Judy Shepard v. Pete Geren

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 10-1761
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Minneapolis Firefighters’ Relief *
Association, on behalf of itself and all *
others similarly situated, *
*
Plaintiff, *
*
Mahendra A. Patel, * Appeal from the United States
* District Court for the Eastern
Plaintiff/Appellant, * District of Missouri.
*
v. *
*
MEMC Electronic Materials, Inc.; *
Nabeel Gareeb; Kenneth H. Hannah, *
*
Defendants/Appellees. *
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Submitted: April 12, 2011
Filed: June 17, 2011
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Before RILEY, Chief Judge, BENTON and SHEPHERD, Circuit Judges.
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RILEY, Chief Judge.
Mahendra A. Patel is the lead plaintiff in this consolidated, but uncertified, class
action securities lawsuit against MEMC Electronic Materials, Inc. (MEMC) and its
former president and chief executive officer, Nabeel Gareeb (collectively, defendants).

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1The Honorable Carol E. Jackson, United States District Judge for the Eastern
District of Missouri.
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Patel’s proposed class action alleges violations of § 10(b) and § 20(a) of the Securities
Exchange Act of 1934, 48 Stat. 891 (codified as amended at 15 U.S.C. §§ 78j(b) and
78t(a)). The district court 1 dismissed Patel’s lawsuit, reasoning (1) the defendants did
not have a duty to announce production failures to MEMC’s investors immediately
and, in any event, (2) Patel failed to allege “facts giving rise to a strong inference” of
scienter, as required by § 21D(b) of the Private Securities Litigation Reform Act of
1995 (PSLRA), 15 U.S.C. § 78u-4(b)(2). Patel appeals, and we affirm.
I. BACKGROUND
A. Patel’s Allegations
MEMC produces silicon wafers used in the semiconductor industry. MEMC
produces polysilicon, the base material in MEMC’s production process, from
manufacturing plants in Pasadena, Texas, and Merano, Italy. A disruption of
polysilicon processing at MEMC’s Pasadena or Merano facilities would be “a
catastrophic event resulting in days or weeks of lost production.” The Pasadena plant
generates more than two-thirds of MEMC’s polysilicon.
On February 29, 2008, MEMC filed a Form 10-K (10-K) with the Securities
Exchange Commission (SEC) disclosing risks associated with its business. Among
other things, the 10-K revealed “a decrease in [MEMC’s] manufacturing throughput
or yields could have a material adverse effect on [MEMC’s] operating results”;
“interruption of operations at [the Pasadena plant] could adversely affect [MEMC’s]
wafer manufacturing throughput and yields and could result in [MEMC’s] inability
to produce certain qualified wafer products, delays or cancellations of shipments of
wafers and a loss of product volume”; and, “[s]imilarly, an interruption [at the Merano
plant] could adversely affect [MEMC’s] results of operations.”

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1. Pre-Class Period Disclosures
Production problems at the Pasadena plant periodically have adversely
impacted MEMC’s financial results. Historically, MEMC updated investors about its
problems.
On September 4, 2007, MEMC filed an SEC Form 8-K (8-K) to disclose a
construction incident at the Pasadena plant which would negatively impact MEMC’s
financial results for the period ending September 30, 2007, by approximately 5%. On
October 25, 2007, MEMC filed another 8-K to state the previously disclosed
construction incident “caused [MEMC] to lose well over a week’s worth of
production, miss [MEMC’s] cost projections by the double digit millions, and delay
[MEMC’s] expansion.”
On January 24, 2008, MEMC held an earnings call in conjunction with the
filing of another 8-K. At the earnings call, Gareeb indicated maintenance issues at the
Pasadena plant would adversely impact earnings for the quarter ending March 31,
2008.
On April 3, 2008, MEMC filed an 8-K indicating MEMC’s Pasadena plant
needed premature maintenance to remove chemical deposits. MEMC disclosed the
maintenance “resulted in much lower than anticipated output, and caused the company
to not achieve the financial targets for the first quarter as disclosed on January 24,
2008.” On April 24, 2008, MEMC filed an 8-K and commented on its first quarter
results. MEMC opined, “given the unplanned issues” at the Pasadena plant, “it is
prudent to be extra cautious regarding our polysilicon output expectations.”
Also on April 24, 2008, the Pasadena plant suffered a gas leak, interrupting
polysilicon production. MEMC immediately issued a press release disclosing the leak
and assuring investors that MEMC did “not anticipate any impact to the financial
targets provided earlier today as a result of this incident.” On April 29, 2008, MEMC

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issued a follow-up press release, confirming the Pasadena plant resumed production
on April 25, 2008.
2. Class Period
On June 13, 2008, a fire at the Pasadena plant halted production for a week.
Also in June 2008, a heat exchanger failed at the Merano plant, interrupting
production overseas as well. MEMC did not immediately disclose either incident.
On July 23, 2008, the company filed an 8-K. Despite increased net sales,
MEMC announced its financial results were “a bit below the bottom end of our
targeted range” because of the previously undisclosed incidents at the Pasadena and
Merano plants. At a contemporaneous conference call, a financial analyst from
Oppenheimer asked Gareeb “what the reasoning was for not doing a pre[-]announce
this time as you served down on in the past.” Gareeb explained MEMC did not
pre-announce the incidents because the estimated anticipated loss—2% below the
bottom end of MEMC’s second quarter projections—was immaterial. Gareeb also
said MEMC “wanted to provide a second half up date that we would not have been
ready to provide” and “have the demonstrated recovery both from the fire as well as
the replacement of the equipment in Merano to ensure that we had a pretty solid set
of numbers in our head” for the rest of the year.
Analysts from Deutsche Bank and Credit Suisse expressed surprise that MEMC
had not pre-disclosed the financial consequences resulting from the incidents at the
Pasadena and Merano plants. Credit Suisse concluded “[f]ear of the unknown” and
“low disclosures make it difficult to evaluate if [MEMC] has the right team in place
to execute.” Oppenheimer opined “the magnitude of the miss [in results] was
significant” because, “[h]ad it not been for [the incidents], MEMC would have
exceeded the high-end of guidance.”

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On July 23 and 24, 2008, there was unusually heavy trading in MEMC’s stock.
MEMC’s shares fell 21.51%, closing on July 24, 2008 at $42.23 per share, down from
$53.80 per share. Patel lost over $383,000 as a result of his transactions in MEMC
stock.
3. Post-Class Period Disclosures
On August 5, 2008, MEMC issued a press release to warn that an impending
tropical storm was “currently anticipated to have approximately a two day effect on
polysilicon production” at the Pasadena plant. MEMC promised to issue another press
release if circumstances changed.
On September 11, 2008, MEMC “issued a press release . . . reporting that it
would be shutting down the Pasadena facility until early next week” due to an
impending hurricane. On September 15, 2008, MEMC issued another press release
about the hurricane. Gareeb told investors there was no major structural damage to
the Pasadena plant and “restart activities commenced as planned over the weekend,”
but there were some delays caused by MEMC’s suppliers’ “own startup difficulties.”
On September 24, 2008, Gareeb cautioned investors that the suppliers’ startup
difficulties were lasting longer than MEMC had anticipated. Gareeb expressed hope
that normal production would resume within the next few days but said, “we now
expect the cumulative impact of these delays to be approximately 15 days worth of
production instead of the 5 days originally forecasted.”
On November 17, 2008, MEMC filed an 8-K. MEMC indicated “the weak
macroeconomic environment has continued to deteriorate . . . causing negative effects
. . . quickly cascading backward through global supply chains, and we cannot expect
to be immune.” On December 17, 2008, the company filed another 8-K revising
downward its fourth quarter outlook.

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B. Dismissal
Patel filed suit in September 2008. In April 2009, the defendants moved to
dismiss the complaint, contending Patel’s § 10(b)/Rule 10b-5 claim should be
dismissed for three alternative reasons: Patel failed sufficiently to allege (1) an
actionable omission; (2) scienter; or (3) materiality. See Fed. R. Civ. P. 12(b)(6). The
defendants argued Patel’s § 20(a) claim should be dismissed because the § 20(a) claim
was derivative of his § 10(b)/Rule 10b-5 claim. In March 2010, the district court
granted the defendants’ motion, holding Patel failed to plead a material omission or
scienter. Patel appeals.
II. DISCUSSION
A. Standard of Review
We review the district court’s dismissal of Patel’s complaint de novo. See
Lustgraaf v. Behrens, 619 F.3d 867, 872 (8th Cir. 2010). We accept as true Patel’s
factual allegations in the complaint and grant all reasonable inferences in Patel’s
favor. See id. at 872-73. We do not defer to the district court’s “legal conclusions or
‘formulaic recitation[s] of the elements of a cause of action.’” Id. at 873 (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
Patel’s “complaint must contain sufficient factual matter, accepted as true, to
‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. ___,
___, 129 S. Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S. at 570). “The
plausibility of a complaint turns on whether the facts alleged allow us to ‘draw the
reasonable inference that the defendant is liable for the misconduct alleged.’”
Lustgraaf, 619 F.3d at 873.
B. Section 10(b)/Rule 10b-5
Section 10(b) makes it unlawful “[t]o use or employ, in connection with the
purchase or sale of any security . . . any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the [SEC] may prescribe

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as necessary or appropriate in the public interest or for the protection of investors.”
15 U.S.C. § 78j(b). “Rule 10b-5 implements [§ 10(b)] by making it unlawful to,
among other things, ‘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.’” Matrixx Initiatives,
Inc. v. Siracusano, 563 U.S. __, __, 131 S. Ct. 1309, 1317 (2011) (quoting 17 C.F.R.
§ 240.10b-5(b)).
To prevail, a § 10(b)/Rule 10b-5 claimant ordinarily must show “(1) a material
misrepresentation or omission by the defendant; (2) scienter; (3) a connection between
the misrepresentation or omission and the purchase or sale of a security; (4) reliance
upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”
Stoneridge Inv. Partners, LLC v. Sci.-Atl., Inc., 552 U.S. 148, 157 (2008). Patel
alleges material omissions, not misrepresentations. Assuming materiality, the district
court held Patel did not sufficiently allege an actionable omission or scienter.
1. Actionable Omission
Patel maintains the defendants had a duty to disclose the July 2008 incidents at
the Pasadena and Merano plants. Patel believes the allegations in his complaint show
the defendants had a “pattern” of disclosing similar disruptions in production. Patel
concludes that, in light of MEMC’s pre- and post-class period disclosures, the
defendants’ failure to disclose the incidents rendered MEMC’s antecedent 10-K and
press releases misleading.
The district court concluded the pre-class period disclosures could not create
a duty on MEMC’s part to disclose the incidents. Citing Gallagher v. Abbott Labs.,
269 F.3d 806 (7th Cir. 2001), the district court reasoned, “Publically-traded
companies are not required to disclose all information as soon as it comes into their
possession simply because the information is material to stock prices.” See id. at 808
(“Much of plaintiffs’ argument reads as if firms have an absolute duty to disclose all

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information material to stock prices as soon as news comes into their possession. Yet
that is not the way the securities laws work. We do not have a system of continuous
disclosure. Instead firms are entitled to keep silent (about good news as well as bad
news) unless positive law creates a duty to disclose.”). The district court emphasized
Patel “cites no case law to support the contention that . . . a ‘pattern’ [of disclosing
events that affect stock prices] can give rise to a duty” to disclose promptly all such
events. The district court ignored MEMC’s post-class period disclosures as
“irrelevant” to establishing whether defendants had a duty to make the disclosures.
Like the district court before us, we are unable to find any legal authority
directly supporting Patel’s pattern theory. Perhaps the best support for Patel’s theory
may be inferred from recent Supreme Court dictum. The Supreme Court in Matrixx
wrote:
[I]t bears emphasis that § 10(b) and Rule 10b-5(b) do not create an
affirmative duty to disclose any and all material information. Disclosure
is required under these provisions only when necessary “to make . . .
statements made, in the light of the circumstances under which they were
made, not misleading. 17 C.F.R. § 240.10b-5(b); see also [Basic Inc. v.
Levinson, 485 U.S. 224, 239 n.17 (1988)] (“Silence, absent a duty to
disclose, is not misleading under Rule 10b-5”). Even with respect to
information that a reasonable investor might consider material,
companies can control what they have to disclose under these provisions
by controlling what they say to the market.
Matrixx, 131 S. Ct. at 1321-22 (emphasis added).
Even if we should infer from Matrixx that a pattern of disclosure may spawn
a duty to disclose, we do not believe Patel has alleged circumstances giving rise to
such a hypothetical duty here. This is not a case, for example, in which MEMC had
just told investors the Pasadena and Merano facilities were fully operational or in

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perfect working order. Instead, MEMC warned investors its business was vulnerable
to any disruption at those plants.
“Mere allegations that statements in one report should have been made in earlier
reports do not make out a claim of securities fraud.” In re K-Tel Int’l Sec. Litig., 300
F.3d 881, 891 (8th Cir. 2002) (quoting Acito v. IMC-ERA Grp., Inc., 47 F.3d 47, 53
(2d Cir. 1995)). We decline to recognize a new cause of action absent extraordinary
circumstances not present here. To do so could encourage companies to disclose as
little as possible. Cf. Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 760 (7th Cir.
2007) (“[W]hat rule of law requires 10-Q reports to be updated on any cycle other
than quarterly? That’s what the ‘Q’ means.”).
2. Scienter
Even if Patel alleged an actionable omission, he failed to plead scienter under
the PSLRA’s special heightened pleading standard. “The inquiry . . . is whether all
of the facts alleged, taken collectively, give rise to a strong inference of scienter, not
whether any individual allegation, scrutinized in isolation, meets that standard.”
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-23 (2007). “[I]n
determining whether the pleaded facts give rise to a ‘strong’ inference of scienter, the
court must take into account plausible opposing inferences.” Id. at 323. The Supreme
Court explained:
The strength of an inference cannot be decided in a vacuum. The inquiry
is inherently comparative: How likely is it that one conclusion, as
compared to others, follows from the underlying facts? To determine
whether the plaintiff has alleged facts that give rise to the requisite
“strong inference” of scienter, a court must consider plausible
nonculpable explanations for the defendant’s conduct, as well as
inferences favoring the plaintiff. The inference that the defendant acted
with scienter need not be irrefutable, i.e., of the “smoking-gun” genre,
or even the “most plausible of competing inferences.” Recall in this
regard that § 21D(b)’s pleading requirements are but one constraint

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among many the PSLRA installed to screen out frivolous suits, while
allowing meritorious actions to move forward. Yet the inference of
scienter must be more than merely “reasonable” or “permissible” - it
must be cogent and compelling, thus strong in light of other
explanations. A complaint will survive, we hold, only if a reasonable
person would deem the inference of scienter cogent and at least as
compelling as any opposing inference one could draw from the facts
alleged.
Id. at 323-24 (internal citations and footnote omitted).
Patel contends he sufficiently pled scienter, explaining he pled MEMC
experienced production problems before and after the class period; the defendants
knew production problems were material to investors’ decisions; the defendants had
represented that past production problems were resolved before the incidents; and
confidential witnesses say Gareeb was actively involved in MEMC’s day-to-day
operations and knew any production problems would adversely affect MEMC’s stock
price.
We do not believe the inference of scienter is as compelling as the more
innocent, simpler inference that the defendants did not believe they had a continuing
duty to disclose information or, as Gareeb stated at the time, MEMC “didn’t think 2%
outside of the bottom of the range was material.” See Tellabs, 551 U.S. at 324. There
was no legal precedent supporting Patel’s “pattern” theory at the time of the incidents;
Patel does not allege any corporate executive personally benefitted from the
non-disclosure, see In re Cerner Corp. Sec. Litig., 425 F.3d 1079, 1085 (8th Cir. 2005)
(holding the fact that one executive-defendant sold 4% of his stock, and all other
executive-defendants sold no stock, “decrease[d] any inference of scienter”) (quoting
K-tel, 300 F.3d at 895-96); and it is undisputed the defendants cautioned investors
before the class period that MEMC’s profits were vulnerable due to any problems at
its Pasadena plant, see Geffon v. Micrion Corp., 249 F.3d 29, 37 (1st Cir. 2001)
(holding the fact the defendant repeatedly warned its investors of a certain risk

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undermined any inference of scienter). We disregard Patel’s bald assertions of
improper motive, see K-tel, 300 F.3d at 891, 894, and reliance on the allegations of
confidential sources, see Higginbotham, 495 F.3d at 757-58 (“It is hard to see how
information from anonymous sources could be deemed ‘compelling’ or how we could
take account of plausible opposing inferences. Perhaps these confidential sources
have axes to grind. Perhaps they are lying. Perhaps they don’t even exist.”).
3. Conclusion
Patel does not sufficiently allege an actionable omission or scienter for his
claim. Patel’s complaint must be dismissed.
C. Section 20(a) Claim
Because we affirm the district court’s dismissal of Patel’s § 10b/Rule 10b-5
claim, we affirm the district court’s dismissal of Patel’s § 20(a) claim. See In re
Hutchinson Tech., Inc. Secs. Litig., 536 F.3d 952, 961-62 (8th Cir. 2008).
D. Motion to Amend
In the final footnote to his brief in opposition to the defendants’ motion to
dismiss, Patel asked the district court for leave to amend the complaint “if the Court
finds that the Complaint is deficient in any respect.” The district court denied Patel’s
motion, finding amendment would be futile because Patel “identifi[ed] no additional
allegations he could make to cure the deficiencies.”
Although ordinarily leave to amend should be freely granted, see Fed. R. Civ.
P. 15, placing a footnote in a resistance to a motion to dismiss requesting leave to
amend in the event of dismissal is insufficient. See In re 2007 Novastar Fin. Inc.,
Secs. Litig., 579 F.3d 878, 884-85 (8th Cir. 2009) (discussing Clayton v. White Hall
Sch. Dist., 778 F.2d 457, 460 (8th Cir. 1985)). Patel also failed to file a Fed. R. Civ.
P. 15(a), Fed. R. Civ. P. 59(e), or Fed. R. Civ. P. 60(b) motion (1) seeking leave to
amend after the district court entered judgment, (2) attaching a copy of the proposed

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amended complaint, and (3) specifying the additional allegations that would overcome
the defendants’ motion to dismiss. See Novastar, 579 F.3d at 884-85. The district
court did not abuse its discretion in denying Patel’s motion to amend. See Morrison
Enters, LLC v. Dravo Corp., 638 F.3d 594, 610-11 (8th Cir. 2011).
III. CONCLUSION
We affirm the judgment of the district court.
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