Raab v. General Physics Corp.

General Physics Corporation (General Physics) (defendant) provided support services for the nuclear-power industry and government nuclear-weapons contractors with the Department of Energy (DOE). General Physics’ stock was publicly traded. On February 20, 1992, Goldman Sachs issued a report recommending the purchase of General Physics’ stock. The report cautioned that General Physics’ 1991 fourth-quarter results had been negatively impacted by a slowdown in new DOE contract awards, but the report noted that General Physics had indicated that the contract awards had begun speeding up. The report did not identify a source for General Physics’ statement. On March 30, 1992, General Physics issued its 1991 annual report to shareholders and filed a 1991 Form 10-K with the Securities and Exchange Commission (SEC). Neither the annual report nor the 10-K mentioned a slowdown in DOE contract awards. Instead, the annual report stated the expectation that helping DOE contractors would be an increasing segment of General Physics’ business in 1992. Also on March 30, General Physics announced that first-quarter earnings for 1992 were significantly lower than analysts’ estimates due to administrative delays in DOE contract awards. The announcement stated that General Physics believed the first-quarter conditions to be temporary and that the remaining 1992 earnings would be aligned with analysts’ estimates. On June 18, 1992, General Physics announced that second-quarter earnings were lower than expected due to continuing delays in DOE contract awards. On June 19, General Physics’ stock price fell 36 percent. Adolph Raab and others who had purchased General Physics stock between February 20 and June 18, 1992 (collectively, the shareholders) (plaintiffs) sued General Physics, alleging violations of § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The shareholders claimed that General Physics had artificially inflated its stock price by failing to fully disclose the impacts of the DOE contract-awards slowdown. The shareholders asserted that General Physics had misled investors by, among other things, (1) stating in the Goldman Sachs report that the DOE’s contracting pace was increasing, (2) predicting growth for the DOE service group in 1992, and (3) stating in the March 30 press release that the contracting slowdown was temporary and that earnings would meet analysts’ expectations for the rest of 1992. The district court dismissed the complaint for failing to plead fraud with specificity, and the shareholders appealed.