shawv. Digital Equip. Corp., 82 F.3d 1194, 1210 [1st Cir. 1996]). Inthe present case, Pacheco's allegations and the summary judgmentrecord simply do not suffice to establish "an extreme departurefrom the range of results which could be anticipated based oncurrently available information." Shaw, 82 F.3d at 1210(emphasis added).
2. Oral Statements by Sims
Pacheco alleges that on August 26, 1998, Sims told Pacheco that"(a) there were not going to be any more surprises; (b) Cambridgewould meet analysts' expectations for the third quarter; and (c)the third quarter was going to be a great quarter." Compl. ¶5.10. Cambridge contends that none of these statements areactionable as matter of law because: (a) any reliance thatPacheco may have placed on these statements is unreasonable asmatter of law; (b) they are accompanied by legally sufficientcautionary language; and (c) they constitute "puffery." Only thelast of these arguments has merit.
Cambridge argues that any reliance by Pacheco upon the August26 oral statements is unreasonable as matter of law due to theexpress language of the Investment Statement: "No person has beenauthorized to give any information or to make any representationsnot contained in this Information Statement in connection withthe matters referred to herein and, if given or made, suchinformation or representations must not be relied upon as havingbeen authorized by Cambridge or Excell." Cambridge App. Ex. 8 at1-2. In Kennedy v. Josephthal & Co., 814 F.2d 798, 801 (1stCir. 1987), the plaintiffs purchased units of a company pursuantto an offering memorandum "replete with warnings" about the risksinvolved in the transaction. When the plaintiffs lost theirinvestment, they alleged that prior to receiving the memorandum,the defendant's representative made false oral statements. TheFirst Circuit held those statements nonactionable on the basis ofthe explicit warnings contained in the offering memorandum. Seeid. at 805; see also Jackvony v. RIHT Financial Corp.,873 F.2d 411, 416 (1st Cir. 1989) ("Insofar as Jackvony argues thatpre-Agreement statements that Hospital Trust would keep Columbusseparate for five years or more were materially misleading, hisclaim fails because in light of the laterAgreement and Prospectus, he could not reasonably have reliedupon them.").
Cambridge, however, ignores a section of the Investor Agreementthat stated, "Cambridge has made available to you . . . theopportunity to ask questions and receive complete and correctanswers from representatives of Cambridge concerning the termsand conditions of the Cambridge Common stock and to obtain anyadditional information relating to the financial condition andbusiness of Cambridge." Cambridge App. Ex. 9 ¶ 4. This provisionrepresents evidence that the parties intended Pacheco to have ameaningful opportunity to ask questions of Cambridge. Thedisclaimer in the Information Statement is, thus, at the veryleast contradicted by the provision of the Investor Agreement.For that reason, the Court rejects the view that the InvestorStatement renders Pacheco's reliance unreasonable.
Cambridge also argues that the statements should benonactionable because they were accompanied by sufficientcautionary language to render them nonactionable: "[W]henstatements of `soft' information such as forecasts, estimates,opinions or projections are accompanied by cautionary disclosuresthat adequately warn of the possibility that actual results orevents may turn out differently, the `soft' statements may not bematerially misleading." Glassman, 90 F.3d at 626 n. 11 (quotingShaw, 82 F.3d at 1213). Cambridge premises this "bespeakscaution" defense on the Investment Statement that was given toeach investor one day after the alleged statements made by Sims.It does not appear, however, that the First Circuit has ever heldthat noncontemporaneous cautionary disclosures can suffice torender statements immaterial as matter of law. Accordingly, theCourt declines to shield the August 26 oral statement under thebespeaks caution doctrine.
Cambridge's final argument has more merit. As the First Circuitnoted in Shaw, 82 F.3d at 1218 n. 32, "Under the common law offraud, courts typically would find . . . [optimistic] statementsto be mere `puffing' or sales talk upon which no reasonableperson would rely, and thus to be legally insufficient to supporta claim." See also Schott Motorcycle Supply, Inc. v. AmericanHonda Motor Co., Inc., 976 F.2d 58, 65 (1st Cir. 1992)(statements respecting future profitability "constitute nothingmore than `puffing' or `trade talk' upon which no reasonableperson would rely"); In re Peritus Software Servs., Inc.Securities Litig., 52 F. Supp.2d 211, 220 (D.Mass. 1999)(corporate puffery rule covers loose optimism about a company'sfuture prospects); In re Boston Tech., Inc. Sec. Litig.,8 F. Supp.2d 43, 54 (D.Mass. 1998) (Lasker, J.) ("[I]t would bepatently unreasonable for an investor to consider `puffery' whenengaged in investment decision making."). Massachusetts hasfollowed this trend since at least 1945: "[N]ot allrepresentations made by a seller are actionable. He is allowedsome leeway in representations which may be regarded as`puffing,' or such as are only matters of opinion or belief, orsuch as are merely promissory in nature." Moran v. Levin,318 Mass. 770, 773, 64 N.E.2d 360 (1945); Zimmerman v. Kent,31 Mass. App. Ct. 72, 79, 575 N.E.2d 70 (1991) (statement on whichliability for misrepresentation may be based must be one of fact,not expectation, estimate, or opinion); see also Greenery Rehab.Group, Inc. v. Antaramian, 36 Mass. App. Ct. 73, 75,628 N.E.2d 1291 (1994) (puffery that tenants were "solid" and "good as gold"not actionable).
The Court rules that the statements made by Sims constitutenonactionable puffery. As Cambridge has demonstrated in itsbriefing, representations similar to each of the statements madeby Sims have been held immaterial as matter of law in othercases:
"There are not going to be any surprises."
See, e.g., Karacand v. Edwards, 53 F. Supp.2d 1236, 1252 (D.Utah 1999) (statement that "the company did not expect any surprises in the fourth quarter" held "meaningless and immaterial" as matter of law).
"Cambridge would meet analysts' expectations for the third quarter."
See, e.g., Raab v. Gen. Physics Corp., 4 F.3d 286, 290 (4th Cir. 1993) (statements that "results during the remainder of 1992 should be in line with analysts' current projections" and that company had "an expected annual growth rate of 10% to 30% over the next several years" held immaterial as matter of law); Thornton v. Micrografx, Inc., 878 F. Supp. 931, 935 (N.D.Tex. 1995) (dismissing claim predicated on defendant's statement that "he is comfortable with Wall Street estimates of 35% to 40% revenue growth this year"); In re Browning-Ferris Indus., Inc. Sec. Litig., 876 F. Supp. 870, 894 (S.D.Tex. 1995) (officer's statement that he was "comfortable with analysts' earnings estimates for the year" held not actionable); Pitten v. Jacobs, 903 F. Supp. 937, 941-44 (D.S.C. 1995) (dismissing claim predicated on defendant's statement that he "was `comfortable with' analysts' earnings estimates"); Colby v. Hologic, Inc., 817 F. Supp. 204, 212 (D.Mass. 1993) (dismissing with prejudice claim predicated on statement that officer is "comfortable with a wide range of street estimates for . . . earnings").
"The third quarter [is] going to be a great quarter."
See, e.g., San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Companies, Inc., 75 F.3d 801, 805 (2d Cir. 1996) (statement that company is expecting strong year for its businesses held nonactionable); Hillson Partners Ltd. Partnership v. Adage Inc., 42 F.3d 204, 216 (4th Cir. 1994) (statement that company was "on track toward reaching its previously forecast goal" immaterial); In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086, 1095 (N.D.Cal. 1994) (statement that "business will be good this year" held nonactionable).
Cambridge Mem. at 13-14. The Court follows these cases and holdsthat the statements challenged in the complaint are nonactionableas matter of law.
C. Pacheco's Motion to Amend
Pacheco has moved to amend the Complaint to reinstitute theclaim under the Exchange Act. Pacheco relies upon the samerepresentations challenged in its common law fraud count, withthe addition of one new allegation: that Sims told Pacheco onAugust 26, 1998 that "the price of Cambridge's stock would be inthe upper 40's by the end of the quarter." Pacheco Mot. Am. Mem.at 6. For the same reasons described above with respect to thecommon law fraud count, the Court rules that the originalrepresentations are insufficient, as matter of law, to ground aclaim under the Exchange Act.7 The alleged guarantee by Simsthat Cambridge's stock would trade at a certain price by the endof the quarter is also nonactionable because, as matter of law,any reliance by an investor on a purported guarantee of aspecific stock price is unreasonable. See Glassman, 90 F.3d at626 ("Forecasts are not guarantees of, or insurance policies for,a firm's future performance, nor are they understood as such byreasonable investors."); Kowal v. MCI Communications Corp.,16 F.3d 1271, 1276 (D.C.Cir. 1994) (financial projections andgeneralized statements of optimism "are not guarantees of futurefinancial performance, nor are they understood as such byreasonable investors"); Haft v. Eastland Fin. Corp.,772 F. Supp. 1315, 1320 (D.R.I. 1991) (holding statement thatstock should trade in the $10.50 to $11.00 range immaterial asopinion).
D. The Counterclaims
Pacheco has also moved this Court to exclude from trial anyevidence or argument relating to claims and factual issues thathave been the subject of arbitration. Given the current postureof this case, Pacheco's motion is more in line with a request todismiss Cambridge's remaining counterclaims. A review of thearbitrator's decision reveals that Pacheco's motion hassubstantial merit. Specifically, it appears that all claimsrelated to the "business condition of Excell" and the"undisclosed tax liabilities" were decided in favor of Pacheco.Moreover, the factual supports for these claims mirror thefactual allegations in Cambridge's counterclaims.
At the same time, however, it is not clear that all theallegations made by Cambridge against Pacheco were eliminated bythe arbitrator's decision. Both the arbitrator's decision andPacheco's motion identify specific claims that were notpresented at the Arbitration Hearing. See Pacheco's Mot. inLimine Mem. at 5 n. 2; Pacheco's Supp. Mot. in Limine Mem. Ex. A.While it may be that these claims lack substance, based on theincomplete record currently before this Court, the counterclaimscannot yet be dismissed.
For the foregoing reasons, the Court ALLOWS the motion forsummary judgment [Docket # 63] and DENIES the motion to amend[Docket # 48].
1. As Cambridge notes, this interpretation of "prospects" asnonreciprocal comports with several other nonreciprocalprovisions in the Agreement. For example, Excell maderepresentations and warranties regarding several items thatCambridge did not. See Cambridge App. Ex. 8 at § 3.5 (Excell'stechnology and intellectual property rights); § 3.7 (Excell's taxliability); § 3.12 (present or threatened litigation againstExcell); § 3.13 (non-default by Excell on any legal instrument orjudgment); § 3.14 (Excell's major contracts); § 3.15 (Excell'smaterial customer relations); § 3.23 (Excell's environmentalliability); § 3.24 (enforceability of Excell contracts); and §3.27 (Year 2000 compliance of Excell computer systems).Furthermore, the representations and warranties of Excellconcerning financial statements and its business are moredetailed and extensive than corresponding obligations incurred byCambridge. Compare id. §§ 3.6, 5.5 with §§ 3.8, 5.8.
2. See, e.g., Compl. ¶ 4.5 ("Cambridge managementanticipated that the company's rate of revenue growth for thesecond half of 1998 and for 1999 would be less than Cambridge andanalysts following the stock expected."); ¶ 4.5 (alleging thatCambridge knew but failed to disclose that certain deferredprojects would cause Cambridge to miss revenue expectations forthe Third Quarter by $5-6,000,000); ¶ 5.12 (alleging thatCambridge knew but failed to disclose that revenues in the secondhalf of 1998 and 1999 were likely to grow by 40-45% instead of50%).
3. Pacheco makes parallel allegations with respect toCambridge's North American business unit. Because the same legalinterpretation applies to these allegations, they are notdiscussed separately.
4. Pacheco also relies upon a number of statements taken frominternal company meeting notes that purportedly support the viewthat Cambridge knew Q398 was going to be disastrous. SeePacheco Opp'n Mem. at 15. Many of these statements are taken outof context or are so vague as to be unreliable evidence ofmanagement knowledge. More fundamentally, however, all of thestatements purportedly refer to Cambridge's ability to meet thirdquarter expectations. As such, they all refer to Cambridge's"prospects," which, as noted above, renders them nonactionableunder the parties' agreement.
5. See In re Number Nine Visual Tech. Corp. Sec. Litig.,51 F. Supp.2d 1, 16 (D.Mass. 1999) ("[I]nformation regarding theimpending results of a quarter might need only be disclosed whenstatements are made very near to the end of that quarter.").
6. This is also the problem with Pacheco's reliance on theefficient market hypothesis. Pacheco argues that "stock marketsare presumed to be efficient, reflecting all currently knowninformation." Pacheco Opp'n Mem. at 10. Thus, the story goes, themarket's adverse reaction to Cambridge's September 4, 1998announcement (in which the price of Cambridge stock dropped some22%) constitutes "dispositive evidence" that the disclosedchanges were both material to the market and not previously knownby the market. Pacheco even offers the testimony of an expert invaluation to support this argument. See id. at 11 (noting thatProfessor Glenn Hubbard will testify that "changes in stockprices are rational responses to the arrival of new informationto the market"). Putting aside the merits of this syllogisticproposition, it does nothing to change the fact that the marketwas responding to information about Cambridge's prospects. OnSeptember 4, Cambridge disclosed that its long-term revenuegrowth rate may drop to 40-45% and that it may not meetexpectations for Q398 and Q498. This information may indeed havebeen material to the market, but it is not covered by theparties' warranty.
7. Specifically, the representation contained in the MergerAgreement is nonactionable because it did not concern the"prospects" of Cambridge and Pacheco has only attempted todemonstrate the falsity of the representation through evidence ofCambridge's Q398 "prospects." See supra Section III(B)(1). Theoriginal three oral statements by Sims are nonactionable because,as discussed above, they constitute puffery. See supra SectionIII(B)(2).