Glassman v. Computervision Corp.

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. Marder,

S. Tara Miller, Hale and Dorr, Bruce D. Angiolillo, Nicholas Even,

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

Dennis M. Kelleher, and Skadden, Arps, Slate, Meagher & Flom, were on

brief, for the defendants-appellees.

Thomas G. Shapiro, with whom Michelle Blauner, Shapiro Grace

Haber & Urmy, Glen DeValerio, Norman Berman, Michael Lange, Berman

DeValerio & Pease, Daniel W. Krasner, Peter C. Harrar, Wolf

*Of the Seventh Circuit, sitting by designation.

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

Garland, and Rabin & Garland, were on brief, for the plaintiffs-

appellants.

July 31, 1996

LYNCH, Circuit Judge. Computervision Corporation, LYNCH, Circuit Judge.

a Massachusetts high technology company, made an initial

public offering ("IPO") of securities on August 14, 1992.

Six weeks later, on September 29, 1992, Computervision

announced that its revenues and operating results for the

third quarter of 1992 would be lower than expected. The

prices of Computervision's stock and notes fell sharply. On

the day after this announcement, the first investor suit was

filed. Computervision and the IPO underwriters were sued

under Sections 11 and 12(2) of the Securities Act of 1933

(the "Securities Act"). The investors also sued

Computervision's principal officers and directors, alleging

controlling person liability under Section 15 of the

Securities Act. Plaintiffs asserted that they represented

the class of investors who purchased common stock or notes

between August 14, 1992 and September 29, 1992. The district

court, after lengthy pre-trial proceedings and full

discovery, both dismissed the case for failure to state a

claim and denied as futile plaintiffs' 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

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12(b)(6) threshold. They say the Proposed Complaint

adequately alleged violations of the securities laws in that

the Prospectus1 for the IPO contained actionable

misrepresentations,"half-truths" or omissions regarding: (1)

the factors considered in determining the prices for the

offerings; (2) certain mid-quarter information for the third

quarter of 1992; (3) the importance of Computervision's low

backlog; (4) the latest release of Computervision's key new

software product, CADDS 5, which Computervision said was

commercially shipping when (plaintiffs say) it 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 a leading supplier of work

station-based computer aided design and computer aided

manufacturing ("CAD/CAM") software and related services to

the mechanical design automation market. Its software

products are utilized in the design of complex parts and

assemblies for the automotive, aerospace, and other

mechanical industries. Its products enable 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.

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the time required for designing, engineering and

manufacturing a product before market introduction. This

"time-to-market" is a key factor in ensuring profitability

and competitiveness.2

The company was organized in 1972 under the name

Prime Computer, Inc.3 Until 1988, Prime was in the business

of making and selling computer systems. In 1988, Prime

acquired Computervision Corporation, a leading supplier of

CAD/CAM hardware and software products. In 1989, the company

was acquired by DR Holdings, and shifted its focus from

computer systems to the CAD/CAM market. A principal

shareholder of DR Holdings, Shearson Holdings,4 provided the

company with a $500 million bridge loan in connection with

the acquisition. That bridge loan was intended to be repaid

with the proceeds from a high-yield bond offering. However,

that offering never occurred and Computervision instead

2. At the time of the IPO, Computervision had an installed

base of 58,000 units, predominantly in North America and

Europe. In 1991, international revenues accounted 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 the parent company of a co-lead

underwriter for the IPO, Shearson Lehman Brothers, Inc. In

addition to Shearson Holdings and its affiliate, Shearson

Lehman Brothers Capital Partners II, L.P., the principal

shareholders of DR Holdings were J.H. Whitney & Co. and

affiliates and the Prudential Insurance Company of America

and affiliates.

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refinanced the bridge loan with $500 million in notes. In

December 1991, interest on the notes was itself converted

from cash payments to payments "in kind," i.e., additional

notes.

The proceeds from the IPO were intended to repay

half the principal amount, of the notes held by Shearson

Holdings, with the rest of the debt to Shearson Holdings to

be converted to Computervision common stock or written off by

Shearson. Both Shearson Holdings and DR Holdings signed

"lock-up" agreements, promising not to sell their equity

positions in Computervision until a year after the IPO.

Plaintiffs posit that Computervision's worsening financial

condition5 placed Shearson Holdings' investment in jeopardy

by increasing the likelihood that Computervision would

default on its debt to Shearson Holdings. Allegedly, the

solution 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 and a half years prior to the IPO,

Computervision suffered close to $1 billion in losses. In

1989, its net losses were $281 million; in 1990, $71 million;

in 1991, $461 million; and for the first six months of 1992,

$143 million. Computervision's CAD/CAM revenues for the

first six months of 1992 decreased by 5% from the

corresponding period in 1991. However, software revenues

from the CADDS line increased 10% from the corresponding

period in 1991.

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On August 14, 1992, Computervision sold $600

million of securities in a registered IPO. The offering was

composed of 25 million shares of common stock at $12 a share

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

Notes due 1997; and $175 million of 11-3/8% Senior

Subordinated Notes due 1999. The Computervision IPO was a

firm-commitment underwriting, in which the underwriters

purchased the securities from the company and assumed the

risk that the market would not accept the securities at the

price set. See Shaw v. Digital Equipment Corp., 82 F.3d

1194, 1200 n.1 (1st Cir. 1996). Shearson Lehman Brothers,

Inc., Donaldson, Lufkin & 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 September 29, 1992, six weeks after the

offering, Computervision announced that its revenue and

operating results for the third quarter of 1992 would be

below expectations. Within a day, the stock price fell 30%,

to $6.25, and the notes were trading at approximately 8%

below face value.

On October 22, 1992, Computervision quantified its

results for the third quarter, which ended on September 27,

1992. Computervision had suffered a net loss of roughly $88

million, including a $25 million non-recurring charge

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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. In addition to claims under

Sections 11, 12(2) and 15 of the Securities Act, plaintiffs

asserted a violation of Section 10(b) of the Securities

Exchange Act of 1934 and negligent misrepresentation.

The eighteen actions were consolidated into one

class action and on June 11, 1993, plaintiffs filed a

Corrected Supplemental Consolidated Amended Class Action

Complaint (the "1993 Amended Complaint").6 Among other

things, the 1993 Amended Complaint alleged that the

Prospectus: (i) distorted Computervision's earning trends;

(ii) omitted disclosure of known uncertainties impacting upon

Computervision's operating results; (iii) omitted disclosure

of the increasing likelihood that Computervision would not

meet its internally projected results for 1992; (iv) omitted

6. The 1993 Amended Complaint formally withdrew any claims

of fraud under section 10(b). Nevertheless, 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).

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disclosure of known declines in the demand for

Computervision's services and products; and (v) omitted

disclosure of software development problems.

On November 23, 1993, the district court heard

argument on defendants' motion to dismiss. While the motion

was under advisement, discovery commenced. Discovery was

extensive. Plaintiffs reviewed more than 130,000 documents

and deposed over twenty witnesses. Plaintiffs have

represented that, 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 a sliver of the claims,

primarily on the grounds that they failed to satisfy the

requirements of Fed. R. Civ. P. 12(b)(6) and 9(b). See

Computervision I, 869 F. Supp. at 64. The district court

noted that the Prospectus warned investors of the risks

involved and that, with one exception, the alleged

misrepresentations were made in a context that adequately

"bespoke caution." Id. at 60-61. As to the omissions, the

court noted that these, 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. Defendants served

their opposition to that motion on February 24, 1995 and

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moved for summary judgment on the sole allegation surviving

the district court's 1994 decision.7 The parties then

entered into a Stipulation of Dismissal, dismissing, with

prejudice, the surviving claim. The stipulation was to be

effective the day after the district court ruled on the

motion for leave to amend.

On May 1, 1995, plaintiffs moved for leave to file

the Proposed Complaint at issue here. The court heard

argument on September 13, 1995, and a week later, on

September 20, denied the motion for leave to amend. The

basis for the denial was futility, in that the Proposed

Complaint failed to state a claim pursuant to Rule 12(b)(6).

The court dismissed the case, entered judgment for the

defendants, and promised a full opinion.

Plaintiffs filed their notice of appeal on October

20, 1995. Subsequently, on February 12, 1996, the district

court issued an opinion setting forth the rationale

underlying its September 1995 order. Computervision II, 914

F. Supp. at 717-22. The one 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 the parties' Rule 16.1(D) Joint Statement

filed December 28, 1994, plaintiffs' proposed amended

complaint and summary judgment motions were served but not

filed with the court.

-10- 10

that that claim failed because: (a) the Prospectus had not

warranted or insured the appropriateness of the securities'

prices; and (b) the 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 claims, relating to

backlog and CADDS 5, failed because they were based on

unreasonable inferences drawn by reading statements in the

Prospectus out of context.8 Id. at 719-22. This appeal

followed.

III.

Analysis

A. Standard of Review

This appeal lies from the district court's denial

of plaintiffs' motion to file an amended complaint. The

motion was denied after full discovery and after the

dismissal of an earlier complaint. The district court ruled

that amendment would be futile. The parties disagreed then,

as they do now, over the proper standard for analyzing this

motion to amend. See id. at 719. Plaintiffs argued that

leave to amend should be "freely given when justice so

requires," Fed. R. Civ. P. 15(a). Computervision II, 914 F.

8. Since there were no actionable misstatements or

omissions, the court held that the negligent

misrepresentation claim against the underwriters failed as

well. Computervision II, 914 F. Supp. at 722.

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Supp. at 719. Defendants embraced the more stringent

"substantial and convincing evidence" standard set forth in

Resolution Trust Corp. v. Gold, 30 F.3d 251, 253 (1st Cir.

1994). Computervision II, 914 F. Supp. at 719. The district

court did not decide the issue, finding the question academic

"as the plaintiffs cannot maintain this action under either

standard." Computervision II, 914 F. Supp. at 719.

Denial of a motion to file an amended complaint is

reviewed for abuse of discretion. See Romani v. Shearson

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

Mullane, 2 F.3d 1456, 1464-65 (7th Cir. 1993) (noting,

however, that the relevant pleading standards must be kept in

mind when applying the abuse of discretion standard). Rule

15(a) provides that "leave [to amend] shall be freely given

when justice so requires." Unless there appears to be an

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

delay, bad faith, dilatory motive, futility of amendment,

prejudice), we will not affirm it. 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

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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. The

district court's order explicitly states: "the motion to

further amend the complaint is denied as futile." "Futility"

means that the complaint, as amended, would fail to state a

claim upon which relief could be granted. See 3 Moore's

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

Vargas v. McNamara, 608 F.2d 15, 17 (1st Cir. 1979). In

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

standard of legal sufficiency as applies to a Rule 12(b)(6)

motion. 3 Moore's, at 15.08[4], at 15-81.

The Gold standard, which requires that proposed

amendments have substantial merit and be supported by

substantial and convincing evidence, is inapplicable for

several reasons. To date, it has only been applied where the

motion to amend is made after a defendant has moved for

summary judgment. See e.g., Gold, 30 F.3d at 253; Torres-

Matos v. St. Lawrence Garment Co., 901 F.2d 1144, 1146 (1st

9. It is unlikely that defendants could have been

prejudiced. Plaintiffs have represented that the allegations

of the Proposed Complaint do not require reopening discovery.

There is also no claim that defendants would need additional

time to change their trial strategy in light of the proposed

amendment. Cf. Tiernan v. Byth, Eastman, Dillon & Co., 719

F.2d 1, 4-5 (1st Cir. 1983) (finding prejudice even where

additional discovery was not necessary; the additional claims

"may well have affected defendants' planned trial strategy

and tactics" and both defendants and the court would likely

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

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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 (3d Cir. 1981); Artman v. International

Harvester Co., 355 F. Supp. 476, 481 (W.D. Pa. 1972). In

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

alter the shape of the case in order to defeat summary

judgment.

Here plaintiffs served the motion to amend before

defendants moved for summary judgment. Further, the claims

in the summary judgment motion were dropped by agreement of

the 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 analogy. This is not a

situation in which plaintiffs seek amendment solely to avert

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

F.3d 937, 944 (7th Cir. 1995). Nor is this a situation in

which it is rational to presume that defendants would be

prejudiced by amendment. 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. 1978)). Although, under these

circumstances, plaintiffs could be guilty of undue delay or

prejudice to defendants might exist, the district court made

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no such finding. Further, the district court did not rely on

Goldandits reasoningwas almostpurelya legalfutility analysis.

Thus, we look at whether the district court

correctly determined that the Proposed Complaint 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 to state a claim. See Motorcity of

Jacksonville, Ltd. v. Southeast Bank, 83 F.3d 1317, 1323

(11th Cir. 1996); see also Keweenaw Bay Indian Community v.

Michigan, 11 F.3d 1341, 1348 (6th Cir. 1993). Review is de

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

F.3d 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 mandatory disclosure requirements of the Securities

Act." Shaw, 82 F.3d at 1201. Section 11 imposes liability

on signers of a registration statement and on underwriters,

among others, if the registration statement "contained an

untrue statement of a material fact or omitted to state a

material fact required to be stated therein or necessary to

make the statements therein not misleading." 15 U.S.C.

77k(a). Section 12(2) provides that any person who "offers

or sells" a security by means of a prospectus or oral

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communication that contains a materially false statement or

that "omits to state a material fact necessary to make the

statements, in the light of the circumstances under which

they were made, not misleading" shall be liable to any

"person purchasing such security from him." 15 U.S.C.

77l(2).

As we said in Shaw, there is a strong affirmative

duty of disclosure in the context of a public offering. 83

F.3d at 1202. The same may be even more emphatically true in

an initial public offering, where the securities have not

before been publicly traded. Cf. Marcel Kahan, Securities

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

Duke L.J. 977, 1014-15 (1992). But the main thrust of

plaintiffs' claims is not based on any duty to disclose.

Rather, they say that this is primarily an 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 exercise of due diligence by the

underwriters, but that in fact the diligence exercised was

deficient in that the most current information was not

considered. In addition, plaintiffs contend that the

Prospectus omitted certain mid-quarter information for the

third quarter of 1992 and contained material misstatements or

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omissions regarding Computervision's backlog and the state of

its latest software product, CADDS 5.

The district court held that the Prospectus would

not bear the characterizations plaintiffs sought to place on

it, and that the allegedly actionable "representations" were

no more than unreasonable inferences drawn by plaintiffs and

unsupported by the surrounding language. Computervision II,

914 F. Supp. at 719. Plaintiffs argue that the district

court erred and that 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 their prices fell subsequent to the

offerings, and that the omission of mid-quarter information

claims reduce to nothing more than an argument that

Computervision was required to disclose its internal

forecasts. Plaintiffs' position, defendants say, is

untenable because the securities laws impose no duty upon a

company to either provide a warranty as to price or to

disclose internal projections. They also say that the

alleged misstatements concerning backlog and CADDS 5 are not

actionably misleading when considered in the context of the

Prospectus as a whole.

1. Pricing/Due Diligence Claims

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The Computervision IPO was unusual in one respect

which has bearing on plaintiffs' claims. Computervision had

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

Shearson Holdings, was affiliated with one of the co-lead

underwriters, Shearson Lehman Brothers. As a result, the

Prospectus informed investors:

Under the provisions of Schedule E to the

By-laws of the National Association of

Securities Dealers Inc. ("NASD"), when

NASD members such as Shearson Lehman

Brothers Inc., participate in the

distribution of an affiliate's

securities, the public offering price can

be no higher than that recommended by a

"qualified independent underwriter"

meeting certain standards.

Hambrecht & Quist (for the stock) and Donaldson Lufkin and

First Boston (for the notes) assumed the obligations of due

diligence as to the public offering prices, and the

Prospectus explicitly represented that they had done so.

This representation in the Prospectus is

significant in two respects. 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 the offering prices. Second, the Prospectus, in

effect, explicitly assured the members of the investing

public that, despite the link between Shearson Holdings and

Shearson Lehman Brothers, they had no reason to fear an

inflated price. The Prospectus made a selling point out of

the fact that independent underwriters had performed due

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diligence, set maximum prices, and thus acted as gatekeepers

against possible misdeeds by Shearson Holdings and Shearson

Lehman Brothers. Cf. 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 Share Offerings there has

been no public market for the Common

Stock. The initial public offering price

was determined by negotiation among the

Company, the Representatives and the Lead

Managers. Among the factors considered

in determining the initial offering

price, in addition to prevailing market

conditions, was the Company's historical

performance, estimates of the business

potential and earnings prospects of the

Company and market prices of and

financial and operating data concerning

comparable companies.

These representations are at the heart of the

Proposed Complaint, which alleges in paragraphs 3(a) and 45,

respectively:

The Stock Prospectus was misleading in

stating that the Stock had been

appropriately priced. The price of the

Notes was also too high, causing their

yields to be too low. 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

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estimates were no longer valid. As of

the date of the Offerings, the Company's

revenues, bookings, visibility and

backlog were all substantially below the

plan prepared by Computervision and

reviewed by the underwriters in

connection with their due diligence and

pricing for the Offerings (the "IPO

Plan"), as well as the 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 potential and

earnings prospects of the Company . . ."

The Prospectuses also stated that

"qualified independent underwriters" had

recommended the initial public offering

price for the Shares and the yields on

the Notes. Those formal, written

recommendations were based on factors

including "estimates of the business

potential of the company" and on the

"economic, market, financial and other

conditions" as they existed on August 13,

1992, the day before the effective date

of the Offerings. Contrary to the

representations in 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 Computervision as

of that date.10

10. Related allegations are found at paragraphs 46 and 84 of

the Proposed Complaint, respectively:

As of the date of the Offerings, all of

Computervision's internal planning and

forecasting devices showed that results

during the first seven weeks of the Third

Quarter were substantially below the

budgets set in the Company's internal

plans and the IPO Plan which the Company

had presented to the Underwriters in

conjunction with their due diligence and

pricing of the Offerings. In particular,

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at the time of the Offerings,

Computervision's U.S. sales were

materially below sales at comparable

points in the prior five quarters. Both

U.S. and international sales were

substantially below the Company's plans.

In addition, Computervision had a $40

million shortfall in visible orders

needed to reach its quarterly budget.

The Underwriters failed to perform

adequate due diligence on

Computervision's actual revenues, sales,

orders, bookings and visibility for the

seven weeks during the Third Quarter

before the Offerings. 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 representations in the

Prospectuses concerning the

recommendations of the qualified

independent underwriters (emphasis

added).

The Underwriters failed to perform

adequate due diligence on the Company's

actual sales, orders, bookings,

visibility and backlog for the first

seven weeks of the Third Quarter before

the Offerings. The Underwriters were

required to but either failed to obtain

and review or ignored information about

actual sales, orders, bookings,

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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, the district court

characterized plaintiffs' claim as being that the prices set

for the securities were inappropriate. Computervision II,

914 F. Supp. at 720. The district court noted that the

Prospectus never represented that the prices were

"appropriate" and that if the Prospectus language quoted in

paragraph 48 of the Proposed Complaint:

constitutes a representation that the

initial price was 'appropriate,'

investors would effectively have

insurance against any decline in price,

rendering their investments risk-free.

Id. We agree with the district court's view of any claim

plaintiffs make that the Prospectus represented that the

price itself was appropriate. We note, however, 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. As a result,

the Stock and Notes were 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).

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The price set for an offering of securities is

essentially a forecast. Price can be characterized as a

present value calculation of the firm's future streams of

earnings or dividends. See In re VeriFone Sec. Litig.

("VeriFone I"), 784 F. Supp. 1471, 1479 (N.D. Cal. 1992)

("securities prices on national exchanges reflect . . . the

expected future cash flows from the security"), aff'd, 11

F.3d 865 (9th Cir. 1993); Richard A. Brealey and Stewart C.

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

cf. Niagara Hudson Power Corp. v. Leventritt, 340 U.S. 336,

339 & n.7 (1951) (approving the SEC's valuation of warrants

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

Medtest Corp., 961 F.2d 620, 623 (7th Cir. 1992)

("[p]robabilities determine the value of stock"); Wielgos v.

Commonwealth Edison Co., 892 F.2d 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; Marx v. Computer

Sciences Corp., 507 F.2d 485, 489-90 (9th Cir. 1974).

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

-23- 23

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

reasonable investors. Kowal v. MCI Communications Corp., 16

F.3d 1271, 1276 (D.C. Cir. 1994); Raab v. General Physics

Corp., 4 F.3d 286, 290 (4th Cir. 1993). Hence, to the extent

plaintiffs' "price" claim rests on either the fact that the

initial offering prices fell shortly after the offering or

the fact that Computervision's third quarter earnings turned

out to be worse than expected, it fails.11 Cf. Pommer, 961

F.2d at 623 ("[S]ecurities 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 of the offering prices themselves.

Instead, they assert that their claim before the district

court was that the Prospectus materially misrepresented that:

11. In addition, when the Prospectus statements about price

are read in context, they appear to be anything but a

guarantee. First, the Prospectus 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 securities would develop or be sustained after the

offering. These cautionary statements in the Prospectus are,

in and of themselves, reason to find this claim not

actionable. See Shaw, 82 F.3d at 1213 ("when statements of

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

projections are accompanied by cautionary disclosures that

adequately warn of the possibility that actual results or

events may turn out differently, the `soft' statements may

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

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

-24- 24

(a) certain types of information were considered by the

underwriters and Computervision in determining prices for

the offering, when, in fact, the most current information of

those types was not considered (or, if considered, was

ignored); and (b) the underwriters did 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 in

the Prospectus that certain factors were considered and that

due diligence was done are required by law to be true as of

the effective date of the offering. See 15 U.S.C. 77k(a)

(liability attaches for misstatements in a prospectus at the

time such part becomes effective); see also 3A Harold S.

Bloomenthal, Securities and Federal Corporate Law 8.23, at

8-102 (1993) ("[T]he prospectus for purposes of section 11

speaks as of the date the registration statement becomes

effective."). Thus, plaintiffs assert that, to the extent

current information up to the date of the offering was not

incorporated into the prices, the statements in the

Prospectus presented a misleading half-truth because they

suggested that the underwriters and Computervision took into

consideration current estimates of business potential and

earnings prospects. Cf. Virginia Bankshares v. Sandberg, 501

U.S. 1095, 1098 (1991) (literally accurate statement

deceptive because only a half-truth). As a general matter,

-25- 25

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

make out a viable legal claim.

It may be asked whether the alleged misstatements

are actionable, given that 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 the

extent they are not reasonably based on, 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 price was "fair"

was actionable to the extent it was not based on, or was

inconsistent with, existing and available facts); Serabian,

24 F.3d at 361 ("predictions about the future that prove to

be off the mark likewise are immunized unless plaintiffs meet

their burden of demonstrating intentional deception");

Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir.) (prediction

violates securities laws if it is made without a genuine

belief or reasonable basis), cert. denied, 474 U.S. 946

(1985); Billard v. Rockwell Int'l Corp., 683 F.2d 51, 56-57

(2d Cir. 1982) ("Although the fairness of the offering price

is not a valid basis for an action under Sections 10(b) and

14(e) . . . , a statement that experts have examined the

price and certified it as fair may well be a material

-26- 26

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 the determination of price. The

alleged misstatement as to factors that were considered, as

of the effective date of the offering, lists the following

factors: (i) the company's historical 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 securities. This list of factors is, in

effect, a laundry list of general factors that would likely

be considered in any reasonable estimation of price. Cf.

Lucian Arye Bebchuk and Marcel Kahan, Fairness Opinions: How

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

27, 34-35 (1989) (listing methods of estimating fair price);

cf. generally Ronald J. Gilson and Reinier H. Kraakman, The

Mechanisms of Market Efficiency, 70 Va. L. Rev. 549 (1984)

(describing the types of information that are incorporated

into securities prices). Therefore, if the defendants did

not actually consider current information in the broad

categories of data they claimed to have looked at, it is

possible that plaintiffs would have a reasonable basis claim.

-27- 27

The due diligence claim also comes down to one that

the setting of the price was done without a reasonable

basis.12 The statement in the Prospectus that the

independent underwriters conducted due diligence was an

affirmative statement that a reasonable investigation of the

company was done and that, using that and other relevant

information, a fair price was estimated. See 15 U.S.C.

77k(b)(3) (due diligence defense under Section 11 requires

"reasonable investigation") & 77l(2) (due diligence under

Section 12 defined as "exercise of reasonable care");

Software Toolworks, 50 F.3d at 621 (9th 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

a failure to perform due diligence. First, a failure to

continue to investigate the company up to the effective date

of the offering is likely to be a failure to do due

diligence. See Software Toolworks, 50 F.3d at 625 & n.2

(intra-quarterly information available before the effective

date of offering not taken into account by underwriters);

Escott v. BarChris Constr. Corp., 283 F. Supp. 643, 690

12. Due diligence is equivalent to non-negligence. See

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

Software Toolworks Inc. Sec. Litig., 50 F.3d 615, 621 (9th

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

-28- 28

(S.D.N.Y. 1968) (where registration statement became

effective on May 16, 1961, attorney did not make reasonable

investigation where he failed to discover that statements

made in January had become inaccurate by May); see also 3A

Bloomenthal, Securities and Federal Corporate Law, 8.23, at

8-102-03. Second, it also may be a failure of due diligence

to rely solely on management representations as to the state

of the company where those representations can reasonably be

verified. See Software Toolworks, 50 F.3d at 625-26

(inadequate for underwriters to rely on company's assurances

as to its financial condition where 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 to them"). Notwithstanding these

generalities, the specifics of plaintiffs' factual claims

must be scrutinized.

(iv) Rule 12(b)(6)

The next and dispositive question is whether there

are sufficient factual allegations as to plaintiffs' theory

in the Proposed Complaint for it to survive a Rule 12(b)(6)

motion. We are mindful that the case comes to us after over

three years of litigation and full discovery. We thus look

more closely at the factual allegations to see if they

support the legal conclusions pled. As this court said in

-29- 29

Resolution Trust Corp. v. Driscoll, 985 F.2d 44 (1st Cir.

1993):

It is, of course, true that at the start

of complex litigation a party may not

have all the facts, so courts normally

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

12(b)(6) at the outset. At the start, a

reasonable basis for belief and an

outline of what one might reasonably hope

to prove may suffice to permit discovery

and ward off premature motions to

dismiss. But [plaintiff's] complaint

against [defendant] is deficient; this

litigation has persisted for almost two

years; and yet even now [plaintiff] is

unable to explain what exactly

[defendant] did that is wrongful . . .

[plaintiff still has not supplied] a

single, coherent, specific description of

what [defendant] has done that is

wrongful.

Id. at 48. A complaint must contain "factual allegations,

either direct or inferential, respecting each material

element necessary to sustain recovery under some actionable

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

(1st Cir. 1988); see also Fleming v. Lind-Waldock & Co., 922

F.2d 20, 24 (1st Cir. 1990); cf. Dewey v. University of New

Hampshire, 694 F.2d 1, 3 (1st Cir. 1982) ("it is not enough

to allege a general scenario which could be dominated by

unpleaded facts"), cert. denied, 461 U.S. 944 (1983); cf.

also Murphy v. United States, 45 F.3d 520, 522 (1st Cir.

1995); Coyne v. City of Somerville, 972 F.2d 440, 444 (1st

Cir. 1992); Correa-Martinez v. Arrillaga-Belendez, 903 F.2d

-30- 30

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] need not credit a complaint's `bald

assertions' or legal conclusions." Shaw, 82 F.3d at 1216

(citations omitted).

Plaintiffs' legal theory breaks down into two

elements: (i) that defendants explicitly stated that the

prices had been set after a reasonable investigation and the

reasonable consideration of relevant facts; and (ii) that

such an investigation was not done and the relevant facts

were not considered (or were ignored).14 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 is true that a failure by the underwriters

either to verify a company's statements as to its financial

13. Defendants argue that the Proposed Complaint sounds in

fraud and hence we should apply Fed. R. Civ. P. 9(b), which

requires that claims of fraud be pled with "particularity."

See Shaw, 82 F.3d at 1223 (although Section 11 and 12(2)

claims do not require allegations of scienter and reliance,

the claims may yet sound in fraud). Since the Proposed

Complaint fails to meet even the lower threshold of Rule

12(b)(6) in the procedural posture in which it comes to us,

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

14. Facts or information may be "required" to be considered

(e.g., if a company affirmatively represents that such was

considered) but do not necessarily have to result in a

reduction or increase in the offering price. The investment

bankers and/or company may well look at the information and

reasonably think that it has already been anticipated and

incorporated into the price.

-31- 31

state or to consider new information up to the effective date

of an offering would almost certainly constitute a lack of

due diligence. See Software Toolworks, 50 F. 3d at 625-26 &

n.2. However, it is plaintiffs' responsibility to plead

factual allegations, not hypotheticals, 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 Cir. 1986) (rejecting plaintiff's suggested

inferences as insufficiently grounded in fact). Here,

plaintiffs provide none.

Plaintiffs' 1993 Amended Complaint acknowledged

that the "Stock Offering Price was twice lowered from its

initial $19 per share price [as of May 1992] to its final

price of $12 per share" in August 1992. Plaintiffs suggest

that these downward adjustments in 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. However, plaintiffs' claim that data

from the first seven 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. The Prospectus

-32- 32

explicitly warned that an investment in the securities

involved a high degree of risk; that Computervision was

highly leveraged; that it operated in a highly competitive

environment and that its products might not be accepted by

customers; and that there had been a history of significant

losses for at least three years. As discussed, price is

essentially a forecast of future earnings. Reducing the

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

earnings. Plaintiffs give us no basis from which to infer

that this reduction in price factored in the disappointing

second quarter results, but did not incorporate the

information from the first seven weeks of the third

quarter.15 Additionally, the cautionary language as to

potential price drops belies plaintiffs' claim that certain

disappointing third quarter information was not considered.

15. Plaintiffs' own Proposed Complaint states that pricing

meetings were held up to August 13, 1992, the day before the

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

on that day. Similarly, the price recommendations of the

independent underwriters were not delivered until August 13,

1992.

Plaintiffs, in paragraphs 51 through 60 of the Proposed

Complaint, purport to describe the pricing process that

Computervision and its underwriters went through. These

paragraphs mention an IPO Plan prepared by Computervision as

one of the pieces of data considered by the underwriters in

their due diligence work. The Proposed 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 reasonably infer that the alleged shortcomings of

the IPO plan (or other company forecasts) mean that the

underwriters did not consider up-to-date information.

-33- 33

Furthermore, the factual context of the offerings

provides no support for the inference plaintiffs seek to

draw. Here the offering was conducted pursuant to a firm-

commitment underwriting, in which the underwriters bore all

the initial risk that the offering prices may have been set

too high.16 Further, as part of the offering, both

Shearson Holdings and DR Holdings agreed to lock up their

Computervision stock holdings for an entire year after the

offerings, thereby decreasing any incentive they would have

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

date.

It has been over three years since the first

complaint in this case was filed and plaintiffs have been

allowed full discovery. In this procedural setting,

16. Although one of the lead underwriters, Shearson Lehman

Brothers, was affiliated with a principal shareholder of

Computervision, the offering also involved three other lead

underwriters, Donaldson Lufkin, First Boston, and Hambrecht &

Quist (who also played the roles of qualified independent

underwriters). Each had both monetary and reputational

capital at risk in the offerings. Cf. Brealey and Myers,

Corporate Finance, at 351. Further, the lead underwriters

represented a syndicate of over forty underwriters. There is

not enough here for us to draw an inference of inadequate

diligence on the part of the underwriters. Cf. Harold S.

Bloomenthal, Going Public Handbook, 3.04[4], at 3-20

(1996)(underwriters look for a price that assures that the

offering will be oversubscribed); James D. Cox, Robert W.

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

37 (1991) (empirical research on IPOs shows that initial

offering prices tend to be systematically lower than the

short-term aftermarket prices, arguably because underwriters

want both insurance against lawsuits and to ensure that the

offering is oversubscribed).

-34- 34

plaintiffs' bald and factually unsupported hypothesis that

the underwriters failed to obtain and use up-to-date

information is not, standing alone, 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 the gaps" in a "skeletal set of

bland allegations"); Gooley, 851 F.2d at 515 (if, "despite

multiple opportunities to finetune the complaint, a naked

conclusion, unanchored in any meaningful set of factual

averments" is the asserted basis for relief, dismissal may

follow).

In essence, all the Proposed Complaint alleges is

that, by the close of trading on September 30, 1992, the

prices of Computervision's securities fell because of an

announcement on September 29 that third quarter earnings were

going to be lower than expected. However, the assertion that

the future fell below projections is not enough in itself to

render the projection actionable. See Kowal, 16 F.3d at 1278

(failure to meet performance projections "supports no

inference" that projection lacked a reasonable basis when

made); cf. Virginia Bankshares, 501 U.S. at 1092-94

(describing the type of hard, contemporaneous facts that

-35- 35

could show a statement about the adequacy of price to be

false). A ruling to the contrary would magnify the risk of

nuisance litigation.17 The district court was justified in

viewing the Proposed Complaint's pricing claims as no more

than an attempt to seek a warranty of the accuracy of price,

and therefore as insufficient. Computervision II, 914 F.

Supp. at 720. Rule 12(b)(6) may set a low threshold, but it

is real. Gooley, 851 F.2d at 514.

2. Mid-Quarter Information

Plaintiffs assert that, as of week seven of the

third quarter of 1992, the following intra-quarterly

information was known, and should have been disclosed: (i)

third quarter domestic bookings18 were only about 24% of

Computervision's internal forecasts for 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 companies that have especially volatile

prices. 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" is a measure of the status of potential

orders and the likelihood that they will be turned into

revenue producing sales.

-36- 36

But alleged deviations from internal forecasts,

without more, do not produce a duty to disclose in the

Prospectus. We recognize that investors may find information

about a firm's internal projections and forecasts to be

important. See Frank H. Easterbrook and Daniel R. Fischel,

The Economic Structure of Corporate Law 305 (1991); cf.

Virginia Bankshares, 501 U.S. at 1090-91 (statement of

opinion by a board of directors can be materially significant

because investors know that directors usually have knowledge

and expertise far exceeding that of the normal investor).

Nonetheless, the federal securities laws focus on the

mandatory disclosure of backward-looking hard information,

not forecasts. See Easterbrook and Fischel, Corporate Law,

at 305-06. A firm has the option to disclose its internal

projections, but is not required to do so.20 See In re

Lyondell Petrochemical Co. Sec. Litig., 984 F.2d 1050, 1052

(9th Cir. 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 516. "The federal securities laws impose no

obligation upon an issuer to disclose 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.

-37- 37

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) intra-quarterly information and

Computervision's undisclosed internal projections. Cf.

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

claim under the securities laws, plaintiffs must "establish a

link between a misleading statement or implication in the

prospectus and an actual fact, not a speculation about the

future, omitted from the document"). The mere fact that

intra-quarterly results lagged behind internal projections

does not, without more, require disclosure. See In re Worlds

of Wonder Sec. Litig., 35 F.3d 1407, 1419 (9th Cir. 1994),

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

Plaintiffs try to buttress their claims by

referring to SEC Regulation S-K, Item 303, 17 C.F.R.

229.303(a)(3)(ii) which requires that "known trends and

uncertainties" about results of operations be disclosed in

the management's discussion and analysis section of certain

SEC filings. This rule, however, has to be read in light of

the SEC's instruction to this paragraph which expressly

states that forward-looking information need not be

disclosed. 17 C.F.R. 229.303(a), Instruction 7; VeriFone

II, 11 F.3d at 870; Lyondell, 984 F.2d at 1053. Given this

-38- 38

context, the phrase "known trends and uncertainties" has to

be understood as referring to those trends discernible from

hard information alone.21 Here, unlike in Shaw, the

undisclosed hard information pled did not indicate a

"substantial likelihood that the quarter would turn out to be

an extreme departure from publicly known trends and

uncertainties." 82 F.3d at 1194. Thus, the alleged

nondisclosures fell neither within the ambit of 17 C.F.R.

229.303(a) or Shaw.

Indeed, of the three alleged nondisclosures, the

only one that plaintiffs compare to hard data is the

nondisclosure as to domestic bookings. Plaintiffs assert

that domestic bookings as of week seven of the third quarter

of 1992 were lower than the corresponding numbers for the

prior five quarters. But the Prospectus explicitly

represented that Computervision suffered cyclical variations

in quarterly results, with its first and third quarter

results typically being lower than those of the second and

fourth quarters. Given those fluctuations, the meaningful

comparison of Computervision's third quarter 1992 booking

numbers is to those of the third quarter of 1991. See Capri

21. The SEC itself distinguishes "forward-looking

information" from "presently known data which will impact

upon future operating results, such as known future increases

in the costs of labor or materials." Instruction 7, 17

C.F.R. 229.303(a).

-39- 39

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 results for the quarter in

progress whenever it perceives the possibility that the

quarter's results may disappoint the market." 82 F.3d at

1210. We further noted in Shaw that when the allegedly

undisclosed information (here only seven weeks into the

quarter -- and where mid-quarter results were not

particularly predictive23) is more remote in time and

causation from the ultimate events of which it supposedly

forewarns, a nondisclosure claim becomes "indistinguishable

from a claim that the issuer should have divulged its

internal predictions about what would come of the undisclosed

information." Id. That quarterly results for the third

quarter of 1992 did in fact turn out to 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 $2.5 million in domestic sales

bookings as of week seven of the third quarter of 1992 and

$3.3 million for the same period in 1991 -- a difference of

$800,000, or less than 1% of the budgeted revenues for that

quarter. This difference was immaterial as a matter of law.

23. Indeed, the Prospectus specifically warns that early-

quarter results are not necessarily predictive because a

substantial portion of both orders and shipments typically

occur in the last month of the quarter.

-40- 40

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 amount of backlog orders; (ii)

Computervision misrepresented that backlog data was not

significant to its results; and (iii) the statement,

"shipments are generally made within 30 days of receiving an

24. An issuer is not required to "disclose interim operating

results for the quarter in progress whenever it perceives a

possibility that the quarter's results may disappoint the

market . . . . Reasonable investors understand that

businesses fluctuate, and that past success is not a

guarantee of more of the same. There is always some risk

that the quarter in progress at the time of an investment

will turn out for the issuer to be worse than anticipated."

Shaw, 82 F.3d at 1210. It is only when "the issuer is in

possession of [hard] nonpublic information that the quarter

in progress will be an extreme departure from the range of

results which could be anticipated based on currently

available information" that disclosure might be required

under the securities laws. Id.

-41- 41

order," was false. "Backlog" is the dollar amount, on any

given day, of orders received for which product has not yet

been shipped. We address these claims in turn and find no

error in the district court's rejection of them.

(i) Dollar Amounts of Backlog

Item 101 of Regulation S-K requires that a

prospectus disclose "to the extent material, . . . [t]he

dollar amount of backlog orders believed to be firm, as of a

recent date and as of a comparable date in the preceding

fiscal year."25 17 C.F.R. 229.101(c)(1)(viii) (emphasis

added). Information is material when there is a reasonable

likelihood that a reasonable investor would consider it

important. See Shaw, 82 F.3d at 1219; Wielgos, 892 F.2d at

517. The Prospectus disclosed that backlog levels were

usually low. But, plaintiffs argue that that disclosure was

not enough. They argue that the specific backlog numbers

were material and hence required to be disclosed. This is

so, they say, because backlog entering the third quarter of

1992 was unusually low. Plaintiffs support their argument by

comparing the backlog entering the third quarter of 1992

25. Computervision issued its securities pursuant to Form S-

1. Item 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 for failure to disclose the

information required to be stated by Item 101 arises under

Section 11 of the Securities Act. See Shaw, 82 F.3d at 1204-

06 (describing the statutory scheme in the context of a Form

S-3 shelf offering).

-42- 42

($26,875,000) to that entering the second quarter

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

thirty-two percent.

There is a threshold flaw in plaintiffs' argument.

As Item 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 year. 17 C.F.R. 229.101(c)(1)(viii).

This is particularly true here, where the Prospectus

specifically stated that Computervision tended to experience

seasonal declines in revenues in its first and third

quarters. See Capri Optics, 950 F.2d at 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 if quarter-to-next-quarter comparisons were

appropriate, Computervision's failure to provide more

specific information is nonetheless not actionable. 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 This minor drop of a few percent is not adequate

26. As the defendants point out, plaintiffs' numbers have

meaning only if they are adjusted for seasonality. While

initial backlog levels for the second and third quarters of

1992 were $39,897,000 and $26,875,000, respectively,

Computervision's budgeted revenues for those quarters were

-43- 43

to support the claim that the difference in backlog levels

between quarters was material and hence required specific

backlog numbers to be disclosed. Where a variable, although

material, is of only minor predictive value, disclosure of a

rough estimate of that variable's value can obviate the need

for more specific disclosure. Cf. Shaw, 82 F.3d at 1211 n.21

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

the "hard" information underlying the projection immaterial

as a matter of fact or of law). Indeed, disclosure of only a

rough estimate may keep 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 and $121,000,000, respectively. When the

initial backlog levels for the two quarters are looked at as

fractions of the budgeted revenues for those quarters, the

result is 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 backlog levels for the

second and third quarters of 1992 as a percentage of actual

revenues (for the second quarter) and forecasted revenues

(for the third quarter), respectively, and found a 9%

difference between the two percentages. 914 F. Supp. at 721.

The district court ruled that this 9% differential was an

insufficient basis to support plaintiffs' claim. Id. Not

knowing the degree to which Computervision's forecasts may

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

not having been provided with this information by the

parties, we are reluctant to endorse the plaintiffs' 9%

number. Cf. Wielgos, 892 F.2d at 515 (defendant's cost

estimates were systematically biased). Nevertheless, we note

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

or 9%.

-44- 44

(2d Cir. 1996) (quoting TSC Industries, Inc. v. Northway,

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

(same). In sum, plaintiffs have no claim that

Computervision's general statement that backlog was usually

low, without the disclosure of specific numbers, was

materially misleading as of the effective date of the

offering. Cf. Backman v. Polaroid Corp., 910 F.2d 10, 16

(1st Cir. 1990) (en banc) ("Disclosing that Polavision was

being sold below cost was not [materially] misleading by

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

F.3d at 1419.

(ii) Immateriality of Backlog

Plaintiffs argue that the Prospectus, in stating

that "the Company does not believe that backlog is

representative of potential sales for any future period," in

effect falsely suggested that backlog was not significant to

Computervision's results. Plaintiffs misread the Prospectus.

The statement in the Prospectus does not say that

information on backlog is insignificant or immaterial.

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

representative. The statement cautions investors that they

should not take backlog levels as necessarily predicting

results for future periods. In addition, there is at least

one other statement on the very same page of the Prospectus

-45- 45

that warns investors that data available early in a quarter

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

of quarterly results because:

a substantial portion of the Company's

orders and shipments typically occur in

the last month of each quarter.

Therefore . . . unexpected 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 not draw too many conclusions from

backlog figures, and not a statement that backlog itself was

immaterial or insignificant.

(iii) Shipments Within Thirty Days

Plaintiffs' final argument on backlog is that the

district court erred in concluding that the statement

"shipments are generally made within thirty days of receiving

an order" was not materially false or misleading. Plaintiffs

point to a backlog aging analysis from the seventh week of

the third quarter of 1992, 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 the word "generally," they base

their claim solely on data from one portion of one quarter

and fail to allege anything meaningful about Computervision's

general practice. Second, even if one portion of one quarter

-46- 46

could be taken as representative, plaintiffs' factual

allegations would not support a misrepresentation claim.

Plaintiffs allege that approximately sixty-one percent of

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

were shipped in between thirty and sixty days, and thirty-

three percent were shipped in more than 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. That sixty-one percent

of orders in one portion of one quarter were shipped within

thirty days is perfectly consistent with the statement that

orders were generally shipped within thirty days. There was

no material misrepresentation.

4. CADDS 5

Plaintiffs' final allegations focus on statements

concerning CADDS 5, Computervision's then-newest CAD/CAM

software product and the centerpiece of the firm's new

business strategy. Plaintiffs allege that the Prospectus

made two sets of material misstatements or omissions with

respect to CADDS 5: (i) the Prospectus misrepresented that,

as of June 1992, CADDS 5 was a "successful product," being

shipped in "volume," i.e., to thousands of customers; and

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

for success when, in fact, the product was beset with

-47- 47

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 Complaint alleged that the

"Prospectus[] misrepresented CADDS 5 as a successful product

commercially shipping in volume." The Proposed Complaint

then defined "`[v]olume commercial shipments'" as those

"involving several thousand customers." The language in the

Prospectus, however, neither refers to CADDS 5 as a

"successful product shipping in volume," nor to shipments to

"several thousand customers;" those descriptions are wholly

the plaintiffs' own. The plain language of the Prospectus

speaks for itself:

Beta testing of CADDS 5 (release 2.0)

commenced in March 1992 with 24 of the

Company's largest CADDS customers and

early introduction sales commenced in

April 1992. 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 customers to whom the product had

been shipped -- 24 in the beta testing stage and 32 in the

commercial shipping stage. 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.

-48- 48

Further, the Prospectus was replete with language

cautioning investors that the market in general (i.e., a

large volume of customers) had not accepted CADDS 5 as yet

and that the product might need further enhancements. For

example, the Prospectus stated 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 existing software product, CADDS 4X, that

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

customers delaying product purchases" and that:

the CAD/CAM industry is characterized by

rapidly changing technology and frequent

new product introductions and product

enhancements . . . [and] [t]here can be

no assurance that the Company will

continue to be successful in identifying,

developing and marketing new products or

enhancing its existing products . . .

[or] 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

-49- 49

Shaw, 82 F.3d at 1213 (if a statement is couched in

cautionary language that disclaims the drawing of a

particular inference, a claim that the statement was

materially misleading may fail as a matter of law). The

context confirms that any possible misleading inference that

might be drawn from Computervision's statement is properly

deemed immaterial as a matter of law.

(ii) Misleading Optimistic Statements

Plaintiffs' final claim is that certain optimistic

statements in the Prospectus regarding the development and

commercial prospects of CADDS 5 were materially misleading in

light of Computervision's alleged nondisclosure of problems

the product was facing. See, e.g., Hanon v. Dataproducts

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

A duty to disclose technical or developmental

problems with a product may arise where a company makes

strongly optimistic or concrete statements about that product

that are in stark contrast to its internal reports. Cf.

Serabian, 24 F.3d at 363-65 (sustaining Section 10(b) claims

where there was a "contrast between what company officials

were hearing internally . . . and what the company was

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

But, in this case, the statements about CADDS 5 in the

Prospectus were not so optimistic as to be materially

misleading about the existence of developmental or commercial

-50- 50

difficulties with CADDS 5. To the contrary, the Prospectus

frequently alludes to the uncertainties associated with the

release of a new product. The key statements identified

by the plaintiffs are that Computervision expected CADDS 5

"to broaden the number of customers in existing accounts as

well as attract new customers," and that "Computervision

believes that CADDS 4X and CADDS 5 are likely to be used in

tandem by major accounts in the foreseeable future." These

statements, whether read in isolation or in the context of

Computervision's numerous warnings that CADDS 5 might not be

accepted by the market and might need further

enhancements,27 suggest, at most, the hope that CADDS 5

will eventually gain acceptance in the market. Such a hope

is not unusual for a company releasing a new product. Cf.

VeriFone I, 784 F. Supp. at 1484 ("securities laws presume

that skilled investors are aware that a corporation's

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

past successes"). Computervision's statements did not rise

to the level of optimism or certainty that 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 of CADDS 5 would adversely affect

Computervision and that many of Computervision's competitors

"have greater financial and operating resources" and that

"there can be no assurance that competitors will not produce

equivalent or superior products."

-51- 51

F.3d at 1219 n.33 (cautiously optimistic statements,

expressing at most a hope for a positive future, do not

trigger a duty to update); San Leandro, 75 F.3d at 811

(subdued generally optimistic statements 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 lacked "definite positive projections" of the sort

that would require later correction), cert. denied, 114 S.

Ct. 1397 (1994). Further, the statements here are markedly

less enthusiastic than the statements that other courts have

found actionable. 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 "phenomenally successful

the first year out of the chute" and would make company's

"growth before this look small"), cert. denied, 496 U.S. 943

(1990); Hanon, 976 F.2d at 501-02 (company's press release

stated that new product had received "strong interest and

high acclaim from users and analysts alike" and its special

features were "rapidly making [it] . . . one of the most

popular in [the company's] line"). Computervision's mild

statements of hope, couched in strongly cautionary language,

cannot be said to have become materially misleading.

IV.

Conclusion

The decision of the district court is affirmed.

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