## Facts

- Cummins redesigned certain diesel engines starting in 1988 to meet new EPA emissions standards and sold them with an engine warranty generally covering two years or 100,000 miles.
- Shareholder Alan J. Stransky filed a putative class action under SEC Rule 10b-5 against Cummins and various officers and directors.
- The complaint alleged Cummins internally recognized the redesign was rushed, insufficiently evaluated, and relied too heavily on prototype testing rather than final production testing.
- Stransky alleged that, by late 1988 and early 1989, warranty claims and warranty costs tied to the redesigned engines rose sharply and exceeded internal predictions and targets.
- Stransky challenged four Cummins press releases that described declining cost curves, progress toward cost targets, current profitability, and expected increasing profitability for the new engines.
- He alleged the releases were misleading because they did not disclose contemporaneous engine defects and escalating warranty expenses.
- The district court dismissed Stransky’s first amended complaint with prejudice under Rule 12(b)(6); the dismissal was certified as final under Rule 54(b) and appealed.

## Issues

1. Whether the complaint plausibly alleged materially false or misleading statements or omissions under Rule 10b-5 based on optimistic press releases about costs and profitability while warranty costs allegedly increased.
2. Whether federal securities law imposed a duty to correct or a duty to update those prior public statements as later information about warranty problems emerged.

## Decision

- The Seventh Circuit affirmed the Rule 12(b)(6) dismissal with prejudice.
- The court held the complaint did not adequately plead that the challenged statements were materially false or misleading when made.
- The court rejected the asserted expansive duty to continuously update optimistic, forward-looking statements based on subsequent adverse developments.
- The court concluded the allegations described disappointed expectations from business predictions, not actionable securities fraud.

## Legal Principles

- A Rule 10b-5 plaintiff must plausibly allege, among other elements, a material misstatement or omission; the key question is whether statements were misleading when made in their context.
- Rule 10b-5 does not create a general duty to disclose all material adverse information; disclosure is required only to the extent needed to keep what was said from being misleading.
- A duty to correct may arise for statements that were false when made; a broad duty to update forward-looking statements as circumstances change is limited and is not triggered merely because later events turn out worse than predicted.
- General expressions of corporate optimism, projections, or expectations about future profitability are typically not actionable absent well-pled facts showing knowing or reckless falsity at the time of the statement.

## Conclusion

The Seventh Circuit held that optimistic press releases about engine cost trends and profitability, without well-pled facts showing contemporaneous falsity or a misleading half-truth, did not support a Rule 10b-5 claim, and it declined to impose an ongoing obligation to update such forward-looking statements as warranty costs increased.


Stransky v. Cummins Engine Co., 51 F.3d 1329 (7th Cir. 1995)