[00:00:02] Speaker 01:
Case number 14-7017, Henry Harmon International Industries, Inc., Securities Litigation, Arkansas Public Employees Retirement System, Individually and on behalf of all other similarly situated appellant, Chilin Kim, and City of Boca Raton General Employees Pension Plan on behalf of itself and all other similarly situated CA072175 v. Harmon International Industries, Inc.

[00:00:28] Speaker 01:
at L. Mr. Toll for the appellant, Ms.

[00:00:30] Speaker 01:
Lovett for the appellees.

[00:00:37] Speaker 04:
Let's wait until the courtroom is cleared.

[00:00:43] Speaker 04:
All right.

[00:00:44] Speaker 04:
Good morning.

[00:00:44] Speaker 06:
Thank you, Your Honor.

[00:00:45] Speaker 06:
So I'd like to reserve three minutes for rebuttal.

[00:00:47] Speaker 06:
May it please the Court, Stephen Toll, for the Arkansas Pension Fund and the class of investors that Arkansas seeks to represent.

[00:00:54] Speaker 06:
We have a narrow focused appeal here, Your Honor.

[00:00:56] Speaker 06:
It's limited to three statements.

[00:00:58] Speaker 06:
I'm going to summarize the statements quickly, focus on the four discrete issues for your consideration, and then argue those points.

[00:01:05] Speaker 06:
And the timing of these statements is critical in terms of the dates and the fiscal year the company was in.

[00:01:12] Speaker 06:
The first two statements, the issue is whether they're forward-looking or current.

[00:01:16] Speaker 06:
The first one was April 26, 2007, where the company discussed its plan to reduce the PND, the Personal Navigation Devices, inventories in Europe.

[00:01:26] Speaker 06:
They said they planned to reduce them to a normal level by year end, which is June 30.

[00:01:30] Speaker 06:
It's a June 30 fiscal year.

[00:01:32] Speaker 06:
It was already at the end of April, 10 months into the year.

[00:01:35] Speaker 06:
and that they planned their forecast sales of 618,000 units for fiscal year 07.

[00:01:41] Speaker 06:
And the key language is, and they said, and that plan is proceeding.

[00:01:45] Speaker 06:
Then they went on to talk about what the inventory would scale down to in the next three months.

[00:01:50] Speaker 06:
The second statement is the September 27 statement, which is right at the end of the first quarter of the next fiscal year.

[00:01:57] Speaker 06:
And in describing the first quarter sales, there are only three days left.

[00:02:00] Speaker 06:
The companies talked again about the P&D business and said, we continue the growth and expansion of that business primarily in Europe.

[00:02:09] Speaker 06:
The third statement, which is not an issue of current versus forward-looking, is really whether the statement is material or immaterial.

[00:02:15] Speaker 06:
Puffery, as the district court found, is from paragraph 82 of the complaint, a statement in the form 10K for the fiscal year ending June 30, dated August 29.

[00:02:25] Speaker 06:
So this is a statement, very important, retrospectively describing the year that just finished, not a future projection at all.

[00:02:32] Speaker 06:
The company said sales of aftermarket products, particularly PNDs, were, in key language, very strong during fiscal year 2007.

[00:02:42] Speaker 06:
So the issue is first, can the court, four issues before this court, can the court consider for the first time on appeal that whether the first two statements were current or forward-looking?

[00:02:53] Speaker 06:
If the court says no, then we waived it by not contesting it below.

[00:02:57] Speaker 06:
You would then look at them as forward-looking and then see if they were accompanied by meaningful cautionary language, which is the only way they could be exempt from liability.

[00:03:06] Speaker 06:
And if you find they're not, as we contend, you should reverse.

[00:03:09] Speaker 06:
Also the question raised is whether you should consider state of mind in making that determination, which is kind of a sub-issue.

[00:03:16] Speaker 06:
If you believe, yes, that you can consider this on appeal, which I believe you can, then it's up to you to decide if those first two statements are current or forward-looking.

[00:03:26] Speaker 06:
If you believe they are current, which we believe they are given the language that was said talking about current conditions, again, I think you must reverse on those two statements.

[00:03:34] Speaker 06:
And you need not even get into all the nuances of forward-looking statement and meaningful cautionary language.

[00:03:40] Speaker 05:
But didn't you argue quite affirmatively in the district court that these were forward-looking statements?

[00:03:45] Speaker 05:
You put them in the section of your brief, characterizing them as forward-looking statements.

[00:03:48] Speaker 05:
You argued that the safe harbor applied because you thought that that's the way you had to argue because they were forward-looking.

[00:03:56] Speaker 05:
And how can we say that that's not a forfeit argument, that they're not even forward-looking statements?

[00:04:01] Speaker 05:
What can you point to in the district court?

[00:04:03] Speaker 06:
Your Honor, you're absolutely correct, Judge Pollard.

[00:04:06] Speaker 06:
But I would say, look at the Lesnessity decision Judge Rogers wrote.

[00:04:10] Speaker 06:
Judge Henderson was on the panel.

[00:04:11] Speaker 06:
And this court has a lot of discretion on whether to consider an issue for the first time on appeal.

[00:04:16] Speaker 06:
And the various factors are considered in order to prevent manifest injustice, exceptional circumstances, if it's a straightforward legal issue to be determined and resolved, which is now fully briefed on appeal.

[00:04:28] Speaker 06:
And this area of current versus forward-looking has just been an evolving area.

[00:04:32] Speaker 06:
You can tell from the briefs there are decisions going both ways on statements that are present tense, whether it's current or forward-looking.

[00:04:40] Speaker 06:
And there's a lot of confusion.

[00:04:41] Speaker 06:
You're absolutely right.

[00:04:42] Speaker 06:
We did argue the other way.

[00:04:44] Speaker 06:
And if the Court believes we cannot argue now, we waive that right, then I would go into the other argument.

[00:04:50] Speaker 06:
if in fact you believe within your discretion.

[00:04:54] Speaker 06:
Because again, this is really a procedural rule to promote the ends of justice, not to defeat them.

[00:04:59] Speaker 06:
And the court could give some guidance to the district courts on what is current and forward-looking.

[00:05:04] Speaker 06:
And if you look at the two statements, and I can't tell what went into our mind back in 08.

[00:05:08] Speaker 06:
Remember, these briefs were written a long time ago, Your Honor.

[00:05:10] Speaker 06:
There's a tortured history here.

[00:05:12] Speaker 06:
And what we were thinking and where the law was on current forward-looking, there's been a lot of development.

[00:05:18] Speaker 06:
But when they say the plan is proceeding, just to me, it's a clear description of current business, whether they will meet the forecast of reducing inventory and selling units that they had said beforehand.

[00:05:29] Speaker 06:
It was not a new projection.

[00:05:31] Speaker 06:
Nothing about it was forward-looking.

[00:05:32] Speaker 06:
And I believe it is current.

[00:05:34] Speaker 06:
The same way in September when they talked about we're going to continue the growth and expansion of P&D sales, they were talking about something that happened that quarter.

[00:05:42] Speaker 03:
So again, correct.

[00:05:43] Speaker 03:
So your strongest argument then for the exception is the fact that the law was unsettled and evolving, and therefore in those extraordinary circumstances, we should hear an issue that the district court expressly stated that the parties agreed

[00:06:02] Speaker 06:
Yes, Your Honor.

[00:06:03] Speaker 03:
I mean, it's a very high burden.

[00:06:04] Speaker 06:
Your Honor, I confess it is, and I'm prepared really to go to the other arguments, but I think you have the discretion to consider it.

[00:06:12] Speaker 06:
If you do, I think you'll find they're current, and can I explain what we did six years ago in the briefing?

[00:06:18] Speaker 05:
Assuming it's forward-looking, is the position that

[00:06:22] Speaker 05:
the failure to caution was a failure to caution about the dangers of excess inventory.

[00:06:29] Speaker 05:
Because in the very statement that you quoted, you talked about planning to reduce inventory to normal levels.

[00:06:39] Speaker 05:
So the statement itself includes some caution, if you will, about burdensome inventory.

[00:06:48] Speaker 05:
And so I guess I'm, what's the caution that they should have made that they didn't make?

[00:06:53] Speaker 06:
Okay, Your Honor, what they did make, and I'll get to your question, what they did make, and we emphasize repeatedly, and this is why I say they really were boilerplate and not meaningful cautionary statements.

[00:07:03] Speaker 06:
They made statements that any company in America could talk about any product.

[00:07:08] Speaker 06:
They said the market's extremely competitive.

[00:07:10] Speaker 06:
There could be pricing pressure.

[00:07:12] Speaker 06:
There could be shifting consumer demand.

[00:07:15] Speaker 06:
We're going to compete with competitors' products.

[00:07:17] Speaker 06:
They said it three straight years in a row with no changes.

[00:07:20] Speaker 06:
Your Honor, what they should have said is we have serious problems with obsolete inventory that we don't think we can sell.

[00:07:27] Speaker 06:
Your comment about what they did say is planning to reduce it is not a cautionary statement.

[00:07:32] Speaker 06:
It is their plan of what's going to happen over the next few months.

[00:07:36] Speaker 06:
A cautionary statement would have been, and again, the facts are important here because we have good confidential witnesses who told us who worked there and told us all about the obsolete inventory and their inability to sell it.

[00:07:48] Speaker 06:
The company knew it.

[00:07:49] Speaker 06:
They didn't tell the market.

[00:07:50] Speaker 06:
There's not one word about obsolescence in any of their warnings anywhere.

[00:07:54] Speaker 06:
So I think that's why, and again, whether we waive the argument or you find that it's forward-looking.

[00:08:00] Speaker 03:
So, well, go ahead.

[00:08:04] Speaker 03:
They didn't use the word obsolescence as such, but they did everything short of that, didn't they?

[00:08:13] Speaker 06:
I don't believe what they said, Your Honor, give the market and the investors an understanding that this is or could be a serious problem, that we've got excess inventory we can't sell because it's out of date.

[00:08:27] Speaker 06:
They didn't really say anything like that.

[00:08:29] Speaker 06:
They talked about we may be delayed in developing new products.

[00:08:33] Speaker 06:
Well, that doesn't mean you can't sell the old products.

[00:08:35] Speaker 05:
In fact, one of the problems was they were developing new products, and they contributed to their own, the obsolescence of their own products.

[00:08:42] Speaker 05:
because they weren't the latest model, right, of Harman?

[00:08:45] Speaker 06:
You are correct, but Your Honor, just because you developed a new model, think of the Apple 4 and 5.

[00:08:51] Speaker 06:
They developed the Apple 5, people were still buying the 4 phones.

[00:08:54] Speaker 05:
So then you're arguing against yourself, because I was thinking that as they're telling their investors, we've got to keep up with the competition, we've got to be cutting edge, we've got to keep developing new models, there's a tension there, because as they develop new models, they render their inventory more and more obsolete,

[00:09:12] Speaker 05:
And therefore, they're failing to balance.

[00:09:15] Speaker 05:
And you're saying, oh, well, they're not actually rendering their inventory obsolete.

[00:09:20] Speaker 06:
I don't think you can make that leap, Your Honor, that as you develop a new product, the older one will not sell.

[00:09:26] Speaker 06:
You sell them at less money and you sell them.

[00:09:28] Speaker 06:
There's a big difference between, you know, lots of people develop new products all the time and they still sell the old ones.

[00:09:35] Speaker 05:
So the problem is that they didn't divulge that the inventory that they said they had ready to go into their new strong sales effort.

[00:09:43] Speaker 05:
was older and therefore would have to be sold at a discount?

[00:09:46] Speaker 06:
They did not.

[00:09:47] Speaker 06:
And in fact, you're honest.

[00:09:48] Speaker 05:
That's the problem.

[00:09:49] Speaker 05:
That is, yes.

[00:09:50] Speaker 05:
They refer to inventory, but we could think that it's the fancy, expensive, full-price new inventory.

[00:09:56] Speaker 06:
Either they had to sell it at a huge discount or they couldn't sell it at all.

[00:09:59] Speaker 03:
Well, that's what I was going to get at.

[00:10:01] Speaker 03:
I mean, standard business would be you get a new model and you're going to sell the older ones at somewhat of a discount.

[00:10:10] Speaker 03:
And the older they get, the discount presumably will be

[00:10:13] Speaker 03:
higher and higher and higher.

[00:10:15] Speaker 03:
And then ultimately you may have to discard some and just take a loss and let it go at that.

[00:10:20] Speaker 03:
But that's standard business operation, isn't it?

[00:10:24] Speaker 06:
Yeah, except, Your Honor, they didn't tell the investors that.

[00:10:26] Speaker 06:
They didn't give the investors that warning.

[00:10:29] Speaker 06:
And in fact, one evidence we have where they had a product at $350 per unit, they finally tried to sell it at $240, and they couldn't sell it when they finally sold it.

[00:10:39] Speaker 06:
Then it got returned in a few months because it was obsolete.

[00:10:42] Speaker 03:
Well, they say, for instance, in this first statement you're quoting, you're relying on is that the inventories in Europe had grown substantially.

[00:10:52] Speaker 03:
and that competition was fierce and we've got to work hard, all that sort of stuff.

[00:10:56] Speaker 03:
And that's why I say the law seems to be developing in the area that maybe I'll just jump ahead and say, you know, you can't misrepresent a historical fact, but

[00:11:12] Speaker 03:
You don't have to say everything so long as you're giving what I'll call the hints that a reasonable investor or potential investor might think about.

[00:11:28] Speaker 06:
Well, you're close, Your Honor, but I agree you don't have to say exactly, but the test that's pretty much settled in the courts is it has to be substantive and tailored, not boilerplate, and significantly similar to what actually happened.

[00:11:41] Speaker 03:
And so it's a three-year repeat.

[00:11:43] Speaker 03:
That's key here.

[00:11:44] Speaker 06:
Yeah.

[00:11:45] Speaker 06:
I mean, they repeat the same thing three years.

[00:11:46] Speaker 06:
And the evidence in the record has to be taken as true from all the confident witnesses is how obsolete everything was, and they couldn't sell the product.

[00:11:54] Speaker 06:
And they never told the market that.

[00:11:57] Speaker 06:
I'd like to move to the other argument, Your Honor, which I think is a very powerful one, very interesting, this language of what does very strong mean, and whether it's what's called tuffery or immaterial according to the district court, or whether it's actionable.

[00:12:11] Speaker 06:
Again, this is critical.

[00:12:13] Speaker 06:
This statement was made.

[00:12:15] Speaker 06:
It was not about the future year.

[00:12:17] Speaker 06:
It was about the year past.

[00:12:19] Speaker 06:
It was describing the year that just completed.

[00:12:22] Speaker 06:
So lots of times you see what they call puffery, corporate optimism.

[00:12:26] Speaker 06:
We expect everything's been great.

[00:12:28] Speaker 06:
We're an amazing company.

[00:12:29] Speaker 06:
All those types of statements are different.

[00:12:31] Speaker 06:
We are talking about a past event here.

[00:12:33] Speaker 06:
They were describing in August what occurred in the year that ended in June.

[00:12:39] Speaker 06:
And what's critical here, there are two Supreme Court decisions that really determine this case, I believe, in our favor, Your Honors, because puffery is basically about immateriality, as the District Court said and other courts have said.

[00:12:51] Speaker 06:
And the question is, is this statement material?

[00:12:53] Speaker 06:
Now, very strong in a different context, someone might say, is it material?

[00:12:58] Speaker 06:
I think really facts are very important here, because materiality is a mixed question of fact and law.

[00:13:04] Speaker 06:
But the Supreme Court in a unanimous decision, TSB v. Northway in 1976, written by Justice Marshall, talked about what it is to be material.

[00:13:14] Speaker 06:
It's when an omitted fact is material, if there's a substantial likelihood a reasonable shareholder would consider it important, it must have assumed actual significance in the deliberations of a reasonable shareholder.

[00:13:27] Speaker 06:
there's a significant likelihood that disclosure would have been viewed by a reasonable shareholder, investor, as having significantly altered the total mix of information.

[00:13:38] Speaker 05:
I'd like to go back, Mr. Toll, to the forward-looking statements and what the appropriate legal standard is there, because as you know, there's a certain amount of

[00:13:48] Speaker 05:
different approaches taken among different courts, and our court has not yet addressed the question.

[00:13:54] Speaker 05:
We have the Second Circuit and the Ninth Circuit suggesting that awareness of historical fact, contrary to cautionary, to states of affairs,

[00:14:10] Speaker 05:
highlighted in cautionary language is relevant under the non-scienter prong of the safe harbor.

[00:14:19] Speaker 05:
And then we have other courts saying, no, there's science in one prong and not in the other.

[00:14:23] Speaker 05:
And so what do you make of that, and what rule do you think we should adopt?

[00:14:27] Speaker 06:
Well, I think it is clearly logical and within the

[00:14:31] Speaker 06:
purposes of the statute again the underlying purpose of the securities laws is the protection of investors to look at the state of mind the knowledge of the defendants I understand the arguments and again the word it's disjunctive and all of that but you can still look at the state of mind in considering whether it's a meaningful cautionary statement

[00:14:51] Speaker 06:
And if they know something that is not what they're telling the public, how can you say it's meaningful?

[00:14:59] Speaker 06:
So I think you have to be able to consider what they knew.

[00:15:02] Speaker 06:
I mean, if we had no facts here, Your Honor, we'd be dead.

[00:15:06] Speaker 06:
But we've got a lot of facts here saying they knew they had obsolete inventory they couldn't sell if that wasn't in the complaint.

[00:15:12] Speaker 06:
I'd say, well, how am I going to argue that it wasn't meaningful?

[00:15:16] Speaker 06:
But we have facts to show it wasn't meaningful.

[00:15:18] Speaker 06:
And I think the court can take that into consideration.

[00:15:20] Speaker 06:
I think it's fact-driven.

[00:15:22] Speaker 05:
And it's not that that caution or failure to caution itself becomes an actionable statement or omission under the securities laws?

[00:15:33] Speaker 06:
No, correct.

[00:15:34] Speaker 06:
No, we do not contend that the risk disclosures themselves are prior.

[00:15:39] Speaker 05:
that they don't qualify for the safe harbor because they don't count as reasonable cautionary statements.

[00:15:46] Speaker 06:
Correct.

[00:15:49] Speaker 06:
I think the best, actually, the district court here in the Iridium case, I believe, but the Second Circuit in the Slayton case and the Seventh Circuit in the Asher case, I think are the two most important opinion on really going through and assessing what the right result should be and what the court should consider.

[00:16:11] Speaker 06:
Back to Northway for a second, the word there that was at issue was the word substantial, just to give a context of what we're talking about here, because it's so easy to look at very strong and say, oh, what does that mean?

[00:16:22] Speaker 06:
But the Supreme Court found the word substantial was a word that could be tested at material in that setting, whether there was a substantial premium offered, as was alleged in that case.

[00:16:33] Speaker 06:
That was 1976.

[00:16:35] Speaker 06:
The next critical decision from the Supreme Court is the well-known Virginia Bank Sheriff's case in 2000, I'm sorry, 1991.

[00:16:43] Speaker 06:
There, the Supreme Court was confronted with the issue of whether a statement of reason, opinion, or belief can be material.

[00:16:50] Speaker 06:
And the Court, with the resounding answer of yes,

[00:16:54] Speaker 06:
And what's interesting there, again, the language being used in that case is whether the merger was fair, and that's the word that was critical, fair to the shareholders, and whether the value was high.

[00:17:07] Speaker 06:
Those were the words allegedly misstated.

[00:17:09] Speaker 06:
And the Supreme Court said, yes, words like that that are kind of conclusory, but when they're used in a commercial context,

[00:17:17] Speaker 06:
Everybody understands they have meaning behind them.

[00:17:20] Speaker 06:
And they rest on a factual basis.

[00:17:22] Speaker 06:
And the factual basis is either accurate, justifies them as accurate, or they can be misleading.

[00:17:28] Speaker 06:
And thus, they qualify as material.

[00:17:31] Speaker 06:
They even actually cited a DC Circuit case in a 1976 case, Dave versus Avery, where a law firm described a merger of whether they'd be worse off.

[00:17:40] Speaker 06:
And that was found to be actionable by this court.

[00:17:43] Speaker 06:
But I think here again, the facts are so critical, because the facts here is, remember the original allegedly forward-looking statement in April said, we're going to sell 618,000 units by the end of June.

[00:17:56] Speaker 06:
They had only sold 300,000 by the end of March.

[00:18:00] Speaker 06:
They never told the public how many they sold, never.

[00:18:05] Speaker 06:
They come out in August with their 10K for the year and say sales of PND, particularly PNDs, were very strong.

[00:18:14] Speaker 06:
This now, look at the facts in the complaint.

[00:18:16] Speaker 05:
Where's the fact about how many they did actually sell?

[00:18:19] Speaker 06:
It's in the complaint, Your Honor.

[00:18:21] Speaker 06:
At paragraph 55 and then 56 and 86D.

[00:18:29] Speaker 06:
So what they sold, they were short by 200,000 units.

[00:18:33] Speaker 06:
That's like a third of the projections.

[00:18:35] Speaker 06:
It's not like 2% or 5%.

[00:18:37] Speaker 06:
A third.

[00:18:38] Speaker 06:
Paragraph 86D says they missed their projections for the year by $85 million, one third of what they forecasted.

[00:18:47] Speaker 06:
And then there were other allegations about how they had the large inventory and they knew it and they couldn't sell it and so on.

[00:18:53] Speaker 06:
So you're an investor.

[00:18:54] Speaker 06:
Think about it.

[00:18:55] Speaker 06:
You heard in April, you know, that what we expect to sell by June

[00:19:00] Speaker 06:
six hundred eighteen thousand you never told what happens and then you hear in august we had sales that were very strong and how about loss causation you know that also this plan murder didn't go through and that's not even in the case anymore your honor no but just in terms of loss causation yeah loss causation these are this puffery is what caused the

[00:19:19] Speaker 06:
Well, Your Honor, there were, again, lost causation, as you know, from the Supreme Court's decision in Doar.

[00:19:25] Speaker 06:
It's a very minimal standard.

[00:19:27] Speaker 06:
A corrective disclosure, whether it ties into the misstatement.

[00:19:30] Speaker 06:
The corrective disclosure here had three elements, and one of the key three elements were the PND failures, the inability to sell PNDs.

[00:19:38] Speaker 06:
So it links directly the corrective disclosures in January and February of 2008 to the misstatements that we allege they made about PNDs in 07.

[00:19:47] Speaker 06:
And the stock drop was enormous, like 25 points the first drop, 7 the second.

[00:19:52] Speaker 06:
Now I'm not, Your Honors, I cannot say, and I won't say if this case goes back, we can collect all those damages because there are multiple things that went into that drop.

[00:20:00] Speaker 06:
But definitely from a causation standpoint, at least part of that has been established and the district court would deal with that.

[00:20:09] Speaker 04:
All right, if there are no more questions, I think I'm over.

[00:20:11] Speaker 04:
Thank you.

[00:20:11] Speaker 04:
We'll give you a couple minutes.

[00:20:12] Speaker 04:
Thank you.

[00:20:13] Speaker 04:
Just love it.

[00:20:23] Speaker 02:
It's clear at this point that plaintiffs cannot prevail without delving into the state of the mind of the defendants or imposing a heightened cautionary statement requirement.

[00:20:37] Speaker 02:
I think most telling in this regard is the reply brief.

[00:20:41] Speaker 02:
At page 18 of the reply brief, the plaintiff identifies the cautionary statement that would be required as follows, and I'm quoting,

[00:20:48] Speaker 02:
There is an extremely high likelihood that much of our P&D inventory will be sold for a loss because they are obsolete.

[00:20:57] Speaker 02:
No court has ever required a company to disparage its own products in order to have a meaningful cautionary statement.

[00:21:04] Speaker 02:
And no court has ever required such specificity in the cautionary statements.

[00:21:10] Speaker 02:
So I think a question for me was, how do you begin this analysis of what should a meaningful cautionary statement look like?

[00:21:17] Speaker 02:
And to me, I think the starting point is, what is the actual risk that was realized?

[00:21:22] Speaker 02:
Plaintiffs identify the two corrective disclosures as a January 2008 press release and a February 2008 press release.

[00:21:30] Speaker 02:
This is from Joint Appendix 270.

[00:21:32] Speaker 02:
Here's what's said in January.

[00:21:34] Speaker 02:
This is the risk that was realized.

[00:21:37] Speaker 02:
In recent months, this sector has experienced significant pricing pressure affecting the entire industry.

[00:21:44] Speaker 02:
That's the January disclosure, the first corrective disclosure, extreme industry-wide pricing pressure.

[00:21:50] Speaker 02:
Here's the February disclosure.

[00:21:53] Speaker 02:
This is at Joint Appendix, page 292.

[00:21:56] Speaker 02:
P&D sales fell by 29 million compared to the same period last year.

[00:22:01] Speaker 02:
Both P&D sales and margins decreased due to aggressive price reductions by competitors, the delay of new products, and the sale of older products at substantial discounts.

[00:22:12] Speaker 02:
Now I want to stop there because there's a lot of

[00:22:14] Speaker 02:
language being thrown around about obsolescence and unsalability, that's not the actual risk that was realized.

[00:22:22] Speaker 02:
The actual risk that was realized, and what plaintiffs say was the corrective disclosure that was accurate, was if products were sold, it's just for more of a discount than Harmon appreciated at the moment.

[00:22:33] Speaker 02:
So what was the end of your sentence?

[00:22:36] Speaker 02:
Excuse me?

[00:22:36] Speaker 02:
What was the end of your sentence?

[00:22:38] Speaker 02:
They were sold at a higher discount than Harmon appreciated or anticipated.

[00:22:43] Speaker 02:
So it was extreme margin pressure.

[00:22:47] Speaker 02:
They knew there'd be margin pressure, but it was even worse than they realized.

[00:22:51] Speaker 02:
So against those risks, what did Harmon say?

[00:22:56] Speaker 02:
If you go to the April 2007 conference call, Dr. Harmon says,

[00:23:02] Speaker 02:
And this is joint appendix page 240.

[00:23:05] Speaker 02:
I had indicated in earlier conference calls that the P&D environment in Europe was not as margin-challenged as it is in the United States, but that we could surely anticipate it.

[00:23:15] Speaker 02:
There was a reasonable foresight in that observation.

[00:23:18] Speaker 02:
In the recent quarter, the European P&D market has become extremely competitive.

[00:23:22] Speaker 02:
We are working extraordinarily hard to increase sales and to maintain adequate margins in that environment.

[00:23:28] Speaker 02:
Later in the call, and this is at page 247 of the appendix,

[00:23:32] Speaker 02:
He's asked a question by an analyst about the pricing pressure and why it's happening.

[00:23:36] Speaker 02:
And he's asked, is it because the growth is slowing and there are more people, or is it higher competition?

[00:23:41] Speaker 02:
And Dr. Harmon says, it's the former.

[00:23:43] Speaker 02:
It's competition.

[00:23:45] Speaker 02:
Next, in September 2007, this is a joint appendix, page 259.

[00:23:51] Speaker 02:
Kevin Brown, the CFO, says, and this is something an investor would pick up on.

[00:23:57] Speaker 02:
He says, first, we expect automotive sales to increase approximately 15% during the quarter, primarily due to the ramp up of an infotainment systems program and higher P&D sales.

[00:24:07] Speaker 02:
Then he goes on to say, we expect gross profit to decline

[00:24:12] Speaker 02:
as we enter mid-infotainment segment and the ramp up our P&D business.

[00:24:18] Speaker 02:
He's saying sales up, profits down.

[00:24:20] Speaker 02:
What explains that?

[00:24:21] Speaker 02:
Pricing pressure.

[00:24:23] Speaker 02:
So an investor's picking, he's disclosing our sales are going up, our prices are going down, and our gross profits are going down year over year.

[00:24:32] Speaker 02:
Finally, in the 2007 annual report at Joint Appendix, page 177, they disclose that they are selling new aftermarket P&D products.

[00:24:45] Speaker 02:
Then there are multiple, multiple disclosures about obsolescence.

[00:24:50] Speaker 02:
I think we need to take a step back here because personal navigation devices seem quaint now that we all have Google Maps on our iPhones.

[00:24:58] Speaker 02:
But at the time, this was a revolutionary cutting edge product in an emerging technology market.

[00:25:06] Speaker 02:
At some level, the risk of obsolescence is inherent in that kind of market.

[00:25:10] Speaker 02:
And that's actually looking backwards.

[00:25:12] Speaker 02:
That's what we see today.

[00:25:13] Speaker 05:
That was my question for you in terms of cautionary language.

[00:25:19] Speaker 05:
We have these kind of conceptual pulls.

[00:25:21] Speaker 05:
that are relatively clear.

[00:25:23] Speaker 05:
It can't be boilerplate, but it doesn't need to be sort of percentages and chapter and verse and your entire internal business plan and the things that keep the CEO up at night.

[00:25:34] Speaker 05:
But it does have to disclose material categories of risk.

[00:25:40] Speaker 05:
And my question is, there is a lot in the disclosure.

[00:25:45] Speaker 05:
There's a lot of cautioned language about this is a very competitive business, and we have to keep innovating.

[00:25:51] Speaker 05:
It's very competitive to keep innovating.

[00:25:52] Speaker 05:
They say it over and over again.

[00:25:55] Speaker 05:
I really see separate cautions about we made too many of some of the devices.

[00:26:04] Speaker 05:
We've sunk some money into inventory early.

[00:26:09] Speaker 05:
and that inventory is gonna be, it's gonna have to be more discounted.

[00:26:15] Speaker 05:
They talk a little bit of inventory and they talk about the need to stay ahead of the curve, but it seems to me that there's kind of this silly and courageous quality of this industry where you have to have enough inventory to keep up with consumer demand because obviously you're not gonna reap the profits of your innovation if you don't do that.

[00:26:31] Speaker 05:
On the other hand, you can't sock away too much inventory because by the very competitive nature by which they've warned,

[00:26:38] Speaker 05:
it's going to become obsolete.

[00:26:40] Speaker 05:
And I hear a lot about the competition, not so much about the just-in-time production demands and how they're

[00:26:47] Speaker 05:
concerned about that.

[00:26:49] Speaker 02:
So let me point you to Joint Appendix page 371.

[00:26:52] Speaker 02:
This is the fiscal year 2006 annual report.

[00:26:55] Speaker 02:
I'm going to read quite a bit because this was the thing that kept me up with this question.

[00:27:01] Speaker 02:
And here's where I think it is.

[00:27:03] Speaker 02:
Here's how the annual report starts.

[00:27:05] Speaker 02:
Dramatically changing technology and equally dramatically changing marketplaces

[00:27:10] Speaker 02:
dictate more creative and shorter product cycles.

[00:27:13] Speaker 02:
Those shorter cycles carry significant challenges and risks.

[00:27:17] Speaker 02:
Shorter and more frequent product cycles clearly demand more and newer engineering.

[00:27:22] Speaker 02:
They require far tighter controls of cost and no less significantly of time.

[00:27:27] Speaker 02:
It is the most demanding and complex challenge to management today.

[00:27:31] Speaker 02:
stay too long with an otherwise attractive product, and management risk the loss of all product that originally generated.

[00:27:38] Speaker 02:
Along with that loss of profits, equal dangers, the loss of momentum, the loss of reputation.

[00:27:43] Speaker 02:
That's at 371 of joint appendix.

[00:27:45] Speaker 02:
It is exactly the risk that you were just discussing.

[00:27:49] Speaker 02:
That's the 2006 annual report.

[00:27:53] Speaker 02:
This is where their fiscal year always messes me up.

[00:27:59] Speaker 02:
It's June 07.

[00:28:01] Speaker 02:
So it's right in this time period.

[00:28:06] Speaker 02:
So then the secondary question is, do they have to go further?

[00:28:09] Speaker 02:
Do they have to say, oh, and by the way, our inventory is really, really old, and we got a whole bunch of it, and we're going to have to sell it at a massive discount?

[00:28:16] Speaker 02:
That's what plaintiffs say.

[00:28:18] Speaker 02:
And that level of specificity, product disparagement, even in the Seventh Circuit Asher decision that plaintiff cite, they say you don't have to go that far.

[00:28:27] Speaker 02:
You don't have to hand your competitors a win.

[00:28:29] Speaker 02:
And there's a secondary reality here.

[00:28:31] Speaker 05:
But you can do that without product disparagement, and you can do it without the invective that maybe even plaintiff's template says, we were a little over-exuberant in producing the

[00:28:44] Speaker 05:
1.1 version so we will have to sell at a discount on those and we've taken that into account and moving forward we've made our production schedule more nuanced and leaner.

[00:28:54] Speaker 05:
That seems pretty standard in terms of disclosure.

[00:28:58] Speaker 02:
The second problem is you don't know how much the product is going to sell for until you sell it.

[00:29:04] Speaker 02:
And these pricing pressures, the extent of the pricing pressures, did not materialize until the second quarter of fiscal year 08.

[00:29:13] Speaker 02:
That's when you can't move the stuff.

[00:29:15] Speaker 02:
The Paragon case, which is what they're talking about, is June.

[00:29:18] Speaker 02:
And they sold that.

[00:29:19] Speaker 02:
And they sold it at a decent margin.

[00:29:22] Speaker 02:
And that actually did not impact the bottom line.

[00:29:25] Speaker 02:
And your gross profits and sales go up over that quarter.

[00:29:30] Speaker 02:
It's not until you get to the second quarter, fiscal year 08, and they're selling it that you get the actual market price realization.

[00:29:38] Speaker 02:
And you can't worry about that.

[00:29:39] Speaker 05:
I'm not following entirely because I thought the complaint pleaded that they came in 200,000 units short of their anticipated sales and 85 million short of their anticipated.

[00:29:53] Speaker 02:
That's an internal projection.

[00:29:55] Speaker 02:
Right?

[00:29:55] Speaker 05:
They missed their internal, but they're not going to... They're telling their investors all along the way, hey, look at our good internal projections.

[00:30:01] Speaker 02:
Well, in one call.

[00:30:02] Speaker 02:
And the reality is, they're not going to get out of the park in sales.

[00:30:06] Speaker 02:
Up until fiscal year 08, second quarter fiscal year 08, the sales of P&Ds are actually rising.

[00:30:12] Speaker 02:
They're going up considerably.

[00:30:14] Speaker 05:
And so these statements... But not as fast as they told investors they planned them to go up.

[00:30:18] Speaker 02:
But they have...

[00:30:20] Speaker 02:
True.

[00:30:20] Speaker 02:
They did miss their internal projection.

[00:30:22] Speaker 02:
So then the question becomes, do they have a duty to correct the forward-looking projection?

[00:30:28] Speaker 02:
The statute answers that for you.

[00:30:30] Speaker 02:
It's subsection D, 15 U.S.C.

[00:30:33] Speaker 02:
78 U.5 subsection D. Safe Harbor says there is no duty to correct an incorrect forward-looking statement.

[00:30:41] Speaker 05:
But except when you turn around and you engage in what you characterize as puffery and say, and hey, we were telling you we were going to sell $618,000 last year, and wow, we ended up with really strong sales.

[00:30:54] Speaker 05:
Relative to what?

[00:30:55] Speaker 05:
The investor thinks relative to what I was told.

[00:30:57] Speaker 05:
OK, we're good on that check.

[00:30:59] Speaker 05:
False.

[00:31:00] Speaker 05:
Right?

[00:31:01] Speaker 02:
Well, the actual statement of puffery, and again, I think this is where reading what was actually said is key.

[00:31:08] Speaker 02:
What's actually said is that automotive sales or sales of aftermarket parts is very strong, including P&Ds.

[00:31:19] Speaker 02:
First, that's actually, if you look at it as automotive sales, particularly PMDs.

[00:31:26] Speaker 05:
Let's look at what was actually said, particularly PMDs.

[00:31:29] Speaker 02:
So I'm going to step back and say, first, our position is that this is just run-of-the-mill corporate optimism.

[00:31:36] Speaker 02:
CEOs, CFOs say this stuff all the time.

[00:31:39] Speaker 05:
Investors don't make investment decisions based on the optimism of management and that's there's a long optimism if you're they're talking retrospectively about a year that's already occurred and what benchmark do they have but what the

[00:31:55] Speaker 05:
corporate spokespeople told them through the year, what are our targets for profit?

[00:32:01] Speaker 05:
What are our targets for sales of these kinds of devices?

[00:32:04] Speaker 05:
And then end of the year, we hit it out of the park on that particular kind of device.

[00:32:09] Speaker 05:
And then the question is, does an investor align that?

[00:32:12] Speaker 02:
And I think the answer to that, and that's the copper case, is no.

[00:32:16] Speaker 02:
You're not going to rely on that.

[00:32:17] Speaker 02:
They're going to rely on the actual projections.

[00:32:19] Speaker 02:
But I think you've hit the ambiguity on the head.

[00:32:22] Speaker 02:
You don't know what the benchmark is.

[00:32:24] Speaker 02:
And because you don't know what the benchmark is, a reasonable investor isn't going to make an investment decision not knowing what the very strong is about.

[00:32:32] Speaker 02:
it could be about what's on page 176 of the joint appendix, which is year over year sales.

[00:32:38] Speaker 02:
And in that context, it's true.

[00:32:41] Speaker 02:
So because you don't have the benchmark, and there's a big gap in time between what you're talking about with the sales projection and this, maybe the more logical inference is that they're talking about year over year sales.

[00:32:55] Speaker 02:
And those were very strong.

[00:32:56] Speaker 02:
But because you don't have a benchmark, that's why you can't

[00:33:00] Speaker 02:
hang materiality on this kind of puffery.

[00:33:04] Speaker 02:
I do want to talk about this.

[00:33:06] Speaker 02:
I do think this is where probably what for you guys would be the interesting legal question is, how does knowledge come into the safe harbor?

[00:33:16] Speaker 02:
And we brief this extensively.

[00:33:19] Speaker 02:
And all I can say is I think that every indicator of statutory construction indicates that you do not look at the state of mind.

[00:33:28] Speaker 02:
We explain at length in the brief why you have a disjunctive.

[00:33:32] Speaker 02:
Everybody agrees.

[00:33:33] Speaker 02:
You have to give each part of the safe harbor meaning.

[00:33:36] Speaker 02:
So this safe harbor has to exist.

[00:33:38] Speaker 02:
It has to be able to operate in a world where you have a false and misleading statement, you have actual knowledge, and you have materiality.

[00:33:45] Speaker 02:
And so if you start importing CNTR into the safe harbor, it doesn't have any sense of independent operation.

[00:33:54] Speaker 02:
And, you know, there's a lot of legislative history flying around, but the legislative history, and this is the joint conference report on this safe harbor, could not be any clearer.

[00:34:03] Speaker 02:
This is page 44 of the conference report.

[00:34:07] Speaker 02:
The conference committee specifies that the cautionary statements identify important factors to provide guidance to issuers and not to provide an opportunity for plaintiff counsel to conduct discovery of what factors were known to the issuer at the time the forward-looking statement was made.

[00:34:24] Speaker 02:
The use of the words meaningful and important factors are intended to provide a standard for the types of cautionary statements upon which a court may decide a motion to dismiss without examining the state of mind of the defendant.

[00:34:36] Speaker 05:
But the conference report also says a cautionary statement that misstates historical facts is not covered by the state harbor.

[00:34:44] Speaker 02:
There is no misstatement of historical fact in these statements.

[00:34:48] Speaker 02:
And this is, I haven't gotten into forward-looking because we believe this is weight.

[00:34:51] Speaker 02:
But if you really want to look at these statements, the first thing, the April 07 plan is proceeding statement.

[00:34:58] Speaker 02:
There's no, it's disclosed, and this is joint appendix page 250.

[00:35:03] Speaker 02:
It's disclosed in that call that they sold 300,000 units.

[00:35:06] Speaker 02:
and they disclosed their plan of 618.

[00:35:09] Speaker 02:
Importantly, there is no allegation that the 300 number's wrong.

[00:35:14] Speaker 02:
There's no allegation that the 300 number was not to plan.

[00:35:18] Speaker 02:
So everything, every current fact is correct.

[00:35:22] Speaker 02:
What plaintiffs are attacking is the, are you going to make the 618?

[00:35:26] Speaker 02:
And that's all the forward-looking parts of it.

[00:35:29] Speaker 02:
It's not in the statement.

[00:35:31] Speaker 02:
the September 07 statement.

[00:35:33] Speaker 02:
So you don't dispute that if there were a statement of historical fact, that that's completely appropriate under the safe harbor as the SEC reads it and as the... I mean, we would... This is not our primary argument, but we do make the argument that if you look at the definition of forward-looking statement, depending on which one you're in, the first one says a statement containing

[00:35:54] Speaker 02:
And so that could be read to mean so long as the statement contains a projection, the whole statement is covered.

[00:36:01] Speaker 02:
But I don't think you need to get there, because there's no dispute in this case about

[00:36:06] Speaker 02:
the current fact.

[00:36:07] Speaker 02:
It's all the forward-looking that's being, and that's what distinguishes this case from the Maker case, for example.

[00:36:13] Speaker 02:
In Maker, you have channel stuffing, you have, which is essentially they're selling products, they're sending products to people who haven't ordered them, right?

[00:36:22] Speaker 02:
They're sending their customers this stuff.

[00:36:24] Speaker 02:
and they're booking it as revenue, which is fraud, and it violates GAAP.

[00:36:30] Speaker 02:
And it's in that context where they say, look, you can't say you're still going strong when you're violating GAAP and your sales numbers are affirmatively wrong because your channel's stopping.

[00:36:40] Speaker 02:
You can't do that.

[00:36:41] Speaker 02:
That's not the case here.

[00:36:42] Speaker 02:
The 300,000 number's correct.

[00:36:44] Speaker 02:
And it's on plan.

[00:36:46] Speaker 02:
And I'm going to say this very quickly, because we didn't discuss this at length in our brief.

[00:36:52] Speaker 02:
The September 7th call, context is key here.

[00:36:57] Speaker 02:
This is a guidance call.

[00:36:58] Speaker 02:
This is not an earnings report call.

[00:37:01] Speaker 02:
So this is a joint appendix, page 259.

[00:37:04] Speaker 02:
Kevin Brown says, we have not yet completed the first quarter.

[00:37:08] Speaker 02:
Therefore, I am reviewing estimates, right?

[00:37:11] Speaker 02:
So everything he talks about is a projection.

[00:37:14] Speaker 02:
And when he gives the $950 million sales number, that is an estimate.

[00:37:20] Speaker 02:
The growth question comes up when the analysts ask,

[00:37:25] Speaker 02:
What's driving?

[00:37:27] Speaker 02:
I can get the actual quote from you.

[00:37:29] Speaker 02:
The analyst asks, what's driving this?

[00:37:31] Speaker 02:
Why is your sales number so high in the first quarter?

[00:37:34] Speaker 02:
And then he states the assumption underlying the estimate.

[00:37:39] Speaker 02:
And the assumption is,

[00:37:41] Speaker 02:
We continue the growth and expansion of that business, that's the P&D business, primarily in Europe.

[00:37:48] Speaker 02:
So he's asked the question, and I think here you've got to read the whole exchange between the analyst and Mr. Brown, because the analyst is asking what's the assumption underlying this estimate, and then he gives it.

[00:38:00] Speaker 02:
That falls squarely within the safe harbor.

[00:38:03] Speaker 02:
Forward-looking statement is defined to include,

[00:38:06] Speaker 02:
any statement of the assumptions underlying or relating to any statement described in the previous subparagraphs, which include projections and estimates.

[00:38:15] Speaker 02:
So again, I get back to the only way you run into a problem is if you start examining state of mind.

[00:38:24] Speaker 02:
And the statute tells you, Congress tells you, you don't look at state of the mind.

[00:38:29] Speaker 02:
You should be allowed to just read the statements and see if you think that they are identifying risks.

[00:38:34] Speaker 02:
And I see I've more than used my time.

[00:38:37] Speaker 02:
You've been so generous with me today.

[00:38:38] Speaker 02:
But I would point out that

[00:38:40] Speaker 02:
Plaintiffs keep saying that the Seventh and the Second Circuit have decided this issue.

[00:38:45] Speaker 02:
They have not.

[00:38:46] Speaker 02:
The Second Circuit in Slayton is dicked up.

[00:38:49] Speaker 02:
And if you look at 604 F3 at 772, it says, we need not cite that.

[00:38:55] Speaker 02:
Right.

[00:38:55] Speaker 05:
No, we realize that.

[00:38:56] Speaker 02:
It's a discussion.

[00:38:57] Speaker 05:
It's a useful discussion, though, given that there are not very many detailed discussions.

[00:39:00] Speaker 05:
What about the fact that the SEC seems to read it the way

[00:39:06] Speaker 05:
The White Judge Katzman said it was susceptible of being read in the dicta in Slayton.

[00:39:11] Speaker 02:
I think you cannot have an agency interpretation that flies in the face of clear statutory language.

[00:39:17] Speaker 05:
So you don't have an indication that that's not still their position?

[00:39:20] Speaker 02:
I don't have any indication.

[00:39:22] Speaker 02:
I'm more than happy to take a look at it and submit a brief to the court if you think that would be helpful.

[00:39:27] Speaker 02:
But you rarely get legislative history this clear, and you rarely get language this clear.

[00:39:33] Speaker 02:
And you put them together, and I don't think there's much room for state of mind in the analysis.

[00:39:40] Speaker 04:
All right.

[00:39:41] Speaker 04:
Thank you.

[00:39:43] Speaker 04:
Does Mr. Toll have any time?

[00:39:46] Speaker 04:
Okay, why don't you take a couple minutes.

[00:39:49] Speaker 06:
I'll be very brief.

[00:39:50] Speaker 06:
I want to focus on one fact issue, because again, I think this materiality issue on very strong is a fact and law question.

[00:39:57] Speaker 06:
My opposing counsel said this 200,000 shortfall on units was an internal projection.

[00:40:03] Speaker 06:
That is wrong, Your Honors.

[00:40:04] Speaker 06:
Paragraph 55 of the complaint and 86D of the complaint, talk about that was actually an internal operating report for July of 2007.

[00:40:13] Speaker 06:
That's the last, that's after the year is over.

[00:40:17] Speaker 06:
So that is an internal document reporting on how bad the results were for the year.

[00:40:22] Speaker 06:
It was not a projection ahead of time.

[00:40:23] Speaker 06:
Those were the final results.

[00:40:25] Speaker 06:
There's a huge shortfall.

[00:40:27] Speaker 06:
They try to say very strong may have meant that could mean referring to prior years or prior quarters, but again, put yourselves in the shoes of a reasonable investor of what they were thinking after they were told they would make 618,000 units.

[00:40:40] Speaker 06:
They didn't come close.

[00:40:42] Speaker 06:
They still said sales were very strong.

[00:40:44] Speaker 06:
When you speak, you have to speak truthfully.

[00:40:47] Speaker 06:
You can't omit material facts.

[00:40:49] Speaker 06:
I think the Supreme Court in the Northway decision said, when you have critical nature of information misstated or omitted, there will always be doubts.

[00:40:58] Speaker 06:
And in view of the prophylactic purpose of the statute, the Securities Act, those doubts are resolved in favor of who the statute is designed to protect.

[00:41:07] Speaker 06:
And here I think the investors were clearly misled by that statement.

[00:41:10] Speaker 06:
And with regard to meaningful cautionary language, I'll just go to Judge Pollard's last statement about what they could have said.

[00:41:16] Speaker 06:
I think it could have easily said, we have a real risk.

[00:41:19] Speaker 06:
We built up inventory.

[00:41:21] Speaker 06:
We may have to sell at a larger discount, or not at all.

[00:41:25] Speaker 06:
That's our risk.

[00:41:26] Speaker 06:
It was never said, and you could not understand that from what they did say, which was the same thing every year.

[00:41:32] Speaker 06:
Thank you, Your Honor.

[00:41:33] Speaker 04:
All right.