USCA1 Opinion

United States Court of Appeals

For the First Circuit
____________________

No. 95-2240

MORRIS I. GLASSMAN, et al.,

Plaintiffs, Appellants,

v.

COMPUTERVISION CORPORATION, et al.,

Defendants, Appellees.

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. William G. Young, U.S. District Judge]

___________________

____________________

Before

Lynch, Circuit Judge,

_____________

Coffin, Senior Circuit Judge,

____________________

Cummings, Circuit Judge.*

_____________

____________________

Peter J. Macdonald, with whom Jeffrey B. Rudman, David E. Mard

__________________
__________________ _____________
S.
Tara Miller, Hale and Dorr, Bruce D. Angiolillo,
________________ ______________ ___________________

Nicholas Ev
___________

Elisabeth Bassin, Simpson Thacher & Bartlett, Thomas J. Dougher

_________________ ____________________________ __________________

Dennis M. Kelleher, and Skadden, Arps, Slate, Meagher & Flom, were
__________________
_____________________________________
brief, for the defendants-appellees.

Thomas G. Shapiro,
__________________

with

whom Michelle Blauner,

_________________

Shapiro Gr
___________

Haber & Urmy, Glen DeValerio, Norman Berman, Michael Lange, Ber
_____________ _______________ ______________ ______________ ___
DeValerio & Pease,
___________________

Daniel
W. Krasner,
____________________

Peter C.
Harrar,
__________________

____________________

*Of the Seventh Circuit, sitting by designation.

W
_

Haldenstein Adler Freeman & Herz, L.L.P., I. Stephen Rabin, Joseph

_________________________________________ ________________ ______
Garland,
_______

and Rabin & Garland,

________________

were on

brief, for

appellants.

____________________

July 31, 1996

____________________

the plaintif

LYNCH, Circuit Judge.

LYNCH, Circuit Judge.
_____________

a Massachusetts

public

Six

technology company,

offering ("IPO")

weeks

announced

third

high

later,

that its

quarter of

Computervision Corporation,

on

of securities

September

revenues and

1992 would

29,

made

an

on August

1992,

14, 1992.

Computervision

operating results

be lower

initial

for the

than expected.

The

prices of Computervision's

stock and notes fell sharply.

the day after this announcement, the first

filed.

Computervision

under Sections 11

(the

and the

and 12(2)

"Securities

IPO underwriters

The

Computervision's principal officers

controlling

person

Securities Act.

the class

liability

Plaintiffs

of investors who

investor suit was

of the Securities

Act").

investors

Section

asserted that

after

discovery,

lengthy

both dismissed

claim and denied

Act of

1933

also

sued

alleging

15

of

purchased common stock

pre-trial

the case

proceedings

or notes

The district

and

for failure to

as futile plaintiffs'

the

they represented

between August 14, 1992 and September 29, 1992.

court,

were sued

and directors,

under

On

full

state a

motion for leave

to

file

a second amended

complaint.

See
___

In re Computervision
____________________

Corp. Sec. Litig. ("Computervision II"), 914 F.

__________________
__________________

Supp. 717,

719 (D. Mass. 1996).

The

investors

appeal

from

the

denial of

their

motion for leave to amend, arguing that their proposed second

amended

complaint (the "Proposed Complaint") passed the Rule

-33

12(b)(6)

threshold.

They

say

adequately alleged violations of

the

Prospectus1

for

the

the

factors considered

in

IPO

backlog; (4)

contained

actionable

omissions regarding: (1)

determining the

offerings; (2) certain mid-quarter

quarter of

Complaint

the securities laws in that

misrepresentations,"half-truths" or

the

Proposed

prices for

the

information for the third

1992; (3) the importance

of Computervision's low

the latest release of

Computervision's key new

software product,

CADDS

commercially shipping

5, which

Computervision

when (plaintiffs say) it

said

was

was not, and

the development and commercial prospects of CADDS 5.

We affirm,

although our reasoning as

to the first

claim differs from that of the district court.

I.

Background
__________

Computervision

is

leading

station-based

computer

manufacturing

("CAD/CAM") software

the

mechanical

products

design

are utilized

assemblies

for

aided

the

design

automation

in the

mechanical industries.

and

of

computer

and related

market.

design

automotive,

supplier

of complex

Its products enable

aided

services to

Its

aerospace,

work

software

parts and

and

other

users to reduce

____________________

1.

The

term "Prospectus" will

be used

throughout although

there were two prospectuses, one for stock and one for notes.
The

parties

treat

them

as

identical

for

all

material

purposes.

-44

the

time

required

manufacturing a

for

product

"time-to-market" is

designing,

before market

a key factor

engineering

introduction.

in ensuring

and

This

profitability

and competitiveness.2

The company

was organized

in 1972 under

the name

Prime

of

Computer, Inc.3

making

acquired

Until 1988, Prime was in the business

and selling

computer

systems.

Computervision Corporation,

CAD/CAM hardware and software products.

was

acquired

computer

by DR

systems

to

Holdings,

the

In

1988, Prime

a leading

supplier of

In 1989, the company

and shifted

CAD/CAM

market.

its

focus from

principal

shareholder of

DR Holdings, Shearson Holdings,4 provided the

company with a

$500 million bridge

the

acquisition.

loan in connection

That bridge loan was intended to be repaid

with the proceeds from a high-yield bond offering.

that

offering

with

never

occurred

and

Computervision

However,

instead

____________________

2.

At the

time of the IPO, Computervision

had an installed

base

of 58,000

Europe.

In

units,
1991,

predominantly in

international

North America

revenues

accounted

and
for

approximately 66% of its total revenues.

3.

The company's name was changed to Computervision Corp. at

the time of the IPO at issue

here.

For clarity, we refer to

the company as "Computervision" throughout.

4.

Shearson

Holdings is

underwriter for the IPO,

addition

to Shearson

Lehman Brothers
shareholders
affiliates and

parent company

of a

co-lead

Shearson Lehman Brothers, Inc.

Holdings and

Capital

of DR

the

its

Partners II,

Holdings

were J.H.

the Prudential Insurance

and affiliates.

-55

In

affiliate, Shearson
L.P.,

the

Whitney

principal
& Co.

Company of

and

America

refinanced

the bridge loan with

December

1991, interest

from cash

payments to

on the

$500 million in

notes.

In

notes was

itself converted

payments "in kind,"

i.e., additional
____

notes.

The proceeds

half

the principal

from the

amount,

Holdings, with the rest

IPO were intended

of the

to repay

notes held

by Shearson

of the debt to Shearson

Holdings to

be converted to Computervision common stock or written off by

Shearson.

Both

Shearson

Holdings and

"lock-up"

agreements, promising

positions

in

not

Computervision until

DR Holdings

to sell

their

year

after the

signed

equity

IPO.

Plaintiffs

posit

that Computervision's

condition5 placed Shearson

by

increasing

default on

solution

the

Holdings' investment in

likelihood

its debt to

worsening financial

that

jeopardy

Computervision

Shearson Holdings.

would

Allegedly,

the

was to take the company public and use the proceeds

to repay a substantial

portion of the debt.

Plaintiffs say

that defendants believed that if Computervision was not taken

public

during

the

summer

of

1992,

the

opportunity

for

Shearson Holdings to recoup its investment would be lost.

____________________

5.

In

the

three

Computervision

and

half

suffered close to

years

prior

to

$1 billion in

the
losses.

IPO,
In

1989, its net losses were $281 million; in 1990, $71 million;
in 1991, $461 million;
$143
first

million.
six

months

and for the first six months of 1992,

Computervision's CAD/CAM
of

1992

decreased

revenues
by

5%

for the

from

the

corresponding
from

the CADDS

period in
line

1991.

However, software

increased 10%

from the

revenues

corresponding

period in 1991.

-66

On

million

August

14,

1992,

Computervision

of securities in a registered IPO.

composed of 25 million shares of

sold

$600

The offering was

common stock at $12 a share

(for a total of $300 million); $125 million of 10-7/8% Senior

Notes

due

1997;

and

Subordinated Notes

firm-commitment

purchased

$175

due 1999.

underwriting,

the securities

risk that the market

price

set.

1194,

1200 n.1 (1st

Inc.,

Donaldson,

million

of

11-3/8%

Senior

The Computervision IPO

in

which

from the

the

was a

underwriters

company and

assumed the

would not accept the securities

at the

v. Digital Equipment Corp.,

________________________

82 F.3d

See Shaw
___ ____

Cir. 1996).

Lufkin

Shearson Lehman Brothers,

& Jenrette

Securities

Corp., The

First Boston Corp., and Hambrecht & Quist, Inc., were the co-

lead underwriters

for the domestic offering,

representing a

syndicate of over forty firms.

On

offering,

September

Computervision

29,

1992,

six

announced

that

weeks

its

after

the

revenue

and

operating results

below

to

for the

expectations.

$6.25, and

third quarter

of

1992 would

be

Within a day, the stock price fell 30%,

the notes

were

trading at

approximately 8%

below face value.

On

October 22, 1992, Computervision quantified its

results for the

1992.

million,

third quarter, which ended

on September 27,

Computervision had suffered a net loss of roughly $88

including

$25

million

-77

non-recurring

charge

occasioned by

its decision to

lay off more than

11% of its

work force.

II.

Description of Actions and Procedural History

_____________________________________________

On September 30, 1992, one day after Computervision

announced that its operating results for the third quarter of

1992 would be lower than expected, plaintiffs filed the first

of eighteen separate complaints.

Sections 11, 12(2) and

asserted

In addition to claims under

15 of the Securities Act,

violation of

Section

10(b)

of the

plaintiffs

Securities

Exchange Act of 1934 and negligent misrepresentation.

The

class

eighteen actions

action

and

on

June

Corrected

Supplemental

Complaint

(the

things,

the

Prospectus:

(i)

"1993

1993

were

11,

1993,

Consolidated

Amended

Amended

consolidated into

plaintiffs

Amended

Complaint

Action

Among

alleged

distorted Computervision's

filed a

Class

Complaint").6

one

other

that

the

earning trends;

(ii) omitted disclosure of known uncertainties impacting upon

Computervision's operating results; (iii)

of the

increasing likelihood

meet its internally projected

that

omitted disclosure

Computervision would not

results for 1992; (iv) omitted

____________________

6.

The 1993 Amended

of

fraud under

Complaint formally withdrew any

section 10(b).

Nevertheless,

claims

the district

court ruled that the complaint sounded in fraud and that Fed.
R.

Civ. P. 9(b)'s strict pleading standards applied.

See In
___ __

re Computervision Corp. Sec. Litig. ("Computervision I"), 869

___________________________________
________________
F. Supp. 56, 63-64 (D. Mass. 1994).

-88

disclosure

of

Computervision's

known

services

declines

and

in

the

products;

disclosure of software development problems.

and

demand

(v)

for

omitted

On

November

23, 1993,

the

argument on defendants' motion to

was

under advisement,

extensive.

and

district court

dismiss.

deposed

over

represented that,

While the motion

discovery commenced.

Plaintiffs reviewed more than

twenty

heard

Discovery

was

130,000 documents

witnesses.

Plaintiffs

have

should the case be reinstated, it does not

require the reopening of discovery.

On November 22, 1994, the district court issued its

decision,

dismissing

all

but

primarily on

the grounds

that

requirements

of

Civ. P.

Fed. R.

Computervision I, 869
________________

noted

that

F. Supp.

the Prospectus

sliver

of

they failed

12(b)(6)

at 64.

warned

the

to satisfy

the

and 9(b).

See
___

The district

investors

claims,

of the

court

risks

involved

and

that,

with

misrepresentations were

"bespoke

caution."

court noted

one

made in

Id. at 60-61.
___

that these,

exception,

the

context that

alleged

adequately

As to the omissions, the

in large part,

referred either

to

information that was effectively disclosed, or to information

for which there was no duty to disclose.

Id. at 62-63.
___

On January 20, 1995, plaintiffs served a motion for

leave to file a second amended complaint.

their

opposition to

that motion

-99

Defendants served

on February

24,

1995 and

moved for

the

summary judgment on the

district

entered

into a

court's

1994

Stipulation

prejudice, the surviving

effective

the day

after
_____

sole allegation surviving

decision.7

The

of Dismissal,

claim.

The

parties

dismissing, with

stipulation was to

the district

then

court

ruled on

be

the

motion for leave to amend.

On May 1,

the

Proposed

1995, plaintiffs moved for leave to file

Complaint

at

issue here.

The

court heard

argument

on

September

September

20, denied

basis for

the

13,

1995,

the motion

denial was

court

dismissed

the

week

for leave

futility,

Complaint failed to state a

The

and

later,

to amend.

in that

the

on

The

Proposed

claim pursuant to Rule 12(b)(6).

case, entered

judgment

for

the

defendants, and promised a full opinion.

Plaintiffs filed their notice of

20,

1995.

court

Subsequently, on

issued

an

opinion

underlying its September 1995

F.

Supp.

at

717-22.

The

appeal on October

February 12, 1996, the district

setting

forth

order.

one

the

rationale

Computervision II, 914

_________________

claim that

had

given the

district court pause at oral argument was the allegation that

the Prospectus

had misrepresented

that the

securities were

"appropriately" priced. The district court nevertheless ruled

____________________

7.

Pursuant to

filed

December

complaint and

the
28,

parties' Rule
1994,

16.1(D) Joint

plaintiffs'

summary judgment

Statement

proposed

amended

motions were served

but not

filed with the court.

-1010

that that claim

failed because: (a)

the Prospectus had

not

warranted

or insured the

prices; and (b) the

appropriateness of the securities'

claim was keyed to the

nondisclosure of

internal projections, which were not required to be disclosed

in any

event.

Id. at 719-20.
___

The district court ruled that

plaintiffs'

other

misrepresentation

backlog and

CADDS

5,

failed because

unreasonable inferences drawn

Prospectus

out of

context.8

claims,

they

by reading

Id. at
___

relating

were

based

statements in

719-22.

to

on

the

This appeal

followed.

III.

Analysis
________

A.

Standard of Review
__________________

This appeal

lies from the district

court's denial

of

plaintiffs' motion

motion

was

denied

to

file an

after

full

amended complaint.

discovery

dismissal of an earlier complaint.

that amendment

would be futile.

as they do now,

motion

leave

requires,"

See id. at
___ ___

amend should

be

after

the

district court ruled

The parties disagreed then,

over the proper standard for

to amend.

to

The

and

The

719.

"freely

Fed. R. Civ. P. 15(a).

analyzing this

Plaintiffs argued that

given when

justice

so

Computervision II, 914 F.

_________________

____________________

8.

Since

omissions,

there
the

misrepresentation
well.

were
court

no

actionable
held

claim against

that

misstatements
the

the underwriters

Computervision II, 914 F. Supp. at 722.

_________________

or

negligent
failed as

-1111

Supp.

at

719.

"substantial

Defendants

embraced

and convincing evidence"

Resolution Trust Corp. v. Gold,

_______________________
____

1994).

the

more

stringent

standard set forth in

30 F.3d 251,

Computervision II, 914 F. Supp. at 719.

_________________

253 (1st Cir.

The district

court did not decide the issue, finding the question academic

"as the

plaintiffs cannot maintain this

standard."

Computervision II, 914 F. Supp. at 719.

_________________

Denial of a motion to file an

reviewed

action under either

for abuse

of discretion.

amended complaint is

See Romani
___ ______

v. Shearson
________

Lehman Hutton, 929 F.2d 875, 880 (1st Cir. 1991);

______________

Mullane,
_______

F.3d

1456,

1464-65 (7th

Cir.

1993)

Arazie v.
______

(noting,

however, that the relevant pleading standards must be kept in

mind when

applying the abuse of discretion

15(a) provides that

when justice so

standard).

"leave [to amend] shall

requires."

Rule

be freely given

Unless there appears

to be

an

adequate reason for the denial of leave to amend (e.g., undue

____

delay,

bad faith,

prejudice),

we

dilatory

will not

motive, futility

affirm it.

of amendment,

Grant v.

News Group

_____

__________

Boston, Inc., 55 F.3d 1, 5 (1st Cir. 1995).

____________

Here, there was no finding that plaintiffs acted in

bad

faith, or in an

effort to prolong

litigation.

Nor was

there a finding that defendants would have been prejudiced by

-1212

the amendment.9

See Ward Electronics Serv., Inc. v.

___ _____________________________

First
_____

Commercial Bank, 819 F.2d 496, 496-97 (4th Cir. 1987).

_______________

Rather, the dismissal rested on other grounds.

district

court's order

explicitly states:

"the

further amend the complaint is denied as futile."

means that the complaint,

claim

upon which

Federal Practice
________________

Vargas
______

motion to

"Futility"

as amended, would fail to

relief could

be granted.

See
___

The

state a

3 Moore's
_______

15.08[4], at 15-80 (2d ed. 1993); see also

___ ____

v. McNamara, 608
________

F.2d 15,

17 (1st

Cir. 1979).

In

reviewing for "futility," the district court applies the same

standard of legal

motion.

sufficiency as applies to a

3 Moore's, at
_______

The

Gold
____

15.08[4], at 15-81.

standard, which

amendments

have

substantial

substantial

and

convincing

several reasons.

motion

to

Rule 12(b)(6)

merit

requires

and

evidence, is

be

that proposed

supported

inapplicable

by

for

To date, it has only been applied where the

amend is

summary judgment.

made after
_____

defendant has

See e.g., Gold, 30 F.3d

___ ____ ____

moved for

at 253;

Matos v. St. Lawrence Garment Co., 901 F.2d 1144,

_____
_________________________

Torres_______

1146 (1st

____________________

9.

It

is

prejudiced.

unlikely

that

defendants

could

have

been

Plaintiffs have represented that the allegations

of the Proposed Complaint do not require reopening discovery.

There is also no claim that defendants
time

would need additional

to change their trial strategy in light of the proposed

amendment.
F.2d 1,

Cf. Tiernan
___ _______

4-5 (1st

v. Byth, Eastman, Dillon & Co., 719

____________________________

Cir. 1983)

(finding prejudice

even where

additional discovery was not necessary; the additional claims

"may well

have affected

and tactics" and

defendants' planned

both defendants and the court

trial strategy
would likely

have "required additional time to prepare for trial").

-1313

Cir.

1990);

Cowen v.

Bank United

of

Texas, FSB,

1995 WL

_____

38978, *9 (N.D.

___________________________

Ill.), aff'd
_____

70 F.3d 937

(7th Cir.

1995);

Carey v. Beans, 500 F. Supp. 580, 582 (E.D. Pa. 1980), aff'd,
_____
_____
_____

659

F.2d

1065

Harvester Co.,
_____________

that

alter

(3d

355 F.

Cir.

1981);

Artman
______

Supp. 476, 481

v.

International
_____________

(W.D. Pa. 1972).

In

context, a plaintiff's motion to amend is an attempt to

the shape

of

the case

in

order to

defeat

summary

judgment.

Here

defendants moved

in the summary

the

plaintiffs served the

for summary judgment.

motion to amend before

______

Further, the claims

judgment motion were dropped by

agreement of
_________

parties and, as a result, no summary judgment motion was

pending

when the

district

court considered

the motion

to

amend.

Nor

does Gold
____

apply by

situation in which plaintiffs

imminent defeat.

This is

not a

seek amendment solely to avert

Cf. Cowen v. Bank United of Texas, FSB, 70

___ _____
__________________________

F.3d 937,

944 (7th Cir. 1995).

which

is rational

it

analogy.

Nor is this

to presume

prejudiced by amendment.

a situation in

that defendants

would be

Cf. Carey v. Beans, 500 F. Supp. at

___ _____
_____

582 (calling prejudice to non-movant the "`touchstone for the

denial of the amendment'" (quoting Cornell & Co. v. OSHA, 573

_____________
____

F.2d

820,

823 (8th

Cir.

circumstances, plaintiffs

1978)).

Although,

could be guilty of

prejudice to defendants might

under

these

undue delay or

exist, the district court made

-1414

no such finding.

Further, the district court did not rely on

Goldandits reasoningwas almostpurelya legalfutility analysis.

____

Thus,

correctly

we

look

determined that

at

whether

the

district

the Proposed Complaint

court

failed to

meet

the pleading standards of

Rule 12(b)(6).

There is no

practical difference, in terms of review, between a denial of

a motion to amend based on futility and the grant of a motion

to dismiss for failure

Jacksonville, Ltd.
___________________

v.

(11th Cir. 1996); see

___

Michigan, 11 F.3d
________

novo.
____

F.3d

to state a claim.

See Motorcity of
___ _____________

Southeast Bank, 83
______________

F.3d 1317, 1323

also Keweenaw Bay Indian Community v.

____ ______________________________

1341, 1348 (6th Cir. 1993).

Review is de
__

See, e.g., Serabian v. Amoskeag Bank Shares, Inc., 24

___ ____ ________
__________________________

357,

361

(1st

Cir.

1994)

(motions

to

dismiss are

reviewed de novo).
__ ____

B.

Securities Law Claims

_____________________

"Sections 11 and

12(2) are enforcement

mechanisms

for the

Act."

mandatory disclosure requirements

Shaw,
____

on signers

among

82 F.3d at 1201.

Section 11 imposes liability

of a registration statement

others, if

untrue statement of

material fact

the registration

a material

fact or omitted

required to be stated therein

statements therein

77k(a).

Section 12(2) provides that

sells"

and on underwriters,

statement "contained

make the

or

of the Securities

security by

not misleading."

means

-1515

of

an

to state

or necessary to

15

U.S.C.

any person who "offers

prospectus or

oral

communication that contains

that

"omits to state a

statements,

they

in the

were made,

"person

not

a materially false statement

material fact necessary

light of

the circumstances

misleading"

purchasing such

shall

security from

to make the

under which

be liable

him."

or

to

any

15 U.S.C.

77l(2).

As

duty

we said in Shaw,
____

there is a strong affirmative

of disclosure in the context of

F.3d at 1202.

a public offering.

83

The same may be even more emphatically true in

an

initial public

before been

offering, where

publicly traded.

the securities

Cf. Marcel
___

have not

Kahan, Securities
__________

Laws and the Social Costs of "Inaccurate" Stock Prices, 41

_________________________________________________________

Duke

L.J. 977,

plaintiffs'

Rather,

1014-15

claims is

they

say

(1992).

not based

that

this is

But

the main

on any

thrust

duty to

primarily

an

of

disclose.

affirmative

misrepresentation or half-truth case.

The Proposed

Complaint centers on

the claim

that

Computervision affirmatively misrepresented that the offering

price

was set

after the

underwriters, but

deficient

considered.

in

that

In

exercise of

that in

the

due diligence

fact the diligence

most current

addition,

plaintiffs

by the

exercised was

information

contend

was

not

that

the

Prospectus

omitted certain

mid-quarter information

for the

third quarter of 1992 and contained material misstatements or

-1616

omissions regarding Computervision's backlog and the state of

its latest software product, CADDS 5.

The district

court held that

not bear the characterizations

it, and

plaintiffs sought to place on

that the allegedly actionable "representations" were

no more than unreasonable

inferences drawn by plaintiffs and

unsupported by the surrounding

914

the Prospectus would

F. Supp.

at 719.

court erred and that

language.

Plaintiffs

Computervision II,
_________________

argue that

the district

they should have been allowed

to amend

their complaint.

Defendants

respond

by asserting

that plaintiffs'

pricing claims reduce to an argument that the securities were

mispriced

because

offerings, and

claims

reduce

their

prices

that the omission of

to

nothing

more

fell

subsequent

to

the

mid-quarter information

than

an

argument

that

Computervision

forecasts.
_________

was

required

Plaintiffs'

to either

disclose

internal

provide

disclose

position,

untenable because the securities

company

to

as

Pricing/Due Diligence Claims

____________________________

-1717

say,

to price

say

or

that

is

to

the

and CADDS 5 are not

when considered in the

Prospectus as a whole.

1.

defendants

They also

alleged misstatements concerning backlog

actionably misleading

internal

laws impose no duty upon

a warranty

projections.

its

context of the

The Computervision IPO

which has bearing on

was unusual in one

plaintiffs' claims.

respect

Computervision had

been owned by an entity, one of whose principal shareholders,

Shearson

Holdings, was

underwriters,

affiliated with

Shearson Lehman

one of

the co-lead

As a

result, the

Brothers.

Prospectus informed investors:

Under the provisions of Schedule E to the

By-laws

of

Securities

the National

Association of

Dealers Inc. ("NASD"),

when

NASD

members

Brothers

such

Inc.,

distribution

as

Shearson

participate
of

an

Lehman
in

the

affiliate's

securities, the public offering price can

be no

higher than that recommended

"qualified

independent

by a

underwriter"

meeting certain standards.

Hambrecht

& Quist (for

First Boston (for the

diligence

as

to

the

the stock) and

Donaldson Lufkin and

notes) assumed the obligations of

public

offering

prices,

and

due

the

Prospectus explicitly represented that they had done so.

This

representation

significant in two respects.

in

the

Prospectus

is

First, the fact that one of the

lead underwriters was affiliated with a principal shareholder

of Computervision arguably gave

that underwriter a reason to

inflate

Second,

the offering

effect, explicitly

prices.

assured

the

members

the Prospectus,

of

the

in

investing

public that,

Shearson

despite the link between

Lehman

inflated price.

the

fact

Brothers, they

The

had

Shearson Holdings and

no reason

to

Prospectus made a selling point

that independent

underwriters

had

fear an

out of

performed due

-1818

diligence, set maximum prices,

and thus acted as gatekeepers

against

Lehman

possible misdeeds by

Brothers.

Cf.
___

Shearson Holdings and Shearson

John

C.

Coffee,

Re-Engineering
______________

Corporate
Disclosure: The
Coming Debate
Over Company
_____________________________________________________________

Registration, 52 Wash. & Lee L. Rev. 1143, 1168 (1995).

____________

(i) The Pricing Claims in the Proposed Complaint

____________________________________________

The

Prospectus

described

the

process

by

which

Computervision and its underwriters arrived at prices for the

offering:

Prior

to the

been

no

Stock.

Share Offerings

public

market for

there has
the

Common

The initial public offering price

was determined by

negotiation among

the

Company, the Representatives and the Lead

Managers.
in

Among

determining

price, in addition

the factors
the

considered

initial

to prevailing

offering
market

conditions, was
performance,

the Company's historical

estimates

of the

potential and earnings

Company

and

financial

business

prospects of

market

prices

and operating

of

the
and

data concerning

comparable companies.

These

representations

are

Proposed Complaint, which alleges

at the

heart

Stock

stating

Prospectus was
that

appropriately
Notes
yields

was also
to

be

the

Stock

priced.

The

too high,
too

the

in paragraphs 3(a) and 45,

respectively:

The

of

low.

misleading in
had

been

price of the
causing their
The
Stock
___________

Prospectus stated that among the factors

_________________________________________
considered in determining the initial
_________________________________________
public offering price were "estimates of
_________________________________________
the
business potential
and earnings
_________________________________________
prospects of the Company." By the time
_________________________________________
of
the
Offerings,
however,
those
_________________________________________

-1919

estimates were no longer valid.

________________________________
the date of
revenues,

bookings,

prepared

reviewed

of

the Offerings, the Company's

visibility

backlog were all substantially

plan

As

by

by

pricing

for

the

Plan"),

as well

below the

Computervision

and

underwriters

in

due diligence

and

the

connection with their

and

Offerings
as the

(the

"IPO

Company's other

internal

plans

and forecasts

(emphasis

added) (footnotes omitted).

The Stock Prospectus represented that the

initial

public

offering

price for

the

Stock was based upon, among other things,

"estimates of the business
earnings prospects
The

potential and

of the Company . . ."

Prospectuses

also

stated

that

"qualified independent underwriters"

recommended
price
the

the initial

for the

Those

recommendations

were

including

"estimates

potential

of the

"economic,

public offering

Shares and the

Notes.

yields on

formal,
based
of

company"

market,

had

written

on
the

factors
business

and

on

financial and

the
other

conditions" as they existed on August 13,

1992, the day
of

the

before the effective

Offerings.

representations in

Contrary

to

date
the

the Prospectuses, the

price of the Shares and the yields on the

Notes

did

not

properly

reflect

the

business potential, earnings prospects or

financial condition
of that date.10

of Computervision as

____________________

10.

Related allegations are found at paragraphs 46 and 84 of

the Proposed Complaint, respectively:

As of

the date of the

Computervision's
forecasting

Offerings, all of

internal

planning

devices showed

and

that results

during the first seven weeks of the Third

Quarter

were

budgets

set

substantially
in

the Company's

plans and the IPO Plan which

had

presented to

below

the

the

internal

the Company

Underwriters

in

conjunction with their due

diligence and

pricing of the Offerings.

In particular,

-2020

____________________

at

the

time

of

the

Computervision's

U.S.

materially

sales

below

points in the prior

U.S.

and

The

to

in

Both

sales

were

had a

visible

its quarterly

Underwriters

adequate

comparable

Computervision

reach

were

the Company's plans.

shortfall

needed

at

international

addition,

million

sales

five quarters.

substantially below
In

Offerings,

due

failed

to

$40

orders
budget.
perform

diligence

on

Computervision's actual revenues,

sales,

orders, bookings and

visibility for

seven

the

weeks

during

before the Offerings.

Third

the

Quarter

The Underwriters
_________________

were required to but did not obtain

_________________________________________
information
necessary to
verify the
_________________________________________

Company's false
statements that such
_________________________________________
results were "more or less where they
_________________________________________
were expected to be."
To the extent the
_________________________________________
Underwriters obtained any
information
_________________________________________
from
the
Company
concerning
these
_________________________________________
results,
the
Stock and
Notes were
_________________________________________
mispriced because the initial offering
_________________________________________
price
and the
yields, as
well as
_________________________________________
Underwriters' recommendations, did not
_________________________________________
take into account these low levels of
_________________________________________
sales
and
the
$40
million
order
_________________________________________
shortfall.
__________

Therefore, the representation

in the Stock prospectus that the offering

price

was based

upon "estimates

of the

business potential and earnings prospects

of the Company" was false and misleading,
as

were

the

Prospectuses
recommendations
independent
added).

representations
concerning
of

in

the
the

the

qualified

underwriters

(emphasis

The

Underwriters

failed

adequate due diligence

actual

sales,

visibility
seven
the

and

weeks of the
Offerings.

on the

orders,
backlog

to

for

perform
Company's
bookings,
the

first

Third Quarter before

The Underwriters were
______________________

required to but either failed to obtain

_________________________________________
and review or ignored information about
_________________________________________
actual
sales,
orders,
bookings,
_________________________________________

-2121

Different claims, which require different analyses, appear to

be asserted in these paragraphs.

(ii)

District Court's Characterization

of the
_____________________________________________

Pricing Claims
______________

In

dismissing

the

action,

characterized plaintiffs' claim as

for the

914

securities were

F. Supp.

Prospectus

at 720.

never

"appropriate" and

the

Computervision II,
_________________

district court

represented

that

that if the Prospectus

the

noted

representation

that the

prices

were

language quoted in

paragraph 48 of the Proposed Complaint:

constitutes

court

being that the prices set

______

inappropriate.

The

district

that

the

initial

price

investors

was

would

'appropriate,'

effectively

have

decline in

price,

insurance against any

rendering their investments risk-free.

Id.
___

We

agree with the

plaintiffs make

price

itself

that

was

district court's view

the Prospectus

appropriate.

We

of any

represented

note,

that

however,

claim

the

that

plaintiffs vigorously deny that such was, or is, their claim.

____________________

visibility
and backlog
necessary to
_________________________________________
verify the Company's statements that they
_________________________________________
were more or less on track.
__________________________
the

Stock

and

Notes

were

As a result,
mispriced

because the initial offering price of the

Stock and the yields on the Notes did not
take into account these

adverse results,

including the $40 million order shortfall

(emphasis added).

-2222

The

essentially

present

earnings

price set

a forecast.

value calculation

or dividends.

for

an offering

Price

can

of the

See
___

of securities

be characterized

firm's future

is

as a

streams of

In re VeriFone Sec. Litig.

_____________________________

("VeriFone I"), 784

___________

F. Supp.

("securities prices

expected

on national exchanges

future cash

F.3d 865 (9th Cir.

1471, 1479

flows from

(N.D. Cal.

1992)

reflect . . . the

the security"),

1993); Richard A. Brealey and

aff'd, 11
_____

Stewart C.

Myers, Principles of Corporate Finance, 61-63 (4th ed. 1991);

_______________________________

cf. Niagara Hudson Power Corp. v. Leventritt, 340

___ ___________________________
__________

339 & n.7

(1951) (approving the SEC's valuation

U.S. 336,

of warrants

in terms of current expectations of future events); Pommer v.

______

Medtest
Corp.,
_______________

961

F.2d

620,

623

("[p]robabilities determine the value

Commonwealth Edison Co., 892 F.2d

________________________

(7th

Cir.

1992)

of stock"); Wielgos v.
_______

509, 514 (7th

Cir. 1989)

(investors value securities

on the basis of how they believe

the firm will do in the future, and not on past performance).

Since price is only a forecast of the firm's future

performance,

it

is

not

actionable

merely

because

the

forecast, in hindsight, does not turn out to be correct.

See
___

In re VeriFone Sec. Litig. ("VeriFone II"), 11 F.3d 865, 871

___________________________
___________

(9th Cir. 1993) (earnings

forecasts made on reasonable basis

not actionable); Wielgos,

_______

892 F.2d at 518;

Sciences Corp.,
_______________

507

F.2d

485,

489-90

Marx v. Computer
____
________

(9th

Cir.

1974).

Forecasts are not guarantees of, or insurance policies for, a

-2323

firm's future performance, nor are they understood as such by

reasonable investors.

F.3d 1271,

1276 (D.C.

Kowal
_____

v. MCI Communications Corp., 16

________________________

Cir. 1994);

Raab v.
____

Corp., 4 F.3d 286, 290 (4th Cir. 1993).

_____

plaintiffs' "price" claim

initial offering

General Physics
_______________

Hence, to the extent

rests on either the

prices fell

the fact that Computervision's

shortly after the

fact that the

offering or

third quarter earnings turned

out

to be worse than expected, it

F.2d at 623 ("[S]ecurities

fails.11

Cf. Pommer, 961

___ ______

laws approach matters from an

ex
__

ante perspective.").
____

(iii) Plaintiffs' Characterization of the Pricing

_____________________________________________

Claims
______

Plaintiffs, however, argue that their attack is not

on

the appropriateness

Instead,

they assert

of the

offering prices

themselves.

that their

claim before

the district

court was that the Prospectus materially misrepresented that:

____________________

11.

In addition, when the

are

read

guarantee.

in

context, they
First,

Prospectus statements about price

appear

the Prospectus

to

be

anything but

provided investors

with

_________
explicit and specific warnings as to factors that might cause
the prices of the securities to fall.

Second, the Prospectus

cautioned investors as to the possibility that no

market for

the

after

securities

offering.
in

and

would

develop

or be

sustained

the

These cautionary statements in the Prospectus are,

of

actionable.

themselves,
See Shaw,
___ ____

reason

to

find

this

82 F.3d at 1213 ("when

claim

not

statements of

`soft' information such as forecasts, estimates, opinions, or

projections

are accompanied

adequately

warn of

events may

turn out

by cautionary

the possibility

disclosures that

that actual

differently, the `soft'

results or

statements may

not be materially misleading"); In re Donald J. Trump Casino

_____________________________
Sec. Litig., 7 F.3d 357, 371 (3d Cir. 1993)(same).
___________

-2424

(a)

certain

underwriters

types of

information

and Computervision in

the offering, when, in fact,

those

types

ignored);

and

was

not

(b) the

were

considered by

determining

the

prices for

the most current information of

considered (or,

underwriters

if

did

considered,

was

due diligence

in

estimating the prices, when they did not because they did not

consider the most current information.

As a threshold

matter, the explicit statements

________

the Prospectus that certain

due

in

factors were considered and that

diligence was done are required by

law to be true as of
_____

the effective date of the offering.

___________________________________

See 15
___

(liability attaches for misstatements

time such part

becomes effective);

U.S.C.

in a prospectus at the

see also
___ ____

3A Harold

Bloomenthal, Securities and Federal Corporate Law

_____________________________________

8-102 (1993)

speaks

as of

effective.").

current

("[T]he prospectus

the

date the

into

the

Prospectus presented

current
_______

earnings prospects.

date of the

prices,

section 11

the

becomes

the extent

offering was not

statements

misleading half-truth

suggested that the underwriters

consideration

assert that, to

S.

8.23, at

registration statement

information up to the

incorporated

for purposes of

Thus, plaintiffs

77k(a)

in

the

because

they

and Computervision took into

estimates of

business

potential and

Cf. Virginia Bankshares v. Sandberg, 501

___ ___________________
________

U.S.

1095,

deceptive

1098

(1991)

(literally

because only a half-truth).

accurate

statement

As a general matter,

-2525

we agree that such a theory, if sufficiently supported, could

make out a viable legal claim.

It may

be asked whether

are actionable, given that

the alleged misstatements

they were made in the

context of

offering prices, which as noted, are essentially forecasts of

future earnings.

While forecasts are

not actionable merely

because they do not come true, they may be actionable to

extent they are not reasonably based on,

the

or are inconsistent

with, the facts at the time the forecast is made.

See Kowal,
___ _____

16 F.3d at 1278; cf. Virginia Bankshares, 501 U.S. at 1093-94

___ ___________________

(board of

directors' statement that merger

was actionable

to the extent

inconsistent with, existing

24 F.3d at 361

it was

price was "fair"

not based

on, or

and available facts);

("predictions about the future that

was

Serabian,
________

prove to

be off the mark likewise are immunized unless plaintiffs meet

their

burden

of

demonstrating

intentional

Eisenberg v. Gagnon, 766 F.2d 770, 776

_________
______

violates securities

belief

or

laws if

it is

reasonable basis),

(1985); Billard v.
_______

price

and

denied,
______

statement

certified

it as

genuine

474 U.S.

946

51, 56-57

fairness of the offering price

valid basis for an action under

14(e) . . . , a

without a

Rockwell Int'l Corp., 683 F.2d

____________________

(2d Cir. 1982) ("Although the

is not a

(3d Cir.) (prediction

made

cert.
_____

deception");

that experts

fair

-2626

may

Sections 10(b) and

have

well

examined

be a

the

material

misrepresentation if those

experts have advised the

offeror

that the price is unfair.").

The

types

of

data

which

the

plaintiffs allege

should have been considered are, in general terms, within the

realm

of data relevant to

alleged misstatement

of the effective

factors:

(i)

the

the determination of

as to factors that

date of the

company's

The

were considered, as

offering, lists the

historical

price.

following

performance;

(ii)

estimates of the business potential and earnings prospects of

the company; and

(iii) market prices

of, and financial

and

operating data concerning, comparable companies with publicly

traded

equity

effect, a

securities.

This

list

of factors

laundry list of general factors

be considered

in any

in

that would likely

reasonable estimation

Lucian Arye Bebchuk and

is,

of price.

Cf.
___

Marcel Kahan, Fairness Opinions: How

______________________

Fair Are They And What Can Be Done About It, 1989 Duke L. J.
____________________________________________

27, 34-35 (1989) (listing

cf. generally Ronald J.

___ _________

methods of estimating fair price);

Gilson and Reinier H. Kraakman,

Mechanisms of Market Efficiency, 70 Va.

________________________________

(describing the

types of

L. Rev. 549

information that

The
___

(1984)

are incorporated

into securities

not

actually

categories

prices).

consider

of data

Therefore, if the

current

they claimed

information

to have

defendants did

in

the

broad

looked at,

it is

possible that plaintiffs would have a reasonable basis claim.

-2727

The due diligence claim also comes down to one that

the

setting

of the

price

was

done

without a

statement

in

the

Prospectus

basis.12

The

independent

underwriters

affirmative statement
___________

company

was done

information,

conducted

that

diligence

the

was

an

that a reasonable investigation of the

and

that, using

a fair price was

77k(b)(3) (due diligence

investigation") &

Section

defined

as

that and

estimated.

defense under

"reasonable

12

due

reasonable

77l(2)

"exercise

Software Toolworks, 50 F.3d

___________________

See
___

other relevant

15 U.S.C.

Section 11

requires

(due diligence

of

at 621 (9th

reasonable

under

care");

Cir. 1994) (noting

that the two articulations of due diligence are "similar," if

not identical).

The law

on due

diligence is

sparse, but

for our

purposes it makes clear that certain inactions may constitute

failure to

perform due

diligence.

First, a

failure to

continue to investigate the company up to the effective date

_________________________

of the offering
_________________

diligence.

See
___

is

likely

to

be

Software Toolworks,
__________________

(intra-quarterly information available

date

of offering

Escott
______

v.

not taken

failure

50 F.3d

BarChris Constr. Corp.,

_______________________

283 F.

do due

at 625

before the

into account

to

& n.2

effective

by underwriters);

Supp.

643, 690

____________________

12.

Due diligence

is

equivalent to

non-negligence.

See
___

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208 (1975);

_____________
__________
Software Toolworks Inc. Sec. Litig., 50 F.3d
_____________________________________

In re
_____

615, 621 (9th

Cir. 1994), cert. denied, 116 S. Ct. 274 (1995).

_____ ______

-2828

(S.D.N.Y.

1968)

effective on May

investigation

(where

registration

statement

16, 1961, attorney did not

where he

failed

to discover

became

make reasonable

that statements

made

in January had become

inaccurate by May);

see also 3A
___ ____

Bloomenthal, Securities and Federal Corporate Law,

____________________________________

8-102-03.

Second, it also may be

to rely solely

a failure of due diligence

on management representations as to the state

of the company where

verified.

See
___

those representations can reasonably be

Software
Toolworks,
____________________

50

F.3d

(inadequate for underwriters to rely on company's

as to

8.23, at

its financial condition where

at

625-26

assurances

underwriters had access

to all available information); BarChris, 283 F. Supp. at 696________

97 ("underwriters must make some reasonable attempt to verify

the

data

submitted

generalities,

to

them").

the specifics

must be scrutinized.

of

Notwithstanding

plaintiffs' factual

these

claims

(iv) Rule 12(b)(6)

_____________

The

next and dispositive question is whether there

are sufficient factual allegations

in the Proposed Complaint

motion.

more

closely

support

for it to survive a

We are mindful that

three years of litigation

at the

as to plaintiffs'

theory

Rule 12(b)(6)

the case comes to us after over

and full discovery.

factual

allegations

the legal conclusions pled.

-2929

We

to see

As this

thus look

if

they

court said in

Resolution Trust Corp.

______________________

v. Driscoll,
________

985 F.2d

44 (1st

1993):

It is, of course,
of complex
have

true that at the start

litigation

all the

a party

facts, so

may

not

courts normally

hesitate to dismiss under Fed. R. Civ. P.

12(b)(6) at the outset.
reasonable

basis

for

At the start, a
belief

and

an

outline of what one might reasonably hope

to prove may suffice to
and

ward

dismiss.
against

off
But

premature

[defendant]

and yet

motions

[plaintiff's]

even now

to

complaint

is deficient;

litigation has persisted

years;

permit discovery

for almost

this
two

[plaintiff] is

Cir.

unable

to

explain

[defendant]

did

[plaintiff

still

what

that is
has

exactly

wrongful . . .

not

supplied]

single, coherent, specific description of

what

[defendant]

has

done

that

is

wrongful.

Id. at 48.
___

either

A complaint

direct

or

element necessary to

legal theory."

(1st

inferential,

respecting

allegations,

each

sustain recovery under some

material

actionable

Gooley v. Mobil Oil Corp., 851 F.2d 513, 515

______
_______________

Cir. 1988); see also Fleming v. Lind-Waldock & Co., 922

___ ____ _______
__________________

F.2d 20, 24

(1st Cir. 1990); cf. Dewey

___ _____

Hampshire,
_________

to

must contain "factual

694 F.2d 1, 3 (1st Cir.

allege a

unpleaded

general scenario

facts"), cert.
_____

v. University of New
_________________

1982) ("it is not enough

which

denied, 461
______

could be

U.S. 944

dominated by

(1983); cf.
___

also
____

1995);

Murphy v.
______

United States,
_____________

45 F.3d

520, 522

Coyne v. City of Somerville, 972 F.2d

_____
___________________

Cir. 1992);

440, 444 (1st

Correa-Martinez v. Arrillaga-Belendez,
_______________
__________________

-3030

(1st Cir.

903 F.2d

49,

52 (1st Cir. 1990).13

"In deciding a motion to dismiss

under Rule 12(b)(6), [we] must take all well-pleaded facts as

true,

but

[we]

assertions'

need

or legal

not

credit

complaint's

conclusions."

Shaw,
____

82 F.3d

Plaintiffs'

legal

breaks

down

(i) that

defendants

`bald

at 1216

(citations omitted).

elements:

theory

explicitly

prices had been set after a reasonable

reasonable consideration

such an investigation

were

not considered

of

was not

(or were

two

stated that

the

investigation and the

relevant facts;

done and

into

and (ii)

the relevant

ignored).14

that

facts

But plaintiffs'

factual pleadings fail to convince us that they have stated a

claim that relevant information was not considered.

a. Failure to Consider Data

________________________

It

either

is

true that

to verify a company's

failure

by the

underwriters

statements as to its financial

____________________

13.

Defendants argue

fraud and hence

that the Proposed Complaint

we should apply Fed. R. Civ.

requires that

claims of fraud be

See
___

F.3d at

Shaw, 82
____

claims do
the

Complaint

may yet

1223 (although

fails to

sound in
meet even

12(b)(6) in the procedural

P. 9(b), which

pled with "particularity."

not require allegations of

claims

sounds in

and 12(2)

scienter and reliance,

fraud).
the

Section 11

Since

the Proposed

lower threshold

of Rule

posture in which it comes

to us,

we do not decide whether Rule 9(b) is applicable.

14.

Facts or information may

(e.g., if
____

a company

considered)

but

be "required" to be considered

affirmatively represents that

do not

necessarily

have

such was

to result

in

reduction or increase in the offering

price.

bankers

at the information and

and/or company may well look

reasonably

think that

it has

already been

The investment

anticipated and

incorporated into the price.

-3131

state or to consider new information up to the effective date

of

an offering would

due diligence.

n.2. However,

factual

almost certainly constitute

See Software Toolworks,

___ __________________

it

is

allegations,

plaintiffs'

not

a lack of

50 F. 3d at 625-26 &

responsibility

hypotheticals,

to

plead

sufficient

to

reasonably allow

the inference that the

defendants actually

did not consider the up-to-date data as of the offering date.

Cf.
___

Lefkowitz v. Smith Barney, Harris Upham & Co., 804 F.2d

_________
________________________________

154, 156

(1st

inferences

Cir. 1986)

as

(rejecting plaintiff's

insufficiently

grounded

in

suggested

fact).

Here,

plaintiffs provide none.

Plaintiffs'

that

the "Stock

initial $19

these

Amended

Complaint

Offering Price was

per share price

price of $12 per

that

1993

[as of

twice lowered

from its

May 1992] to

its final

share" in August 1992.

downward

adjustments

in

acknowledged

Plaintiffs suggest

price

reflected

the

disappointing results for the second quarter of 1992, but not

the negative

information from the

first seven weeks

of the

third quarter of 1992.

from the first seven

However,

plaintiffs' claim that data

weeks of the third quarter

was ignored

both lacks factual support and is belied by context.

Not

only did

Computervision and

the underwriters

lower the initially planned stock offering price by more than

30%, but the Prospectus abounds with warnings that the market

price might dip lower once trading commenced.

-3232

The Prospectus

explicitly

involved

warned

that

an

investment

high degree

of

risk;

highly leveraged;

that it

environment and that

customers; and that

losses

for at

essentially

price

a forecast

of

years.

securities

was

highly competitive

not be accepted

by

history of significant

As discussed,

future earnings.

price is

Reducing

the

from $19 to $12 showed a reduced expectation of future

___________________

earnings.

that this

second

its products might

least three

the

that Computervision

operated in a

there had been a

in

Plaintiffs give us

reduction in

quarter

no basis from

price factored in

results,

but

did

not

which to infer

the disappointing

incorporate

the

information

from

quarter.15

the

first

Additionally,

potential price

seven

weeks

the cautionary

of

the

language

drops belies plaintiffs' claim

third

as

to

that certain

disappointing third quarter information was not considered.

____________________

15.

Plaintiffs'

own Proposed Complaint

meetings were held up to August

states that pricing

13, 1992, the day before the

offering, and that the $12 price was established at a meeting

on that

day.

Similarly, the

price recommendations

independent underwriters were not delivered

of the

until August 13,

1992.
Plaintiffs, in
Complaint,

paragraphs 51 through 60

purport

Computervision

to

describe the

pricing

and its

underwriters

went through.

paragraphs mention an IPO

one of the pieces
___
their

of the Proposed

work.

that
These

Plan prepared by Computervision as

of data considered by the

due diligence

process

The Proposed

underwriters in
Complaint alleges

that the IPO Plan did not fully reflect the information as to
the first seven weeks of the third quarter of 1992.

However,

we cannot
the IPO

reasonably infer that the

plan

(or other

company
_______

alleged shortcomings of

forecasts) mean

that

the

underwriters did not consider up-to-date information.

____________

-3333

Furthermore, the factual

provides

draw.

no support

for

Here the offering

context of the

the inference

offerings

plaintiffs seek

was conducted pursuant

to

to a firm-

commitment underwriting, in

the initial risk that

too

high.16

the offering prices may have

been set

as

and DR

Computervision stock

had

bore all

Further,

Shearson Holdings

offerings,

which the underwriters

part

of

the

Holdings agreed

holdings for

thereby decreasing any

offering,

to lock up

an entire year

both

their

after the

incentive they would have

to inflate the short-term stock price as of the offering

date.

It

complaint

allowed

has

been

in this

full

over

three years

case was filed

discovery.

In

since

and plaintiffs

this

the

first

have been

procedural

setting,

____________________

16.

Although one of
___

the lead underwriters, Shearson

Lehman

Brothers,

was

affiliated

Computervision,

with a

principal

the offering also

shareholder of

involved three other lead

________________

underwriters, Donaldson Lufkin, First Boston, and Hambrecht &

____________
Quist

(who also

played the

underwriters).

Each

capital at risk

in the

Corporate Finance,
_________________

roles of

had both

monetary

offerings.

at 351.

qualified independent

Cf.
___

and

reputational

Brealey and

Further, the

lead underwriters

represented a syndicate of over forty underwriters.

not enough here
diligence on the
Bloomenthal,

for us

to draw an

part of the underwriters.

(1996)(underwriters look
offering

inference of

Going Public Handbook,

_______________________

will be

for a

There is
inadequate

Cf.
___

Harold

3.04[4],

at

price that assures

oversubscribed); James

Myers,

D. Cox,

S.
3-20

that the
Robert W.

Hillman and Donald C. Langevoort, Securities Regulation, 236_____________________

37

(1991) (empirical

offering

prices tend

research
to

on IPOs

be systematically

short-term aftermarket prices, arguably

want both insurance

shows that

lower than

-3434

the

because underwriters

against lawsuits and to ensure

offering is oversubscribed).

initial

that the

plaintiffs'

the

bald and

underwriters

information

is

factually unsupported

failed

not,

to

standing

obtain

alone,

and

hypothesis that

use

up-to-date

sufficient.

Cf.
___

Driscoll, 985 F.2d at 48 (dismissal proper where after almost

________

two years

of litigation

plaintiffs' complaint contained

no

factual allegations to support its legal conclusions); Dewey,

_____

694 F.2d

at 3-4

(dismissal proper where

plaintiff, despite

having eight months to make original complaint more specific,

was not

able to

"fill in

bland allegations");

Gooley,
______

multiple opportunities

conclusion,

averments" is

the gaps" in

851 F.2d at 515

to finetune

unanchored in

the asserted

a "skeletal

any

the

(if, "despite

complaint, a

meaningful

set

basis for relief,

set of

of

naked

factual

dismissal may

follow).

In essence, all

that,

by the

prices

close of

the Proposed Complaint alleges

trading on

of Computervision's

September 30,

securities

is

1992, the

fell because

of

an

announcement on September 29 that third quarter earnings were

going to be lower than expected.

the

However, the assertion that

future fell below projections is not enough in itself to

render the projection actionable.

(failure

to

meet

inference" that

made);

cf.
___

(describing

performance

projection

See Kowal, 16 F.3d at 1278

___ _____

projections

lacked a

Virginia Bankshares,
____________________

the

type of

hard,

-3535

"supports

reasonable basis

501

U.S.

at

no

when

1092-94

contemporaneous facts

that

could

show a

false).

statement about

A ruling to

nuisance litigation.17

viewing the

is real.

2.

The district court

to be

risk of

was justified in

pricing claims as

no more

to seek a warranty of the accuracy of price,

therefore as

Supp. at 720.

of price

the contrary would magnify the

Proposed Complaint's

than an attempt

and

the adequacy

insufficient.

Computervision II,
_________________

Rule 12(b)(6) may set a low

914 F.

threshold, but it

Gooley, 851 F.2d at 514.

______

Mid-Quarter Information
_______________________

Plaintiffs

third

quarter

information was

of

assert that,

1992,

known, and

the

as of

week seven

following

should have been

of the

intra-quarterly

disclosed: (i)

third

quarter domestic

bookings18

were only

Computervision's internal forecasts

_____________________________________

for

about 24% of
_______

those

weeks, and

significantly below bookings at comparable points in the past

five quarters; (ii) Computervision's international sales were

____

also short of internal forecasts;

_________________________________

and (iii)

Computervision

had a shortfall of $40 million in visible19 orders

_________________________

from its
________

internal forecasts and IPO Plan.

_______________________________

____________________

17.

This

risk would be heightened in the case of new-growth

high-technology
prices.

companies

that

have

especially

volatile

See, e.g., James Bohn and Stephen Choi, Fraud in the

___ ____
____________

New-Issues Market: Empirical Evidence on Securities Class

_____________________________________________________________
Actions, 144 U. Pa. L. Rev. 903, 908 (1996).
_______

18.

A "booking" represents the receipt of an order.

19.

"Visibility"

orders and

the

is a

measure of

likelihood that

the status

they

will be

of potential
turned

into

revenue producing sales.

-3636

But

without

alleged

more, do

Prospectus.

not

deviations

produce a

from internal

duty

forecasts,

to disclose

in

the

We recognize that investors may find information

about

firm's internal

important.

See
___

projections

and

Frank H. Easterbrook and

forecasts to

Daniel R. Fischel,

The Economic Structure of Corporate Law

___________________________________________

Virginia Bankshares,
____________________

501

U.S.

at

be

305 (1991);

1090-91

(statement

cf.
___

of

opinion by a board of directors can be materially significant

because investors know that directors usually

and

expertise far

Nonetheless,

mandatory

the

federal

disclosure

not forecasts.

at 305-06.

exceeding that

securities

See Easterbrook and

___

is not

normal investor).

laws

of backward-looking

A firm has

projections, but

of the

have knowledge

focus

the

hard information,

Fischel, Corporate Law,

_____________

the option to disclose

required

on

to do

so.20

its internal

See In re
___ ______

Lyondell Petrochemical Co. Sec. Litig., 984

_______________________________________

(9th Cir.

F.2d 1050, 1052

1993); In re Convergent Technologies Sec. Litig.,

__________________________________________

948 F.2d 507, 516

(9th Cir. 1991)

(as amended on denial

of

rehearing en banc); see also Arazie, 2 F.3d at 1468; Wielgos,

___ ____ ______
_______

892

F.2d at

obligation

516.

upon

"The federal

an

issuer

to

securities laws

disclose

impose no

forward-looking

information such as internal projections, estimates of future

____________________

20.

That

internal forecasts

are disclosed

to underwriters

does not make them any more susceptible to a duty to disclose

to the investing public.

See Lyondell, 984 F.2d at 1053.

___ ________

-3737

performance, forecasts, budgets, and similar data."

Shaw, 82
____

F.3d at 1209.

Plaintiffs' nondisclosure claims fail

because they

base their allegations solely on discrepancies between actual

(but

undisclosed)

Computervision's

intra-quarterly

undisclosed

internal

information

projections.

VeriFone I, 784 F. Supp. at 1484 (in order to

__________

and

Cf.
___

assert a valid

claim under the securities laws, plaintiffs must "establish a

link

between a

misleading statement

or implication

actual fact, not

a speculation about

prospectus and an

future,

omitted from

intra-quarterly

the document").

results

lagged behind

The mere

in the

the

fact that

internal projections

does not, without more, require disclosure.

See In re Worlds
___ ____________

of Wonder Sec. Litig., 35

______________________

(9th Cir. 1994),

F.3d 1407, 1419

cert. denied, 116 S. Ct. 185 (1995).

_____ ______

Plaintiffs

referring

to

SEC

229.303(a)(3)(ii)

try

to

buttress

their

Regulation

S-K, Item

303,

which

uncertainties" about

requires

results of

that

"known

claims

17

by

C.F.R.

trends

operations be disclosed

and

in

the management's

SEC filings.

the

SEC's

states

that

disclosed.

II,
__

discussion and analysis section

This rule, however,

instruction

to

17 C.F.R.

has to be read in light of

this paragraph

forward-looking

information

229.303(a),

11 F.3d at 870; Lyondell, 984

________

-3838

of certain

which

need

expressly

not

be

Instruction 7; VeriFone
________

F.2d at 1053.

Given this

context, the

phrase "known trends and

be understood

as referring to those

hard

information

undisclosed

hard

alone.21

Here,

information

pled

uncertainties" has to

trends discernible from

unlike

did

in

Shaw,
____

not

indicate

the

"substantial likelihood that the quarter would turn out to be

an

extreme

departure

uncertainties."

nondisclosures

82

from

F.3d

at

fell neither

publicly

known

1194.

Thus,

within the

trends

the

ambit of

and

alleged

17 C.F.R.

229.303(a) or Shaw.
____

only

one

Indeed,

of the

that

plaintiffs

nondisclosure

as to

three alleged

compare

to

domestic bookings.

nondisclosures, the

hard

data

is

the

Plaintiffs assert

that

domestic bookings as of week seven of the third quarter

of 1992

prior

were lower

five

than the

quarters.

But

corresponding numbers

the

Prospectus

for the

explicitly

represented that Computervision suffered

cyclical variations

in

and

quarterly

results,

with

its first

results typically

being lower than

fourth quarters.

Given

comparison of

quarter

those of the

second and

those fluctuations, the

meaningful

Computervision's

numbers is to those of the

third

third quarter

1992

third quarter of 1991.

booking

See Capri
___ _____

____________________

21.

The

SEC

information" from

itself

distinguishes

"presently

known data

"forward-looking
which will

impact

upon future operating results, such as known future increases

in

the

C.F.R.

costs of

labor or

materials."

Instruction

7, 17

229.303(a).

-3939

Optics Profit Sharing v. Digital Equip. Corp., 950 F.2d 5, 10

_____________________
____________________

(1st Cir. 1991).

And that comparison is unavailing.22

As we said in Shaw, "we reject any bright-line rule

____

that

an issuer engaging in a public offering is obligated to

disclose

interim

operating

progress

whenever

it

quarter's results

1210.

quarter

and

particularly

causation

noted in

information

--

from

claim

that

that when

only

is

seven

more

ultimate events

forewarns, a nondisclosure

possibility

mid-quarter

predictive23)

remote

of which

should

quarter

in

that

the

82 F.3d

at

the allegedly

weeks into

results

claim becomes

the issuer

the

the market."

Shaw
____

(here

where

from the

for

perceives the

may disappoint

We further

undisclosed

results

were

in

time

the

not

and

it supposedly

"indistinguishable

have

divulged

its

internal predictions about what would come of the undisclosed

information."

quarter

of

Id.
___

That

1992 did

in

quarterly results

fact

turn out

to

for

the third

be

lower than

expected

is not enough to

produce the inference

that as of

the offering date Computervision had hard mid-quarter results

____________________

22.

The relevant numbers are

bookings as

of week seven

$3.3 million for

23.

of 1992 and

-- a difference of

1% of the budgeted revenues

for that

This difference was immaterial as a matter of law.

Indeed,

quarter

of the third quarter

the same period in 1991

$800,000, or less than

quarter.

$2.5 million in domestic sales

the Prospectus

results are

substantial portion

not

specifically warns

necessarily

of both orders

-4040

predictive because

and shipments

occur in the last month of the quarter.

that earlya

typically

that would have predicted a material departure in the end-of-

quarter results.24

3.

Backlog
_______

Plaintiffs

separately

allege that

the Prospectus

contained three material misstatements and omissions relating

to backlog.

One

paragraph of the Prospectus is

the subject

of these claims:

Shipments are generally made within 30

_________________________________________
days of receiving an order.
___________________________

In light of

the short time between order and shipment

of

the

Company's products,

the Company

___________
generally has relatively little backlog
_________________________________________
at any given date, and the
__________________

Company does
____________

not
believe
that
backlog
is
_________________________________________
representative of potential sales for any
______________
future period (emphasis added).

Plaintiffs say that: (i)

Computervision was required to, but

failed to disclose the dollar

Computervision

significant

amount of backlog orders; (ii)

misrepresented

to

its

that

results;

backlog

and

(iii)

data

the

"shipments are generally made within 30 days

was

not

statement,

of receiving an

____________________

24.

An issuer is not required to "disclose interim operating

results for the quarter

possibility

that the

market . . . .
businesses

in progress whenever it
quarter's results

Reasonable

fluctuate,

and

investors
that

past

may

perceives a

disappoint the

understand
success

is

that
not

guarantee of

more of the

that the quarter

in progress

will turn out for

Shaw, 82
____

same.

the issuer to be worse

F.3d at 1210.

It is

progress will be an

results
available

which

could

information"

is always

at the time

possession of [hard] nonpublic

in

There

of an

only when "the

under the securities laws.

issuer is in

information that the

anticipated
that

investment

than anticipated."

extreme departure from

be

some risk

disclosure

Id.
___

-4141

based
might

quarter

the range of
on

currently
be required

order,"

was false.

given day, of orders

been shipped.

"Backlog"

is the dollar

amount, on any

received for which product has

We address these

not yet

claims in turn and

find no

error in the district court's rejection of them.

(i) Dollar Amounts of Backlog

_________________________

Item

prospectus

101

of

date and

fiscal year."25

added).

S-K

requires

that

disclose "to the extent material, . . .

_________________________

dollar amount of backlog

recent

Regulation

as of

a comparable

date in

that a

reasonable

important.

See Shaw, 82
___ ____

the preceding

229.101(c)(1)(viii)

is material when there is

likelihood

[t]he

orders believed to be firm, as of a

17 C.F.R.

Information

investor

would

(emphasis

a reasonable

consider

F.3d at 1219; Wielgos, 892

_______

it

F.2d at

517.

The Prospectus

disclosed

that

backlog levels

usually low.

But, plaintiffs argue that that

not enough.

They

were

argue that

so, they say, because

1992 was unusually low.

_________

comparing

the backlog

disclosure was

the specific backlog

________

material and hence required

were

to be disclosed.

numbers

This is

backlog entering the third quarter

of

Plaintiffs support their argument by

entering

the third

quarter of

1992

____________________

25.
1.

Computervision issued its securities pursuant to Form SItem 11(a) of

the Instructions to Form S-1

requires the

prospectus to furnish the information required by Item 101 of

Regulation

S-K.

Liability

information required to

for failure

be stated by

Section 11 of the Securities Act.

06

to

disclose

Item 101 arises

the
under

See Shaw, 82 F.3d at 1204___ ____

(describing the statutory scheme in the context of a Form

S-3 shelf offering).

-4242

($26,875,000)

to

that

entering

the

second

quarter

($39,897,000) -- a difference of approximately $13 million or

thirty-two percent.

There

As

Item

is a threshold flaw in plaintiffs' argument.

101(c)(1)(viii)

itself

says,

the

appropriate

comparison

is

not

to

the

numbers

from

an

immediately

preceding quarter, but to those from a comparable date in the

preceding

fiscal

This

particularly

is

specifically

year.

17

C.F.R.

true

here,

229.101(c)(1)(viii).

where

the

Prospectus

stated that Computervision tended to experience

seasonal

declines

quarters.

See
___

in

revenues

Capri Optics,
_____________

in

its

950

first

F.2d

at

and

third

10

(where

defendant's business was seasonal,

it was not meaningful for

plaintiffs to compare results for

the quarter in question to

those for the immediately preceding quarter).

Even

appropriate,

specific

if

quarter-to-next-quarter comparisons

Computervision's

failure

to

provide

information is nonetheless not actionable.

were

more

Roughly

adjusting the numbers for seasonality, they show only a minor

drop

in initial

backlog

levels (as

fractions of

budgeted

quarterly revenues) between the

second and third quarters of

1992.26

few percent is

This minor drop

of a

not adequate

____________________

26.

As the

defendants point

meaning only if
initial
1992

they are

out, plaintiffs' numbers

adjusted for

backlog levels for the second

were

$39,897,000

Computervision's

and

While

and third quarters of

$26,875,000,

budgeted revenues

-4343

seasonality.

have

for those

respectively,
quarters were

to support the

between quarters

claim that the

was

difference in backlog
__________

material and

backlog numbers to be disclosed.

hence required

levels

specific

Where a variable, although

material, is of only minor predictive value, disclosure of

rough estimate of that variable's

for more specific disclosure.

value can obviate the need

Cf. Shaw, 82 F.3d at 1211 n.21

___ ____

(disclosure of a "soft" projection may, in some cases, render

the

"hard" information underlying

as a matter of fact or of law).

rough

estimate

may

keep

the projection immaterial

Indeed, disclosure of only a

investors

from

attaching

undue

importance to minor shifts in the variable's value and avoids

the

risk of

"burying

the [investors]

in

an avalanche

of

trivial information."

San Leandro Emergency Medical Group

_____________________________________

Profit Sharing Plan v.

___________________

Philip Morris Cos., 75 F.3d

__________________

801, 810

____________________

$159,500,000
initial

and

$121,000,000,

respectively.

When

the

backlog levels for the two quarters are looked at as

fractions of
result is

the budgeted

revenues for those

quarters, the

25% for the second quarter and 22.2% for the third

quarter -- a difference of less than 3%.

The district court, in Computervision II, noted that the
_________________
Proposed Complaint calculated initial
second and third quarters
revenues
________
(for

(for

the

the second

third

quarter),

backlog levels for the

of 1992 as a percentage
quarter) and

The district

court ruled

insufficient basis
knowing the

forecasted revenues
___________________

respectively,

difference between the two percentages.

that this

and

found

9%

914 F. Supp. at 721.

9% differential was

to support plaintiffs'

degree to

of actual
______

claim.

which Computervision's

Id.
___

an
Not

forecasts may

have been systematically biased vis-a-vis actual results, and

not

having

parties,
number.

been

we

provided

are reluctant

Cf. Wielgos,
___ _______

892

with
to

this

information

endorse

F.2d at

estimates were systematically biased).

by

the plaintiffs'

515

the
9%

(defendant's cost

Nevertheless, we note

that our conclusion would not be different whether we used 3%

or 9%.

-4444

(2d

Inc.,
____

Cir. 1996)

(quoting TSC Industries, Inc.

_____________________

v. Northway,
_________

426 U.S. 438, 448 (1976)); Convergent, 948 F.2d at 516

__________

(same).

In

sum,

plaintiffs

Computervision's general statement

low,

without

materially

the

disclosure

misleading

offering.

Cf.
___

(1st Cir.

1990) (en

being

reason

as

Backman v.
_______

sold below

of

have

no

that backlog was

of

specific

the

effective

was not

that

usually

numbers,

date

Polaroid Corp., 910

______________

banc) ("Disclosing that

cost

claim

of

F.2d 10,

was

the

16

Polavision was

[materially] misleading

by

of not saying how much below."); Worlds of Wonder, 35

________________

F.3d at 1419.

(ii) Immateriality of Backlog

________________________

Plaintiffs

that

"the

Company

argue that

the Prospectus,

does

believe

not

representative of potential sales

that

in stating

backlog

is

for any future period," in

effect falsely suggested that

Computervision's results.

The statement

information

on

backlog

backlog was not significant to

Plaintiffs misread the Prospectus.

in the Prospectus does

is

insignificant

not say that

or

immaterial.

Instead, it says that such information should not be taken as

representative.

should not

take

The

statement cautions investors that

backlog levels

results for future periods.

one other statement on

as

necessarily

In addition, there is

the very same page of

-4545

they

predicting

at least

the Prospectus

that warns investors that

data available early in

a quarter

(i.e., opening backlog) is not necessarily a strong predictor

____

of quarterly results because:

substantial

portion of

orders and shipments

the

last

Therefore

month
. .

the Company's

typically occur
of

each

unexpected

in

quarter.
delays

or

actions . . . could result in significant

quarterly

fluctuations in

the Company's

operating results.

Hence, when read in context,

Computervision's statement that

backlog was not representative of sales was plainly a warning

that

investors should

backlog

not

draw too

many conclusions

from

figures, and not a statement that backlog itself was

immaterial or insignificant.

(iii) Shipments Within Thirty Days

____________________________

Plaintiffs' final

district

court

erred

in

argument on backlog is

concluding

that

the

that the

statement

"shipments are generally made within thirty days of receiving

an order" was not materially false or misleading.

point

the

to a backlog aging

analysis from the

third quarter of 1992,

Plaintiffs

seventh week of

which indicates that

39% of the

backlog balance, at that time, was to be shipped in more than

thirty

days.

The first

problem with the

argument is that,

although plaintiffs attack

their

claim solely on data

the word

"generally," they

from one portion

base

of one quarter

and fail to allege anything meaningful about Computervision's

general practice.

Second, even if one portion of one quarter

-4646

could

be

taken

as

representative,

plaintiffs'

factual

allegations

Plaintiffs

would

not

allege that

support

misrepresentation claim.

approximately

sixty-one percent

of

orders were shipped out in less than thirty days, six percent

were shipped

three

in between thirty

percent

were

shipped

and sixty days,

in

more

than

and thirty-

sixty

days.

Computervision's statement said that shipments were generally

made

within thirty days of receiving an order, not that they

were always

made within thirty days.

of orders in one

thirty days

portion of one quarter were

is perfectly consistent with

orders were generally shipped within

no material misrepresentation.

4.

CADDS 5
_______

That sixty-one percent

shipped within

the statement that

thirty days.

There was

Plaintiffs' final allegations

concerning

software

CADDS

product

5,

and

business strategy.

made

two sets

respect to

as

Computervision's

of material

the

that the

misstatements or

CADDS 5: (i) the

in "volume,"

allege

statements

then-newest

centerpiece of

Plaintiffs

of June 1992, CADDS

shipped

the

focus on

CAD/CAM

firm's

new

Prospectus

omissions with

Prospectus misrepresented that,

5 was a

"successful product," being

i.e., to
____

thousands of

customers; and

(ii) the Prospectus materially overstated CADDS 5's potential

for

success

when,

in

fact,

the

-4747

product

was beset

with

problems.

As with the backlog claims, we affirm the district

court's rejection of the CADDS 5 claims.

(i) Successful Product Shipping in Volume

_____________________________________

Plaintiffs'

Proposed

"Prospectus[] misrepresented

commercially

then

defined

shipping in

"`[v]olume

Complaint

alleged that

the

CADDS 5 as a successful product

volume."

commercial

The Proposed

shipments'"

Complaint

as

those

"involving several thousand customers."

Prospectus,

however,

neither

"successful product shipping in

"several

refers

own.

The

to

CADDS

as

volume," nor to shipments to

thousand customers;" those

the plaintiffs'

The language in the

descriptions are wholly

plain language of

the Prospectus

CADDS 5

2.0)

speaks for itself:

Beta testing

of

commenced

in March

Company's

largest

early

introduction

April

1992.

(release

1992 with 24
_______
CADDS

of the

customers
_________

and

sales

commenced

in

Commercial

shipments

of

CADDS 5 (release 2.0)

began in June 1992

and as of June 28, 1992, Release 2.0 had

_____________________________________
been shipped to 32 customers (emphasis
_______________________________

added).

Far from

alluding to thousands of

customers, the Prospectus

specified the
_________

number of

been shipped

-- 24 in the

commercial shipping stage.

customers to

whom the product

beta testing stage and

had

32 in the

Plaintiffs' assertion that

this

precise statement can be interpreted as implying that CADDS 5

was

being shipped, or was ready to be shipped, to thousands,

is baseless.

-4848

Further, the Prospectus

cautioning

large

investors that

the

volume of customers) had

and that the

example,

product might need

the Prospectus stated

was replete with

market in

language

general (i.e.,
____

not accepted CADDS

5 as yet

further enhancements.

For

that although Computervision

hoped to replace its "declining hardware revenues and margins

with sales

of higher margin CAD/CAM

software products . . .

[n]o assurance can be given that the Company will be

_____________________________________________________________

successful in achieving this objective" (emphasis added).

______________________________________

In

addition, the Prospectus warned that "customer acceptance of

_______________________

CADDS 5 is critical"
______________________

to continued

customer

purchase

of

Computervision's

the

existing software

product, CADDS

4X, that

"delayed release of CADDS 5 (Release 2.0) resulted in

_______________________________________________________

customers delaying product purchases" and that:

____________________________________

the CAD/CAM industry is

rapidly changing

characterized by

technology and frequent

________

new product introductions and product

_________________________________________
enhancements .
____________
no assurance
_____________

. . [and] [t]here can be

_______________
that

the

Company

will

continue to be successful in identifying,

developing and marketing new
enhancing
[or]

its

existing

products or

products . . .

that new customers will change to

___________________________________

the Company's new products even if they

_________________________________________
are judged to be
superior
______________________________

(emphasis

added).

Computervision's statement that it had commercially

shipped

CADDS 5 software to

32 customers must

be viewed in

the context of the Prospectus' numerous cautionary statements

that CADDS

5 might

never be

accepted by

the market.

See
___

-4949

Shaw,
____

82

F.3d

at

1213

(if

statement

is

couched

in

cautionary

language

that

particular

inference,

materially

misleading may

context confirms

might be

disclaims

claim

that

fail as

the

drawing

the

a matter

of

statement

was

of law).

The

that any possible misleading inference that

drawn from

Computervision's statement

is properly

deemed immaterial as a matter of law.

(ii) Misleading Optimistic Statements

________________________________

Plaintiffs' final claim

statements in

is that certain optimistic

the Prospectus regarding

the development

and

commercial prospects of CADDS 5 were materially misleading in

light of

the

Computervision's alleged nondisclosure

product was

facing.

See,
___

e.g., Hanon
____ _____

Corp., 976 F.2d 497, 502 (9th Cir. 1992).

_____

of problems

v. Dataproducts
____________

problems

duty

with

to

disclose

a product

may

technical

or

developmental

arise where

company makes

strongly optimistic or concrete statements about that product

that

are in

stark contrast

Serabian, 24 F.3d at
________

where there

were

was a

hearing

to its

internal reports.

Cf.
___

363-65 (sustaining Section 10(b) claims

"contrast between what

internally

. . .

and what

company officials

the

company

was

telling the public at the same time" (emphasis in original)).

________________

But,

in this

Prospectus

case,

were

not

the statements

so

optimistic

about

as

CADDS 5

to

be

in

the

materially

misleading about the existence of developmental or commercial

-5050

difficulties with CADDS 5.

frequently

alludes to the

release of a new product.

by the

plaintiffs are

"to broaden the

well

as attract

believes

To the contrary,

uncertainties associated with the

The

key statements

identified

that Computervision expected

number of customers in

new

the Prospectus

customers,"

that CADDS 4X and CADDS 5

CADDS 5

existing accounts as

and that

"Computervision

are likely to be used in

tandem by major accounts in

statements, whether

the foreseeable future."

read in isolation

or in the

Computervision's numerous warnings that

accepted

by

the

enhancements,27

market

suggest,

at most,

will eventually gain acceptance

is not

unusual for a company

VeriFone I,
__________

that

skilled

784 F. Supp.

investors

and

context of

CADDS 5 might not be

might

the

need

hope

further

that CADDS

in the market.

Such

aware

that

a hope

releasing a new product.

at 1484 ("securities

are

These

Cf.
___

laws presume

corporation's

performance with a new product . . . is unlikely to replicate

past successes").

to

Computervision's statements did

the level of optimism

or certainty that

not rise

would make them

materially misleading in the absence of disclosure of initial

developmental problems the product was

facing.

Cf. Shaw, 82
___ ____

____________________

27.

The Prospectus also states that "a significant delay" in

the

availability

Computervision
"have
"there

of

CADDS

would

adversely

affect

and that many of Computervision's competitors

greater financial

and operating

resources" and

that

can be no assurance that competitors will not produce

equivalent or superior products."

-5151

F.3d

at

1219

expressing

trigger

at

a duty

n.33

most a

to

(cautiously

hope for

optimistic

statements,

positive future,

update); San Leandro,

____________

(subdued generally optimistic statements

75 F.3d

do not

at

811

constituted nothing

more than puffery and were not actionable); In re Time Warner

_________________

Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993) (statements
_________________

at issue

that would

lacked "definite positive projections"

require later

Ct. 1397 (1994).

actionable.

correction), cert. denied,

_____ ______

Further, the statements here are

less enthusiastic than the

found

of the sort

114 S.

markedly

statements that other courts have

See In re Apple Computer Sec. Litig., 886

___ ________________________________

F.2d 1109, 1118-19 (9th Cir. 1989) (company executives stated

that new

computer product would be

the first year

out of

"phenomenally successful

the chute" and

would make

"growth before this look small"), cert. denied, 496

_____ ______

(1990); Hanon,
_____

stated

976 F.2d

that new

product had

high acclaim from users

features were

popular

at 501-02 (company's

received "strong

in [the

[it] .

company's] line").

statements of hope, couched

. .

U.S. 943

press release

interest and

and analysts alike" and its

"rapidly making

company's

special

one of the

most

Computervision's

mild

in strongly cautionary language,

cannot be said to have become materially misleading.

IV.

Conclusion
__________

The decision of the district court is affirmed.

________

-5252