## Facts

- Stac Electronics sold “Stacker,” a data-compression product for MS-DOS-compatible computers.
- Stac’s financial results improved markedly in the six months before March 31, 1992, with increased revenues and earnings largely attributed to Stacker sales.
- On May 7, 1992, Stac completed an initial public offering of 3,000,000 shares using a prospectus and related offering materials.
- The prospectus included several pages of risk factors, including warnings that Stac operated in a highly competitive industry and that large competitors (including Microsoft) could introduce similar products, increasing competition and reducing revenues.
- Purchasers of Stac stock during the class period sued Stac, certain officers/directors, and the underwriters, alleging the offering materials and related statements overstated prospects and inadequately disclosed competitive threats from Microsoft and the related risk to Stac’s earnings.
- After the IPO, Stac’s stock price fell substantially below the offering price; plaintiffs attributed the decline to market recognition of Microsoft’s competing product and Stac’s competitive position.
- The district court dismissed the first amended complaint under Rule 12(b)(6); plaintiffs appealed.

## Issues

1. Whether the complaint plausibly alleged actionable, material misstatements or omissions in the IPO materials under Securities Act § 11 and Exchange Act § 10(b)/Rule 10b-5 despite extensive risk disclosures.
2. Whether the challenged optimistic statements were actionable or non-actionable puffery and protected forward-looking statements in light of cautionary language.
3. Whether the complaint pleaded scienter with sufficient specificity for the § 10(b)/Rule 10b-5 claim.
4. Whether controlling-person claims under Securities Act § 15 and Exchange Act § 20 could proceed absent a well-pleaded primary violation.

## Decision

- The Ninth Circuit affirmed dismissal of all claims.
- The court held that, read as a whole, the prospectus’s specific competition-related warnings prevented the alleged omissions from being materially misleading.
- The court treated many challenged statements as non-actionable optimism or puffery, and found predictive statements not actionable when coupled with meaningful risk disclosure.
- The court held plaintiffs failed to plead facts supporting a strong inference of scienter for the § 10(b)/Rule 10b-5 claim.
- Because no primary violation was stated, the controlling-person claims under §§ 15 and 20 were properly dismissed.

## Legal Principles

- Materiality turns on whether there is a substantial likelihood that the omitted or misstated fact would significantly alter the “total mix” of information available to a reasonable investor.
- Detailed, specific cautionary disclosures in offering materials can render alleged omissions or projections immaterial as a matter of law (the “bespeaks caution” doctrine).
- Generalized corporate optimism and promotional characterizations (puffery) are not actionable misrepresentations under federal securities laws.
- Securities Act § 11 requires an untrue statement of material fact or a material omission making statements misleading, but does not require scienter.
- Exchange Act § 10(b)/Rule 10b-5 requires scienter; allegations based mainly on later stock declines or hindsight inferences do not satisfy scienter pleading requirements.
- Controlling-person liability under Securities Act § 15 and Exchange Act § 20 depends on a viable underlying primary securities-law violation.

## Conclusion

The Ninth Circuit upheld dismissal because the IPO materials repeatedly warned of the precise competitive risks that later harmed Stac, the challenged rosy statements were non-actionable, and the complaint did not plead contemporaneous facts showing material falsity or scienter; without a primary violation, controlling-person theories also failed.


In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996)