San Antonio Fire & Police Pension Fund v. Syneos Health Inc. ( 2023 )

USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 1 of 21
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 21-2309
SAN ANTONIO FIRE & POLICE PENSION FUND; EL PASO FIREMEN &
POLICEMEN’S PENSION FUND, individually and on behalf of all others similarly
situated,
Plaintiffs - Appellants,
and
EGLE VAITKUVIENE,
Plaintiff,
v.
SYNEOS HEALTH INC.; ALISTAIR MACDONALD; GREGORY S. RUSH;
MICHAEL A. BELL; ROBERT BRECKON; DAVID F. BURGSTAHLER; LINDA S.
HARTY; RICHARD N. KENDER; WILLIAM E. KLITGAARD; KENNETH F.
MEYERS; MATTHEW E. MONAGHAN; DAVID Y. NORTON; ERIC P. PAQUES,
Defendants - Appellees.
Appeal from the United States District Court for the Eastern District of North Carolina, at
Raleigh. Louise W. Flanagan, District Judge. (5:18-cv-00029-FL)
Argued: December 8, 2022 Decided: July 24, 2023
Before HARRIS and RICHARDSON, Circuit Judges, and Patricia Tolliver GILES, United
States District Judge for the Eastern District of Virginia, sitting by designation.
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 2 of 21
Affirmed by published opinion. Judge Richardson wrote the opinion, in which Judge
Harris and Judge Giles joined.
ARGUED: Douglas Wilens, ROBBINS GELLER RUDMAND & DOWD LLP, Boca
Raton, Florida, for Appellants. Brian Thomas Frawley, SULLIVAN & CROMWELL
LLP, New York, New York, for Appellees. ON BRIEF: Jack Reise, Stephen R. Astley,
Elizabeth A. Shonson, ROBBINS GELLER RUDMAN & DOWD LLP, Boca Raton,
Florida, for Appellants. David H. Kistenbroker, Joni S. Jacobsen, DECHERT LLP,
Chicago, Illinois, for Appellee Gregory S. Rush. Y. Carson Zhou, Krystal D. Valentin,
SULLIVAN & CROMWELL LLP, New York, New York, for Appellees Syneos Health,
Inc.; Michael A. Bell; Robert Breckon; David F. Burgstahler; Linda S. Harty; Richard N.
Kender; Williams E. Klitgaard; Alistair Macdonald; Kenneth F. Meyers; Matthew E.
Monaghan; David Y. Norton; and Eric P. Pâques. Lee M. Whitman, WYRICK ROBBINS
YATES & PONTON LLP, Raleigh, North Carolina, for Appellees.
2
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 3 of 21
RICHARDSON, Circuit Judge:
A company’s investors voted for a merger, but now feel that they were misled in
violation of federal securities law. Before the vote, the company and its executives gave
the investors high hopes by espousing optimistic projections for the merged entity. A few
months later—with the merger cemented—the investors’ hopes were dashed as the
company’s economic outlook darkened. Yet not every financial disappointment is
actionable under federal law. Here, as is often the case, the optimistic projections proved
wrong but no one is liable. So the district court was right to dismiss Plaintiffs’ class-action
lawsuit.
I. Background
This case arose when two companies merged in the biopharmaceutical market.
Biopharmaceutical companies develop medicines from living cells. Those medicines must
be tested and then approved by the Food and Drug Administration before they can be
publicly marketed. The two companies here—INC Research Holdings, Inc. and inVentiv
Health, Inc.—did not develop their own medicines, but helped other companies that did.
Pre-merger, INC Research specialized in assisting biopharmaceutical companies conduct
clinical trials as part of the Food and Drug Administration’s approval process. And
inVentiv mostly provided commercialization services for approved drugs. In other words,
INC Research helped pharmaceutical companies get their drugs approved, while inVentiv
3
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 4 of 21
helped companies sell their drugs after approval. Wanting to break into the approved-drug-
commercialization market, INC Research sought to merge with inVentiv in 2017. 1
The two companies started laying the groundwork well in advance, first discussing
the merger in November 2016. For the next few months, INC Research’s executives
conducted due diligence on the potential deal. Their due diligence included looking at
inVentiv’s commercial business and its relationships with key customers. The last due
diligence meeting was on May 2, 2017. About a week later, the companies issued a press
release announcing their intent to merge.
Finalizing the merger required approval by INC Research’s shareholders. Because
inVentiv was a privately owned company, there was limited public information about its
business health. But, aside from the May press release, the shareholders still had at least
two other means to learn about inVentiv before voting: earnings calls and proxy materials.
During the earnings calls, shareholders could ask questions about the merger directly to
INC Research’s executives. The proxy materials—which INC Research filed with the
Securities and Exchange Commission and distributed to shareholders before the merger
vote—also contained details about the merger. 2
1
After the merger, in January 2018, INC Research changed its name to Syneos
Health, Inc. As the relevant events here occurred before the name change, we refer to the
company as INC Research both before and after the merger.
2
Proxy materials are documents provided to investors that help them make informed
decisions about their votes. See J.A. 134; see also 17 C.F.R. § 240.14a-3.
4
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 5 of 21
Some of these communications, Plaintiffs say, were misleading. Specifically,
Plaintiffs claim that they relied on allegedly misleading statements that INC Research and
its executives made in three different communications: (1) the press release announcing
the merger; (2) an earnings call held on May 10; and (3) an earnings call held on July 27.
First came Defendants’ 3 press release announcing the proposed merger. It
“projected” that INC Research’s adjusted earnings per share would increase in the first year
following the merger, with mid- to high-single-digit growth in 2018 and over 20% growth
in 2019. 4
Later that same day, May 10, Defendants held an earnings call during which they
discussed the benefits of the potential merger. On the call, Defendants disclosed that
inVentiv’s commercial business was down in 2017 because of customer cancellations and
low drug-approval rates from the Food and Drug Administration. But INC Research’s
CEO noted that new drug approvals were rebounding and that these approvals “feed[ ]” the
commercial business. J.A. 60. Similarly, INC Research’s CFO called the potential new-
drug approvals “a huge leading indicator” of future commercial business. J.A. 61. He said
that the team was “confident” in high revenue growth in 2018 based on “new drug
3
Plaintiffs bring four separate claims, some against one group of defendants, and
others against a different group. These two groups involve distinct combinations of INC
Research and its executives. But nothing in our opinion rests on the distinction between
the two groups, so we refer to both classes of defendants as “Defendants” collectively.
4
The fiscal year that Defendants used for their projections and business data
essentially tracked the calendar year, beginning January 1 and ending December 31.
5
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 6 of 21
applications doubling” in 2017 and “the pipeline discussions we’re having with our
customers.” J.A. 61.
Then, over two months later, on July 27, there was another earnings call. INC
Research’s CFO told investors: “We’re more optimistic today than we were on May 10”
about the combined company’s growth numbers for 2018. J.A. 66. He linked his
optimism, in part, to strong new-drug-approval numbers, calling them “a precursor to” and
“leading indicator” of success in the commercial business. J.A. 43. But he also told
investors that the commercial business still had to “close” business “in the second half of
this year” to hit its projections. J.A. 43.
INC Research shareholders voted to approve the merger and it finalized in August
2017. Before the vote, INC Research provided the shareholders with proxy materials that
recommended approval and included the merger announcement press release and the May
10 earnings call transcript. Those documents also contained detailed cautionary language,
warning investors that this was a risky undertaking and success was not guaranteed.
These warnings proved prescient. Things soured quickly and the rest of the year
was painful for the shareholders. Starting in September, the company’s stock price
plummeted. The fall followed comments from INC Research’s CFO that inVentiv’s
commercial business was a “wild card” that would experience “roughly flat” revenue
growth in 2018 and lead to only single-digit revenue growth for the overall company post-
merger. J.A. 45–46. Defendants said that this was partially because—although drug
6
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 7 of 21
approvals were up—inVentiv had secured no large sales contracts in 2017. 5 INC
Research’s year rounded out with a series of corporate departures and reshuffling that
lasted through early 2018.
On the heels of this turmoil, an INC Research shareholder brought a class action
against INC Research and its CEO and CFO, purporting to represent those who bought
INC Research stock between May 10 and November 8, 2017. The district court then
appointed two pension funds as lead plaintiffs: San Antonio Fire & Police and El Paso
Firemen & Policemen. They filed an amended complaint asserting four claims under the
Securities Exchange Act of 1934: (1) violations of § 10(b) and Rule 10b-5; (2) violations
of § 14(a) and Rule 14a-9; and (3) and (4) control person liability under § 20(a), based on
the alleged §§ 10(b) and 14(a) violations, respectively. 6 They also added several other INC
Research executives as defendants.
Plaintiffs’ core allegation is that Defendants misled them into thinking that the
merger would be more successful than it was by painting a rosy picture of the future without
also disclosing critical, adverse facts. Specifically, they allege that Defendants never told
5
Both parties refer to these large sales contracts as “100-plus sales team contracts.”
J.A. 77. The term describes commercialization contracts for approved drugs that require
at least 100 sales representatives. But Defendants dispute that this moniker describes a
particularly unique subset of large contracts. Because it does not matter for our analysis,
we decline to weigh in on that dispute. And, throughout this opinion, when we say “large
sales contracts” we mean “100-plus sales team contracts.”
6
As is standard, this opinion refers to the claims according to the Securities
Exchange Act sections from which they arise. However—in U.S. Code-speak—the claims
are based on 15 U.S.C. §§ 78j(b), 78n(a), and 78t(a) respectively.
7
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 8 of 21
shareholders—at least, not before they approved the merger—that inVentiv’s commercial
business depended on signing large sales contracts, nor that inVentiv had not yet secured
any of these contracts in 2017. They claim that Defendants knew this information and so
misled investors by giving more optimistic projections than were warranted.
The district court dismissed Plaintiffs’ case for failure to state a claim. It first held
that Plaintiffs’ allegations could not satisfy § 10(b)’s scienter requirement. It then
dismissed their § 14(a) claim, determining that Defendants had provided sufficient
disclaimers to make any alleged misrepresentations immaterial. Lastly, it rejected
Plaintiffs’ § 20(a) claims because—with the alleged § 10(b) and § 14(a) violations
dismissed—there were no viable predicate offenses. On appeal, Plaintiffs challenge the
dismissal of each claim. Reviewing the order de novo, we affirm.
II. Discussion
A. Section 10(b) claim: Plaintiffs have not adequately pleaded scienter
Section 10(b) of the Act makes it unlawful to “use or employ, in connection with
the purchase or sale of any security . . . any manipulative or deceptive device or contrivance
in contravention of [Securities and Exchange Commission] rules.” 15 U.S.C. § 78j(b).
Those rules render it unlawful to “make,” “in connection with the purchase or sale of any
security,” “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.” 17 C.F.R. § 240.10b–5.
Private parties suing under these provisions must establish six elements, one of
which is “scienter.” See Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 552 U.S. 148,
8
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 9 of 21
157 (2008). 7 That element requires Plaintiffs to establish that Defendants intentionally or
recklessly misled them. Ottmann v. Hanger Orthopedic Grp., Inc., 353 F.3d 338, 344 (4th
Cir. 2003). The district court found that Plaintiffs failed to adequately allege scienter and
so dismissed the claim. We agree.
At the motion-to-dismiss stage, § 10(b) plaintiffs face “heightened pleading
requirements.” Stoneridge, 552 U.S. at 165; see also 15 U.S.C. § 78u–4(b). When it comes
to scienter, this means that plaintiffs must “state with particularity facts giving rise to a
strong inference that the defendant acted” with intentional or reckless deception “with
respect to each act or omission alleged.” See 15 U.S.C. § 78u–4(b)(2)(A); Ottmann, 353
F.3d at 344. So, to win on appeal, Plaintiffs must raise a strong inference that Defendants
intended to deceive them or created such a high risk of misleading them that Defendants
must have known that they were being deceptive. See Matrix Capital Mgmt. Fund, L.P. v.
BearingPoint, Inc., 576 F.3d 172, 181 (4th Cir. 2009). 8
Applying this heightened pleading standard is a comparative, two-step process. See
Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 314 (2007). We first consider the
7
In total, the six elements that a plaintiff must prove in a § 10(b) case are: “(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, 552 U.S. at 157.
8
See also Ottmann, 353 F.3d at 343 (defining a reckless act as one “so highly
unreasonable and such an extreme departure from the standard of ordinary care as to
present a danger of misleading the plaintiff to the extent that the danger was either known
to the defendant or so obvious that the defendant must have been aware of it”).
9
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 10 of 21
“inferences [of scienter] urged by the plaintiff.” Id. We then weigh those inferences
against “competing inferences rationally drawn from the facts alleged,” id., giving each
only “the inferential weight warranted by context and common sense.” Matrix Capital,
576 F.3d at 183. In the end, “[a] complaint will survive . . . 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.” Tellabs, 551 U.S. at 324.
In this case, to understand the inference of scienter that Plaintiffs urge—i.e.,
Plaintiffs’ inference about why Defendants made the contested statements (or omissions)—
we must first identify how Defendants’ statements might mislead. Plaintiffs rely on three
statements, two from May and one from July. Each is purportedly misleading in the same
way: It made sunny predictions about future performance without also telling investors
that inVentiv had secured no large sales contracts, and without warning investors that this
failure was a major indicator of future headwinds. 9 Absent this extra information, Plaintiffs
say, Defendants’ projections were misleading.
9
Plaintiffs do not allege that the statements were misleading simply because they
contained optimistic growth projections that turned out to be false. That is for good reason,
since forward-looking statements and puffery are often non-actionable under the Securities
Exchange Act. See Boykin v. K12, Inc., 54 F.4th 175, 183–84 (4th Cir. 2022). Plaintiffs
instead focus their ire on what they characterize as omissions of present or historical fact,
which generally are actionable. See id.We need not resolve whether that characterization holds water. This opinion’s
§ 10(b) analysis focuses only on the scienter element, and does not address whether
Plaintiffs’ claim might fail for other reasons too. See KBC Asset Mgmt. NV v. DXC Tech.
Co., 19 F.4th 601, 607 (4th Cir. 2021) (explaining that § 10(b)’s elements “can be
addressed in any order” and that “the failure to adequately allege scienter is enough to
doom the claim”).
10
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 11 of 21
So that is how the contested statements might mislead. But, to prevail, Plaintiffs
must also address why Defendants made those statements. Specifically, Plaintiffs must
create a strong inference that Defendants intended to mislead investors—or else recklessly
disregarded the risk that they might do so—when they gave their projections without the
extra information. Establishing this “why” requires first showing that Defendants knew the
missing information. It also requires showing that Defendants knew that the information
was relevant for evaluating their projections. And it requires showing that Defendants went
ahead and left the information out anyway, with the intent to mislead Plaintiffs—or at least
with a reckless disregard for the risk that leaving the information out would make their
projections misleading.
In sum, Plaintiffs’ § 10(b) scienter allegation boils down to whether they can raise
a strong inference that Defendants: (1) knew when they spoke in May and July that
inVentiv had not secured any large sales contracts; (2) knew that failing to secure those
types of contracts was a predictor of future poor performance; and (3) knew at that time,
or were at least reckless to the risk, that investors would be materially misled if they were
not told this information—i.e., that failing to secure those contracts by that point in the year
was such a strong negative predictor that Defendants’ projections must be misleading
without disclosing it.
At the outset, we note that Plaintiffs do not put forward any plausible motive for
why Defendants sought to defraud investors. True, they were not required to. But we
cannot ignore this omission. It “weighs heavily” against them in the scienter analysis. In
re Triangle Cap. Corp. Sec. Litig., 988 F.3d 743, 752 (4th Cir. 2021) (cleaned up). After
11
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 12 of 21
all, we generally do not presume that “defendants would tout a contract” that they knew
was “doomed to fail” without some ulterior motive. Boykin, 54 F.4th at 186. To overcome
this weakness, Plaintiffs’ “circumstantial evidence of fraud must be correspondingly
greater.” Slayton v. Am. Exp. Co., 604 F.3d 758, 776 (2d Cir. 2010).
But Plaintiffs’ alleged circumstantial evidence falls far short. To create an inference
of scienter, they point primarily to Defendants’ due diligence leading up to the merger.
According to Plaintiffs’ allegations, Defendants held a series of meetings at which they
generally discussed the commercial aspects of inVentiv’s business. Because, Plaintiffs
contend, Defendants talked about inVentiv’s commercial business at these meetings, they
therefore must have realized: (1) that inVentiv had not yet secured any large sales
contracts; (2) that those contracts were, in general, a predictor of inVentiv’s future
performance; and (3) that failing to secure any of those contracts by that point in the year
was such an important predictor that it would be misleading to forecast commercial success
for the next year without telling investors about that extra information.
Plaintiffs thus ask us to infer specific knowledge from these due diligence meetings.
But we can’t. That general due diligence occurred does not support the inference that
Defendants learned any specific information: neither that, by midyear, inVentiv had not
yet signed any large sales contracts, nor that these contracts were important for inVentiv’s
business model.
Put differently, Plaintiffs essentially assert that Defendants should have known
about certain business facts given their diligence. But that proposition, in effect, merely
argues that Defendants negligently performed due diligence: “It would have been poor due
12
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 13 of 21
diligence if they did not learn these facts.” And mere negligence cannot support a § 10(b)
claim; Plaintiffs must plead, at a minimum, recklessness. See Ottmann, 353 F.3d at 343.
As we have said, we cannot impute factual knowledge to individuals merely based
on their professional position or because “such knowledge relates to the business’s core
operations.” KBC Asset Mgmt., 19 F.4th at 612. That is, we may not infer—from the mere
fact that Defendants learned general information about inVentiv’s business—that they thus
learned specifically: (1) that inVentiv had not yet signed the particular types of contracts
at issue here, nor (2) that those contracts were predictors of inVentiv’s future business
success. See In re Advanced Battery Techs., Inc., 781 F.3d 638, 646 (2d Cir. 2015)
(explaining that a mere allegation that proper due diligence would have uncovered certain
information is “generally insufficient to establish the requisite scienter for private securities
fraud claims”); see also Tellabs, 551 U.S. at 326 (explaining that “omissions and
ambiguities count against inferring scienter”).
But there’s more. Even were we to set all that aside—and momentarily infer that
Defendants learned through their due diligence meetings both (1) that inVentiv had not yet
secured a large sales contract, and (2) that these contracts were important for inVentiv’s
business model—Plaintiffs would still be out of luck. Simply knowing this information
would not be enough for scienter. Defendants would also have to know—or, at a bare
minimum, be reckless to a risk—that declining to share that information would render their
rosy predictions misleading for investors. See Maguire Fin., LP v. PowerSecure Int'l, Inc.,
876 F.3d 541, 548 (4th Cir. 2017).
13
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 14 of 21
Yet we “may not stack inference upon inference to satisfy the [§ 10(b)] pleading
standard.” Id. And the inference that Defendants learned this information about inVentiv’s
business does not necessarily support the further inference that Defendants knew (or were
reckless to the risk that) their future predictions would be misleading without including
that information. After all, Defendants might well have believed that their earnings
projections were unaffected by inVentiv’s failure to secure a large contract by the time of
their due diligence meetings.
Recall that the last due diligence meeting took place on May 2, 2017. Even if
Defendants learned at that meeting that inVentiv had not yet secured a large sales contract,
and even if Defendants learned that those contracts were important for inVentiv’s business
model, there were still seven months left in the year to sign one. And that prospect might
have seemed entirely possible, particularly when Defendants thought that inVentiv’s
business was “seasonal” and driven by “end-year” sales. See J.A. 43, 190. Defendants
thus may well have thought that inVentiv’s failure to sign a large sales contract by May
was not a strong predictor about its future performance; and they thus might have
reasonably concluded that omitting that information did not make their earnings projections
misleading.
To summarize, we may not infer, from the mere fact that Defendants conducted due
diligence on inVentiv, that Defendants learned about inVentiv’s failure to sign any large
sales contracts, nor about any supposed centrality of those contracts to inVentiv’s business
model. And, even if we could infer that Defendants learned those facts in their due
14
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 15 of 21
diligence meetings, we could not thereby infer that Defendants also learned that those facts
foreclosed their sunny projections.
Aside from the due diligence meetings, Plaintiffs marshal little evidence of scienter.
They suggest that we may divine an inference of scienter in the “temporal proximity”
between Defendants’ allegedly misleadingly optimistic statements in May and July and
their revelations in September and November that inVentiv was a “wild card” and that
revenue would be roughly flat. And it is certainly true that the “temporal proximity
between . . . allegedly false statements or omissions and the subsequent disclosure of the
truth” can sometimes help support an inference of scienter. See KBC Asset Mgmt., 19 F.4th
at 612.
But that is only so when the temporal proximity between false and truthful
statements is very close. Only then, in context, may the short time between the two
statements suggest that the speaker must have known the truth when they uttered the falsity.
See, e.g., Miss. Pub. Employees’ Ret. Sys. v. Bos. Sci. Corp., 523 F.3d 75, 91 (1st Cir. 2008)
(finding a one-week gap between claiming that a vehicle defect was “fixed” and issuing a
recall “strong evidence” of scienter). Otherwise, the link between an earlier misstatement
and a later revelation is “purely speculative.” See Triangle Cap., 988 F.3d at 752. Here,
the months-long gap between the statements is too wide to support an inference of scienter.
See KBC Asset Mgmt., 19 F.4th at 612–13 (finding a similar gap insufficient to raise a
strong inference of scienter).
Plaintiffs next ask that we infer scienter from the post-merger corporate departures
and reshuffling. But executive departures are, at best, weak evidence of scienter. Cf. id.
15
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 16 of 21
at 609. And given that Plaintiffs have failed to raise an inference of scienter through any
other means, we decline to read anything nefarious into the leadership changes of a
company in flux. See Triangle Cap., 988 F.3d at 754 (“[W]ithout allegations
demonstrating [scienter more clearly] . . . we find it difficult to give this regime change any
weight toward a scienter inference.”).
Given the weakness of Plaintiffs’ inference, the final step of the comparative
analysis is easy. Plaintiffs offer no plausible arguments for why their pleadings suggest
that Defendants acted with the required mental state. They have raised no inference of
scienter. We contrast this with the competing inference: Defendants made optimistic
projections that didn’t pan out. That is the more compelling inference.
This is all the more true because Defendants explicitly based their projections on
assumptions that did not materialize. They told investors that, for their projections to be
correct, inVentiv had to “close” business “in the second half” of the year. See J.A. 66.
This disclosure fits with Defendants’ belief that inVentiv had a seasonal business driven
by end-year sales. See J.A. 606 (noting that “inVentiv has historically experienced an
increase in net revenues in the fourth quarter as a result of clients’ increased spending at
the end of the calendar year”); J.A. 695 (explaining that “[e]nd-year sales drive this
business”). The more “compelling” inference is that Defendants simply expected inVentiv
to sign more commercial contracts by the end of 2017 than it did—not that they
intentionally or recklessly misled investors. So the district court properly dismissed
Plaintiffs’ § 10(b) claim. See Tellabs, 551 U.S. at 324 (“A complaint will survive . . . only
16
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 17 of 21
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.”).
B. Section 14(a) claim: Any misrepresentations are immaterial
To make out their § 14(a) claim, Plaintiffs must adequately allege that Defendants
solicited “proxies through a proxy statement that contains false or misleading material facts
or omits any material fact that leaves a proxy statement false or misleading.” Paradise
Wire & Cable Defined Ben. Pension Plan v. Weil, 918 F.3d 312, 318 (4th Cir. 2019) (citing
17 C.F.R. § 240.14a–9(a)). A fact—omitted or included—is material if there is a
“substantial likelihood” that its disclosure or removal “would have been viewed by the
reasonable investor as having significantly altered the total mix of information made
available.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). In other words,
materiality is contextual and a fact that is material when “viewed in a vacuum” may be
immaterial when “considered, as is appropriate, in a broader frame.” See Omnicare, Inc.
v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 190 (2015)
(discussing falsity rather than materiality); Paradise Wire, 918 F.3d at 321–23 (applying
Omnicare’s contextual approach to materiality).
Cautionary language included in proxy materials is part of the “total mix of
information made available” to investors. See TSC Indus., 426 U.S. at 438; Paradise Wire,
918 F.3d at 322. So, because materiality is contextual, it can be “negate[d]” by adequate
warnings and disclaimers. Gasner v. Bd. of Supervisors, 103 F.3d 351, 358 (4th Cir. 1996).
That is, if—given those warnings—it is not “substantial[ly] likel[y]” that adding an
additional truthful fact would have changed a reasonable investor’s mind about their
17
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 18 of 21
investment decision, then adding that fact would not have “significantly altered” how they
viewed the total mix, and that fact is thus immaterial. See id. at 356. So when—as here—
an investor alleges that a company’s growth projection was misleading because it failed to
disclose additional negative information, we first consider any “cautionary language”
provided before deciding whether the omitted information is material. 10 Id. at 358;
Paradise Wire, 918 F.3d at 318–22.
Of course, not just any warning will do. The warnings must be “specific” and
“tailored to address the alleged misrepresentation or omission.” Paradise Wire, 918 F.3d
at 319. Vague, boilerplate disclaimers will not cut it. See In re Trump, 7 F.3d at 371. The
point is that the cautionary language stands in for the omitted information, warning the
investor not to rely too heavily on, or read too deeply into, a certain proposition. For this
to work, the proxy statement’s warnings must directly address the alleged deficiencies in
that proposition. See Gasner, 103 F.3d at 359. When warnings are so tailored, the
reasonable investor knows not to put too much stock in the proposition. And if the
proposition is later undermined by an undisclosed fact, it matters not; the investor will not
10
This concept is often called the “‘bespeaks caution’ doctrine.” See Gasner, 103
F.3d at 358 (collecting cases). Calling this a “doctrine” may be overselling it. See Donald
C. Langevoort, Disclosures That “Bespeak Caution,” 49 Bus. Law. 481, 483 (1994)
(observing that the doctrine is “more a collection of cases linked by a common phrase or
quotation than a set of analytically homogenous holdings”). In this Circuit, and in others,
it is really just a “shorthand” for the unexceptional observation that materiality is contextual
and so can be—as a matter of law—negated by adequate warnings. See In re Donald J.
Trump Casino Sec. Litig., 7 F.3d 357, 364 (3d Cir. 1993); Paradise Wire, 918 F.3d at 319.
18
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 19 of 21
overhaul her calculus based on bad news that she was, in essence, already primed to
receive.
Here, Plaintiffs allege that the proxy materials’ optimistic 2018 growth projections
were misleading because they omitted the fact that inVentiv had not yet signed any large
sales contracts in 2017, instead emphasizing overall drug-approval numbers. For this
omission to be material, a reasonable investor would have to view the total mix of
information significantly differently if told overall drug-approval numbers were not the
best indicator of future commercial-sector performance and that inVentiv had not signed
any large sales contracts in 2017.
But this omission is not material because Defendants included “specific warnings,”
“tailored to address” Plaintiffs’ exact complaints. See Paradise Wire, 918 F.3d at 319.
Plaintiffs challenge the projections because they partially relied on the underlying
assumption that high drug-approval rates would lead to high commercial sector revenue.
Yet Defendants specifically warned that the assumptions underlying their projections were
uncertain and potentially flawed. And, while Plaintiffs complain that the projections were
too optimistic because inVentiv had not yet signed any large contracts, they were
specifically warned that this optimism was based on “pipeline discussions” with customers
rather than finalized deals. See J.A. 27.
Investors were also warned that the projections may be inaccurate; that the success
of inVentiv’s commercial business was not assured; that inVentiv had struggled to achieve
profitability and might do so again; that inVentiv’s success depended on other companies’
expenditure on commercialization services, which could decline; and that inVentiv was in
19
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 20 of 21
a highly competitive space which could hinder its commercial business. These specific
warnings were put forth against the backdrop of a broad warning that the “combined
company [could] fail to achieve the anticipated benefits of combination.” J.A. 483. Given
both the breadth and specificity of these warnings, Plaintiffs cannot plausibly contend that
the total mix of information available to them would have been significantly altered if they
had been told that overall drug-approval numbers were not the best indicator of future
commercial revenue and that inVentiv had not signed a contract to provide over 100 sales-
team members in the first half of 2017.
Our rejection of Plaintiffs’ claim flows naturally from our holdings in both Gasner
and Paradise Wire. In Gasner, bondholders sued a company that defaulted, claiming they
would not have bought the bonds if they had been told additional adverse information about
the company. See 103 F.3d at 356. The Court held that the omission was immaterial
because the bondholders were advised there was “no guarantee” the venture would succeed
and were told the uncertainty of the venture “in specific detail.” See id. at 359. Similarly,
in Paradise Wire, investors who voted for a merger claimed that optimistic stock-price
estimates and future financial performance projections were misleading because they were
undercut by undisclosed facts. 918 F.3d at 316–18. But the court determined that the
omissions were immaterial because the accompanying proxy statement included adequate
warning language that cautioned investors that the projections might be wrong, the
underlying assumptions might be uncertain, and the merger might not be profitable. See
id. at 322–23. Our Plaintiffs’ claims mirror those in Gasner and Paradise Wire and—while
the specifics of the warnings must vary from case to case to remain appropriately tailored—
20
USCA4 Appeal: 21-2309 Doc: 38 Filed: 07/24/2023 Pg: 21 of 21
our Defendants’ cautionary language is markedly similar to the warnings that negated
materiality in those cases. So the securities fraud claims fail here just as they did there. 11
* * *
INC Research’s investors have a right to be disappointed that their company’s
performance did not meet its optimistic projections. But that does not mean that they also
have a right to civil remedies under federal securities law. Securities fraud liability cannot
be “predicated solely on an overly optimistic view of a future which may, in fact, encounter
harsh economic realities down the road.” See Maguire Fin., 876 F.3d at 548. Yet that is
precisely what Plaintiffs seek to do here. The district court order dismissing their case is
thus
AFFIRMED.
11
Because we affirm the district court’s dismissal of Plaintiffs’ § 10(b) and § 14(a)
claims, we also affirm the dismissal of their § 20(a) claims. Liability under § 20(a) of the
Securities Exchange Act is derivative. See Singer v. Reali, 883 F.3d 425, 438 (4th Cir.
2018). Here, Plaintiffs predicate their § 20(a) claims only on their § 10(b) and § 14(a)
claims. So their § 20(a) claims cannot succeed unless Plaintiffs also succeed on either their
§ 10(b) or § 14(a) claims. Since both of those claims fail, so too do Plaintiffs’ § 20(a)
claims.
21