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Greenberg v. Crossroads Sys.

United States Court of Appeals for the Fifth Circuit

April 14, 2004, Filed

No. 03-50311

Opinion

 [*659]  W. EUGENE DAVIS, Circuit Judge:

Purchasers of Crossroads Systems, Inc. stock between January 25, 2000, and August 24, 2000, filed this putative class action 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  [*660]  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 [**2]  and remand for further proceedings.

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 inter-operability, increased speed, and server-free backup. Over the next several months, 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,  [**3]  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.

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364 F.3d 657 *; 2004 U.S. App. LEXIS 7189 **; Fed. Sec. L. Rep. (CCH) P92,738

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.

Prior History:  [**1]  Appeal from the United States District Court for the Western District of Texas. A-00-CV-457-JN. James R Nowlin, US District Judge.

In re Crossroads Sys. Sec. Litig., 2002 U.S. Dist. LEXIS 26716 (W.D. Tex., Nov. 22, 2002)

Disposition: Affirmed in part, vacated in part, and remanded.

CORE TERMS

stock, district court, stock price, routers, fraud-on-the-market, interoperability, false statement, negative information, summary judgment, statistically significant, class period, drop, products, misrepresentation, misleading, alleged misrepresentation, decline in price, confirmatory, earnings, fiscal, market price, share price, announcement, revelation, unrelated, customer, partial summary judgment, positive statement, third quarter, inventory

Civil Procedure, Appeals, Standards of Review, De Novo Review, Judgments, Summary Judgment, General Overview, Summary Judgment Review, Standards of Review, Securities Law, Express Liabilities, Misleading Statements, Class Actions, Prerequisites for Class Action, Blue Sky Laws, Offers & Sales, Civil Liability, Fraudulent Interstate Transactions, Evidence, Inferences & Presumptions, Criminal Law & Procedure, Fraud, Securities Fraud, Elements, Tax Law, Federal Taxpayer Groups, S Corporations, Civil Liability Considerations, Torts, Elements, Causation, Inferences, Evidentiary Considerations, Partial Summary Judgment, Reviewability of Lower Court Decisions, Preservation for Review, Burdens of Proof, Opposing Materials, Entitlement as Matter of Law