Greenhouse v. MCG Capital Corp.

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

CHARLES GREENHOUSE, individually 

and on behalf of all others similarly

situated; EVELYN ROSEN; WILLIAM B.

MOUK,

Plaintiffs-Appellants,

v.  No. 03-2318

MCG CAPITAL CORPORATION; BRYAN

MITCHELL; JANET C. PERLOWSKI;

STEVEN F. TUNNEY,

Defendants-Appellees.



Appeal from the United States District Court

for the Eastern District of Virginia, at Alexandria.

Leonie M. Brinkema, District Judge.

(CA-03-114-A-1)

Argued: September 30, 2004

Decided: December 21, 2004

Before WILKINSON, GREGORY, and SHEDD, Circuit Judges.

Affirmed by published opinion. Judge Gregory wrote the opinion, in

which Judge Wilkinson and Judge Shedd joined.

COUNSEL

ARGUED: Sanford Svetcov, LERACH, COUGHLIN, STOIA, GEL-

LER, RUDMAN & ROBBINS, L.L.P., San Francisco, California, for

2 GREENHOUSE v. MCG CAPITAL CORP.

Appellants. Charles Edward Davidow, WILMER, CUTLER, PICK-

ERING, HALE & DORR, L.L.P., Washington, D.C., for Appellees.

ON BRIEF: Jack Reise, Scott L. Adkins, LERACH, COUGHLIN,

STOIA, GELLER, RUDMAN & ROBBINS, L.L.P., Boca Raton,

Florida; John C. Pasierb, COHEN, GETTINGS & CAULKINS, P.C.,

Arlington, Virginia; David Kessler, Stephen P. McFate, SCHIFFRIN

& BARROWAY, L.L.P., Bala Cynwyd, Pennsylvania, for Appel-

lants. Paul R. Eckert, WILMER, CUTLER, PICKERING, HALE &

DORR, L.L.P., Washington, D.C., for Appellees.

OPINION

GREGORY, Circuit Judge:

This suit arises from a CEO’s lie about finishing college. Specifi-

cally, Bryan J. Mitchell ("Mitchell"), the founder and leader of MCG

Capital Corporation ("MCG" or "the company") misled his company

into believing that he was awarded a college degree when, in truth,

he never obtained one. As a result, MCG misrepresented Mitchell’s

educational background in the documents it publicly filed for inves-

tors. Once Mitchell came clean, MCG corrected its statements.

MCG’s stock price dipped sharply once the truth was revealed, and

shortly thereafter it found itself defending this class action lawsuit

brought by MCG shareholders in the United States District Court for

the Eastern District of Virginia. The stock owners pursued claims

against MCG under § 11(a) of the Securities Act of 1933, § 10b of the

Securities Exchange Act of 1934, and SEC Rule 10b-5, and against

several individual defendants, including Mitchell, under the control-

person liability provisions of the respective securities statutes. On

September 12, 2003, the district court dismissed the case, finding as

a matter of law that Mitchell’s education was immaterial. While we

freely acknowledge that Mitchell’s conduct is indefensible, we agree

that the actual fact misrepresented was immaterial under the securities

laws. Therefore, we affirm.

I.

MCG is an Arlington, Virginia-based venture capital firm that

GREENHOUSE v. MCG CAPITAL CORP. 3

makes debt and equity investments in small and mid-sized private

businesses in the media, communications, technology, and informa-

tion services sectors.1 The company has been traded publicly since its

Initial Public Offering ("IPO") in late 2001.

Following about a decade of experience at two banks, in 1998

Mitchell helped found MCG and began his tenure as the company’s

CEO and Chairman of the Board. The Appellees admit that Mitchell

held himself out as having earned a bachelor’s degree in economics

from Syracuse University.2 The truth, however, is that Mitchell

attended Syracuse for three years and studied economics, but left

before getting his degree.

MCG included Mitchell’s purported educational background in

various forms filed with the SEC in preparation for its IPO.3 As an

example, the "biographical information" section of the registration

statements and prospectus ("Prospectus") stated:

Bryan J. Mitchell has served as our Chief Executive Officer

since 1998 and as the Chairman of our board of directors

since May 2001. Mr. Mitchell has served as a member of

our board of directors since 1998 and also served as our

President from 1998 to May 2001. From 1997 to 1998, Mr.

Mitchell was a Senior Vice president for First Union

National Bank. From 1988 to 1997, Mr. Mitchell was

employed by Signet Bank where he served as a Senior Vice

President. Mr. Mitchell serves on the board of directors of

MCG Finance Corporation and MCG Finance Corporation

II. Mr. Mitchell earned a B.A. in Economics from Syracuse

University.

1

MCG is registered with the SEC as a "business development com-

pany" under the Investment Company Act of 1940, 15 U.S.C. §§ 80a-53-

64.

2

Appellants argue, perhaps reasonably but without specific evidence,

that Mitchell must have misrepresented his academic credentials to each

of his previous employers.

3

Specifically, along with its Prospectus, Appellants allege that the mis-

representation was included in MCG’s Forms 497, N-2, N-2/A, PRE

14A, and DEF 14A. J.A. 24-25.

4 GREENHOUSE v. MCG CAPITAL CORP.

Prospectus at 79 (emphasis added). The brief biographical statements

about MCG’s managers were, of course, merely one part of MCG’s

filings; other extensive information existed. Aside from this single

sentence, repeated in various forms, however, Appellants allege no

other misstatements.

After apparent pressure by Herb Greenberg ("Greenberg"), a

reporter with the website "TheStreet.com" who questioned Mitchell’s

actual history, Mitchell told the truth to MCG’s board on November

1, 2002. Later that same day, MCG publicly corrected Mitchell’s mis-

representation through a press release, which read:

MCG Capital Corporation announced today that its Chair-

man and Chief Executive Officer, Bryan J. Mitchell,

informed the Company’s Board of Directors this morning

that contrary to prior disclosures, he does not hold a Bache-

lor of Arts degree from Syracuse University. The Board of

Directors has requested the Chairman of the Company’s

Audit Committee, Wallace B. Millner, III, to review the

facts relating to these matters and to report to the full board

as promptly as possible.

J.A. 74. Appellants assert that this announcement brought MCG nega-

tive attention in the investment world. Specifically, they allege that an

analyst for Wachovia Securities downgraded MCG to "Hold" from

"Buy" on the day of the announcement, noting a worry that this mis-

representation foreshadowed larger "credibility issues" and that two

reporters on CNN’s Lou Dobbs Moneyline discussed the stock shortly

after the company’s correction, noting that Mitchell was "another

CEO that lied about his resume". J.A. 28-29. Appellants also note that

Greenberg questioned on "TheStreet.com" whether other "correc-

tions" were forthcoming. Specifically, on November 1, 2002 Green-

berg wrote that, ". . . if the CEO’s disclosure isn’t correct, you can’t

help but wonder . . . what else isn’t?". J.A. 76. He repeated this refrain

in a November 3rd post: "Can’t help but wonder why [sic] credibility

an admitted liar, of a CEO, will have going forward. (And can’t help

but wonder what else at the company has been, shall we say, embel-

lished.)". J.A. 81. Finally, on November 12th, Greenberg opined in an

article about MCG that, "[w]hen a CEO lies about his educational

GREENHOUSE v. MCG CAPITAL CORP. 5

background . . . you have to wonder what else might not be right."

J.A. 84.

It is plainly plausible that, at least temporarily, investors ingested

or shared these financial pundits’ concerns about the company’s cred-

ibility in the wake of the corrective announcement. The stock dipped

to $8.40 from $11.85 per share on November 1, 2002. The full price

history of the stock, however, complicates the case: the next day, the

stock regained approximately half of the previous day’s loss, and the

remainder of its losses were recovered within about a month.4

While Mitchell was an undoubtedly important person for MCG,5 he

was by no means above its punishment. On November 3rd, the Board

withheld Mitchell’s 2001 and 2002 bonuses, made him repay monies

loaned to him by MCG, and removed his title as Chairman of the

Board. Mitchell remains stripped of his title as Chairman; he retained

(and retains) his position as CEO.

Appellee’s Fed. R. Civ. P. 12(b)(6) motion to dismiss did not deny

that Mitchell’s credentials were misstated, but rather argued that

whether Mitchell finished his degree at Syracuse was immaterial as

a matter of law. Concluding that the Appellants "cannot use the credi-

bility and integrity problems that result from a false statement to

bootstrap an otherwise immaterial false statement into creating a basis

for a securities fraud action," J.A. 152, the district court dismissed the

case.

4

Specifically, on Monday, November 4, 2002, MCG’s share price

bounced back up $1.52, and, by December 10, 2002, it traded at a pre-

disclosure price. This increase took place during a time when the broader

markets were flat, at best. See J.A. 63, 88-90. We note that we, as well

as the district court, may take judicial notice of published stock prices

without converting a motion to dismiss into a motion for summary judg-

ment. See Ganino v. Citizens Utils. Co., 228 F.3d 154, 167 n.8 (2d Cir.

2000).

5

The company itself represented in its investment materials that mem-

bers of MCG’s credit committee (which approves all of MCG’s invest-

ments) and senior management team — both of which include Mitchell

— play a crucial role in the company’s success.

6 GREENHOUSE v. MCG CAPITAL CORP.

II.

A.

A district court’s dismissal for failure to state a claim under Fed.

R. Civ. P. 12(b)(6) is reviewed de novo. Goldstein v. Moatz, 364 F.3d

205, 211 (4th Cir. 2004). In general, the motion should not be granted

"unless it appears certain that the plaintiff can prove no set of facts

which would support its claim and would entitle it to relief." Mylan

Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993).

B.

In order to prevail on a claim for securities fraud under either

S.E.C. Rule 10b-5 ("Rule 10b-5") or Section 11(a) of the Securities

Act of 1933, 15 U.S.C. § 77k ("Section 11(a)"), the plaintiff must

prove, inter alia, "materiality."6 Specifically, Rule 10b-5 makes it

unlawful 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 under which they were made,

not misleading. . ." and carries with it a private right of action for the

Rule’s enforcement. Likewise, Section 11(a) creates a right of action

6

See Phillips v. LCI Intern., Inc. 190 F.3d 609, 613 (4th Cir. 1999)("In

order to prevail on a § 10(b) and a Rule 10b-5 claim, the plaintiff carries

the burden of proving: (1) the defendant made a false statement or omis-

sion of material fact (2) with scienter (3) upon which the plaintiff justifi-

ably relied (4) that proximately caused the plaintiff’s damages."); Gasner

v. Bd. of Supervisors, 103 F.3d 351, 356 (4th Cir. 1996) (same); Parnes

v. Gateway 2000, Inc., 122 F.3d 539 (8th Cir. 1997)(any fact misrepre-

sented must be material to serve as the basis for a Section 11(a) viola-

tion); Greenapple v. Detroit Edison Co., 618 F.2d 198 (2nd Cir.

1980)(same).

The term "material" does not exist explicitly in the text of Section

10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b)

("Section 10(b)"). However, the Supreme Court treats Section 10(b)

identically to Rule 10b-5 for purposes of materiality. See Basic, Inc. v.

Levinson, 485 U.S. 224, 231 (1988).

GREENHOUSE v. MCG CAPITAL CORP. 7

for purchasers when a registration statement "contained an untrue

statement of a material fact" or omits a material fact.7

Here, an investment in close textual reading pays dividends. The

plain language of Rule 10b-5 and Section 11(a) requires any success-

ful securities-fraud suit to allege a fact that is both untrue and mate-

rial. Sometimes the term "material misrepresentation" is used in the

securities-fraud context. As this case illustrates, however, this state-

ment can be imprecise. "Material" modifies "fact"; it does not modify

"misrepresentation." This is deceptively simple. Assuming other

requirements for liability are satisfied, these laws prohibit any misrep-

resentation of a fact deemed material. But they decidedly do not pro-

hibit any misrepresentation — no matter how willful, objectionable,

or flatly false — of immaterial facts, even if it induces reactions from

investors that, in hindsight or otherwise, might make the misrepresen-

tation appear material.8 It follows that no matter the attendant outcry

or opprobrium about a lie, if the specific fact misrepresented is imma-

terial, a suit cannot succeed.

The seminal Supreme Court treatment of materiality in the

securities-fraud context, found in Basic, Inc. v. Levinson, 485 U.S.

224 (1988), confirms this reading. In Basic, the Court expressly

adopted the materiality rule of TSC Indus., Inc. v. Northway, Inc., 426

U.S. 438 (1976), and noted that, "a plaintiff must show that the state-

ments were misleading as to a material fact. It is not enough that a

statement is false or incomplete, if the misrepresented fact is other-

wise insignificant." Basic, at 238 (emphasis in original). Under Basic

and its progeny, a fact is material if there is "a substantial likelihood

that the disclosure of the . . . fact would have been viewed by the rea-

sonable investor as having significantly altered the total mix of infor-

7

The Complaint also made claims against the individual defendants

under 15 U.S.C. §§ 77o and 78t, the respective "control person" liability

provisions of Sections 10b and 11(a). These provisions are, essentially,

dependent derivatives of their parent statutes, and are thus properly dis-

missed if the parent statutes fail to state a claim upon which relief may

be granted.

8

It must be thus: public reaction or fear of future revelations simply

cannot be an "untrue statement", nor can it be "made" by the defendant

or "contained" in SEC filings.

8 GREENHOUSE v. MCG CAPITAL CORP.

mation made available." Id. at 231-32. See also Phillips v. LCI Int’l,

Inc. 190 F.3d 609, 617 (4th Cir. 1999) (noting "even lies are not

actionable" unless the lie is something that alters the total mix of

information available to a reasonable investor); Gasner v. Bd. of

Supervisors, 103 F.3d 351, 356 (4th Cir. 1996) (explaining that the

question of materiality is an objective one). It is important to note that

a "reasonable investor" is neither an ostrich, hiding her head in the

sand from relevant information, nor a child, unable to understand the

facts and risks of investing. See Hillson Partners L.P. v. Adage, Inc.,

42 F.3d 204, 213 (4th Cir. 1994)(courts need not ascribe "childlike

simplicity" to reasonable investor, but should ask whether investors

would have considered information significant)(citing Basic at 232-

34). The "total mix" of information available varies on a fact-specific

and case-by-case basis. However, in determining the total mix of

publicly-available information, a court ruling on a 12(b)(6) motion

may look to "documents or articles cited in the complaint, SEC fil-

ings, press releases, stock price tables, and other material on which

the plaintiff’s allegations necessarily rely." Morris v. Wachovia Sec.,

Inc., 277 F.Supp.2d 622, 629 (E.D. Va. 2003) (citing In re The First

Union Corp. Sec. Litig., 128 F.Supp.2d 871, 883 (W.D.N.C. 2001)).

Finally, cases note that determining materiality is a "mixed ques-

tion of law and fact." See TSC Indus., 426 U.S. at 450. When courts

decide they wish for a jury to hear a claim, they generally take pains

to emphasize the fact-specificness of materiality. See, e.g., id. at 450

("The determination requires delicate assessments . . . [that] are pecu-

liarly ones for the trier of fact."); see also, e.g., 1 Thomas Lee Hazen,

The Law of Securities Regulation § 7.3[1], 581 n.4 (4th ed. 2002)

(collecting cases). Appellants seize on to this fact and argue that,

given the facts in the complaint, only a jury could make the assess-

ment necessary and that the district court erred by dismissing the

claim at an early stage of litigation. No shortage of cases, however,

make clear that materiality may be resolved by a court as a matter of

law. See, e.g., Longman v. Food Lion, 197 F.3d 675 (4th Cir. 1999)

(alleged omissions of federal labor law and unsanitary food practices

were immaterial as a matter of law); Klein v. General Nutrition Cos.,

186 F.3d 338, 342 (3d Cir. 1999) (various alleged omissions from

registration statement and prospectus were not material and could be

decided as a matter of law); Hillson Partners, 42 F.3d at 209, 219-20

(noting that materiality was "fact-specific inquiry" but dismissing suit

GREENHOUSE v. MCG CAPITAL CORP. 9

as immaterial); Raab v. General Physics Corp., 4 F.3d 286, 290-91

(4th Cir. 1993). The only requirement is that no reasonable jury could

find it substantially likely that a reasonable investor would find the

fact at issue material in the "total mix" of information. See, e.g., TSC

Indus., 426 U.S. at 450 ("materiality [is] appropriately resolved as a

matter of law" when "reasonable minds cannot differ on the ques-

tion").

Thus, our task on an appeal of an order granting a motion to dis-

miss for want of materiality is as straightforward as it is awkwardly

stated: we must, resolving doubt in favor of Appellants, decide

whether a reasonable jury could find it "substantially likely" that a

reasonable investor would believe that the disclosure of the untrue

fact(s) (and nothing but the disclosure of the untrue fact(s)) would

alter the "total mix" of information available to the reasonable inves-

tor.

III.

Appellants make a number of arguments, the best of which can be

summarized roughly into three main points: (A) as a key manager,

Mitchell’s education is a material fact; (B) "management’s integrity"

is always material; and (C) the district court erred by confusing causa-

tion with materiality and by taking into account the price of the stock

after November 1st, the day of disclosure. We address, and dismiss,

each contention in turn.

A.

The misrepresentation of an executive’s educational credentials has

seldom been addressed in published cases. Even the closest case anal-

ogies seem somewhat difficult to apply here because, as noted above,

materiality is a fact-specific determination. Those few cases (notably,

none from circuit courts) discussing misrepresentation of an educa-

tional degree even obliquely, however, do not support Appellants’

argument that misstatements about managers’ academic backgrounds

are material.

Indeed, no binding precedent exists, and the only case of which we

are aware that deals explicitly with such a fraud by an executive dis-

10 GREENHOUSE v. MCG CAPITAL CORP.

misses that allegation as immaterial and takes pains to distinguish it

from truly material facts. See New Equity Sec. Holders Comm. for

Golden Gulf, Ltd. v. Phillips, 97 B.R. 492, 496-97 (E.D. Ark. 1989)

(distinguishing misrepresentation of a business degree, as immaterial,

from the omission of recent felony conviction of director, prior and

pending litigation against the company, and SEC investigation of the

company, as all material).

Appellants, however, cite two district court cases in support of their

claim that an individual’s education is material: SEC v. Physicians

Guardian Unit Inv. Trust, 72 F.Supp.2d 1342 (M.D. Fla. 1999) and

SEC v. Suter, No. 81 C 3865, 1983 WL 1287 (N.D. Ill. 1983). These

cases are distinguishable. Physicians Guardian denies, in a notably

conclusory fashion, a motion to dismiss an eight-count, 59-paragraph

action by the SEC requesting emergency relief and alleging a remark-

able multitude of outlandishly fraudulent activity. One of these many

fraudulent activities by repeat offenders included that a manager

falsely claimed to have a law degree and 27 years of experience as

a lawyer. 72 F.Supp.2d at 1344-51. Suter grants injunctive relief in a

securities fraud action that contained, hiding among many other false-

hoods that are clearly more important, a claim that an investment

adviser falsely claimed to have an MBA. 1983 WL 1287 at *3.

Appellants contend that the failure of the courts in these two cases

to tease out as immaterial the educational credential from the other

frauds, as did the New Equity court, is evidence that the courts found

such misrepresentations material. This may be facially reasonable, but

quickly becomes unpersuasive once one examines the opinions. In

both cases the SEC sought and obtained emergency injunctive relief

from a long litany of ongoing fraudulent activity by repeat players in

the fraud game. In each case, the courts appear overwhelmed with the

wide-ranging fraudulent behavior alleged of the defendants. In short,

neither court addresses in any specific fashion the materiality of the

individual education-related claim within the entire, wide-ranging

action, but rather rules against the defendants en masse. Here, in con-

trast, we are presented with the unusual circumstance that only one

misrepresentation is alleged among uncountable other pieces of infor-

mation in the prospectus, other filings, and elsewhere, making up the

"total mix" of information.

GREENHOUSE v. MCG CAPITAL CORP. 11

While we do not hold as a matter of law that a key manager’s edu-

cation could never be material, we do find that Mitchell’s education

is immaterial here. Even limiting our view, as we must, to those mate-

rials relied upon by the Appellants in formulating their complaint and

those materials publicly available to reasonable investors, and view-

ing them in the light most favorable to the Appellants, Mitchell’s edu-

cational background could not be said to alter the "total mix" of this

information. For example, a reasonable investor would likely value

information found in MCG’s publicly filed statements and elsewhere

including: Mitchell’s years of management in financial institutions;

the other board members’ and key managers’ similar track record; the

years of MCG’s earnings statements as a private company; the firm’s

debt/equity ratio; the general costs of capital and macroeconomic

trends; the strength of MCG’s potential competitors; etc. In compari-

son, Appellants have advanced no credible theory as to why a reason-

able investor would consider what Mitchell did (or, as the case may

be, did not do) during what would have been his fourth year at Syra-

cuse to constitute something so important that it would alter this large

body of information.9 In short, the unavoidable conclusion one

reaches is that, in an age of heightened sensitivity to corporate scandal

some investors found, for a very short period of time, MCG’s stock

to be damaged goods because the company’s credibility was suddenly

suspect, and investors were concerned that revelations of other, more

important fabrications were soon forthcoming.10

9

The emphasis here is on "credible": Appellants suggest that Mitchell’s

lack of a degree is crucial because the degree would have been in eco-

nomics, and MCG is a financial services company. But merely asking

one question answers this claim: all else being equal, would a reasonable

investor have devalued MCG’s stock had he never studied economics at

all, but rather graduated with a degree in, say, mathematics or psychol-

ogy? Of course not.

10

Indeed, Appellants concede and argue as much, as they must. The

negative news reports Appellants cite did not breathlessly say, "Bryan

Mitchell didn’t take advanced macroeconomics in the early 1980s! MCG

will fail!". Rather, they cynically (and perhaps quite sensibly in a time

that saw numerous, highly publicized corporate frauds) stated, "he lied

about this; what else is untrue?".

12 GREENHOUSE v. MCG CAPITAL CORP.

B.

Happily, this realization affords us the opportunity to address

Appellants’ next argument. Appellants cite a number of ultimately

unavailing cases in their attempt to argue that MCG’s disclosure

about Mitchell implicated management’s integrity. Nobody — even

MCG — disputes the idea that Mitchell’s integrity was brought into

question by the revelation that he lied. But this is only a distraction

from the real issue: whether the actual fact misrepresented — that is

the basis for this suit and that caused investors to question manage-

ment’s integrity — was, in and of itself, material.

In support of their integrity argument, Appellants present the case

of Gerhardt v. ConAgra Foods, Inc., 335 F.3d 824 (8th Cir. 2003).

But in Gerhardt, unlike here, there plainly was a misrepresented fact

that was actually material: management violated generally accepted

accounting principles and significantly overstated their earnings. Id.

at 830 ("The keystone of plaintiffs’ materiality argument is their alle-

gation that UAP’s misrepresentations caused ConAgra to appear to be

earning more than it was."). If ConAgra’s leaders knowingly misrep-

resented their earnings, of course one byproduct might be that inves-

tors would reasonably question the integrity of the company’s

management; like here, the "integrity concerns" in Gerhardt are

merely derivative of the misrepresentation that was the basis for the

suit. The key difference, however, is that the fact misrepresented in

Gerhardt — the company’s earnings — might plausibly alter the total

mix of information to a reasonable investor; here, Mitchell’s failure

to complete his fourth year in college could not.

Likewise, Appellants cite Zell v. Intercaptial Income Sec., Inc., 675

F.2d 1041 (9th Cir. 1982), for the same proposition. But again, Zell

dealt with a fact of an indisputably different quantum: the defendant’s

proxy statement failed to disclose "a score of lawsuits charging viola-

tions of state and federal securities laws." Id. at 1043. That both mis-

representations call management’s integrity into question follows

almost necessarily from the fact that they are lies; it does not, how-

ever, aid in the determination of whether Mitchell’s lie was about a

material fact.

Finally, Appellants cite a 40-year old SEC case for the proposition

that integrity is "always a material factor." In the Matter of Franchard

GREENHOUSE v. MCG CAPITAL CORP. 13

Corp., 42 S.E.C. 163, Release No. 33-4710, 1964 WL 6754 (S.E.C.

July 31, 1964). In addition to the fact that it predates the Supreme

Court’s pronouncement in Basic and other key cases on materiality,

Appellants fail to note that this statement is, yet again, ancillary to

concerns growing from actual material facts that were not disclosed

(and thus were at issue) in the case. Reading the full context out of

which Appellants pluck their quote that integrity "is always a material

factor," one learns that the underlying fact at issue was that the com-

pany’s registration statements continually failed to disclose transfers

of large sums from the company to the controlling stockholder and

chief executive officer, which he used in his own ventures. Id. at *2-

*4, *6. This, in turn, created a likelihood of shift in control and

caused clear conflicts of interest with the company and its sharehold-

ers. Id.

In short, in each of these "integrity" cases, and unlike this case, a

real, live, material fact was at issue. Appellants seem to have chosen

these cases because the courts appear to have noted, offhandedly, that

management’s integrity is important and necessarily implicated with

such revelations. Of course, to some extent, "management’s integrity"

will always be implicated in any falsehoods. But as this Circuit and

the Court in Basic noted, not all lies are actionable; the securities laws

are only concerned with lies about material facts. Reading the law

otherwise, as Appellants would have us do, simply reads materiality

out of the statute. Under their theory, almost any misrepresentation by

a CEO — including, perhaps, one about his or her marital fidelity,

political persuasion, or golf handicap — that might cause investors to

question management’s integrity could, as such, serve as a basis for

a securities-fraud class action. The law simply does not permit such

a result.

C.

Finally, Appellants challenge the extent to which the district court

looked at MCG’s stock history after the initial November 1, 2002

drop, and suggest that the court misunderstood the basics of material-

ity analysis. They cite Justin Indus. v. Choctaw Sec., Inc., 920 F.2d

262, 267-68 (5th Cir. 1990) for the proposition that market movement

"cannot be a dispositive test [of materiality]" and argue that the court,

in fact, used it as a dispositive test.

14 GREENHOUSE v. MCG CAPITAL CORP.

First, we take the time to note that there is absolutely no evidence

that the court ever used the movement of MCG’s stock price as a "dis-

positive" test. But more fundamentally, we remind the reader that our

review of a court’s 12(b)(6) dismissal is de novo. As such, we "may

affirm the dismissal by the district court on the basis of any ground

supported by the record even if it is not the basis relied upon by the

district court." Ostrezenski v. Seigel, 177 F.3d 245, 253 (4th Cir.

1999). Thus, we are not compelled to address whether the district

court reached its decision in the correct fashion, so long as we believe

— as we do — that the result is supported by the record.

The extent to which a district court may look at a stock’s price his-

tory to determine whether a fact was material is a difficult issue on

which courts take varying positions.11 The majority rule seems to be

that it can be some evidence, but not, standing alone, dispositive evi-

dence. Because it is unnecessary to the resolution of this case, we

explicitly refrain from taking a position on this thorny issue. We note

only the commonsense proposition that judges are not stockbrokers,

and that, even with the corrective lenses of hindsight, they must be

11

See, e.g., No. 84 Employer-Teamster Joint Council Pension Fund v.

America West Holding Corp., 320 F.3d 920, 947-50 (9th Cir. 2003)

(Tallman, J., dissenting and explaining various circuits’ views on how

relevant stock-price behavior is to materiality analysis); Oran v. Stafford,

226 F.3d 275, 282 (3d Cir. 2000) (describing and emphasizing the role

of the market effect on the stock price by the company’s disclosure in

materiality analysis); In re Burlington Coat Factory Sec. Litig., 114 F.3d

1410, 1425 (3d Cir. 1987) (declaring that "because the market for BCF

stock was ‘efficient’ and because the July 29 disclosure had no effect on

BCF’s price, it follows that the information disclosed on September 20

was immaterial as a matter of law."); SEC v. Bausch & Lomb Inc., 565

F.2d 8, 15-16 (2d Cir. 1977) (considerable decrease in price did not

establish materiality per se); Geiger v. Solomon-Page Group, Ltd., 933

F. Supp. 1180, 1188 (S.D.N.Y. 1996) ("Evidence of stock price move-

ment may be relevant to the issue of materiality but it is not determina-

tive."); Simon v. American Power Conversion Corp., 945 F. Supp. 416,

424 (D.R.I. 1996) (viewing a negative reaction by the stock price as

indicative of materiality); Akerman v. Oryx Communications, Inc., 609

F.Supp. 363, 368 (S.D.N.Y. 1984) (lack of significant decrease in stock

price following disclosure did not establish immateriality as a matter of

law), aff’d, 810 F.2d 336 (2d Cir. 1987).

GREENHOUSE v. MCG CAPITAL CORP. 15

chary of theories that purport to discern precisely what caused stock

prices to rise or fall.

IV.

In conclusion, while we acknowledge that Mitchell’s lie is indefen-

sible, it does not follow invariably that it is illegal. We hold that,

viewed properly, it is not substantially likely that reasonable investors

would devalue the stock knowing that Mitchell skipped out on his last

year at Syracuse. That is, if one imagines a parallel universe of affairs

where the one and only thing different was that MCG’s filings made

no mention of Mitchell’s education (or, instead, said simply that he

"attended" Syracuse or "studied economics" there), we find it incredi-

ble to believe that MCG’s stock would be worth even a penny more

to a reasonable investor.

AFFIRMED