Whiting

Facts

Plaintiffs bought stock in Applied Signal Technology, Inc., during the six months before the company revealed that its revenue had fallen 25% from the preceding quarter. Immedi- ately following this disclosure, the stock price dropped 16%. Plaintiffs sued the company and two of its officers under Securities Exchange Act § 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

Applied Signal’s customers are almost all agencies of the federal government. Two civilian agencies together account for 80% of the company’s revenue; military agencies account for most of the rest. According to plaintiffs, these government customers can, at any time and for any reason, order the com- pany to stop working on existing contracts for up to 90 days. Compl. ¶ 26; see 48 C.F.R. § 52.242-15(a) (model contract provision); id. § 42.1305(b)(1) (agencies “may” use this pro- vision). The company only gets paid for work it actually per- forms, so when the government issues a “stop-work order,” Applied Signal immediately ceases to earn money. And, because stopped work often is eventually cancelled altogether, 6392 WHITING v. APPLIED SIGNAL TECHNOLOGY a stop-work order signals a…