Glassman v. Computervision
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Glassman v. Computervision, (1st Cir. 1996).
Opinion
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. 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
-3- 3
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.
-4- 4
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
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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. 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
-3- 3
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.
-4- 4
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.
-5- 5
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.
-6- 6
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
-7- 7
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).
-8- 8
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
-9- 9
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. _________________
-11- 11
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
-12- 12
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").
-13- 13
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
-14- 14
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
-15- 15
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
-16- 16
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 ____________________________
-17- 17
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
-18- 18
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 _________________________________________
-19- 19
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,
-20- 20
____________________
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, _________________________________________
-21- 21
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).
-22- 22
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. ________
-52- 52
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