Milkie v. Extreme Networks Inc

* Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 05-10007
EDWARD M. MILKIE,
Plaintiff-Appellant,
versus
EXTREME NETWORKS, INC.,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Texas
Before GARWOOD, CLEMENT, and PRADO, Circuit Judges.
PER CURIAM:*
Edward M. Milkie (Milkie) appeals the district court’s
dismissal of his three claims against Extreme Networks, Inc.
(Extreme). We affirm in part, vacate in part, and remand.
Milkie’s allegations of common-law fraud
United States Court of Appeals
Fifth Circuit
F I L E D
May 19, 2006
Charles R. Fulbruge III
Clerk

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The district court found that Milkie failed to plead
fraudulent intent with specificity, and dismissed Milkie’s claim
of common-law fraud under Federal Rule of Civil Procedure 9(b).
Liberally construing the complaint in Milkie’s favor and taking
as true all pleaded facts, we find that the district court erred
in holding that Milkie did not adequately allege that Extreme’s
Director of Investor Relations, John Carvell (Carvell) knew his
statements on September 27, 2002, that there was no material
adverse news coming from Extreme, were untrue.
Specifically, we hold that Milkie sufficiently alleged that
Carvell, on Friday, September 27, was aware of the approximate
sales and earnings results for the quarter ending Sunday, September
29, as these results were contained in the press release issued
sometime before 5:30 a.m. Pacific time on September 30, and the
press release identified Carvell as one of the two points of
contact for more information. We do not reach the question of
whether the allegations are sufficient with respect to any
statements made prior to September 27, and we note that the only
specific dates of statements by Carvell that are alleged are
September 18, September 26, and September 27.
We also note that there are no factual allegations concerning
Extreme’s stock price from September 19 through September 27, nor
what its trading range was on September 30. We do not suggest that
the complaint is sufficient to allow recovery for reduction in

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stock price between September 18 and September 27.
We also note that the complaint proceeds on the assumption
that revenue and earnings projections for the quarter ended
September 29, 2002, were not met and that this was stated in the
press release. The press release, however, said no such thing.
Instead, it stated that the company expected revenue for the
quarter to be approximately $100 million, as compared to $113
million in the previous quarter. In addition, based on this
revenue, the company expected to report losses of $0.03 to $0.04
per share. The press release, however, does not say anything about
whether this information was expected or adverse. Nothing in the
complaint alleges that Extreme made any prior projections of the
quarter’s revenues or earnings. The record contains Extreme’s
Annual Report (Form 10-K) for the year ended June 30, 2002, which
was filed approximately September 30, 2002, and Extreme’s Quarterly
Report (Form 10-Q) for the quarter ended March 31, 2002, which was
filed approximately May 13, 2002. Neither of these documents
suggests any projection of increased earnings or the like; indeed
quite the opposite. As this was not addressed below, nor raised by
Extreme below or on appeal, we leave its legal significance to the
district court in the first instance on remand.
Finally, we are concerned that Milkie’s allegations regarding
Carvell’s statements that there would be no materially adverse news
forthcoming likely can only reasonably be understood as referring

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to facts not publicly known, as otherwise, the stock market
presumably would already reflect such information and the same
information in the September 30 press release would not drive the
price down. The complaint proceeds on the theory that the press
release’s reflection of earnings and sales was inconsistent with
Carvell’s earlier statements and made them false; in other words,
that Carvell impliedly represented that earnings would be better
than those announced on September 30. Yet, it appears that
informing Milkie on September 26 or September 27 what the earnings
would be, and for Milkie to sell his stock on that basis before the
information was public, would violate SEC regulations. The
district court did not address this issue and should do so in the
first instance on remand. Although Extreme attempted to raise this
issue to some extent below, it has not adequately briefed it on
appeal. It may be that the issue is one best addressed on summary
judgment or the trial on the merits.
Milkie’s allegations of negligent misrepresentation
The district court explicitly did not distinguish between
Milkie’s claim for negligent misrepresentation and his claim for
common-law fraud. The district court’s dismissal of Milkie’s claim
for negligent misrepresentation is vacated and remanded for the
reasons expressed above.
Milkie’s allegations of constructive fraud
The dismissal of Milkie’s claim for constructive fraud is

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affirmed for the reasons stated by the district court.
For the foregoing reasons, the dismissal of Milkie’s claims
for common-law fraud and negligent misrepresentation is vacated and
those claims are remanded for further proceedings consistent with
this opinion.
AFFIRMED IN PART; VACATED IN PART and REMANDED.

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