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United States Court of Appeals
Fifth Circuit
F I L E D
April 14, 2004
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 03-50311
STEPHEN GREENBERG, Individually and on behalf of all others
similarly situated; AVIEL MARRACHE, Lead Plaintiff; CHARLES
BINKS, Individually and on behalf of all others similarly
situated; RYAN BRISTOL, on behalf of himself and all others
similarly situated; RYAN W. CONNORS, on behalf of himself an all
others similarly situated; PETER MARGONELLI, on behalf of
themselves and all others similarly situated; RANDALL SIMON, on
behalf of themselves and all others similarly situated; ROGER D.
LYNCH, individually and on behalf of all others similarly
situated; MYRNA ALZAGA, Individually and on behalf of all others
simlarly situated; SAM RHOADES, Individually and on behalf of all
others similarly situated; STEVEN WALLERSTIEN, on behalf of all
others similarly situated; ERIC SCHUESSLER, on behalf of himself
and all others similarly situated; IAN GOTLIB, on behalf of
himself and all others similarly situated.
Plaintiffs-Appellants,
v.
CROSSROADS SYSTEMS, INC.; BRIAN R. SMITH; REAGAN Y. SAKAI; JOHN
R. MIDDLETON,
Defendants-Appellees.
Appeal from the United States District Court
for the Western District of Texas
Before DAVIS, WIENER, and STEWART, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
Purchasers of Crossroads Systems, Inc. stock between January
25, 2000, and August 24, 2000, filed this putative class action
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against Crossroads and three of its officers seeking recovery for
securities fraud under Sections 10(b) and 20(a) of the Securities
Exchange Act and Rule 10b-5. The action is based on several
statements made by defendants relating to the capabilities of
Crossroads's products and financial results for the first three
quarters of Fiscal Year 2000. The defendants moved for partial
summary judgment on the ground that the plaintiffs cannot establish
reliance on any of Crossroads's alleged false statements under the
theory of fraud-on-the-market. We agree with the district court's
analysis as to most of the alleged false statements but disagree
with respect to the allegedly false statements made on 24 May 2000,
6 June 2000, 12 June 2000, and 5 July 2000. We therefore vacate
the summary judgment as to these latter statements and remand for
further proceedings.
I.
Crossroads is a public company based in Austin, Texas, that
designs, manufactures, and sells storage routers.1 On January 25,
2000, Crossroads announced that production was beginning on its
"Third Generation" of storage routers, comprised of models 4150,
4250, and 4450. The release included details on several features
of the new line of routers, such as interoperability, increased
speed, and server-free backup. Over the next several months,
1 Storage routers are devices that relieve congestion within
computer networks and reduce the time to back-up electronic
information.
-2-

Crossroads made additional more statements concerning the
capabilities of its Third Generation line of routers. On July 27,
2000, Crossroads released multiple items of unfavorable news,
including the news that Crossroads had issued a temporary stop-ship
of its products because of interoperability problems. After the
July 27 release, the price of Crossroads stock fell by about one-
half.
In February, 2001, the plaintiffs filed this private
securities fraud class action on behalf of purchasers of Systems,
Inc. (Crossroads) common stock between January 25, 2000, and August
24, 2000 (the "Class Period"), alleging violations by Crossroads
and its principal executives of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The Plaintiffs alleged that
during the Class Period Crossroads made several material public
misrepresentations overstating the interoperability and other
capabilities of its router products that tended to inflate the
price of the company's stock. In addition, the plaintiffs alleged
that Crossroads overstated the company's financial results during
the class period.2 Plaintiffs also alleged that the "truth" about
these statements was revealed on 27 July 2000 and 24 August 2000,
causing the price of Crossroads stock to decline sharply.
2 Plaintiffs alleged that Crossroads made these
misrepresentations on 25 January 2000, 7 February 2000, 22
February 2000, 23 February 2000, 27 March 2000, 19 April 2000, 23
May 2000, 24 May 2000, 6 June 2000, 12 June 2000, 14 June 2000,
20 June 2000, 27 June 2000, 5 July 2000, 13 July 2000.
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The Defendants filed a motion to dismiss under Rule 12(b)(6).
The district court denied this motion on August 15, 2001. In
September of 2001, this court issued its opinion in Nathenson v.
Zonagen, Inc., 267 F.3d 400 (5th Cir. 2001), which clarified, inter
alia, the rule in this circuit concerning the proof required to
establish reliance in a securities fraud case based on fraud-on-
the-market. After completing discovery and deposing the lead
plaintiff, Crossroads filed a motion for partial summary judgment
arguing that under Nathenson the plaintiffs were not entitled to a
presumption of reliance under the fraud-on-the-market theory of
their case. The district court held that under Nathenson,
plaintiffs asserting a fraud-on-the-market theory are not entitled
to the presumption of reliance where the alleged misrepresentations
do not affect the market price of the stock. The district court
concluded that an efficient market will digest unexpected new
information within two days of its release. The district court
used this two-day window to determine whether the alleged
misrepresentations sufficiently affected the price of Crossroads
stock so that the plaintiffs would be entitled to the fraud-on-the-
market presumption of reliance.3 For various reasons discussed
below, the district court concluded that the plaintiffs were not
entitled to the presumption of reliance for any of the alleged
3 The plaintiffs do not challenge the use of this two-day
window.
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misrepresentations. The district court then designated this
partial summary judgment a final judgment and dismissed the
plaintiffs case.
II.
We review the district court's grant of summary judgment de
novo, considering all evidence in a light most favorable to the
non-movant. Campos v. City of Houston, 113 F.3d 544, 545 (5th Cir.
1997). Summary judgment will be affirmed where, after independent
review, there is no genuine issue of material fact and the movant
is entitled to a judgment as a matter of law. Walker v. Thompson,
214 F.3d 615, 624 (5th Cir. 2000). Summary judgment may be
affirmed on any basis supported by the record. Conkling v. Turner,
138 F.3d 577 (5th Cir. 1998).
III.
To state a private securities fraud claim under � 10(b)4 and
Rule 10b-5,5 "a plaintiff must allege, in connection with the
4 Section 10(b) provides, in pertinent part:
It shall be unlawful for any person, directly or
indirectly . . .
(b) To use or employ, in connection with the purchase
or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of
such rules and regulations as the [SEC] may prescribe a
necessary or appropriate in the public interest or for
the protection of investors.
15 U.S.C. � 78j(b).
5 Rule 10b-5 provides, in pertinent part:
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purchase or sale of securities, (1) a misstatement or an omission
(2) of material fact, (3) made with scienter (4) on which plaintiff
relied (5) that proximately caused [the plaintiffs'] injury."
Nathenson v. Zonagen, Inc., 267 F.3d 400, 406-07 (5th Cir. 2001)
(quotation omitted) (emphasis added). The Supreme Court recognized
that requiring proof of "actual reliance" in class actions was
unduly burdensome because of the obvious difficulty of showing that
every class member individually relied on the alleged misstatement.
To ease this burden the Supreme Court, in Basic v. Levinson,
recognized the securities fraud theory of fraud-on-the-market. 485
U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). Under this theory,
reliance on the statement is rebuttably presumed if the plaintiffs
can show that (1) the defendant made public material
misrepresentations, (2) the defendant's shares were traded in an
efficient market, and (3) the plaintiffs traded shares between the
time the misrepresentations were made and the time the truth was
revealed. Id. at 247 n. 27, 108 S.Ct. 978.6 The Defendants may
It shall be unlawful for any person, directly or
indirectly . . .
(b) To make any untrue statement of a material fact or
to omit to state a material fact necessary in order to
make the statements made, in the light of the
circumstances, not misleading . . . in connection with
the purchase or sale of any security.
17 C.F.R. � 240.10b-5.
6 Under this theory, where securities are traded in an
efficient market, it is assumed that all public information
concerning a company is known to the market and reflected in the
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rebut this presumption by "[a]ny showing that severs the link
between the alleged misrepresentation and either the price received
(or paid) by the plaintiff, or his decision to trade at fair market
price[.]" Id. at 247, 108 S.Ct. 978.
During the discovery phase of the instant case, this court
issued its opinion in Nathenson v. Zonagen, Inc., 267 F.3d 400,
406-07 (5th Cir. 2001), where we stated,
Basic plainly states that the presumption of reliance may
be rebutted by "[a]ny showing that severs the link
between the alleged misrepresentation and . . . the price
received (or paid) by the plaintiff." This would include
a showing that "the market price would not have been
affected by" the alleged "misrepresentations," as in such
a case "the basis for finding that the fraud had been
transmitted through market price would be gone."
Nathenson, 267 F.3d at 414 (citations omitted). Accordingly,
Nathenson held that "in cases depending on fraud-on-the-market
theory, [] the complained of misrepresentation or omission [must]
have actually affected the market price of the stock[.]" Id. at
415. The Nathenson plaintiffs could not show that the price of
Zonagen's stock was actually affected by the allegedly false
statements, either by showing an increase in price following the
allegedly false positive statements or a corresponding decrease in
price following the revelation of the misleading nature of these
market price of the company's stock. Therefore, when someone
purchases a company's stock in an efficient market, we can
presume that he relied "on the supposition that the market price
is validly set and that no unsuspected manipulation has
artificially inflated the price[.]" Blackie v. Barrack, 524 F.2d
891, 907 (9th Cir. 1975).
-7-

statements. As such, the plaintiffs were not entitled to the
fraud-on-the-market presumption of reliance.
Crossroads moved for partial summary judgment on the issue of
presumption of reliance based on Nathenson's requirement of an
actual effect on stock price. The district court noted that the
price of Crossroads stock either declined or did not increase in a
statistically significant manner in the two days following the
alleged misrepresentations made on 25 January 2000, 22 February
2000, 23 February 2000, 24 March 2000, 27 March 2000, 19 April
2000, 23 May 2000, 24 May 2000, 6 June 2000, 12 June 2000, 14 June
2000, 20 June 2000, 27 June 2000, 5 July 2000, and 13 July 2000.
The lack of stock price movement led the district court to conclude
that under Nathenson the plaintiffs were not entitled to the
presumption of reliance for the statements made on these days. The
district court further found that the release of the "truth" of
these allegedly false statements on 27 July 2000 and 24 August 2000
was not evidence that the stock price had actually been affected by
those statements because the decline in price following both of
these dates was statistically insignificant. In reaching this
conclusion the district court compared the overall decline in stock
price between the first day of the Class Period and the day before
the July 27 release.7 Because decline in stock price during the
7 The district court found that the price dropped from
$13.44 to $5.00 after the July 27 announcement and from $12.62 to
$9.00 after the August 24 announcement. On the other hand, the
-8-

Class Period was, respectively, almost 800% and 1900% greater than
that following the release of the "truthful" information, the
district court concluded that the decline in price following 27
July 2000 and 24 August 2000 was not statistically significant.
IV.
The plaintiffs argue that the district court erred in finding
that they were not entitled to the fraud-on-the-market presumption
of reliance for each of the allegedly false statements made by
Crossroads during the Class Period. The plaintiffs concede that by
looking only to the two-day change following these dates they
cannot show that the price of Crossroads stock increased in a
statistically significant manner. However, the plaintiffs argue
that Nathenson allows them to benefit from the presumption of
reliance if it can be shown that "special circumstances" prevented
the price from otherwise rising.
The plaintiffs argument centers around the following statement
from Nathenson:
We also realize that in certain special circumstances
public statements falsely stating information which is
important to the value of a company's stock traded on an
efficient market may affect the price of the stock even
though the stock's market price does not soon thereafter
change. For example, if the market believes the company
will earn $1.00 a share and this belief is reflected in
price of the stock fell from $80.75 on January 25 to $13.44 on
July 26. The court pointed out that the $67.31 drop between the
first day of the class and the day before the July 27
announcement was 798% greater than the drop in the two days after
the July 27 announcement, and it was 1962% greater than the drop
in the two days after the August 24 announcement.
-9-

the share price, then the share price may well not change
when the company reports that it has indeed earned $1.00
a share even though the report is false in that the
company has actually lost money (presumably when that
loss is disclosed the share price will fall).
267 F.3d at 419 (emphasis added).
The plaintiffs argue that this statement somehow relieves them
of their burden in a fraud-on-the-market case to show that a
stock's price was actually affected by an allegedly false
statement. We do not agree. This example merely recognizes a
market reality that a stock's price will not change upon the
release of confirmatory information, i.e., information already
known to the market. This reality, however, is immaterial to the
question of reliance in 10b-5 fraud claims. Reliance is an
indispensable element of any fraud claim because it provides the
"causal connection between a defendant's misrepresentation and a
plaintiff's injury." Basic, 485 U.S. at 423. The fact that a
market will not double-count the same information does not
establish a nexus between misrepresentation and injury, especially
in the context of fraud-on-the-market where we allow this
relationship to be proved indirectly. A causal relationship
between the statement and actual movement of the stock price is
still required. Indeed, the example itself notes that when the
"truth" is revealed "the share price will fall." Nathenson, 267
F.3d at 419. It is this actual movement of stock price which must
be shown by fraud-on-the-market plaintiffs, and a plaintiff cannot
-10-

relieve himself of this obligation by referring to "special
circumstances" in an attempt to explain non-movement of the stock
price. Id. For these reasons, we reject the plaintiffs argument
that a showing of "special circumstances" will entitle them to the
presumption of reliance.
V.
On 27 July 2000, Crossroads released several items of very
negative news. The release stated, in pertinent part:
The company believes that revenues for the [third]
quarter may be as much as two-thirds below revenues for
the prior quarter.
* * *
One of the Company's largest customers will not be
ordering at the end of this quarter due to an imbalance
in its inventory as it transitions to new products. To
address this, Crossroads and the customer have agreed to
a one-time rebalancing of inventory and movement to
Crossroads newer products.
During the fiscal third quarter Crossroads' products
experienced interoperability issues in certain SAN
configurations and in mid-July the Company issued a stop
ship as a precaution. A correction is in the final
stages of testing and is scheduled to be released
shortly.
* * *
Finally, Compaq informed the Company late in July of its
plan to transition out of the Crossroads' 4100/4200
router solutions by the end of this calendar year and
replace them with Compaq's own solution.
Following this statement, the price of Crossroads stock declined
almost 63%, from $13.44 to $5.00. The plaintiffs argue that the
district court erred in concluding that the decline in price
following this statement was not statistically significant.
-11-

Furthermore, the plaintiffs argue that this statement revealed the
falsity of Crossroads's previous statements and that the ensuing
decline sufficiently demonstrates that the price of Crossroad stock
was artificially inflated, or propped up, by those previous
statements.
1.
We first consider whether the district court erred in
concluding that the drop in stock price following the statement on
27 July 2000 was not statistically significant. In reaching this
conclusion, the district court compared the dollar difference
between the drop in price following the 27 July 2000 announcement
and the overall decline in price during the Class Period. The
district court found it significant that following the 27 July 2000
release Crossroads stock price dropped from $13.44 to $5.00, a
decline of $8.44, while the price of the stock fell from $80.75 to
$13.44, a decline of $67.31, during the total Class Period prior to
the 27 July 2000 release. The district court compared these two
declines and concluded that the decline following the 27 July 2000
statement was not statistically significant because the overall
decline in stock price during the Class Period was 798% greater
than the decline following 27 July 2000. The district court relied
on Ieradi v. Mylan Laboratories, Inc., 230 F.3d 594, 600 (3d Cir.
2000), where the Third Circuit came to a similar conclusion when
the overall drop in share price immediately prior to the alleged
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revelation of the "truth" was only 300% greater than the drop in
share price in the two days after the "truth" was revealed.
The plaintiffs argue that the district court erred in
determining the significance of the decline by comparing the
decline following 27 July 2000 to the total decline in stock price
during the Class Period.8 The plaintiffs argue that the proper
method for determining whether a drop in price is statistically
significant is to consider the percentage of value lost following
the revelation of the "truthful" information. The plaintiffs point
out that under the district court's reasoning, even if the price of
the stock dropped 100%, from $13.44 to zero, it would still not be
statistically significant.
We find the district court's reliance on Ieradi to be
misplaced. First, the portion of Ieradi relied upon by the
district court concerns the question of materiality. 230 F.3d at
599-600. The fraud-on-the-market presumption addresses reliance,
not materiality, and the two elements are fundamentally different.
Nathenson, 267 F.3d at 418. Second, as the plaintiffs point out,
under the district court's method even if Crossroads's stock had
lost all its value following the 27 July 2000 statement, that loss
of $13.44 would still not be considered statistically significant
8 The plaintiffs make the same claims regarding Crossroads's
release of its final third quarter numbers on 24 August 2000.
However, because the 24 August 2000 release is confirmatory, the
fate of the plaintiffs claims based on this statement are tied to
that of the 27 July 2000 release.
-13-

because of the much larger decline of $67.31 during the overall
Class Period. Indeed, in that situation the overall decline would
still be 500% greater than that following 27 July 2000. But the
question is one of causation, and we believe the focus should be on
the change in price following the release of the "truthful"
information. In this case, where the price of the stock fell 63%
within two days after the information was released, we find the
district court erred in concluding that this was not a
statistically significant drop in price.9
2.
We next consider the plaintiffs argument that the significant
decline in stock price following the 27 July 2000 statement is
evidence that the price had been inflated by Crossroads's earlier
statements. As we have noted, the main concern when determining
whether a plaintiff is entitled to the presumption of reliance is
the causal connection between the allegedly false statement and its
effect on a company's stock price. Nathenson makes it clear that
to establish this nexus the plaintiffs must be able to show that
the stock price was actually affected. 267 F.3d at 418-419. This
is ordinarily shown by an increase in stock price immediately
9 We realize that whether a drop in a stock's price is
statistically significant will vary depending on the average
trading range for that particular stock. A drop of 10% for a
volatile stock may not be statistically significant whereas the
same drop for a stock with little average movement may be
significant. However, we have no difficulty saying that a 63%
drop in this stock following the release of this information was
statistically significant.
-14-

following the release of positive information. We read Nathenson
to also allow plaintiffs to make this showing by reference to
actual negative movement in stock price following the release of
the alleged "truth" of the earlier misrepresentation. Id. at 417-
419. Nathenson repeatedly emphasizes that the plaintiffs were not
entitled to the presumption of reliance because the price of the
defendants' stock did not decline upon revelation that the earlier
positive statements were misleading. Id. at 417-419. Because in
Nathenson there was no decline in price following the release of
the alleged `truth,' Nathenson had no reason to explain the
requirements for succeeding on a claim where such a decline
occurred.
We are satisfied that plaintiffs cannot trigger the
presumption of reliance by simply offering evidence of any decrease
in price following the release of negative information. Such
evidence does not raise an inference that the stock's price was
actually affected by an earlier release of positive information.
To raise an inference through a decline in stock price that an
earlier false, positive statement actually affected a stock's
price, the plaintiffs must show that the false statement causing
the increase was related to the statement causing the decrease.
Without such a showing there is no basis for presuming reliance by
the plaintiffs. A similar problem arises where multiple items of
negative information are released on the same day. For example, a
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company may make a false statement and later reveal the falsity of
that statement and at the same time release other unrelated
negative information. In this situation, to trigger the
presumption plaintiffs must demonstrate that there is a reasonable
likelihood that the cause of the decline in price is due to the
revelation of the truth and not the release of the unrelated
negative information. In the absence of such a showing the
invocation of the presumption of reliance would be based solely on
speculation.
Finally, it is necessary that the earlier positive
misrepresentation not be confirmatory. As we noted in our example
in Nathenson, 267 F.3d at 419, confirmatory information has already
been digested by the market and will not cause a change in stock
price. Because the presumption of reliance is based upon actual
movement of the stock price, confirmatory information cannot be the
basis for a fraud-on-the-market claim.
In sum, in order for plaintiffs to show that a stock's price
was actually affected through evidence of a significant price
decrease following the revelation of the alleged "truth" of earlier
false statements, plaintiffs must demonstrate: (1) that the
negative "truthful" information causing the decrease in price is
related to an allegedly false, non-confirmatory positive statement
made earlier and (2) that it is more probable than not that it was
this negative statement, and not other unrelated negative
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statements, that caused a significant amount of the decline.
A.
Turning to the summary judgment evidence in this case, we
first consider whether evidence of the drop in price following the
27 July 2000 statement raises an inference that the price of
Crossroad stock was actually affected by Crossroads's earlier
statements regarding the features of its products. Of the alleged
misrepresentations made by Crossroads regarding the features of its
products, only those made on 25 January 2000, 23 February 2000, 20
June 2000, 14 June 2000, and 27 June 2000 are non-confirmatory and
therefore actionable.10
On 25 January 2000,11 14 June 2000,12 and 27 June 200013
10 On 22 February 2000, Crossroads issued a press release
which stated, "As planned, Crossroads began production shipments
of its 4x50 line of high-performance, Fibre-Channel storage
routers." This statement is confirmatory, it merely notes that
Crossroads was doing what it had said it would in the 25 January
2000 announcement. As discussed earlier, confirmatory statements
do not affect the price of a company's stock and cannot be the
basis for a fraud-on-the-market claim.
11 On this date Crossroads released the news that it was
beginning production of its Third Generation of storage routers.
The release stated, in pertinent part, "Crossroads Systems Inc. .
. . today announced the availability of the entire 4x50 line of
Fibre-Channel-SCSI storage routers, which includes the 4150, 4250
and 4450 models. . . . Each Crossroads router has an Ethernet
port which enables the router to interoperate with enterprise
level management software."
12 On this date, Crossroads announced its participation in
an interoperability certification program for storage router
vendors run by Sun Microsystems. The press release stated, in
pertinent part, that "Crossroads is working with the certified
partners to provide pervasive SAN interoperability. . . . Since
1998, our SAN interoperability lab has tested and verified more
-17-

Crossroads made non-confirmatory, positive statements (that were
allegedly false) concerning the interoperability of its new line of
routers. The 27 July 2000 statement specifically revealed the
interoperability problems Crossroads was having with its routers.
The plaintiffs have therefore shown that the `positive' statements
and the 27 July 2000 `negative, truthful' statement are related.
But the plaintiffs are faced with the additional problem that the
27 July 2000 announcement included other unrelated negative
information in addition to information relating to interoperability
problems. Specifically, the statement informed the market that one
of Crossroads's biggest customers, Compaq, would no longer be a
customer because it was developing its own line of routers, that
another large customer, StorageTek, would not be ordering any new
routers because of an overstock in inventory of Crossroads's older
routers, and that Crossroads's third quarter earnings would be
almost two-thirds below analysts estimates. Comparing the relative
seriousness of all the information released in the 27 July 2000
statement, the news that Crossroads had ordered a temporary stop-
ship of its products is by far the least negative information
than 3,500 solutions. Our commitment to this certification
process is another way Crossroads demonstrates its role as a
leader in providing interoperable SAN solutions."
13 On this date, Crossroads announced that it had entered
into an agreement whereby Crossroads 4x50 routers would be
integrated into a larger library storage system manufactured by
JVC. The release stated, in pertinent part, that this new
relationship "demonstrate[s] Crossroads' ability to interconnect
a wide variety of storage devices in the SAN."
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released that day. Temporary glitches in technology products are
by no means a rare or devastating occurrence. Thus, in order for
the plaintiffs to trigger the reliance presumption they must
demonstrate the likelihood that the 27 July 2000 interoperability
statements played a significant role in the decline in stock price.
The plaintiffs have not done so, either in their Complaint or
through their expert, Dr. Hakala. In the face of the more serious
negative statements unrelated to interoperability and without any
explanation by the plaintiffs, we conclude that a fact finder could
not find that the news regarding temporary interoperability
problems played a significant role in the decline in price
following the 27 July 2000 statement. For these reasons, the
statements regarding the interoperability of Crossroads's routers
cannot form the basis for a fraud-on-the-market claim.
The plaintiffs allege that Crossroads's 23 February 2000
statement falsely reported on the speed of its new routers.14 The
plaintiffs allege that this statement was false and misleading
because at the time it was made performance tests had not yet been
run to verify its accuracy. The negative information released on
27 July 2000, however, makes no reference to increased router
speed. Without a showing that the allegedly false, positive
information was related to the negative information released on 27
14 On this day S.G. Cowen issued a report in which
Crossroads stated that the new line of 4x50 routers "provides
twice the through put compared to the 4200 [line]."
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July 2000, the plaintiffs cannot demonstrate that this statement
artificially inflated the price of Crossroads stock. This
statement cannot form the basis of a fraud-on-the-market claim.
The plaintiffs allege that Crossroads's 20 June 2000 statement
falsely reported that `server-free backup' was now available on its
4x50 line of routers.15 The plaintiffs allege this statement was
misleading because server-free backup was not available on the 4x50
line of routers when this release was issued. Again, however, the
negative information released on 27 July 2000 makes no mention of
server-free backup or the lack of its availability on the new
routers. Without a showing that the allegedly false positive
information was related to the negative information released on 27
July 2000, the plaintiffs cannot demonstrate that this statement
artificially inflated the price of Crossroad stock. This statement
cannot form the basis for a fraud-on-the-market claim.
B.
We next consider whether the drop in price following the 27
July 2000 statement may be used to show that Crossroads's stock
price was actually affected by the financial statements made by
15 On this day a Crossroads press release stated, in
pertinent part:
Server-Free Backup is the next `killer-app' for SANs
that further leverages our customers' current SAN
investments. . . . This technology is an integral facet
of our 4250 and 4450 storage routers as it allows our
customers to free their server resources, run mission-
critical applications and virtually eliminate the
backup window.
-20-

Crossroads directly and to analysts. Of the allegedly false
financial statements made by Crossroads, only those made on 22
February 2000, 23 February 2000, 24 May 2000, 12 June 2000, and 5
July 2000 are non-confirmatory and therefore actionable.16
The statements made on 22 February 200017 and 23 February 200018
reported Crossroads's financial results for the first quarter of
Fiscal Year 2000 and detailed analysts earnings estimates for the
fiscal second quarter. The 27 July 2000 statement states only that
"revenues for the [third] quarter may be as much as two-thirds
below revenues for the prior quarter." The release does not report
16 On 27 March 2000, Crossroads's CEO was quoted in Dow
Jones Newswires as stating that he was "comfortable with
analysts' estimates that the company's revenue will rise 20%,
quarter to quarter, in Fiscal 2000." This statement merely
confirms the estimates made by analysts at S.G. Cowen Securities
Inc. and Needham & Co. on 23 February 2000.
On 19 April 2000, S.G. Cowen Securities Inc. issued
another report reaffirming its estimates of 20% growth from
quarter to quarter. This too confirms the analysts' statements
made on 23 February 2000.
On 23 May 2000, Crossroads issued its financial results
for the second fiscal quarter, ended 30 April 2000. Crossroads's
earnings were in line with analysts' estimates made on 23
February 2000. This is the classic example of confirmatory
information. The market expected Crossroads to report a certain
level of earnings, and those estimates proved to be accurate.
17 On this day Crossroads reported its financial results for
the first quarter of Fiscal Year 2000, ended 31 January 2000.
The results were positive, with total revenues 12% higher than
analysts estimates. In addition, Crossroads posted a loss of
only $0.01 per share versus analysts estimates of a $0.07 per
share loss.
18 On this day, Needham & Co. and S.G. Cowen Securities Inc.
reported Crossroads first quarter earnings. These analysts also
revised upward their earnings estimates for Crossroads in the
second fiscal quarter.
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any concern that Crossroads's first and second quarter earnings may
be incorrect. Moreover, the 27 July 2000 release makes no
reference at all to Crossroads's first and second fiscal quarters.
Because there is no relationship between the statement made on 27
July 2000 and those made on 22 February 2000 and 23 February 2000,
Crossroads's statements on these days cannot form the basis for a
fraud-on-the-market claim.
The allegedly false statements made on 24 May 2000,19 6 June
2000,20 12 June 2000,21 and 5 July 200022 all concerned Crossroads's
earnings for the third quarter of Fiscal Year 2000. Because the 27
July 2000 release clearly concerned a significant revenue shortfall
19 On this day S.G. Cowen Securities Inc. released a report
on Crossroads in which they revised upward their previous
earnings estimates for the fiscal third quarter.
20 On this day analysts from Needham & Co. participated in a
series of meetings with Crossroads's management. In these
meetings Crossroads's management stated that it was confident
that the company would meet and possibly exceed the estimated
third quarter revenues.
21 On this day Needham & Co. released a report on
Crossroads. In this report, Needham & Co. adjusted upward their
estimates for Crossroads's expected revenue in the third quarter
of 2000. In addition, the report stated that after talking with
Crossroads's management, Needham & Co. thought "that Crossroads
should at least maintain, and could potentially achieve a
reacceleration of sequential quarterly revenue growth[.]"
22 On this day Dain Rauscher Wessels released a report on
Crossroads based upon information learned at a recent meeting
with Crossroads's management. During that meeting, Crossroads's
management told Dain Rauscher Wessels analysts that it had 45%-
50% of its business left to close for the third quarter ending 31
July 2000.
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for Crossroads's third fiscal quarter, the plaintiffs have shown
the requisite link between the 27 July 2000 negative information
and the earlier statements. The plaintiffs, however, are again
faced with the additional problem that the 27 July 2000
announcement included negative information that was unrelated to
the earnings shortfall. The plaintiffs offer no evidence or
analysis tending to show that the drop in price following the 27
July 2000 release was likely caused by the negative financial news.
However, unlike the news of temporary interoperability problems, we
are persuaded the news that a company's revenue will be 66% below
estimates satisfies the plaintiffs burden. News that a company's
earnings will be two-thirds short of analysts estimates is the type
of negative information most likely to cause a sharp decline in
stock price. For these reasons, we find that Crossroads's
statements on 24 May 2000,6 June 2000, 12 June 2000, and 5 July
2000 may form the basis for the plaintiffs fraud-on-the-market
claim.
VI.
We next consider the only purportedly false statement alleged
in the plaintiffs Complaint which was followed by a significant
increase in stock price. On 7 February 2000 Crossroads announced
a worldwide agreement with Hitachi Data Systems to resell
Crossroads's older 4x00 model router. The release stated, in
pertinent part:
Crossroads welcomes the opportunity to work with Hitachi
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Data Systems to provide Hitachi customers the ability to
quickly and easily reap the benefits a SAN can offer. .
. The unique interoperability feature of Crossroads'
storage routers coupled with the strength of each members
product will bring smooth installation and optimal
performance within an organization's infrastructure.
In the two days following this statement, the price of Crossroads
stock rose from $109.75 to $163.25, and the district court found
that this was a statistically significant rise in price. However,
as the district court pointed out, the plaintiffs Complaint alleges
that this statement was misleading because the 4x50 routers--not
the 4x00 routers--were not interoperable. The district court
observed that this information, that the 4x50 routers were
`interoperable,' had been released to the market on 25 January 2000
and was therefore confirmatory. As such, the district court
concluded that the increase in price could not have been due to the
allegedly false claim of `interoperability.'
The plaintiffs do not dispute that their Complaint alleges
that the 7 February 2000 statement was misleading because the 4x50
routers were not interoperable. The plaintiffs argue, however,
that evidence offered by Crossroads on summary judgment proves that
the statement really concerned the older 4x00 routers. Therefore,
the plaintiffs argue that their mistake in pleading should be
excused because "the evidence controls" over the complaint. The
plaintiffs further argue that they sufficiently alleged the
interoperability problems of the 4x00 routers in their Complaint.
This argument made by the plaintiffs was not presented to the
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district court in opposition to the defendants motion for partial
summary judgment. Arguments not raised in the district court
cannot be asserted for the first time on appeal. FDIC v. Mijalis,
15 F.3d 1314, 1326-27 (5th Cir. 1994); Stokes v. Emerson Electric
Co., 217 F.3d 353, 358 n. 19 (5th Cir. 2000). This is especially
true where the assertion first raised on appeal is factual.
DeBardeleben v. Cummings, 453 F.2d 320, 324 (5th Cir. 1972) ("Where
the moving papers do not reveal the presence of a factual
controversy on a material issue, the adversary cannot simply assent
by silence to the factual theory presented in the motion-and on
which the parties stand in the Trial Court-and then assert
thereafter on appeal as grounds for reversal a purported factual
disagreement never before revealed.").
Accepting the facts as they were presented to the district
court, we find the district court did not err in concluding that
the allegedly false claim of interoperability on 7 February 2000
was confirmatory. This information had previously been released to
the market in Crossroads's statement on 25 January 2000. As we have
noted, confirmatory information does not actually affect the stock
price. Accordingly, the 7 February 2000 statement cannot form the
basis of the plaintiffs fraud-on-the-market claim.
VII.
We next consider the allegedly false statements made by Brian
Smith, CEO of Crossroads, on 13 July 2000. The price of Crossroads
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stock had declined at a steady pace in the weeks prior to this
statement. On 13 July 2000 the Dow Jones Newswire reported that
Smith, when asked about the recent stock decline, stated "that the
company . . . had made no announcements and had planned none that
might explain the pattern." Smith also "speculated that the recent
stock declines . . . could be the result of fears that early
investors with large stakes may start selling their shares." The
plaintiffs claim this comment was false and misleading because
Smith knew that the real reason for the decline was the
interoperability problems Crossroads was having with its routers
and the pending return of $1.1 million in outdated inventory by
StorageTek.
A statement of belief is only open to objection where the
evidence shows that the speaker did not in fact hold that belief
and the statement made asserted something false or misleading about
the subject matter. Virginia Bankshares, Inc. V. Sandberg, 501
U.S. 1083,1095-1096 (1991). Assuming, without deciding, the
plaintiffs have sufficiently shown that Smith did not actually
believe his statement, the plaintiffs still cannot survive summary
judgment on this claim because the plaintiffs have not shown the
statement was false. In order for the plaintiffs allegation to be
true (and for Smith's statement to be false) it is necessary that
the decline in stock price prior to Smith's 13 July 2000 statement
have actually been caused by the negative interoperability and
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inventory information. The plaintiffs, however, have offered no
evidence that the market learned of this information at any time
prior to its release on 27 July 2000, two weeks after Smith's
statement. The plaintiffs claim is supported by nothing more than
an unsubstantiated conclusory statement. Such statements are not
competent summary judgment evidence. Abbott v. Equity Group, Inc.,
2 F.3d 613, 619 (5th Cir. 1993) ("Unsubstantiated assertions are
not competent summary judgment evidence"); Hugh Symons Group, PLC
v. Motorola, Inc., 292 F.3d 466, 470 (5th Cir. 2002) (conclusory
statements are not sufficient to successfully oppose a motion for
summary judgment). For these reasons, the district court correctly
granted summary judgment as to the statement made on 13 July 2000.
VIII.
For the reasons stated above, we find the statements made by
Crossroads on 25 January 2000, 22 February 2000, 23 February 2000,
27 March 2000, 19 April 2000, 23 May 200, 14 June 2000, 20 June
2000, 27 June 2000, and 13 July 2000 may not form the basis of a
fraud-on-the-market claim. Accordingly, for these statements the
district court's grant of summary judgment is affirmed. We find
that the plaintiffs may maintain a fraud-on-the-market claim with
respect to the statements made by Crossroads on 24 May 2000, 6 June
2000, 12 June 2000, and 5 July 2000. Accordingly, for these
statements the district court's grant of summary judgement is
vacated, and this case is remanded to the district court for
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further proceedings.
AFFIRMED in part, VACATED in part, and REMANDED.
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