Opinion for the Court filed by Circuit Judge SENTELLE.
SENTELLE, Circuit Judge:
This is an appeal from a judgment of the district court for the District of Columbia dismissing a complaint under the Securities Exchange Act of 1934 and Rule 10b-5 for failure to plead fraud with sufficient particularity and for failure to state a claim upon which relief could be granted. Plaintiff-appellants, who claim to be members of a class of individuals who purchased MCI common stock from January 30, 1990 to November 15, 1990, sued defendant-appellees MCI Communications Corp. ("MCI") and several of its directors and officers. The complaint alleged that during the putative class period, MCI made statements of optimism and projections of future financial performance which were false and misleading because the company failed to disclose certain competitive pressures and the negative impact that MCI's merger with Telecom U.S.A. would have on its future financial performance. Plaintiffs claimed that MCI's projections of future financial performance lacked a reasonable basis when made because the company knowingly or recklessly disregarded the impact these factors would have on the accuracy of its projections. Because the complaint failed to satisfy FED.R.CIV.P. 9(b) and 12(b)(6), the district court properly ordered dismissal and did not abuse its discretion in denying leave to amend. We therefore affirm.
We accept as true the following facts set out in plaintiffs' complaint for the purposes of this appeal. See Schuler v. United States, 617 F.2d 605, 608 (D.C.Cir.1979). Defendant-appellee MCI is a Delaware corporation with its headquarters in Washington, D.C. The company is publicly-held. Its shares trade over-the-counter on the NASDAQ's National Market System. During the putative class period, MCI operated as the second-largest provider of long-distance telephone service in the United States. At that time, American Telephone and Telegraph Co. ("AT & T") controlled 64-70 percent of the long-distance market, compared to MCI's 13-15 percent share. Telecom U.S.A. ("Telecom") was the nation's fourth largest long-distance provider until April 8, 1990, when
For the past decade, MCI has reported nearly uninterrupted improvement in its revenues, earnings, and earnings per share. This solid historical performance was capped with record earnings and a 20% increase in revenues in 1989. The company continued to report year-to-year gains in its first quarter ended March 31, 1990; its second quarter ended June 30, 1990; and its third quarter ended September 30, 1990. However, after the stock market closed on November 15, 1990, MCI announced that it was consolidating its seven regional divisions into four, that it was restructuring operations and could reduce its workforce 6% nationwide in the following six months to reduce expenses, and that it expected revenue growth in the fourth quarter to be "flat" compared to the prior quarter if existing trends continued. The company also acknowledged that restructuring and merger costs would constrain growth in the next several quarters, and that AT & T's aggressive marketing was eroding its market share gains in the residential and small-to-medium sized business markets. The day following the announcement, the price per share of the company's common stock dropped from $29.99 per share to $22.62 at the close of trading.
On November 19, nine shareholders filed this lawsuit as a class action in the United States District Court for the District of Columbia, alleging that MCI and its management had engaged in securities fraud. See Kowal v. MCI Communications Corp., No. 90-2862 (D.D.C. filed Nov. 19, 1991). On February 19, an amended complaint was filed by fourteen named plaintiffs, asserting claims against MCI and two of its senior officers under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (1993) (collectively "Rule 10b-5"). The complaint alleged that between January 30, 1990 and November 15, 1990, MCI made certain optimistic statements and projections of future earnings, revenues and sales which were false and misleading, thereby artificially inflating the price of MCI common shares. The principal statements that the complaint alleged to be actionable under Rule 10b-5 included the following:
Appellants contend that MCI's statements regarding its future prospects were false and misleading because the company did not disclose the following "facts":
Appellants alleged that the company's numerous projections and statements of optimism lacked a reasonable basis when made because MCI knowingly or recklessly disregarded these factors in making their predictions of future financial performance.
On March 21, 1991, the defendants moved to dismiss the complaint under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. On May 19, 1992, the district court granted the motion. Because it viewed much of the information allegedly omitted as negative characterizations of disclosed corporate events, general industry conditions, or the activities of MCI's competitors, the court
Appellants challenge the district court's decision to dismiss the complaint, contending that they have stated a claim under Rule 10b-5, met all pleading obligations under Rule 9(b), and in any case should have been permitted to amend their complaint if it was found to be inadequate on either of these grounds.
A. Rule 12(b)(6)
To state a claim for securities fraud under Rule 10b-5, a plaintiff must allege that the defendant knowingly or recklessly made a false or misleading statement of material fact in connection with the purchase or sale of a security, upon which plaintiff reasonably relied,
The complaint should not be dismissed unless plaintiffs can prove no set of facts in support of their claim which would entitle them to relief. See Schuler v. United States, 617 F.2d at 608 (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)). To that end, the complaint is construed liberally in the plaintiffs' favor, and we grant plaintiffs the benefit of all inferences that can be derived from the facts alleged. Id. 617 F.2d at 608. However, the court need not accept inferences drawn by plaintiffs if such inferences are unsupported by the facts set out in the complaint. Nor must the court accept legal conclusions cast in the form of factual allegations. See Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 2944, 92 L.Ed.2d 209 (1986).
Appellants did not allege and do not contend on appeal that MCI misrepresented historical data about the company's financial performance, but base their claim of securities fraud entirely on certain forward-looking statements of optimism and projections that the company voluntarily disclosed to the market. We have not previously examined the actionability of such statements under Rule 10b-5 or set out plaintiffs' obligations in pleading such claims. As a sister circuit has observed, "the matter of whether and under what circumstances predictions are actionable is today a complicated and evolving area of securities law." Isquith v. Middle South Utilities, Inc., 847 F.2d 186, 203 (5th Cir.), cert. denied, 488 U.S. 926, 109 S.Ct. 310, 102 L.Ed.2d 329 (1988). Nonetheless, caselaw in other circuits sheds considerable light on the allegations necessary to state a claim for securities fraud based on misleading projections.
Financial projections and generalized statements of optimism represent management's opinion of how the company is expected to perform within a defined time frame. See Capri Optics Profit Sharing v. Digital Equipment Corp., 950 F.2d 5, 10 (1st Cir. 1991). Such projections are not guarantees of future financial performance, nor are they understood as such by reasonable investors. See Raab v. General Physics Corp., 4 F.3d 286 (4th Cir.1993); In re Verifone Sec. Litig., 784 F.Supp. 1471, 1481 (N.D.Cal.1992), aff'd, 11 F.3d 865 (9th Cir.1993). Instead, knowing the inaccuracy inherent in forecasting, investors generally opt to use or disregard predictions
Statements of opinion or forward-looking statements such as projections, estimates or forecasts are considered "statements of fact" for the purposes of the securities laws. See Isquith, 847 F.2d at 203; cf. Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, ___, 111 S.Ct. 2749, 2757, 115 L.Ed.2d 929 (1991). As such, while a company is generally under no obligation to disclose its expectations for the future to the investing public, see Regulation S-K, Item 303, Instr. 7, 17 C.F.R. § 229.303 (1993), if the company chooses to volunteer such information, its disclosure must be full and fair, and courts may conclude that the company was obliged "to disclose additional material facts ... to the extent that the volunteered disclosure was misleading...." In re Craftmatic Sec. Litig., 890 F.2d 628, 641 n. 17 (3d Cir.1989). See also Panter v. Marshall Field & Co., 646 F.2d 271, 292 (7th Cir.), cert. denied, 454 U.S. 1092, 102 S.Ct. 658, 70 L.Ed.2d 631 (1981).
The "`only truly factual elements involved in a projection are the implicit representations that the statements are made in good faith and with a reasonable basis.'" Isquith, 847 F.2d at 204 n. 12 (quoting B. Hiler, The SEC and the Courts' Approach to Disclosure of Earnings Projections, Asset Appraisals, and Other Soft Information: Old Problems, Changing Views, 76 Md. L.Rev. 1114, 1123 (1987)). Accordingly, projections and statements of optimism are false and misleading for the purposes of the securities laws if they were issued without good faith or lacked a reasonable basis when made. See In re Trump Casino Sec. Litig., 7 F.3d 357, at 371 (3d Cir.1993); Roots Partnership v. Land's End, Inc., 965 F.2d 1411, 1417 (7th Cir.1992); Sinay v. Lamson & Sessions Co., 948 F.2d 1037, 1040 (6th Cir. 1991); Isquith, 847 F.2d at 203-04. See also In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir.1989), cert. denied, 496 U.S. 943, 110 S.Ct. 3229, 110 L.Ed.2d 676 (1990).
The district court did not hold that projections and statements of optimism are not actionable under the federal securities laws, but did conclude that most of misstatements and omissions alleged in the complaint did not state a claim because MCI had no duty to disclose the information in question.
We agree with the district court that many of plaintiffs' allegations called for pejorative characterizations of disclosed factual matters. See, e.g., Kowal v. MCI Communications Corp., 1992 WL 121378, *2, No. 90-2862, slip op. at 11 (D.D.C. May 20, 1992) (allegations claimed company failed to disclose that MCI's competitive position was "deteriorating;" funds were "insufficient" to compete "effectively;" AT & T placed "great pressure" on MCI). Since the use of a particular pejorative adjective will not alter the total mix of information available to the investing public, see Basic, 485 U.S. at 231-32, 108 S.Ct. at 983, such statements are immaterial as a matter of law and cannot serve as the basis of a 10b-5 action under any theory. See, e.g., In re Trump Casino Sec. Litig., 7 F.3d 357, 374; Goldberg v. Meridor, 567 F.2d 209, 218 n. 8 (2d Cir.1977), cert. denied, 434 U.S. 1069, 98 S.Ct. 1249, 55 L.Ed.2d 771 (1978); Hershey v. MNC Financial, Inc., 774 F.Supp. 367, 372 (D.Md.1991); In re RAC Mortgage Inv. Corp. Sec. Litig., 765 F.Supp. 860, 864 (D.Md.1991).
B. Rule 9(b)
Appellant's remaining allegations, which assert that MCI's projections and statements of optimism lacked a reasonable basis when made, were properly dismissed since plaintiffs failed to plead fraud with the degree of
We review de novo dismissal under Rule 9(b) for failure to plead fraud with particularity. See Wool v. Tandem, 818 F.2d 1433, 1439 (9th Cir.1987). In so doing, "all the allegations of material fact are taken as true and construed in the light most favorable to the non-moving party ... [and] it must appear to a certainty that the plaintiff would not be entitled to relief under any set of facts that could be proved." Id. (citations deleted).
Rule 8 of the Federal Rules of Civil Procedure states that a claim for relief should contain "a short and plain statement of the claim showing that the pleader is entitled to relief," but Rule 9(b) also requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud ... shall be stated with particularity." FED.R.CIV.P. 9(b). Reading these two provisions in conjunction "normally ... means that the pleader must state the time, place and content of the false misrepresentations, the fact misrepresented and what was retained or given up as a consequence of the fraud." United States v. Cannon, 642 F.2d 1373, 1385 (D.C.Cir.1981) (quotation deleted), cert. denied, 455 U.S. 999, 102 S.Ct. 1630, 71 L.Ed.2d 865 (1982).
However, where plaintiffs seek to base a claim of securities fraud on false and misleading projections or statements of optimism, their complaint must also plead sufficient facts that if true would substantiate the charge that the company lacked a reasonable basis for its projections or issued them in less than good faith. See Roots, 965 F.2d at 1419 (plaintiffs bear "the burden of pleading sufficient facts on both the `reasonable basis' and `good faith' issues"); In re Trump Casino Sec. Litig., 7 F.3d 357, at 373 n. 17 (allegation that estimate of casino's value was misleading because it lacked adequate basis in fact "failed to satisfy the particularity requirement of Rule 9(b)" because it failed to allege sufficient facts suggesting unreasonableness of appraisal methodology); Raab, 4 F.3d 286, at 288 (allegation of fraud based on statement that "results during the remainder of 1992 should be in line with analysts' current projections" failed to satisfy 9(b), when plaintiffs "alleged no facts showing that General Physics did not believe these statements were accurate" at the time made); In re Verifone, 784 F.Supp. at 1487 ("conclusory assertion that the projections ... lacked a reasonable basis" was "unsubstantiated conclusion" and "insufficient to satisfy Rule 9(b)").
Appellants contend that they have pled sufficient facts to support an inference that MCI's statements of optimism and projections lacked a reasonable basis when made. They point to the "gross deviation" between the results actually achieved by MCI and the results that MCI predicted would be achieved. We entirely reject this theory. The fact that the company's performance did not conform to that predicted supports no inference that MCI's statements lacked a reasonable basis when made. "Every prediction of success that fails to materialize cannot create on that account an action for securities fraud ...," since statements of anticipated earnings "hardly constitute a guarantee that earnings [will] be forthcoming in particular amounts...." Raab, 4 F.3d 286, at 288. A failure to meet projected earnings or revenues "does not in itself suggest the goal fell outside the realm of reasonable probability and therefore lacked a reasonable basis." Roots, 965 F.2d at 1418.
Appellants further ask us to infer that appellees were aware of undisclosed facts which seriously undermined the validity of their projections, and therefore acted in less than good faith by offering projections which they knew or should have known lacked a reasonable basis in fact. We do not find such an inference reasonable under the facts pled in the complaint. In Roots, the Seventh Circuit considered securities fraud allegations very similar to those in the instant case. The plaintiffs in Roots alleged that the defendants knew or should have known that certain operational problems at the company (including slackening demand, low-margin liquidations and declining profit margins) would preclude the company from achieving its earnings goals, and that the company's earnings projections were therefore false and misleading. The court first noted that the plaintiffs did not allege that the defendants knew or should have known that the scope of
Appellants' complaint suffers from the same defects. We conclude that they have failed to set forth sufficient facts to suggest that MCI's optimistic statements and earnings projections lacked a reasonable basis by virtue of the competitive factors and operational problems set forth in the complaint. The complaint itself describes MCI's long history of positive earnings, and the facts set out in the complaint establish that these earnings continued through three of the four reporting quarters that fell within the putative class period. A history of successful operations in many circumstances may provide management with a reasonable basis for predictions of similar prospects in the future. See In re Craftmatic Sec. Litig., 890 F.2d at 642 n. 19; Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 515 (7th Cir.1989). Successful performance in the past despite the acknowledged presence of these competitive factors undermines the inference that MCI's projections and statements of optimism lacked a reasonable basis when made. See, e.g., Joint Appendix at 29 (first quarter earnings gains achieved despite "aggressive competition and a much lower pricing environment"); id. at 41 (third quarter earnings gains achieved despite "the challenge of smoothly integrating Telecom"). Plaintiffs have pled insufficient facts to suggest that these competitive pressures had become so significant that they jeopardized the possibility of MCI attaining its projected earnings and revenues for 1991.
Plaintiffs' allegations regarding the Telecom merger also suffer from the pleading defects described above. The complaint lacks any factual specificity to support the proposition that "customers were switching, [or] for the proposition that concealment of this information equalled fraud," see Kowal, slip op. at 15, and plaintiffs' pleadings on information and belief did not aver that facts regarding customer switching were particularly within the defendants' knowledge, or identify the facts upon which their belief of customer switching was founded. As such, dismissing the complaint under Rules 9(b) and 12(b)(6) was proper.
C. Leave to Amend
The district court denied leave to amend after dismissing the complaint. We review a district court's decision to deny leave to amend for abuse of discretion. See Gaubert v. Federal Home Loan Bank Bd., 863 F.2d 59, 69 (D.C.Cir.1988). Appellants contend the district court abused its discretion since courts commonly grant leave to securities fraud plaintiffs to amend their complaints if such complaints were dismissed on 9(b) grounds, and deny leave to amend only under aggravated circumstances. Plaintiff-appellants also argue that the district court's failure to explain why it was denying leave to amend constituted a per se abuse of discretion.
Plaintiffs also failed to tender a proposed amended complaint pursuant to Local Rule 108(i), which states that "[a] motion for leave to file an amended pleading shall be accompanied by an original of the proposed pleading as amended." These unexcused procedural defaults vitiate any need for the district court to explain why permitting amendment under these circumstances was not in the interest of justice. In light of these failings and the pleading infirmities in the complaint, we conclude that the order of the district court dismissing the complaint and denying leave to amend should be affirmed.
It is so ordered.
This court has not previously passed on the viability of the theory and sees no occasion to do so here, as plaintiffs' complaint is inadequate on a number of grounds.