
USCA1 Opinion

	




                            United States Court of Appeals                                For the First Circuit                                 ____________________          No. 95-1995                               MERRY LOU SHAW, ET AL.,                               Plaintiffs, Appellants,                                          v.                           DIGITAL EQUIPMENT CORP., ET AL.,                                Defendants, Appellees.                                 ____________________          No. 95-1996                              LEONARD WILENSKY, ET AL.,                               Plaintiffs, Appellants,                                          v.                           DIGITAL EQUIPMENT CORP., ET AL.,                                Defendants, Appellees.                                 ____________________                    APPEALS FROM THE UNITED STATES DISTRICT COURT                          FOR THE DISTRICT OF MASSACHUSETTS                     [Hon. Joseph L. Tauro, U.S. District Judge]                                            ___________________                                 ____________________                                        Before                               Torruella, Chief Judge,                                          ___________                            Cyr and Lynch, Circuit Judges.                                           ______________                                 ____________________               Sanford P.  Dumain,  with whom  David J.  Bershad, James  P.               __________________              _________________  _________          Bonner, Milberg, Weiss, Bershad,  Hynes & Lerach, Glen DeValerio,          ______  ________________________________________  ______________          Kathleen  Donovan-Maher,  Berman,   DeValerio  &  Pease,  Richard          _______________________   _____________________________   _______          Schiffrin, Schiffrin  & Craig, Ltd.,  Joseph D. Ament,  and Much,          _________  ________________________   _______________       _____          Shelist, Freed,  Denenberg, Ament, Bell &  Rubenstein, P.C., were          ___________________________________________________________          on brief, for the Shaw appellants.                            ____               Thomas  G.  Shapiro, with  whom  Edward  F. Haber,  Shapiro,               ___________________              ________________   ________          Grace,  Haber &  Urmy,  Glen  DeValerio, Kathleen  Donovan-Maher,          _____________________   _______________  _______________________          Berman, DeValerio & Pease, Fred Taylor Isquith,  Peter C. Harrar,          _________________________  ___________________   _______________          Wolf,  Haldenstein,  Adler,  Freeman   &  Herz,  L.L.P.,  Richard          _______________________________________________________   _______          Bemporad, and Lowey, Dannenberg,  Bemporad & Selinger, P.C., were          ________      _____________________________________________          on brief, for the Wilensky appellants.                            ________               Edmund C.  Case, with whom  Jordan D.  Hershman, Deborah  S.               _______________             ___________________  ___________          Birnbach,  Testa,  Hurwitz &  Thibeault,  John  D. Donovan,  Jr.,          ________   ____________________________   ______________________          Randall W.  Bodner,  Daniel J.  Klau, and  Ropes &  Gray were  on          __________________   _______________       _____________          brief, for the Shaw appellees.                         ____               Edmund  C. Case,  with whom Jordan  D. Hershman,  Deborah S.               _______________             ___________________   __________          Birnbach,  Testa,  Hurwitz &  Thibeault,  John  D. Donovan,  Jr.,          ________   ____________________________   ______________________          Randall W. Bodner, Daniel J. Klau, Ropes  & Gray, Gerald F. Rath,          _________________  ______________  _____________  ______________          Robert A. Buhlman,  Bingham, Dana  & Gould,  Michael J.  Chepiga,          _________________   ______________________   ___________________          Daniel  A. Shacknai,  and  Simpson, Thacher  &  Bartlett were  on          ___________________        _____________________________          brief, for the Wilensky appellees.                         ________                                 ____________________                                     May 7, 1996                                 ____________________                   LYNCH,  Circuit Judge.   Plaintiffs,  purchasers  of the                           _____________            securities of Digital Equipment Corp., appeal from the district            court's dismissal of  two consolidated  class actions  alleging            violations  of the  federal securities  laws.   Both complaints            assert that there were misleading statements and nondisclosures            in  the  registration  statement  and  prospectus  prepared  in            connection  with  a public  offering of  stock.   That offering            commenced on March 21, 1994, just 11 days prior to the close of            the  quarter then in progress,  and about three  weeks prior to            the company's announcement of an unexpectedly negative earnings            report for that quarter.  One of the complaints further alleges            that defendants made fraudulently optimistic statements to  the            public in the period  leading up to the offering.  The district            court found that neither complaint identified any statements or            omissions actionable  under the  securities laws  and dismissed            both  for failure to state a claim.   We agree that many of the            alleged misstatements  and omissions  do not provide  a legally            cognizable  basis  for  the  plaintiffs' claims,  but  we  also            conclude that  a limited set of allegations  in both complaints            relating to  the registration statement and  prospectus for the            March 1994 offering does state a  claim.  We further find  that            the surviving  portions of the complaints  satisfy the pleading            requirements of Fed. R.  Civ. P. 9(b).  Accordingly,  we affirm            the  district court's  decision in  part, reverse in  part, and            remand for further proceedings.                                          -3-                                           I.                                       Background                                       __________                   Digital  Equipment  Corporation ("DEC")  is  one  of the            world's  largest suppliers of  computer hardware,  software and            services.  Founded  in 1957,  it first became  a publicly  held            company  in 1966.  By  the early 1990's,  the company's success            had  burgeoned  into  $14  billion  in yearly  revenues.    The            company's success story,  however, would not last forever.   By            1992, the company had fallen on hard times.  In January 1992 it            reported  its  first-ever quarterly  operating  loss  of $138.3            million.   Faced in the ensuing months with operating losses in            the  range  of $30  million to  $311  million per  quarter, the            company  decided to  engage in  radical surgery,  cutting loose            some  35,000  employees over  the course  of  15 months  in the            process,  including its founder and CEO.  To cover the costs of            these  actions, the company accumulated "restructuring" charges            totalling  close  to $3.2  billion  in  fiscal years  1990-1992            combined.                   In the midst of its financial woes, however, the company            took some  steps to restore its health.   In February 1992, DEC            had introduced a new product, the "Alpha" chip.  The Alpha chip            was hailed  as a  technological advance that  could potentially            restore  the  company's fortunes.    In  mid-1992, the  company            installed a new CEO, Robert B. Palmer.  He took the helm in the            fall  of  that  year, as  the  company  continued to  implement            strategies  to help its Alpha technology gain acceptance in the                                          -4-            marketplace  and  to  bring   the  company  back  to  financial            vitality.   At  the  time Palmer  took  over, the  company  had            absorbed  over $3 billion in  losses for the  prior three years            and  had  been losing  money at  the  rate of  approximately $3            million  per day.  Under  the new management,  it appeared that            the company's financial hemorrhaging had finally begun to slow.                   On  January 14, 1993, DEC reported a loss for the second            quarter of fiscal year 1993 that  was far smaller than had been            anticipated by analysts.  That promising result was followed by            another   quarter   of  losses,   but   within   Wall  Street's            expectations.   Then, on July  28, 1993, the  company announced            its first profitable quarter since before the 1992 fiscal year,            reporting a net profit of $113.2 million for the fourth quarter            of  fiscal year 1993.  That result was slightly below analysts'            expectations, but  a stark improvement over  the operating loss            of $188.1 million (and overall loss of $2 billion) reported for            the comparable quarter in the prior year.                   Still,  on October  20, 1993,  DEC announced  a  loss of            $83.1  million for  the first quarter  of 1994,  an improvement            over the $260.5  million loss  for the same  quarter the  prior            year,  but worse than analysts had been predicting.  On January            19,  1994, the  company  announced  another setback,  reporting            losses for  the  second quarter  of  fiscal year  1994,  ending            January  1, 1994,  of $72  million.   The loss  was  worse than            analysts had expected and was virtually identical to the losses            for that period the prior year.                                          -5-                   It was against  this backdrop that  DEC, on January  21,            1994,  filed  with the  SEC  a  "shelf" registration  statement            giving  the company the  option to  issue up  to $1  billion in            various  classes of  debt and  equity securities.    Two months            later, DEC  through its  underwriters conducted an  offering of            $400 million in depositary  shares of preferred stock, pursuant            to the "shelf" registration, a prospectus dated March 11, 1994,            and a prospectus supplement dated March 21, 1994.  The offering            commenced on the  date of the prospectus  supplement and closed            one  week later on March 28, 1994,  four days before the end of            the  third fiscal quarter.  All 16 million depositary shares of            preferred stock were sold,  at an offering  price of $25.   DEC            raised a badly needed $387.4 million.1                   Less  than three  weeks later,  on April  15, 1994,  DEC            announced  an  operating  loss of  over  $183  million  for the            quarter that  had ended on April  2, 1994.  This  third quarter            loss  was far greater than analysts had been expecting, and the            largest that the  company had reported since  the first quarter            of fiscal 1993.  It bucked the positive trend of reduced losses            under the company's new management.   The announcement sent the            price of  the newly  distributed preferred stock  tumbling from            the offering price of $25 to $20.875 by the close of trading on            April 15.  The common stock fell from $28.875 to $23 during the                                            ____________________            1.  Because  the offering  was  conducted pursuant  to a  "firm            commitment"  underwriting  arrangement,  DEC  sold  all of  the            offered shares to the  underwriters at a discount, who  then in            turn  sold the shares to the public.  Thus, DEC's proceeds were            less than the total offering amount.                                          -6-            same period, and to  $21.125 by the  close of the next  trading            day.                   In its April 15 announcement, the company also disclosed            that it had decided to "accelerate [its] on-going restructuring            efforts" and  "also consider further restructuring."   This was            despite a representation in  the March 21 prospectus supplement            that   "[t]he   Corporation   believes   that   the   remaining            restructuring  reserve of  $443  million is  adequate to  cover            presently   planned   restructuring   actions."     Eventually,            following  the close of fiscal year 1994, DEC announced on July            14, 1994 that it  would cut almost one-fourth of  its remaining            workforce and  take an additional  charge of  $1.2 billion  for            fiscal year 1994  (beyond the $443 million remaining in reserve            as  of March 21) to cover the costs of additional restructuring            activities.                                          II.                               Description of the Actions                               __________________________                   These  two lawsuits  were  filed on  Tuesday, April  19,            1994,  two business  days after  the company's  announcement of            April 15, 1994.  One, the Wilensky action, brought on behalf of                                      ________            all  persons who  purchased  shares in  the  March 1994  public            offering, asserts claims  under Sections 11,  12(2), and 15  of            the Securities Act of 1933 ("Securities Act")  against DEC, its            Chief Executive Officer (Robert B. Palmer), its Chief Financial            Officer  (William Steul), and  seven underwriting or investment            banking firms,  representing a purported defendant  class of 65                                          -7-            underwriters who participated in the offering.  The second, the            Shaw action, advances claims under  Sections 10(b) and 20(a) of            ____            the  Securities Exchange Act of 1934  ("Exchange Act") and Rule            10b-5,   and  a   pendent   claim  of   common  law   negligent            misrepresentation, on  behalf of  all purchasers of  DEC common            stock  between January  19  and  April  15,  1994  (the  "Class            Period").                   At  the heart of both complaints are two sets of claims.            First, plaintiffs  assert that DEC management  had knowledge of            material facts concerning  the large  losses developing  during            the  third fiscal quarter of 1994, and that the defendants were            under  a duty  to  disclose such  material  information to  the            market  in connection  with  the public  offering conducted  on            March  21, 1994.  Second, both the Wilensky and Shaw plaintiffs                                               ________     ____            contend that the representation made in the March 21 prospectus            supplement  concerning the  "adequacy"  of  the  then-remaining            "restructuring reserve" was  materially misleading.   The  Shaw                                                                       ____            plaintiffs  allege,  additionally,  that throughout  the  Class            Period,  the defendants made fraudulently optimistic statements            to  the  public  concerning  DEC's future  prospects  in  order            artificially to  inflate the market  value of  DEC shares,  and            that these statements were actionably false or misleading.                   The defendants  filed motions  to dismiss under  Fed. R.            Civ. P. 9(b) and 12(b)(6).  The district court consolidated the            cases, stayed  all discovery, and then  dismissed both actions.            The  district  court ruled,  inter  alia,  that defendants  had                                          -8-            violated  no   duty  to  disclose  and   that  the  defendants'            statements  were  not  misleading,  bespoke  caution,  or  were            otherwise not actionable as a matter of law.  The court granted            the defendants' motions to dismiss under Rule 12(b)(6), without            reaching   whether  the   complaints  satisfied   the  pleading            requirements  of Rule 9(b).  These appeals followed.  We affirm            in  part and reverse in part.   For clarity, we discuss each of            the two actions in turn.                                          III.                            The Section 11 and 12(2) Claims                            _______________________________                                   (Wilensky Action)                                    ________                   Sections 11 and 12(2) are enforcement mechanisms for the            mandatory  disclosure  requirements of  the  Securities Act  of            1933.     Section  11   imposes  liability  on   signers  of  a            registration   statement,   and   on   underwriters,   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.  Section 12(2) provides that            any person  who "offers  or  sells" a  security by  means of  a            prospectus or  oral communication containing 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).                                          -9-                   The Wilensky plaintiffs assert claims under Sections 11,                       ________            12(2), and  15,2 alleging  that the registration  statement and            prospectus  filed  in connection  with  the  March 1994  public            offering  contained materially false  statements and omitted to            state  material information  required  to be  provided therein.            The thrust of the Wilensky complaint is that defendants knew as                              ________            of the March 21 date  of the 1994 public offering,  of material            facts portending  the unexpectedly  large losses for  the third            quarter  of fiscal  1994 that  were announced  later, and  that            failure to  disclose these  material facts in  the registration            statement  and prospectus violated  Section 11.   Additionally,            the  Wilensky  plaintiffs contend  that  the  statement in  the                 ________            registration   statement   and  prospectus   characterizing  as            "adequate" the company's then-remaining "restructuring reserve"            of  $443  million  was  materially  false  and  misleading,  in            violation of both Sections 11 and 12.                   The defendants parry by attempting to reduce plaintiffs'            claims to an argument that the company was required to disclose            its internal forecasts about the outcome of the third  quarter.                         _________            They argue  that the plaintiffs' position  is untenable because            the securities laws impose  no duty upon a company  to disclose            internal projections, estimates of  quarterly results, or other            forward-looking information.  They  also say that the statement            concerning the adequacy of the company's restructuring reserves                                            ____________________            2.  Section 15  imposes derivative  liability upon  persons who            "control" those  liable under Section 11 or 12.  See 15  U.S.C.                                                             ___              77o.                                          -10-            is  not  actionably  misleading  when  considered  in  context.            Finally, defendants contend that  the complaint fails to allege            sufficient  facts  establishing that  DEC  and  the underwriter            defendants were statutory "sellers" subject to  liability under            Section 12(2).  We evaluate each set of arguments separately.            A.  Actionability of Alleged Nondisclosures Under Section 11            __  ________________________________________________________                   The proposition that silence, absent a duty to disclose,            cannot  be  actionably  misleading,  is a  fixture  in  federal            securities law.  See, e.g., Backman v. Polaroid Corp., 910 F.2d                             ___  ____  _______    ______________            10,  13 (1st  Cir. 1990)  (en banc).   Equally settled  is that            accurate reports of past successes  do not themselves give rise            to  a duty to inform the  market whenever present circumstances            suggest that  the future may bring  a turn for the  worse.  See                                                                        ___            Serabian v. Amoskeag Bank  Shares, Inc., 24 F.3d 357,  361 (1st            ________    ___________________________            Cir.  1994);  Capri Optics  Profit  Sharing  v. Digital  Equip.                          _____________________________     _______________            Corp., 950 F.2d  5, 7-8 (1st  Cir. 1991).   In short, the  mere            _____            possession of material nonpublic  information does not create a            duty  to disclose  it.  See  Roeder v. Alpha  Indus., Inc., 814                                    ___  ______    ___________________            F.2d 22, 26 (1st Cir. 1987) (citing Chiarella v. United States,                                                _________    _____________            445 U.S. 222, 235 (1980)).                   To focus here  on a  duty to disclose  in the  abstract,            however, would be to miss the obvious  in favor of the obscure.            This action  arises out of an  allegedly defective registration            statement  and prospectus  filed  in connection  with a  public            stock offering.  The obligations that attend the preparation of            those  filings embody  nothing if  not  an affirmative  duty to                                          -11-            disclose a broad range  of material information.  Cf.  Herman &                                                              ___  ________            MacLean v. Huddleston, 459 U.S.  375, 381-82 (1983). Indeed, in            _______    __________            the context of a public offering, there is a strong affirmative            duty  of disclosure.3   See  Ernst &  Ernst v.  Hochfelder, 425                                    ___  ______________     __________            U.S. 185,  195  (1976) (the  Securities  Act "was  designed  to            provide  investors with full disclosure of material information            concerning public offerings").                   The question  here is not whether  defendants were under            an abstract duty to disclose information -- clearly, they were.            The  issue, rather,  is whether the  defendants had  a specific            obligation  to  disclose  information  of  the  type  that  the            plaintiffs complain was omitted from the registration statement            and  prospectus.    The  task of  deciding  whether  particular            information is  subject to  mandatory disclosure is  not easily            separable  from   normative  judgments   about  the   kinds  of            information  that  the securities  laws  should  require to  be                                                     ______            disclosed,  which  depend,   in  essence,  on  conceptions   of            materiality.     See  generally  Victor  Brudney,   A  Note  On                             ______________                     ___________                                            ____________________            3.  In  Roeder, this  court  alluded to  three situations  that                    ______            could give rise to a duty to disclose material facts:  (i) when            an insider trades in  the company's securities on the  basis of            material  nonpublic  information;  (ii)   when  a  statute   or            regulation requires disclosure; and  (iii) when the company has            previously made  a statement  of material  fact that is  false,            inaccurate,  incomplete,   or  misleading  in   light  of   the            undisclosed information.  Roeder,  814 F.2d at 27; see  also In                                      ______                   _________ __            re Time  Warner, Inc.  Sec. Litig.,  9 F.3d 259,  267 (2d  Cir.            __________________________________            1993),  cert. denied, 114 S. Ct. 1397 (1994); Backman, 910 F.2d                    _____ ______                          _______            at 12-13; Greenfield v.  Heublein, Inc., 742 F.2d 751,  758 (3d                      __________     ______________            Cir.  1984), cert. denied,  469 U.S.  1215 (1985).   We  do not                         ____________            decide here  whether these three  situations are the  only ones            that  could  trigger a  duty  of  disclosure,  or whether  they            necessarily would do so in every case.                                          -12-            Materiality and  Soft Information Under the  Federal Securities            _______________________________________________________________            Laws,  75 Va. L.  Rev. 723, 728  (1989).  For  our purposes, it            ____            suffices  to say that the determination  of whether the alleged            nondisclosures in this case  provide a legally sufficient basis            for the plaintiffs' claims cannot be severed from consideration            of the basic policies  underlying the disclosure obligations of            the applicable statutes and regulations.                   We conclude that we cannot say that DEC was not required            to disclose material information  concerning its performance in            the quarter  in progress  at the  time of  the  March 21,  1994            public offering.  Nor can  we conclude, as a matter of  law and            on  these pleadings,  that DEC  was not  in possession  of such            material nonpublic information at the time of the offering.                   1.  The Insider Trading Analogy                   __  ___________________________                   In   understanding   the   nature  of   the   disclosure            requirements  attending  a  public  offering of  stock,  it  is            helpful  to  conceptualize DEC  (the  corporate  issuer) as  an            individual insider transacting in the company's securities, and            to examine the disclosure obligations that would then arise.                   There is  no doubt that an  individual corporate insider            in possession of material  nonpublic information is  prohibited            by the federal securities laws from trading on that information            unless he makes public disclosure.  He must disclose or abstain            from trading.  See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833,                           ___ ___    ______________________            848  (2d Cir.  1968)  (en banc),  cert.  denied, 394  U.S.  976                                              _____________            (1969);  see also SEC v.  MacDonald, 699 F.2d  47, 50 (1st Cir.                     ________ ___     _________                                          -13-            1983)  (en banc).  A central justification for the "disclose or            abstain" rule is to deny  corporate insiders the opportunity to            profit  from the inherent trading advantage  they have over the            rest of the contemporaneously trading market by reason of their            superior access to information.  See Shapiro  v. Merrill Lynch,                                             ___ _______     ______________            Pierce, Fenner & Smith, Inc., 495 F.2d 228, 235 (2d Cir. 1974);            ____________________________            SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968)            ___    ______________________            (en banc).4    The rule  eliminates  both the  incentives  that            insiders  would  otherwise  have  to delay  the  disclosure  of            material  information,  and  minimizes  any  efficiency  losses            associated  with  the diversion  of  resources  by insiders  to            "beating  the market."    See Robert  C.  Clark, Corporate  Law                                      ___                    ______________              8.2,  at  273-75 (1986);  Frank  H. Easterbrook  &  Daniel R.            Fischel,  The Economic  Structure of  Corporate Law  288 (1991)                      _________________________________________            ("The  lure of trading profits may induce people to spend a lot            of effort and other resources "beating the market"; . . . [T]he            prompt  disclosure of  information  by the  affected firm  will            extinguish the  trading opportunity.   When everyone  knows the            truth, no one can speculate on it."5).                                            ____________________            4.  See  also  Brudney, supra,  at 735  (noting that  the other                _________           _____            major justification  for requiring trading insiders to disclose            is  to  increase  the   quality  and  quantity  of  information            available to investors, thereby  facilitating efficiency in the            allocation of capital).            5.  Judge Easterbrook and  Professor Fischel ultimately  reject            this   beating-the-market  concern   as  a   justification  for            mandatory disclosure.  They  argue that companies normally will            _________            voluntarily  disclose material bad  news, because,  among other            reasons,  if   a  company  consistently  fails   to  make  such            disclosure, the market will discount the value of the company's            securities  by   the  increased  probability  that   it  is  in                                          -14-                   The policy rationale for  the "disclose or abstain" rule            carries over to  contexts where a corporate  issuer, as opposed            to  an   individual,  is   the  party  contemplating   a  stock            transaction.    Courts,  including  this one,  have  treated  a            corporation trading in its own  securities as an "insider"  for            purposes  of the  "disclose  or  abstain"  rule.    See,  e.g.,                                                                ___   ____            McCormick  v. Fund American Cos.,  Inc., 26 F.3d  869, 876 (9th            _________     _________________________            Cir.  1994)  (collecting  cases) ("[T]he  corporate  issuer  in            possession of material nonpublic  information, must, like other            insiders in  the same  situation, disclose that  information to            its shareholders or refrain from trading with them."); Rogen v.                                                                   _____            Ilikon  Corp., 361  F.2d 260,  268 (1st  Cir. 1966);  Kohler v.            _____________                                         ______            Kohler  Co.,  319  F.2d 634,  638  (7th  Cir.  1963); Green  v.            ___________                                           _____            Hamilton Int'l Corp., 437 F. Supp. 723, 728-29 (S.D.N.Y. 1977);            ____________________            VII Louis  Loss & Joel Seligman, Securities Regulation 1505 (3d                                             _____________________            ed. 1991) ("When the issuer itself wants to buy or sell its own            securities, it has  a choice: desist or disclose.");  18 Donald            C.  Langevoort,  Insider  Trading:  Regulation,  Enforcement  &                             ______________________________________________            Prevention    3.02[1][d],   at  5  (3d   rel.  1994)  ("Issuers            __________            themselves  may buy or sell their own securities, and have long                                            ____________________            possession  of  undisclosed   material  negative   information,            thereby  increasing the  company's  long-run costs  of  raising            capital.   Id.  at  288-89.    However,  as  the  authors  also                       ___            recognize,   the  argument  for  voluntary  disclosure  becomes            considerably weaker in contexts where  the short-term interests            of the company's managers  differ from its long-term interests,            for example, where management  is under pressure to  engineer a            rapid turnaround  in the company's financial  performance.  See                                                                        ___            id. at 169 (discussing  the "agency" problem in the  context of            ___            tender offers).                                          -15-            been  held   to  an  obligation  of   full  disclosure  . . . .            Conceptually,  extending  the  insider  trading  prohibition to            instances of issuer insider trading makes perfect sense.").                   Just  as an individual  insider with  material nonpublic            information about pending merger or license negotiations  could            not   purchase   his   company's  securities   without   making            disclosure,  the  company  itself  may  not engage  in  such  a            purchase  of its  own stock,  if it  is in  possession of  such            ________            undisclosed information.   See, e.g.,  Rogen, 361 F.2d  at 268.                                       ___  ____   _____            By extension, a comparable rule should apply to issuers engaged            in a stock offering.  Otherwise, a corporate issuer selling its                       ________            own securities would be left free to exploit  its informational            trading  advantage, at  the expense  of investors,  by delaying            disclosure  of  material  nonpublic negative  news  until after            completion of the  offering.   Cf. Ian Ayres,  Back to  Basics:                                           ___             ________________            Regulating How Corporations Speak to the Market, 77 Va. L. Rev.            _______________________________________________            945,  959-60  (1991) (describing  the argument  that securities            laws impose needed discipline,  because companies do not always            internalize  the costs  of failing to  provide the  market with            accurate information that would lower stock prices).                   2.  The Statutory and Regulatory Scheme                       ___________________________________                   Analogizing a corporate issuer  to an individual insider            subject  to the "disclose  or abstain" rule  of insider trading            law  illustrates  the policy  reasons  supporting  a comparably            strong  disclosure  mechanism  in   the  context  of  a  public            offering.   We look  to the explicit  statutory and  regulatory                                          -16-            framework to determine whether the Securities Act provides such            a  mechanism,  and  whether  the Wilensky  complaint  states  a                                             ________            legally cognizable claim for nondisclosure under Section 11.                   Section  11 by its terms  provides for the imposition of            liability  if a  registration  statement, as  of its  effective            date: (1) "contained an untrue statement of material fact"; (2)            "omitted  to  state  a  material  fact required  to  be  stated            therein"; or (3) omitted to state a material fact "necessary to            make  the  statements  therein  not  misleading."    15  U.S.C.              77k(a).  The plaintiffs' claim of nondisclosure relies on the            second  of these three bases  of liability.   That predicate is            unique  to Section 11; neither Section  12(2) of the Securities            Act  nor Section  10(b) or  Rule 10b-5  under the  Exchange Act            contains  comparable language.   It is intended  to ensure that            issuers, under  pain of  civil liability,  not  cut corners  in            preparing registration  statements and  that they  disclose all            material information required  by the  applicable statutes  and            regulations.   See Huddleston,  459 U.S.  at 381-82;  Harold S.                           ___ __________            Bloomenthal  et al.,  Securities Law  Handbook   14.08,  at 663                                  ________________________            (1996  ed.)   ("Congress  . . .  devised  Section   11  of  the            Securities Act  as  an  in  terrorem remedy  that  would  . . .            encourage careful preparation of the registration statement and            prospectus.").                   The   information   "required  to   be   stated"   in  a            registration statement is  spelled out  both in  Schedule A  to            Section 7(a)of  the Securities Act, 15  U.S.C.    77g(a), 77aa,                                          -17-            and in  various regulations promulgated by the  SEC pursuant to            its statutory authority.6   Those rules and  regulations are no            less  essential  to  the  statutory  scheme  than  the  general            outlines of the statute itself.  Cf. Touche Ross &  Co. v. SEC,                                             ___ __________________    ___            609 F.2d 570, 580 (2d Cir. 1979).                   In  this  case,  DEC  conducted its  March  1994  public            offering pursuant to a registration statement  on SEC Form S-3.            Item 11(a) of the  instructions to Form S-37 requires  that the            issuer (registrant) describe in the portion of the registration            statement comprising the prospectus:                   any and all material changes  in the registrant's                   _________________________________________________                   affairs which have occurred  since the end of the                   _______                   latest fiscal year  for which certified financial                   statements  were included  in the  latest  annual                   report to  security  holders and  which have  not                   been described  in a report on  Form 10-Q or Form                   8-K filed under the Exchange Act.            Instructions to Form S-3, Item 11(a) (emphasis added).                   To  understand  the  scope  of  the  "material  changes"            disclosure requirement, it is  helpful to understand the nature                                            ____________________            6.  Section  7(a)  of  the  Securities Act  provides  that  the            "registration statement  shall contain such  other information,            and be accompanied  by such other documents,  as the Commission            may  by  rules or  regulations  require as  being  necessary or            appropriate in  the public interest  or for  the protection  of            investors."   15 U.S.C.    77g(a); see also  15 U.S.C.   77j(d)                                               ________            (granting SEC similar authority  with respect to prospectuses);            15  U.S.C.   77s(a)  (granting  SEC broad  authority to  "make,            amend,  and  rescind  such  rules  and  regulations as  may  be            necessary to carry out the provisions of this [Act],  including            rules  and regulations  governing  registration statements  and            prospectuses").            7.  The provisions of the  registration forms prescribed by the            SEC constitute  an integral  part of the  regulatory disclosure            framework.  See 17 C.F.R.    230.400, 230.401, 239.0-1 et seq.                        ___                                        _______                                          -18-            of  Form  S-3.   Form S-3  is  a streamlined  registration form            available only to certain  well-capitalized and widely followed            issuers about which a  significant amount of public information            is  already available.8  A  registrant on Form S-3 accomplishes            disclosure  in  part  by  incorporating in  the  prospectus  by            reference  its  most  recent Form  10-K  and  Forms  10-Q filed            pursuant  to the Exchange Act.   See Instructions  to Form S-3,                                             ___            Item 12(a).  Unlike registrants on more broadly available forms            (such as S-1), a Form S-3 registrant is not required separately            to furnish  in the prospectus the information  required by Item            303(a) of Regulation S-K, 17 C.F.R.   229.303(a) ("Management's            discussion and  analysis of financial condition  and results of            operations"),9 because  that  information  is  presumed  to  be            contained   in  the   Exchange  Act   filings  that   Form  S-3            incorporates by reference, which  are themselves subject to the            requirements of Regulation S-K.10   The primary purpose  of the                                            ____________________            8.  To be eligible to register on Form S-3, an issuer must have            been subject to public reporting  requirements for at least one            year, filed all reports required  under the Exchange Act  (such            as Forms 10-Q  and 10-K) timely during the past  year, and must            meet certain other requirements  relating to financial strength            and stability.  See 17 C.F.R.   239.13; see also Bloomenthal et                            ___                     ________            al., supra,   5.05[1][b], at 212-13.                 _____            9.  Item   303(a)   requires   the   disclosure,   among  other            information, of  "any known  trends or uncertainties  that have            had  or that  the  registrant reasonably  expects  will have  a            material  favorable  or  unfavorable  impact on  net  sales  or            revenues  or income  from  continuing operations."   17  C.F.R.              229.303(a)(3)(ii).            10.  By  contrast,  a registrant  on Form  S-1 (which  does not            permit incorporation  by reference) must  independently furnish            in the  prospectus  the information  required  by Item  303  of            Regulation S-K.  See Instructions to Form S-1, Item 11(h).                             ___                                          -19-            "material changes" disclosure requirement  of Item 11(a), then,            is to  ensure that  the prospectus  provides investors  with an            update  of the  information  required to  be  disclosed in  the            ______            incorporated  Exchange Act  filings, including  the information            provided  in   those  filings  concerning   "known  trends  and            uncertainties" with respect to "net sales or revenues or income            from continuing operations."  17 C.F.R.   229.303(a)(3)(ii).                   In this case, the  date of the final prospectus  for the            March 1994 offering and the  effective date of the registration            statement was March  21, 1994.11  Prior  to that date,  the end            of  DEC's  latest fiscal  year was  July  3, 1993  (fiscal year            1993), and the last Form 10-Q  filed by the company was for the            quarter  that had ended on January 1, 1994 (DEC's second fiscal            quarter).    The  question,  then,  is  whether  the  complaint            contains  sufficient  allegations  that  defendants  failed  to            disclose   in  the   registration  statement   any  information            regarding "material changes" in DEC's "affairs" as of March 21,            1994,  that had  occurred since July  3, 1993 and  had not been            reported  in  the Form  10-Q filed  for  the second  quarter of            fiscal  year 1994.   If  the Wilensky  complaint adequately  so                                         ________            alleges, then  the complaint sets  forth a cognizable  claim of            nondisclosure under Section 11,  namely, that defendants failed                                            ____________________            11.  The  effective date  of  the  registration  statement  for            purposes of Securities Act liability is  the "speaking date" of            the  final   prospectus.    See  Bloomenthal   et  al.,  supra,                                        ___                          _____              5.05[2][f] at 216.  The parties do not dispute that March 21,            1994 was the effective date of the registration statement.                                          -20-            to include in the  registration statement information "required            to be stated therein."                   3.  The Alleged Nondisclosures                   __  __________________________                   Plaintiffs argue that defendants  failed to comply  with            Item 11(a) by omitting three categories of information from the            registration  statement  and  prospectus.    First,  plaintiffs            contend  that  defendants  failed  to  disclose  that  DEC  had            embarked on  a risky marketing strategy  that involved slashing            prices  and   sacrificing  profit  margins  in   the  hopes  of            increasing  "market  penetration" of  the company's  Alpha chip            products.  Second, plaintiffs  assert that defendants failed to            disclose  that under  the  company's compensation  scheme,  its            sales  representatives  were being  paid  "double commissions,"            again to the detriment of the company's profit margins.  Third,            and  most centrally, plaintiffs allege that, by the date of the            March 21 offering, defendants were in possession of, yet failed            to disclose,  material knowledge  of facts indicating  that the            third fiscal  quarter would be an  unexpectedly disastrous one.            We dispose of the  first two claims of nondisclosure,  and then            focus our discussion on the third.                      a.  Marketing Strategy                      __  __________________                   The  defendants  provide  a  decisive rejoinder  to  the            plaintiffs'  claim of  nondisclosure concerning  the "marketing            strategy":  the  relevant  aspects  and   consequences  of  the            strategy were in fact  prominently disclosed, both in  the text                                          -21-            of   the   prospectus   and  in   documents   incorporated   by            reference.12   For  example, in  its Form  10-Q filing  for the            quarter ending  October 2, 1993  (the first  quarter of  fiscal            year 1994), the company explained its reported decline in gross            profit margins as follows:13                   The decline in product gross margin resulted from                   the decrease in product  sales, a continued shift                   in  the  mix  of  product  sales  toward  low-end                   systems  which  typically  carry  lower  margins,                   competitive  pricing  pressures  and  unfavorable                   currency   fluctuations,   partially  offset   by                   manufacturing cost efficiencies.                   The  Corporation  has   adopted  an   aggressive,                   competitive  price structure  for  its  Alpha AXP                   systems.   Given  this  pricing, as  well  as the                   factors described in the preceding paragraph, the                   Corporation   expects  to   experience  continued                   downward pressure on product gross margins.            This statement, in  conjunction with related disclosures  found            elsewhere  in the prospectus  and incorporated filings relating            to  "competitive  pricing  pressures,"  declining  gross profit            margins,   "competitive   pricing    actions   taken   by   the            Corporation,"  an "industry  trend toward  lower  product gross                                            ____________________            12.  As  required by Item 12  of the instructions  to Form S-3,            the  March  11, 1994  prospectus  specifically incorporated  by            reference the company's Form  10-K filing for fiscal  year 1993            (as amended by  Form 10-K/A dated March 11, 1994), and its Form            10-Q filings for the quarterly periods that ended on October 2,            1993 and January 1, 1994.            13.  Since   the  complaint   alleges  nondisclosures   in  the            registration statement  and prospectus,  the court may  look to            the text of those materials and the incorporated SEC filings to            determine whether the plaintiffs' allegations are well founded.            See  Kramer v. Time  Warner, Inc., 937  F.2d 767,  774 (2d Cir.            ___  ______    __________________            1991).   We discuss more fully later the circumstances in which            a court  may look outside  the four corners  of a complaint  in            deciding a motion to dismiss.                                          -22-            margins,"   and   "persistent  intense   pricing  competition,"            together obviate  the plaintiffs' claim that  defendants failed            to disclose the company's  adoption of a price-cutting strategy            to boost the "market penetration" of its Alpha-based systems.                      b.  "Double Commissions"                      __  ____________________                   The plaintiffs'  claim of a failure  to disclose "double            commissions" also fails to make out a Section 11 violation.  To            the   extent   that   the  claim   comprises   allegations   of            mismanagement,14  it is  not  cognizable  under the  securities            laws.  See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477-80                   ___ _____________________    _____            (1977);  In re Craftmatic Sec. Litig., 890 F.2d 628, 638-39 (3d                     ____________________________            Cir. 1989) (stating that  plaintiffs cannot circumvent Santa Fe                                                                   ________            by simply  pleading  a  mismanagement claim  as  a  failure  to            disclose management  practices); see  also Hayes v.  Gross, 982                                             _________ _____     _____            F.2d 104, 106 (3d  Cir. 1992).  Otherwise, the  claim fails for            lack  of any  allegations  establishing a  plausible theory  of            materiality.                   The complaint does not allege that  "double commissions"            have  some intrinsic  significance  to investors.    Plaintiffs            complain, rather, that DEC  failed to tell the market  that the            commission-based compensation scheme, instead of boosting sales            as it was  supposed to  do, was contributing  to the  company's            losses.  This argument is problematic.  As the complaint itself            acknowledges, DEC publicly announced  the switch from a salary-                                            ____________________            14.  The  complaint's  assertion   that  "DEC  implemented  its            commission  program  and  set  sales  quotas  without   careful            evaluation" is an example of such an allegation.                                          -23-            based  compensation scheme  to the  incentive-based model  that            produced the double commissions.  Furthermore, according to the            complaint,  the switch  was  made not  during the  third fiscal                                              ___            quarter  of 1994,  but some  two years earlier,  in 1992.   The                                                                ____            plaintiffs do  not  allege that  any  material changes  to  the            compensation scheme were implemented after that time.  Whatever            the bearing of DEC's incentive-based compensation scheme on the            company's expenses  in relation to its  revenues, the investing            public  had  at least  a year's  worth  of hard  financial data            (through the second quarter of fiscal 1994) to evaluate whether            the  commission   system   was  working   to   increase   gross            margins,15 or  instead, as  plaintiffs allege, to  shrink them.            Plaintiffs  do not allege that  there were any material changes            in the payment  of commissions  between the time  of the  March            public  offering  and the  last prior  Form  10-Q filed  by the            company  (for the  second fiscal  quarter of  1994), and  so on            their  own theory  the claim  that DEC  failed to  disclose the            payment of "double commissions" amounts to naught.                      c.  Operating Results Prior to End of Quarter                      __  _________________________________________                   We  turn to  the complaint's central,  overarching claim            that  defendants failed,  in connection  with the  March public            offering,  to disclose material factual developments foreboding            disastrous quarter-end  results.  In evaluating  this claim, we                                            ____________________            15.  The payments made to  sales representatives constituted  a            component   of  the  company's   quarterly  expenses,  and  the            aggregate effect of such payments could have been determined by            examining the  company's quarterly earnings  data, as disclosed            in the required SEC filings.                                          -24-            accept arguendo  the complaint's allegations16 that  DEC had in                   ________            its  possession as  of  the March  21  offering date  nonpublic            information  concerning  the company's  ongoing quarter-to-date            performance,   indicating   that  the   company   would  suffer            unexpectedly large  losses  for that  quarter.   We ask,  then,            whether  there was a duty  to disclose such  information in the            registration  statement and  prospectus  under  the  rubric  of            "material changes" under Item 11(a) of Form S-3.  We focus upon            the defendants' primary legal arguments on this point: that DEC            was under no duty to disclose "intra-quarterly" results or  any            other  information  concerning  its  third  quarter performance            until  after the quarter ended; and that defendants had no duty            as  of March 21, 1994  to disclose any  internal projections or            predictions concerning the expected outcome of the quarter.                   A central  goal underlying the  disclosure provisions of            the securities laws  is to promote  fairness and efficiency  in            the  securities markets.  See  Central Bank of  Denver, N.A. v.                                      ___  _____________________________            First  Interstate Bank of Denver,  N.A., 114 S.  Ct. 1439, 1445            _______________________________________            (1994) ("Together, the Acts embrace a fundamental purpose . . .            to  substitute   a  philosophy  of  full   disclosure  for  the            philosophy of caveat emptor." (internal quotation omitted)); In                                                                         __            re  LTV Sec. Litig., 88 F.R.D. 134,  145 (N.D. Tex. 1980).  The            ___________________            disclosure  of  accurate   firm-specific  information   enables                                            ____________________            16.  As  discussed  below,  based   on  the  character  of  the            allegations in  the Wilensky complaint, the  plaintiffs' claims                                ________            under  the  Securities Act  are  not  subject  to the  pleading            requirements of Fed. R. Civ. P. 9(b).                                          -25-            investors  to compare  the prospects of  investing in  one firm            versus  another,  and  enables  capital to  flow  to  its  most            valuable uses.  LHLC Corp.  v. Cluett, Peabody & Co., 842  F.2d                            __________     _____________________            928, 931 (7th  Cir.), cert.  denied, 488 U.S.  926 (1988);  cf.                                  _____  ______                         ___            Acme Propane, Inc. v.  Tenexco, Inc., 844 F.2d 1317,  1323 (7th            __________________     _____________            Cir. 1988) (securities laws aim at ensuring the availability to            the investing public of information not otherwise in the public            domain).      The   availability   of   reliable  firm-specific            information is also essential to  the market's ability to align            stock price with a security's "fundamental value."  See  Marcel                                                                ___            Kahan,  Securities Laws  and the  Social Costs  of "Inaccurate"                    _______________________________________________________            Stock Prices, 41 Duke L. J. 977, 988-89 (1992).            ____________                   The need for issuers to disclose material information is            crucial  in the context  of a public  offering, where investors            typically must rely (unless the offering is "at the market") on            an  offering   price  determined  by  the   issuer  and/or  the            underwriters of  the offering.   See Kahan,  supra, at  1014-15                                             ___         _____            (explaining   the   heightened   need  to   target   disclosure            requirements  to  companies   engaged  in  public   offerings).            Accordingly,  the  disclosure  requirements  associated  with a            stock  offering  are  more  stringent than,  for  example,  the            regular periodic disclosures called for in the company's annual            Form  10-K or quarterly  Form 10-Q  filings under  the Exchange            Act.  See id. at 1014-15 & n.163.                  ___ ___                   The   need  for  complete   and  prompt   disclosure  is            particularly keen when a corporation issues stock pursuant to a                                          -26-            "shelf registration" under SEC  Rule 415(a), as DEC did  in its            public  offering of  March 1994.   See  17 C.F.R.    230.415(a)                                               ___            (permitting  registration  of  securities  to be  issued  on  a            "continuous" or "delayed" basis).   The shelf registration rule            permits  a  company to  file  a  single registration  statement            covering  a certain quantity of securities (register securities            "for  the shelf"),  and  then  over  a  period  of  up  to  two            years,17   with  the  appropriate   updates  of  information,18            issue  installments  of   securities  under  that  registration            statement (take  the securities  "down from the  shelf") almost            instantly,  in  amounts  and  at  times  the  company  and  its            underwriters deem  most propitious.   See Clark, supra,  at 751                                                  ___        _____            (explaining that the  shelf registration process  enables firms            to pinpoint the timing of offerings to the issuer's advantage);            see  generally  Jeffrey  N.   Gordon  &  Lewis  A.  Kornhauser,            ______________            Efficient Markets, Costly Information, and Securities Research,            ______________________________________________________________            60 N.Y.U. L. Rev. 761, 819-20 (1985).                                            ____________________            17.  A  shelf registration  under Rule  415 may  only cover  an            amount of securities that "is reasonably expected to be offered            and  sold within two years  from the initial  effective date of            the registration."  17 C.F.R.   230.415(a)(2).            18.  For  example,   Rule  415(a)(3)  requires   that  a  shelf            registrant comply with Item 512(a) of Regulation S-K, 17 C.F.R.              229.512(a)(ii), which requires that a registrant file a post-            effective amendment to an initial  registration statement "[t]o            reflect in the prospectus any facts or events arising after the            effective  date  of  the  registration  statement . . .  which,            individually  or  in  the aggregate,  represent  a  fundamental            change  in  the  information  set  forth  in  the  registration            statement."                                          -27-                   The  social benefit  of the  shelf registration  rule is            that  it can enable an issuer to  decrease its costs of raising            capital.   See Clark,  supra, at 751.   The concomitant risk is                       ___         _____            that, by  permitting securities  to be  offered on a  "delayed"            basis, the rule may adversely affect the quality and timeliness            of the  disclosures made in connection with the actual issuance            of securities.   See Shelf Registration,  SEC Release Nos.  33-                             ___            6499,  34-20384, 35-23122, 1983 WL 35832 (SEC), *2 ("Shelf Reg.            Rel.");  see  also  I Loss  &  Seligman,  supra,  at 355  ("The                     _________                        _____            rationale  for  limiting  the  time   during  which  registered            securities  may   be  sold  is  that   investors  need  current            information   when  considering   an   offering.     To  permit            'registration  for  the shelf'  runs  the  risk that  investors            subsequently  will  be  offered  securities  on  the  basis  of            outdated  or  stale  information.").    In  response  to  these            concerns,  the SEC, in adopting  Rule 415 in  its current form,            assured  that  "[p]ost-effective  amendments  [to  the  initial            registration  statement]  and  prospectus  supplements  [would]            serve  to ensure  that  investors are  provided with  complete,            accurate and current information at the time of the offering or            sale of securities."   Shelf  Reg. Rel., supra,  1983 WL  35832                                                     _____            (SEC), *9.   The SEC  explained that registrants  would not  be            permitted  "to use the shelf  registration rule as  a basis for            omitting   required   information   from   their   registration            statements when they  become effective."   Id.,  1983 WL  35832                                                       ___            (SEC), *10.                                          -28-                   Based  on  concerns  about  Rule  415's  effect  on  the            adequacy and timeliness  of disclosure, the SEC  chose to limit            the availability of the  rule, in the context of  primary stock            offerings, to the widely-followed companies (like DEC) that are            eligible  to register  securities on  SEC Form  S-3.19   See 17                                                                     ___            C.F.R.   230.415(a)(1)(x); SEC Rel.  No. 33-6499, 1983 WL 35832            (SEC) at  *5; I  Loss & Seligman,  supra, at  361 & n.90.   The                                               _____            theory  was that the concerns about adequacy of disclosure were            less prominent in the case  of "S-3" registrants, because those            companies are precisely the ones that in the ordinary course of            their  businesses  "provide a  steady  stream  of high  quality            corporate information  to the marketplace  and whose  corporate            information is broadly  disseminated[] . . . and  is constantly            digested and  synthesized by  financial analysts."   Shelf Reg.            Rel., supra, 1983 WL 35832 (SEC), *5.                  _____                   Defendants  assert here that the disclosure requirements            of  the Securities Act and regulations, including Item 11(a) of            Form  S-3,  should be  interpreted  so  that they  would  never                                                                      _____            mandate the provision of  current information about a company's            performance in the quarter in progress at the time of  a public            offering, so  long as the  company satisfies its  quarterly and            annual periodic disclosure obligations  under the Exchange Act.            That argument cuts severely against  the very reason the  shelf                                            ____________________            19.  As an exception to  the Form S-3 limitation, the  SEC also            made  the shelf  registration rule  available in  certain other            limited  circumstances  not  relevant  here.    See  17  C.F.R.                                                            ___              230.415(a)(1)(i)-(ix); Bloomenthal et  al., supra,    5.12[1]                                                          _____            at 235-36; I Loss & Seligman, supra, at 362-63.                                          _____                                          -29-            registration rule was made available to issuers like DEC:  that            "S-3"  companies would  provide  the market  with a  continuous            stream of high quality corporate information.  The rule permits            offerings  to  be made  on  a "continuous"  or  "delayed" basis            because  it envisions  "continuous"  disclosure.   It would  be            inconsistent with  this rationale to  permit an issuer  to take            refuge in its  periodically-filed Forms 10-Q  or 10-K to  avoid            the  obligation to disclose current material facts in its shelf            offering prospectus.                   Absent some mechanism requiring a registrant to disclose            internally known, material nonpublic information  pertaining to            a  quarter in  progress, the  shelf registration  procedure, by            enabling the  issuer to  pinpoint the  timing of its  offering,            would  give   a  company   anticipating  a  negative   earnings            announcement the  ability to  time its offerings  of securities            from the shelf  to be completed prior to the  public release of            the known negative news.  This would allow companies to exploit            what amounts to  a naked informational trading  advantage.  Cf.                                                                        ___            Gordon & Kornhauser, supra, at 819-20.  Item 11(a) of Form S-3,                                 _____            by   requiring  the  issuer  to  disclose  current  information            concerning  "material changes"  from previously  reported data,            provides  a mechanism -- comparable  in effect to the "disclose            or abstain" rule governing insider  trading -- to prevent  such            strategic behavior.20                                            ____________________            20.  Of  course, if  the  issuer desires  not  to disclose  the            information prior to quarter's end, then the flexibility of the            shelf registration  procedure permits  the issuer to  "delay" a                                          -30-                   In  the  face of  these  concerns, DEC  argues  that the            plaintiffs' claims of nondisclosure  are without merit, because            they  seek  to  impose liability  upon  DEC  for  a failure  to            disclose  its internal  projections  about the  outcome of  the                                    ___________            third quarter  of  fiscal 1994.   The  federal securities  laws            impose no obligation upon an issuer to disclose forward-looking            information such as internal  projections, estimates of  future            performance, forecasts, budgets, and  similar data.  See, e.g.,                                                                 ___  ____            In re  Verifone Sec. Litig., 11 F.3d  865, 869 (9th Cir. 1993);            ___________________________            In re Convergent  Technologies Sec. Litig.,  948 F.2d 507,  516            __________________________________________            (9th  Cir.  1991).    Plaintiffs, however,  insist  that  their            Section 11  claim is concerned  not with  the nondisclosure  of            projections, but of current  information that DEC allegedly had            in  its  possession as  of March  21,  1994 about  "losses" the            company  was  incurring in  the  ongoing  quarter.   Defendants            respond, in turn, that  under a system of  quarterly reporting,            "losses" cannot be realized until a quarter has ended, and that            because  the quarter  in question  did not  end until  April 2,            1994, whatever information  DEC had as  of March 21  concerning            that quarter necessarily must have been forward-looking, in the            nature  of a projection or forecast, which it had no obligation            to disclose.                   DEC's  argument elevates  form  over  substance.   DEC's            assertion that  companies do not realize "losses" as such until                                            ____________________            planned offering until  after the quarter is completed  and the            results from the quarter are publicly reported.                                          -31-            a  quarter has  ended is,  of course,  largely unexceptionable.            But it does  not follow that DEC's  only information concerning            the  ongoing quarter  as of  March 21  must have  been forward-            looking.   That  contention  relies on  two faulty  components.            First,  it assumes  that plaintiffs  could not  adduce adequate            evidence   that  defendants  were  actually  in  possession  of            material information about the  ongoing quarter at the relevant            time.  Second,  it assumes that the potential  unreliability of            inferences that  could be drawn from  current information about            operating results as of eleven days before the end of a quarter            absolutely protects that information from mandatory disclosure.            The first premise is  inconsistent with the standards governing            a Rule 12(b)(6)  motion to  dismiss.  The  second confuses  the            issue of materiality with the duty to disclose.                   Defendants  posit, in essence, that there can never be a            duty to disclose internally known, pre-end-of-quarter financial            information,  because  any inferences  about  the  quarter that            might  be  drawn  from   such  information  could  be  rendered            unreliable by later developments in the same quarter, such as a            sudden  surge of  profitable  sales.   This  position does  not            withstand scrutiny.  Present,  known information that  strongly            implies  an  important  future   outcome  is  not  immune  from            mandatory disclosure merely because  it does not foreordain any            particular  outcome.     The  question  whether  such   present            information  must be  disclosed  (assuming the  existence of  a            duty), poses  a classic  materiality issue: given  that at  any                                          -32-            point in a quarter, the remainder of the period may not  mirror            the  quarter-to-date, is  there a  sufficient probability  that            unexpectedly disastrous quarter-to-date performance  will carry            forward  to  the end  of the  quarter,  such that  a reasonable            investor   would  likely   consider  the   interim  performance            important to the overall mix of information available?                   As desirable as bright-line  rules may be, this question            cannot be answered by reference to  such a rule.  To try  to do            so would  be contrary to Basic, Inc.  v. Levinson, 485 U.S. 224                                     ___________     ________            (1988).  The Supreme Court there refused to adopt a bright-line            approach   to  determine  at   what  stage  preliminary  merger            discussions   create  a   sufficient   probability  of   actual            consummation to become  material.  See id. at 237-39 (rejecting                                               ___ ___            "agreement-in-principle" test).  So here.  We decline to adopt,            as defendants  would have  us do,  a  hard and  fast rule  that            current information concerning a company's operating experience            is  never  subject to  disclosure until  after  the end  of the            quarter  to  which  the  information  pertains.    Rather,  the            question is whether the nondisclosure of interim facts rendered            the prospectus materially  incomplete.  An  issuer's compliance            with the  periodic disclosure requirements of  the Exchange Act            does  not per  se preclude  such undisclosed  facts  from being                      _______            material.                   By the same token,  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                                          -33-            whenever it perceives a  possibility that the quarter's results            may  disappoint the market.  Far from it.  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.   The            market  takes   this  risk  of  variability   into  account  in            evaluating the company's prospects based on the available facts            concerning  the  issuer's   past  historical  performance,  its            current   financial  condition,   present  trends   and  future            uncertainties.    But,  strong-form  efficient  market theories            aside, the  ability of market  observers to evaluate  a company            depends  upon the information publicly  available to them.  If,            as plaintiffs  allege  here, the  issuer  is in  possession  of            nonpublic information  indicating that the quarter  in progress            at the time of the public offering will be an extreme departure            from the range of  results which could be anticipated  based on            currently available  information,  it is  consistent  with  the            basic  statutory  policies   favoring  disclosure  to   require            inclusion of that information in the registration statement.                   We  do not  mean to  imply, however,  that nondisclosure            claims  similar to those asserted  by plaintiffs here can never            be disposed  of as a matter of law.  In many circumstances, the            relationship between the  nonpublic information that plaintiffs            claim  should  have been  disclosed and  the actual  results or            events that  the undisclosed information  supposedly would have                                          -34-            presaged will be so attenuated that the undisclosed information            may be  deemed immaterial as a matter of law.  Cf. Verifone, 11                                                           ___ ________            F.3d at 867-70 (affirming  dismissal of claim that registration            statement allegedly failed  to disclose information  concerning            development that  came  to light  six  months later);  Krim  v.                                                                   ____            BancTexas Group, Inc., 989  F.2d 1435, 1439, 1449-50 (5th  Cir.            _____________________            1993)   (affirming  summary  judgment  disallowing  claim  that            prospectus failed to disclose  information of developments that            matured  four months  later); Convergent,  948 F.2d  at 509-11,                                          __________            515-16  (same,  where prospectuses  in  March  and August  1983            allegedly failed to disclose negative developments announced in            February 1984); Zucker v. Quasha, 891 F. Supp. 1010, 1012, 1018                            ______    ______            (D.N.J.   1995)  (dismissing   complaint   based   on   alleged            nondisclosure in March 31 registration statement of information            relating to results of period ending July 2), aff'd, __ F.3d __                                                          _____            (3d Cir. 1996)  (table, No. 95-5428).   In such  circumstances,            where the  allegedly  undisclosed information  is  sufficiently            remote in time or  causation from the ultimate events  of which            it   purportedly   forewarned,   the   plaintiff's   claim   of            nondisclosure may  be indistinguishable  from a claim  that the            issuer should have divulged its internal predictions about what            would come of  the undisclosed information.   Cf. Verifone,  11                                                          ___ ________            F.3d at 869 (characterizing plaintiffs' claims of nondisclosure            of "adverse material facts and trends" as of March 13 as claims            that defendants  failed to disclose forecasts  of news actually            released to public on September 17).                                          -35-                   Here, however,  the prospectus in question  was filed 11            days prior  to the end of the quarter in progress.  The results            for that quarter turned out to be, by all accounts, the product            of  more than a minor  business fluctuation.   Accepting, as we            must, the plaintiffs' allegation that  DEC, by March 21,  1994,            was in  possession of information about  the company's quarter-            to-date performance (e.g.,  operating results) indicating  some                                 ____            substantial likelihood that the quarter would turn out to be an            extreme departure from publicly known trends and uncertainties,            we  cannot conclude as a matter of  law and at this early stage            of  the litigation  that such  information was  not subject  to            mandatory disclosure under the  rubric of "material changes" in            Item 11(a) of  Form S-3.   We conclude,  accordingly, that  the            Wilensky   plaintiffs'  complaint as  to this  theory states  a            ________            legally cognizableclaim under Section11 of theSecurities Act.21                                            ____________________            21.  It bears  reemphasizing  that  the  plaintiffs'  claim  is            sustainable  only to the extent it relates to the nondisclosure            of   "hard"  material   information,  as   opposed   to  "soft"            information in the nature  of projections.  See In  re Verifone                                                        ___ _______________            Sec. Litig., 784 F.  Supp. 1471, 1482 (N.D. Cal.  1992), aff'd,            ___________                                              _____            11 F.3d 865  (9th Cir. 1993); see generally 2  Loss & Seligman,                                          _____________            supra, at 622 n.66.  Although DEC had no obligation to disclose            _____            a forecast  of results for the quarter  in progress at the time            of  the offering, it was permitted to  do so.  If it had chosen            to  disclose  such a  forward-looking  projection,  and if  the            projection was made with reasonable basis and in good faith, it            would  have been protected by  the SEC's safe harbor provision.            See  SEC  Rule 175,  17 C.F.R.    230.175;  see also  Arazie v.            ___                                         ________  ______            Mullane,  2 F.3d 1456, 1468 (7th Cir. 1993); Searls v. Glasser,            _______                                      ______    _______            64 F.3d  1061, 1066  (7th  Cir. 1995);  cf. Private  Securities                                                    ___            Litigation Reform Act of  1995, Pub. L. No. 104-67,    102, 109            Stat. 737, 749-55 (creating  expanded statutory protection  for            forward-looking  statements).  Furthermore,  had DEC  chosen to            disclose projected  results, such a disclosure  (if reasonable)            could very  well have  rendered the "hard"  interim information            underlying  the projection immaterial as a matter of fact or of                                          -36-            B.    Actionability   of  Statement  Concerning   Restructuring            __    _________________________________________________________            Reserves             ________                   The   Wilensky   plaintiffs   also   allege   that   the                         ________            registration statement and prospectus for the March 21 offering            contained  a   materially   false  and   misleading   statement            actionable under both Sections 11 and 12(2).  They contend that            the statement of DEC's  "belie[f]" as to the "adequacy"  of the            then-remaining $443  million  restructuring reserve  "to  cover            presently   planned  restructuring   actions"  was   false  and            misleading, in light of information  contemporaneously known to            the company.                   1.  Background                   __  __________                   The   "restructuring   reserve"  referred   to   in  the            prospectus supplement originated as a $1.5 billion charge taken            by DEC  at the close  of its fiscal  year 1992 (ended  June 27,            1992) as part  of the company's  ongoing efforts to  streamline            the company  "to achieve  a competitive cost  structure."   The            reserve was intended to cover the anticipated costs of employee            separations,  facilities   consolidations,  asset  retirements,            relocations, and  related expenses.   The company  had absorbed            similar restructuring charges of  $1.1 billion and $550 million            in fiscal years 1991 and 1990, respectively.                                            ____________________            law,  unless the market would have had some reason to discredit            the projection, thereby creating a substantial  likelihood that            a  reasonable investor  might still  have found  the underlying            information  important   to  the  total   mix  of   information            available.                                          -37-                   During fiscal year  1993, DEC took  a number of  actions            consistent with the $1.5 billion dollar reserve recorded at the            end  of fiscal year 1992.  By the  end of the fiscal year (July            3,   1993),  the   remaining   reserve  was   reported  to   be            approximately $739 million.  During  the first two quarters  of            the  next fiscal year, the  company continued to  draw from the            reserve, so that by the  end of the second quarter  (January 1,            1994), the reserve stood at approximately $443 million.  In its            Form  10-Q  for  that  quarter, dated  February  4,  1994  (and            incorporated by reference  into the registration statement  and            prospectus  at issue here), DEC stated its belief that the $443            million   reserve  was   "adequate"   to  cover   restructuring            activities  planned at that time.   This statement was repeated            in  the prospectus supplement dated  March 21, 1994.   The full            statement,  with its  immediately surrounding  context, was  as            follows:                   While spending for R&E  [research &  engineering]                   and SG&A  [selling, general & administrative]  is                   declining, the Corporation  believes its cost and                   expense levels  are still too high  for the level                   and  mix  of  total  operating  revenues.     The                   Corporation is reducing  expenses by streamlining                   its   product   offerings    and   selling    and                   administrative practices, resulting in reductions                   in employee population, closing and consolidation                   of  facilities  and  reductions  in discretionary                   spending.    The Corporation  believes  that  the                   remaining restructuring reserve  of $443  million                   is   adequate   to    cover   presently   planned                   restructuring  actions.    The  Corporation  will                   continue to take  actions necessary to  achieve a                   level of costs  appropriate for its revenues  and                   competitive for its business.                                          -38-                   As events turned  out, additional restructuring  charges            were in fact taken  later in fiscal year 1994.  At  the time of            the company's  announcement  on  April  15, 1994  of  the  $183            million loss for  the third fiscal  quarter of 1994,  defendant            Palmer  stated that  he  had already  instructed management  to            "accelerate [the company's] on-going restructuring efforts" and            that  the company  would  "consider  further  restructuring  to            achieve [its]  goals."   In  line  with these  statements,  the            company announced on  July 20,  1994 (just after  the close  of            fiscal year 1994)  that it  had decided to  take an  additional            restructuring charge of $1.2 billion in fiscal year 1994 (ended            June 30, 1994).                   2.  Whether the Statement Was Misleading                   __  ____________________________________                   Although defendants were  required to disclose the  size            of  the remaining  restructuring  reserve  in the  registration            statement and  prospectus as affecting the  company's liquidity            and capital resources,22  the characterization  of the  reserve            as adequate was  arguably voluntary.  But  whether voluntary or               ________            not, DEC's description of its belief  as of March 21, 1994 that            the remaining $443 million  reserve was "adequate" carried with            it  an obligation  to  ensure that  the representation  was not                                            ____________________            22.  Item 303(a)  of Regulation S-K requires  the registrant to            include in its Exchange  Act filings (e.g., Forms 10-Q  and 10-                                                  ____            K),  which   in  turn   are  incorporated  by   reference  into            registration statements  on Form S-3, a  description of "trends            or any  known  demands, commitments,  events or  uncertainties"            affecting the  registrant's liquidity, and of  the registrant's            "material  commitments for  capital  expenditures."   17 C.F.R.              229.303(a)(1)-(2).                                          -39-            misleading.   See  Roeder,  814 F.2d  at  26; cf.  Serabian  v.                          ___  ______                     ___  ________            Amoskeag  Bank Shares, Inc., 24  F.3d 357, 365  (1st Cir. 1994)            ___________________________            ("[I]f a defendant  characterizes . . . reserves as  'adequate'            or  'solid'  even  though  it  knows  they  are  inadequate  or            unstable, it  exposes itself  to possible liability  [under the            securities laws]." (quoting Shapiro v. UJB Financial Corp., 964                                        _______    ___________________            F.2d 272, 282 (3d  Cir.), cert. denied, 506 U.S.  934 (1992)));                                      _____ ______            cf. also In re Wells  Fargo Sec. Litig., 12 F.3d 922,  930 (9th            ________ ______________________________            Cir.  1993), cert. denied, 115  S. Ct. 295  (1994).  Plaintiffs                         _____ ______            assert that defendants failed to meet that obligation.                   The  undeniable purport of  the "adequacy"  statement is            that  DEC  had no  plans  as  of  the date  of  the  prospectus            supplement  to engage in actions  that would require the taking            of  a  restructuring  charge   beyond  the  $443  million  then            remaining  in  "reserve."     This  was  false  or  misleading,            plaintiffs  say, because  DEC knew  as of  March 21,  1994 that            further  restructuring actions  would be  necessary to  put the            company  back on  the  right track  after  its impending  third            quarter  setback,  and that  these  actions  would deplete  the            remaining  reserve and require further restructuring charges to            be  taken.  Defendants reply, as the district court noted, that            whatever the  natural implication of the  "adequacy" statement,            its  context  sufficiently  "bespeaks caution"  to  render  any            misleading inference from the  statement immaterial as a matter            of law.  We do not agree.                                          -40-                   The   "bespeaks   caution"   doctrine  "is   essentially            shorthand for  the well-established principle that  a statement            or  omission must be  considered in context."   In re Donald J.                                                            _______________            Trump Casino Sec. Litig., 7 F.3d 357, 364 (3d Cir. 1993), cert.            ________________________                                  _____            denied, 114 S. Ct. 1219 (1994); see also Rubinstein v. Collins,            ______                          ________ __________    _______            20 F.3d  160, 167 (5th  Cir. 1994).  It  embodies the principle            that 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  under the            securities  laws.23  See Romani v.  Shearson Lehman Hutton, 929                                 ___ ______     ______________________            F.2d   875,  879   (1st  Cir.   1991);  see   also   Harden  v.                                                    __________   ______            Raffensperger, Hughes  &  Co., 65  F.3d  1392, 1404  (7th  Cir.            _____________________________            1995);  In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413-                    __________________________________            14 (9th Cir. 1994) (collecting cases), cert. denied, 116 S. Ct.                                                   _____ ______            185 (1995); Rubinstein, 20 F.3d at 166-68; In re  Trump, 7 F.3d                        __________                     ____________            at 371-72;  I. Meyer Pincus & Assocs. v. Oppenheimer & Co., 936                        _________________________    _________________            F.2d  759, 763  (2d Cir. 1991).   In  short, if  a statement is            couched in or accompanied by prominent cautionary language that            clearly  disclaims or  discounts  the drawing  of a  particular            inference,  any   claim  that  the  statement   was  materially            misleading because it gave rise to that very inference may fail            as a matter of law.  In re Trump, 7 F.3d at 364.                                 ___________                                            ____________________            23.  The  doctrine   has  been   codified  in   the  Securities            Litigation  Reform Act, supra,  Pub. L. No.  104-67,   102, 109                                    _____            Stat. at 750.                                          -41-                   Here, however,  the bespeaks  caution doctrine  does not            preclude  a claim  that  the reserve  "adequacy" statement  was            materially  misleading.   The "adequacy"  statement has  both a            forward-looking  aspect  and  an  aspect  that   encompasses  a            representation of present fact.  In its forward-looking aspect,            the  statement   suggests  that  DEC  would   take  no  further            restructuring charges in the near-term future.  In its present-            oriented aspect, it represents  that as of March 21,  1994, DEC            had  no  current  intent  to undertake  activities  that  would            require any such further restructuring charges to be taken.  To            the extent  that plaintiffs allege that  the reserve "adequacy"            statement  encompasses  the  latter representation  of  present                                                                    _______            fact, and that  such a representation  was false or  misleading            ____            when made,  the surrounding cautionary language  could not have            rendered  the statement  immaterial as  a matter  of law.   See                                                                        ___            Harden,  65  F.3d  at  1405-06 (explaining  that  the  bespeaks            ______            caution doctrine  cannot  render misrepresentations  of  "hard"            fact nonactionable).24                   Furthermore,  to the extent that  plaintiffs allege that            the "adequacy" statement implies  a hiatus on new restructuring            charges  for  the  near  future,  we  do  not  think  that  the            surrounding  context warns  against  such  an implication  with            sufficient clarity to be thought to bespeak caution.  See Fecht                                                                  ___ _____                                            ____________________            24.  Cf. also Securities Litigation  Reform Act, supra, Pub. L.                 ________                                    _____            No. 104-67,   102, 109  Stat. at 750 (providing safe  harbor to            statements  couched   in  cautionary  language   only  if   the            statements are identified as forward-looking).                                          -42-            v. Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995), cert. denied,               _________                                      _____ ______            64 U.S.L.W. 3688 (1996).   The prospectus supplement does state            that  DEC will "continue  to take actions,"  but it  is at best            ambiguous  whether those "actions"  refer to  any restructuring            activities  other than  those "presently  planned."   Thus, one            might  easily interpret  the purportedly  cautionary statement,            especially in light of the "adequacy" characterization, to mean            that  the  company's  ongoing  "actions" will  continue  to  be            covered by the existing restructuring reserve.  If it was true,            as plaintiffs allege, that defendants knew as of March 21, 1994            that DEC's  performance in the third  quarter would precipitate            actions  on a  scale  and schedule  that would  necessitate the            taking  of additional  restructuring  charges,  the  "adequacy"            statement may well have been materially misleading.                   We  cannot conclude,  as a  matter of  law and  on these            pleadings,  that the  actionability of  the "reserve  adequacy"            statement is precluded by a context that bespeaks caution.  The            cautionary statements to which defendants point did not provide            an unambiguous  warning of the possibility that  DEC might take            additional restructuring  charges in the  near future --  as it            turned out, a charge of $1.2 billion in the fiscal year then in            progress.  See  id. at 1082 (bespeaks caution doctrine provides                       ___  ___            basis for  dismissal  as matter  of law  "only when  reasonable            minds could not disagree  as to whether the mix  of information                                                        ___            in the [allegedly actionable] document is misleading" (emphasis            in  original)); Rubinstein,  20  F.3d at  167-68 (stating  that                            __________                                          -43-            questions of whether  disclosures were sufficiently  cautionary            may  not always be resolved as a  matter of law).  Accordingly,            we  hold that the district  court erred in  concluding that the            plaintiffs'   allegations   pertaining   to    the   prospectus            supplement's  description  of  the  restructuring   reserve  as            "adequate"  fail  to  state  a  claim  under  Sections  11  and            12(2).25            C.  Whether Defendants Are Statutory "Sellers"            __  __________________________________________                   As  an  alternative  basis  for affirming  the  district            court's dismissal of the  Section 12(2) claim, defendants argue            that the  Wilensky plaintiffs have failed  adequately to allege                      ________            their status  as statutory "sellers."26   We conclude  that the            complaint  adequately alleges  "seller" status  only as  to the            underwriter  defendants.   The dismissal  of the  Section 12(2)            claim as to the other defendants will accordingly be affirmed.                                            ____________________            25.  Defendants argue that, as a matter of fact, the market was            well aware in January 1994 or earlier that DEC might eventually            be forced to take further restructuring charges in fiscal  year            1994.   This, however, does not address whether the disclosures            in the prospectus supplement  themselves "bespeak caution" as a            matter of law.   Moreover, the evidence cited by  defendants on            this point  goes far beyond  the allegations of  the complaint.            While evidence of actual market knowledge might be proper grist            for  the summary judgment mill  on the question of materiality,            it  cannot properly  be  considered in  evaluating whether  the            plaintiffs' complaint is legally sufficient to survive a motion            to dismiss under Rule 12(b)(6).            26.  The  district  court,  having  dismissed  the  plaintiffs'            claims on other grounds, did not reach this issue.   We may, of            course,   affirm  the   district  court's   dismissal  on   any            independently sufficient  ground.   See  Crellin  Technologies,                                                ___  ______________________            Inc. v. Equipmentlease Corp., 18 F.3d 1, 13 (1st Cir. 1994).            ____________________________                                          -44-                   In Pinter  v.  Dahl, 486  U.S. 622  (1988), the  Supreme                      ______      ____            Court  described in detail the  class of defendants  who may be            sued as  "sellers" under Section  12(1) of the  Securities Act.            See id. at 641-44.   Section 12(2) defines the  persons who may            ___ ___            sue  and  be  sued  thereunder  in  language identical  to  the            language  used in  Section 12(1).   Thus, Pinter's  analysis of                                                      ______            "seller" for purposes of Section 12(1) applies with equal force            to  the interpretation of  "seller" under Section  12(2).  See,                                                                       ___            e.g.,  Ackerman v.  Schwartz, 947  F.2d 841,  844-45 (7th  Cir.            ____   ________     ________            1991); In re Craftmatic Sec. Litig., 890 F.2d 628, 635 (3d Cir.                   ____________________________            1989); Moore  v. Kayport Package  Express, Inc., 885  F.2d 531,                   _____     ______________________________            536 (9th Cir. 1989); Wilson v. Saintine Exploration  & Drilling                                 ______    ________________________________            Corp., 872 F.2d 1124,  1125-26 (2d Cir. 1989); Dawe v. Main St.            _____                                          ____    ________            Management Co., 738 F. Supp. 36, 37 (D. Mass. 1990).            ______________                   A  person who "offers or sells" a security may be liable            under Section 12 to  any person "purchasing such  security from                                             __________                ____            him."   15  U.S.C.   77l(2)  (emphasis  added).   Although  the            "purchasing from" language in  the statute literally appears to            contemplate a relationship between defendant and plaintiff "not            unlike  traditional contractual  privity," Pinter, 486  U.S. at                                                       ______            642, the Pinter  Court held  that Section 12  liability is  not                     ______            limited  to  those   who  actually  pass  title  to  the  suing            purchaser.   See id. at  645.   This is so  because even  "[i]n                         ___ ___            common parlance," a person may "offer or sell" property without            actually passing title.  Id. at 642.  For example,  a broker or                                     ___            agent  who solicits a purchase "would commonly be said . . . to                                          -45-            be among  those 'from' whom the buyer  'purchased,' even though            the  agent  himself  did   not  pass  title."    Id.   at  644.                                                             ___            Furthermore,  because "solicitation  is the  stage at  which an            investor is most likely  to be injured," id. at  646, the Court                                                     ___            found  it consistent with the policies of the statute to permit            imposition  of  liability  on  a non-owner  of  securities  who            "successfully  solicits"27  the  plaintiff's  purchase  of  the            securities, provided that the  solicitor is "motivated at least            in part by  a desire to  serve his own  financial interests  or            those of the securities owner."  Id. at 647.28                                             ___                   The Pinter Court limited its holding in ways that govern                       ______            the result here.   The  Court held that  the "purchasing  . . .            from"  requirement  of  Section  12 limits  the  imposition  of            liability to "the buyer's immediate seller" and  thus, "a buyer            cannot recover  against his seller's seller."  Pinter, 486 U.S.                                                           ______            at 643 n.21 (citations omitted).  Second, the Court stated that            proof the defendant caused a plaintiff's purchase of a security                                ______            is not enough  to establish that the  defendant "solicited" the            sale for Section 12 purposes.   See id. at 651 (explaining that                                            ___ ___                                            ____________________            27.  Section  2(3)  of the  Securities  Act  defines "sale"  or            "sell"  to   include,   among  other   notions,  "every   . . .            solicitation of an  offer to buy, a  security or interest in  a            security, for value."  15 U.S.C.   77b(3); see Pinter, 486 U.S.                                                       ___ ______            at 643.            28.  The  Court reasoned  that where  a person's  motivation in            persuading another to purchase  securities is solely to benefit            the  buyer, it  would  be  "uncommon  to  say  that  the  buyer            'purchased'  from  him,"  and  that such  motivation  makes  it            difficult to  characterize the person's  act as "solicitation."            Pinter, 486 U.S. at 647.            ______                                          -46-            "[t]he  'purchase  from' requirement  of    12  focuses on  the            defendant's  relationship  with  the  plaintiff-purchaser"  and            rejecting  use of a test under which defendant could qualify as            a  seller if  he  was a  "substantial  factor" in  causing  the            transaction to take place).  Finally, the  Court indicated that            a person's "remote" involvement  in a sales transaction or  his            mere  "participat[ion]  in  soliciting the  purchase"  does not            subject him to Section 12 liability.   See id. at 651 n.27.   A                                                   ___ ___            defendant must be directly  involved in the actual solicitation            of a securities purchase in order to qualify, on that basis, as            a Section  12 "seller."  See In re Craftmatic, 890 F.2d at 636;                                     ___ ________________            Capri v. Murphy, 856 F.2d 473, 478-79 (2d Cir. 1988); Dawe, 738            _____    ______                                       ____            F. Supp. at 37.                   We  apply these  principles  to the  Wilensky complaint.                                                        ________            The March 1994  public offering  was made pursuant  to a  "firm            commitment"  underwriting, as  disclosed  in  the  registration            statement  and prospectus  supplement.   The plaintiffs  do not            contend  otherwise.   In  a firm  commitment underwriting,  the            issuer of the securities sells all  of the shares to be offered            to one or more underwriters, at some discount from the offering            price.  Investors thus purchase shares in the offering directly            from the underwriters (or  broker-dealers who purchase from the            underwriters), not  directly  from the  issuer.   In fact,  the            March 21, 1994  prospectus supplement  represented that  "[DEC]            has agreed not to, directly or indirectly, sell, offer or enter                                          -47-            into any agreement  to offer  or sell, shares  of [the  offered            stock]."                   Because the  issuer in  a firm  commitment  underwriting            does not pass  title to  the securities, DEC  and its  officers            cannot be held liable as  "sellers" under Section 12(2)  unless            they   actively  "solicited"   the   plaintiffs'  purchase   of            securities  to  further their  own  financial  motives, in  the            manner of a broker or  vendor's agent.  See Pinter 486  U.S. at                                                    ___ ______            644-47.  Absent such solicitation, DEC can be viewed as no more            than a  "seller's seller," whom plaintiffs would  have no right            to sue under Section 12(2).  See id. at 644 n.21; PPM Am., Inc.                                         ___ ___              _____________            v.  Marriott Corp.,  853 F.  Supp. 860,  874-75 (D.  Md. 1994);                ______________            Louis  Loss  &   Joel  Seligman,  Fundamentals   of  Securities                                              _____________________________            Regulation 1000-01 (3d ed. 1995) ("[I]t seems  quite clear that            __________              12  contemplates only an action by a buyer against his or her                                                                 __________            immediate  seller.  That is to say,  in the case of the typical            _________________            'firm-commitment  underwriting,'  the  ultimate   investor  can            recover only from the dealer who sold to him or her." (emphasis            in original; footnotes omitted)).                   The  factual allegations in the complaint supporting the            purported  status  of  DEC  and the  individual  defendants  as            Section  12(2) sellers  are sparse,  and all  pertain  to those            defendants'   involvement   in   preparing   the   registration            statement,  prospectus,  and  other  "activities  necessary  to            effect the sale of  the[] securities to the  investing public."            Under Pinter, however, neither  involvement in preparation of a                  ______                                          -48-            registration  prospectus  nor  participation   in  "activities"            relating   to  the   sale   of   securities,  standing   alone,            demonstrates  the  kind of  relationship between  defendant and                                        ___________________________________            plaintiff that  could establish  statutory seller status.   See            _________                                                   ___            Pinter,  486 U.S.  at 651  & n.27;  Shapiro, 964  F.2d at  286.            ______                              _______            Although  the complaint  also contains a  conclusory allegation            that each defendant "solicited  and/or was a substantial factor            in the purchase  by plaintiffs" of securities in  the offering,            the Supreme  Court specifically rejected a  proposed test under            which a  defendant's being  a "substantial factor"  in bringing            about  a sale  could establish  statutory seller  status.   See                                                                        ___            Pinter, 486 U.S. at 651.  Furthermore, the  term "solicitation"            ______            is a legal term  of art in this context.   In deciding a motion            to dismiss under  Rule 12(b)(6),  a court must  take all  well-            pleaded facts as  true, but  it need not  credit a  complaint's            "bald  assertions"  or  legal conclusions.    Washington  Legal                                                          _________________            Found. v. Massachusetts Bar Found., 993 F.2d 962, 971 (1st Cir.            ______    ________________________            1993)  (quoting United States v.  AVX Corp., 962  F.2d 108, 115                            _____________     _________            (1st  Cir. 1992)).    Here it  is  undisputed that  the  public            offering  was   conducted  pursuant   to   a  firm   commitment            underwriting,  and plaintiffs'  bald and  factually unsupported            allegation  that  the issuer  and  individual  officers of  the            issuer "solicited" the plaintiffs' securities purchases is not,            standing alone, sufficient.                   While,  on a  different  set of  allegations, an  issuer            involved  in a firmly  underwritten public offering  could be a                                          -49-            "seller"  for purposes  of  Section  12(2),  we hold  that  the            Wilensky  complaint does not  contain sufficient non-conclusory            ________            factual allegations which, if true, would establish that DEC or            the  individual  defendants  qualify  as such.    However,  the            complaint  does   adequately   allege  that   the   underwriter            defendants directly  sold securities to the  plaintiffs (in the            literal   sense  of   passing  title),   consistent   with  the            underwriting   arrangements   disclosed   in   the   prospectus            supplement  of March 21, 1994.  We conclude that the plaintiffs            have adequately alleged statutory  seller status as against the            underwriter defendants,  but not against DEC  or the individual            defendants.                                          IV.                                The Section 10(b) Claims                                ________________________                                     (Shaw Action)                                      ____                   The plaintiffs  in the  Shaw action assert  claims under                                           ____            Sections  10(b) and 20(a)29  of the Securities  Exchange Act of            1934, 15  U.S.C.    78j(b), 78t(a), and  Rule 10b-5 promulgated            thereunder,  17  C.F.R.    240.10b-5.   The  implied  right  of            private   action   under  Section   10(b)   and  Rule   10b-530                                            ____________________            29.  Section 20(a) provides for derivative liability of persons            who "control"  others found  to be  primarily liable under  the            Exchange Act.            30.  Section  10(b)  proscribes the  "use  or employ[ment],  in            connection with the purchase or sale of any security, . . . any            manipulative   or   deceptive   device   or    contrivance   in            contravention of  such rules and regulations  as the Commission            may  prescribe."   15  U.S.C.   78j(b).    Rule 10b-5  makes it            unlawful  "[t]o make any untrue statement of a material fact or            to omit to state a material fact necessary in order to make the                                          -50-            complements the civil enforcement function provided by Sections            11  and  12(2)  of  the   Securities  Act  by  reaching  beyond            statements  and  omissions made  in  a  registration statement,            prospectus, or  in connection  with an initial  distribution of            securities,  to  create  liability  for  false  or   misleading            statements  or omissions  of material  fact in  connection with            trading in the secondary  market.  See Central Bank  of Denver,                                               ___ _______________________            114 S. Ct.  at 1445; Eckstein v. Balcor Film  Investors, 8 F.3d                                 ________    ______________________            1121, 1123-24 (7th  Cir. 1993),  cert. denied, 114  S. Ct.  883                                             _____ ______            (1994).                   In  addition  to  proving  that  the  defendant  made  a            materially false or misleading statement or omitted to  state a            material  fact necessary to make  a statement not misleading, a            Rule 10b-5 plaintiff, unlike a plaintiff asserting claims under            Section  11 or 12(2) of the Securities Act, must establish that            the  defendant acted  with scienter,  and that  the plaintiff's            reliance  on  the defendant's  misstatement caused  his injury.            See Holmes v. Bateson, 583  F.2d 542, 551 (1st Cir.  1978); see            ___ ______    _______                                       ___            also San Leandro Emergency Medical Group Profit Sharing Plan v.            ____ _______________________________________________________            Philip Morris Cos., Inc., 75 F.3d 801, 808 (2d Cir. 1996).  The            ________________________            same standard of materiality,  however, applies to claims under            Section 10(b) and Rule 10b-5 as to claims under Sections 11 and            12(2) of the Securities  Act.  See  Lucia v. Prospect St.  High                                           ___  _____    __________________            Income Portfolio, Inc., 36  F.3d 170, 172 n.3 (1st  Cir. 1994).            ______________________                                            ____________________            statements made, in the light of the circumstances  under which            they were  made, not  misleading . . . in  connection with  the            purchase or sale of any security."  17 C.F.R.   240.10b-5(b).                                          -51-            Finally, a plaintiff asserting  securities fraud must plead the            alleged   "circumstances   constituting   fraud    . . .   with            particularity."  Fed. R. Civ. P. 9(b).                   The   Shaw  plaintiffs  advance   the  same   claims  of                         ____            nondisclosure  and  misstatement  championed  by  the  Wilensky                                                                   ________            plaintiffs.      They  allege   further   that  those   alleged            nondisclosures  and misstatements  were  made  with  fraudulent            intent,  that  defendants'  conduct  artificially  inflated the            market price of  DEC common stock,  and that this fraud  on the            market  caused  the plaintiffs  to  suffer damages.    The Shaw                                                                       ____            plaintiffs also  allege  that defendants  committed  actionable            fraud by making optimistic statements to the public (outside of            any SEC filing)  concerning the company's  prospects throughout            the  Class  Period,31  even  though  they  knew  or  recklessly            disregarded nonpublic  information indicating that  the company            was  then in dire straits, as was ultimately disclosed on April            15, 1994.  The defendants respond that they were  under no duty            to disclose  the information identified by  plaintiff, and that            none of the statements attributed to them was materially false,            misleading, or otherwise actionable.            A.  Nonactionability of Loosely Optimistic Statements            __  _________________________________________________                                            ____________________            31.  The Class Period (here, January 19 through April 15, 1994)            constitutes  the  time  period  during  which  members  of  the            putative plaintiff class purchased  shares of DEC common stock.            We  limit  our  analysis  of  the Shaw  plaintiffs'  claims  of                                              ____            affirmative misrepresentation to  the statements allegedly made            by  defendants  within the  Class Period.    See In  re Clearly                                                         ___ ______________            Canadian Sec. Litig., 875 F. Supp. 1410, 1420 (N.D. Cal. 1995).            ____________________                                          -52-                   The Shaw  plaintiffs allege  that the defendants  made a                       ____            number of fraudulently optimistic  statements about DEC through            media  outlets  (e.g., newspapers  and trade  publications) and                             ____            press  releases issued  by the  company.   The  district court,            after  analyzing  each  of  the statements  identified  by  the            plaintiffs,  held as a matter of law that none was sufficiently            material to support a claim of securities fraud.  We agree.                   In most circumstances, disputes  over the materiality of            allegedly false  or misleading statements must  be reserved for            the trier of  fact.  See Basic, 485 U.S. at 236; Lucia, 36 F.3d                                 ___ _____                   _____            at  176.   But not  every unfulfilled  expression of  corporate            optimism, even if characterized  as misstatement, can give rise            to a genuine  issue of materiality  under the securities  laws.            See Lucia, 36 F.3d  at 176 (leaving open possibility  that some            ___ _____            materiality determinations may be made as a matter of law).  In            particular,  courts have  demonstrated  a  willingness to  find            immaterial   as  a  matter  of  law  a  certain  kind  of  rosy            affirmation   commonly  heard   from  corporate   managers  and            numbingly  familiar to  the  marketplace --  loosely optimistic            statements  that are so vague, so lacking in specificity, or so            clearly  constituting  the opinions  of  the  speaker, that  no            reasonable investor could  find them important to the total mix            of  information available.32   See, e.g., San  Leandro, 75 F.3d                                           ___  ____  ____________                                            ____________________            32.  Under the common law of fraud, courts typically would find            such statements to be  mere "puffing" or sales talk  upon which            no  reasonable  person  could  rely,  and  thus  to be  legally            insufficient  to   support  a  claim.     See,  e.g.,  Greenery                                                      ___   ____   ________            Rehabilitation Group, Inc. v. Antaramian, 628 N.E.2d 1291, 1293            __________________________    __________                                          -53-            at 807, 811 (holding not actionable statement that the  company            "expect[ed] . . . another year of strong growth in earnings per            share"); Hillson  Partners Ltd. Partnership v.  Adage, Inc., 42                     __________________________________     ___________            F.3d  204,   213  (4th  Cir.  1994)   (similar,  where  alleged            fraudulent statement  was: "[the  company] is on  target toward            achieving the  most profitable  year in  its  history"); In  re                                                                     ______            Caere Corporate Sec. Litig.,  837 F. Supp. 1054,  1057-58 (N.D.            ___________________________            Cal. 1993) ("[The company  is] 'well-positioned' for growth.");            Colby v.  Hologic, Inc., 817 F. Supp.  204, 211 (D. Mass. 1993)            _____     _____________            ("Prospects for long term growth are bright.").                   Review   of    vaguely   optimistic    statements    for            immateriality  as a matter of  law may be  especially robust in            cases involving a fraud-on-the-market  theory of liability.  In            such  cases,  the  statements   identified  by  plaintiffs   as            actionably misleading  are alleged to have caused injury, if at            all, not through the plaintiffs' direct reliance upon them, but            by dint of the statements' inflating effect on the market price            of the security purchased.  See Basic, 485 U.S. at 241-47; Rand                                        ___ _____                      ____            v. Cullinet Software,  Inc., 847  F. Supp. 200,  205 (D.  Mass.               ________________________            1994).   When  the  truth is  disclosed  and the  market  self-            corrects,  investors who  bought at  the inflated  price suffer            losses.  Those losses can be deemed to have been  caused by the            defendants'   statements,  even   absent  direct   reliance  by                                            ____________________            (Mass. App. Ct. 1994), rev. denied, 417 Mass. 1103 (1994); Webb                                   ____ ______                         ____            v. First of Mich. Corp., 491 N.W.2d 851, 853 (Mich. App. 1992);               ____________________            Rodio  v. Smith,  587  A.2d 621,  624  (N.J. 1991);  Hauter  v.            _____     _____                                      ______            Zogarts, 14 Cal.3d 104, 111-12 (1975) (en banc).            _______                                          -54-            plaintiffs,  because the statements were presumptively absorbed            into and reflected  by the  security's price.   See Basic,  486                                                            ___ _____            U.S. at 243-44 (quoting In re LTV, 88 F.R.D. at 143).                                    _________                   This presumption of investor  reliance on the  integrity            of  stock prices has the  primary effect of  obviating the need            for plaintiff  purchasers to plead individual reliance.  But by            its  underlying rationale,  the  presumption  also  shifts  the            critical  focus of the materiality inquiry.  In a fraud-on-the-            market   case  the   hypothetical  "reasonable   investor,"  by            reference to  whom materiality is gauged, must  be "the market"            itself, because it is the market, not any single investor, that            determines the price of a publicly traded security.  See In  re                                                                 ___ ______            Verifone Securities  Litigation, 784 F. Supp.  1471, 1479 (N.D.            _______________________________            Cal.  1992) ("The  fraud-on-the-market theory  thus  shifts the            inquiry  from  whether an  individual  investor  was fooled  to            whether the market as a whole was fooled."), aff'd, 11 F.3d 865                                                         _____            (9th Cir. 1993); see also In re Apple Computer Sec. Litig., 886                             ________ ________________________________            F.2d  1109, 1113-14 (9th Cir. 1989), cert. denied, 496 U.S. 943                                                 _____ ______            (1990); cf. Easterbrook & Fischel, Corporate Law, supra, at 297                    ___                        _____________  _____            (explaining how unsophisticated investors  "take a free ride on            the information impounded by the market").                   Thus, a claim that a fraud was perpetrated on the market                                                                     ______            can draw  no sustenance  from allegations that  defendants made            overly-optimistic statements, if those statements are ones that            any  reasonable  investor  (ergo,  the  market)   would  easily            recognize  as  nothing  more   than  a  kind  of  self-directed                                          -55-            corporate puffery.   The market  is not so  easily duped,  even            granted that  individual investors  sometimes are.   See  In re                                                                 ___  _____            Apple  Computer,  886 F.2d  at  1114;  Wielgos v.  Commonwealth            _______________                        _______     ____________            Edison Co., 892 F.2d 509, 515 (7th Cir. 1989); see also Raab, 4            __________                                     ________ ____            F.3d at 289-90 ("[T]he market price  of a share is not inflated            by vague  statements  predicting  growth.  . . .  Analysts  and            arbitrageurs  rely  on  facts in  determining  the  value of  a            security,  not  mere  expressions   of  optimism  from  company            spokesmen." (citations omitted)).  This is particularly so with            respect  to the  securities of an  actively traded  and closely            followed company like DEC.   Cf. LTV, 88 F.R.D. at  144 (citing                                         ___ ___            empirical studies  demonstrating that assumptions  about market            efficiency  are strongest  with  respect to  "[t]the prices  of            stocks  of larger corporations, such as those listed on the New            York Stock Exchange").                   While we have no  occasion or intention to adopt  here a            per se rule  that expressions of optimism uttered  by corporate            ___ __            managers  can never  support a  claim of  securities fraud,  we                          _____            think  that  in  this  case,  the  statements  outside  of  the            registration statement and prospectus identified  by plaintiffs            as actionably  misleading are  -- with one  exception discussed            separately below -- by their nature, too patently immaterial to            support a fraud-on-the-market claim.                   We agree  with the district  court, for example,  that a            claim  of securities  fraud  cannot lie  on  the basis  of  the            statements  made  by  defendant  Steul  (DEC's  chief financial                                          -56-            officer)  in January  1994,  in reaction  to the  disappointing            earnings  results for the quarter just ended.  Steul was quoted            as saying  that the company's  transition to selling  its Alpha            chip products was  "going reasonably well" and that the company            "should show  progress quarter  over quarter, year  over year."            We  hold  to  be  similarly not  actionable  (because  patently            immaterial)  Steul's  comment  of  January 19,  1994  that  the            company  was "basically on  track"; his comment  of January 20,            1994 that  "DEC was a  very healthy company";  defendant Robert            Palmer's statement of the same date that he was "confident that            DEC  was pursuing the right strategy"; and the February 8, 1994            statement by DEC's head of European operations (not a defendant            here) that he  was "pretty optimistic"  that the company  would            "be  able  to stabilize  [its] revenue"  in  the first  half of            calendar  year 1994 and "start  to grow revenue"  in the second            half.    These statements  all so  obviously  fail to  pose any            "substantial  likelihood"  of being  "viewed by  the reasonable            investor" -- let  alone the market --  "as having significantly            altered  the total  mix of  information available,"  Basic, 485                                                                 _____            U.S.  at 231-32  (quotation  omitted), that  they are  properly            deemed immaterial as a matter of law.33                                            ____________________            33.  Plaintiffs additionally argue that several forward-looking            statements   allegedly  made   by  defendants   prior  to   the                                                            _____            commencement of  the Class Period (January 19,  1994) gave rise            to a  "duty to  update," which defendants  purportedly violated            during  the Class Period.   Plaintiffs point to  a statement by            Steul  in  October  of   1993  that  the  company's  continuing            restructuring actions  over the  fiscal year "will  probably be            smaller  than  the  last   four  quarters";  a  September  1993            statement that "[s]ervice revenues have continued to grow"; and                                          -57-            B.  Importance of Context: the "Break-Even" Statements            __  __________________________________________________                   The Shaw plaintiffs allege  that on January 20, February                       ____            23,  and March 29,  1994, DEC made  or was  responsible for the            following statements to the  public, on those respective dates:            "[w]e are  operating very close to  break-even"; "we're running            very close to  break-even"; and  "we are very  close to  break-            even."    Plaintiffs assert  that  given the  magnitude  of the            losses  actually disclosed to the public on April 15, 1994, the            "break-even"  statements must  have  been false  when made  and            constituted actionable fraud.                   Putting  aside for  the moment  whether plaintiffs  have            adequately  alleged  that  these  statements  were  made   with            fraudulent  intent,  the statements,  when  read in  isolation,                                            ____________________            a  statement by defendant Palmer  on November 4,  1993 that the            prospect of turning a profit  was a "reasonable expectation" in            fiscal  year  1994.   Whatever  the  circumstances  in which  a            company  might be  subject  to a  duty to  "update" information            previously disclosed, we do not think that the pre-Class Period            statements identified by  plaintiffs are of the kind that could            trigger  any  such  duty.    The  alleged  statement  regarding            "service revenues"  constitutes a statement of  historical fact            not alleged  to be  false, and  as such,  does not  provide the            basis for a duty to update.  See Serabian, 24 F.3d at 361.  The                                         ___ ________            other alleged  statements  are cautiously  optimistic  comments            that  would not be actionable  in the first  instance.  See San                                                                    ___ ___            Leandro, 75 F.3d at 811.  They express, at most, "only the hope            _______            of any  company" for a positive  future, and "lack the  sort of            definite   positive  projections   that  might   require  later            correction."  In re Time Warner, Inc. Sec. Litig.,  9 F.3d 259,                          ___________________________________            267 (2d Cir.  1993), cert. denied, 114 S.  Ct. 1397 (1994); see                                 _____ ______                           ___            also  San Leandro,  75 F.3d at  811 (finding no  duty to update            ____  ___________            "subdued general  comments" of  optimism).  Moreover,  it seems            likely  that  any  "duty  to  update"  DEC's  pre-Class  Period            statements  would  have  been  extinguished  by  the  company's            disclosure of  financial information  in the  negative earnings            announcement  of January 19, 1994, the first day of the alleged            Class Period.                                          -58-            provide reason for pause.  The statements cannot accurately  be            described  as the  kind of  diffuse expressions  of opinion  or            optimism  that  can  be  deemed,  by  their  nature,  obviously            immaterial  as  a  matter of  law.    Rather,  they appear,  in            isolation, to  be statements quantifying  the company's current            operating inflows as more  or less approximating outflows, thus            inviting  an  inference  that the  end  results  for the  third            quarter  might turn  out likewise.   The  rub, however,  is the            context surrounding the statements.  When evaluated in context,            the  "break-even" statements  do not  give rise  to a  claim of            securities fraud.                   In  deciding a motion to dismiss  a securities action, a            court may properly consider the relevant entirety of a document            integral  to or explicitly  relied upon in  the complaint, even            though not  attached to  the complaint, without  converting the            motion into one for  summary judgment.  See Watterson  v. Page,                                                    ___ _________     ____            987  F.2d  1, 3-4  (1st Cir.  1993)  (explaining that  the main            problem of looking  to documents outside the  complaint -- lack            of notice to plaintiff -- is dissipated "[w]here plaintiff  has            actual  notice . . .  and has  relied upon  these documents  in            framing  the complaint"  (quoting  Cortec Indus.,  Inc. v.  Sum                                               ____________________     ___            Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991), cert. denied, 112            ____________                                  _____ ______            S. Ct. 1561  (1992)); see also San Leandro,  75 F.3d at 808-09;                                  ________ ___________            Romani,  929  F.2d at  879 n.3.    Were the  rule  otherwise, a            ______            plaintiff  could  maintain  a claim  of  fraud  by excising  an            isolated  statement from a  document and importing  it into the                                          -59-            complaint,  even  though  the  surrounding  context  imparts  a            plainly  non-fraudulent  meaning  to  the   allegedly  wrongful            statement.  We  look to  the full context  of the  "break-even"            statements attributed to defendant Steul.34                   The  first time the "break-even"  statement appeared was            in a  Boston Herald article headlined "Digital falls short with            $72.1M  loss," published on January 20, 1994, the day after DEC            had announced its disappointing earnings results for the second            quarter  of  fiscal year  1994.    The article  attributed  the            following statement to Steul:                   The $72 million loss represents  only 2.2 percent                   of revenues, Steul said.   "We are operating very                   close to break-even.  It's a lot of money, but on                   the other hand it's small compared to what losses                   have been in the past."  Steul would not say when                   Digital will again be profitable.  "I hesitate to                   give  you an  estimate because  we just  have too                   much  uncertainty   in  the   immediate   future"                   [paragraph structure omitted].            It is  plain that Steul's "break-even"  characterization refers            to  the fact  that  the $72  million  loss that  had just  been            reported for the  second quarter  of fiscal year  1994 was,  in                              ______            fact, only a small percentage of the company's total  revenues.            The  statement cannot  reasonably be  understood as  a material            comment on  the current status  or anticipated  results of  the            company's  third quarter.  Since  plaintiffs do not allege that                                            ____________________            34.  The  full text of the  news articles in  which the "break-            even"  statements   appeared,  and  which  are   cited  in  the            complaint,  have  been provided  to  us  in a  jointly-prepared            appendix.  Plaintiffs have not objected to the district court's            nor  the defendants' making reference to the full text of those            articles.                                          -60-            the  characterization  of  "close   to  break-even"  placed  an            actionably fraudulent spin on DEC's second quarter results, the                                                ______            statement in that context can be of no moment.                   The second "break-even" statement appeared in a February            23, 1994 Wall Street Journal article.  The article's author had                     ___________________            obtained  an "internal"  DEC finance  review, and  divulged its            contents as follows:                   "We're  running very  close to  break-even,"  the                   [internal]  review  says,   though  "revenue   is                   uncertain  for  next  two-plus  quarters."    The                   review concludes  that Digital "will still  be in                   turnaround for the  next two  or three  quarters"                   and that managers  should "focus heavily on  cash                   conservation."   There is a chance,  it adds, "if                   we keep at Q2 spending levels, that we can make a                   profit this  fiscal  year."    While  Mr.  Palmer                   confirmed many  of these points  in an interview,                   he wouldn't  make any forecast.  "This is a large                   organization that  was  in deep  trouble  when  I                   started,  and   we  still  have  a   way  to  go"                   [paragraph structure omitted].            The  context  of the  "break-even"  statement  in the  internal            review,  as reported,  sufficiently bespeaks caution  to render            any forward-looking connotation that  could otherwise be  taken            from the statement immaterial as a matter of law.  Cf. Polin v.                                                               ___ _____            Conductron  Corp.,  552  F.2d 797,  806  n.28  (8th  Cir. 1976)            _________________            (holding that statement by company that it "saw a 'possibility'            of a break-even soon" was immaterial as matter of law, since it            was  phrased so  as  to "bespeak  caution  in outlook"),  cert.                                                                      _____            denied, 434  U.S. 857 (1977).  Given  the statements attributed            ______            to the internal review that "revenue is uncertain for next two-            plus quarters"; that "[DEC] will still be in turnaround for the            next two or three quarters"; that "we still have a  way to go";                                          -61-            and  given  Palmer's reported  refusal  to  make any  forecast,            coupled  with  the  absence  of  any  specifics  regarding  the            authoritativeness or timeliness  of the  "internal" report,  no            reasonable  investor  (nor  the  market)  could  have  attached            importance to  any forward-looking connotation  of the  "break-            even" statement described in the article.                   A similar analysis applies to the "break-even" statement            that appeared in the  March 29, 1994 issue of  Financial World.                                                           _______________            In that article, defendant  Steul was quoted as saying  "We are            very  close to break-even.   If it hadn't  been for currencies,            and had we been able to ship  everything ordered, we would have            been in  the black in  the second quarter."   As with  the Wall                                                                       ____            Street Journal piece, neither  the Financial World piece itself            ______________                     _______________            nor  the  Shaw  complaint  specifies  the  date  on  which  the                      ____            statement was  actually made.35   But, again, Rule  9(b) issues            aside, the "break-even" comment is most naturally understood as            looking backward to the  second quarter of fiscal 1994,  not to            the  future.  Furthermore, to the extent that any other meaning            could be discerned, it is directly negated by other  qualifying            comments attributed to Steul in the same article, including the            following:                   What Digital needs at  this point is time.   Says                   Steul, "Wall  Street always  wants quick results,                   but it took a couple of years to get where we are                   and  it will take more than  a couple of quarters                   to turn it around."                                              ____________________            35.  It is  unclear whether  the statement quoted  in Financial                                                                  _________            World had been freshly made by Steul, or was recycled from pre-            _____            existing sources.  The Shaw complaint does not specify.                                   ____                                          -62-            This warning that favorable results would be slow to come is  a            far cry from a  "prediction of a break-even year," which is how            plaintiffs  characterize  Steul's   comments.     Additionally,            because plaintiffs  allege  that  a fraud  on  the  market  was            committed   by  statements   communicated  in   this  financial            analyst's article,  it is only  fair to note that  the tenor of            the   article  is   one  of   skepticism  about   DEC's  future            prospects.36  On the  facts as alleged, the district  court did            not err  in concluding that  the "break-even" statement  in the            Financial World piece was immaterial as a matter of law.            _______________            C.   Actionability under Section 10(b) of Omissions            __   ______________________________________________                 and Misleading Statements in the Registration                 _____________________________________________                 Statement and Prospectus                  ________________________                   The  remaining statements  and omissions alleged  by the            Shaw plaintiffs to be fraudulent  under Section 10(b) and  Rule            ____            10b-5 relate  to the registration statement  and prospectus for            DEC's March  1994 stock offering.   These alleged misstatements            and omissions are identical to those that underlie the Wilensky                                                                   ________            plaintiffs'  claims   under  Sections  11  and   12(2)  of  the            Securities  Act.   We  conclude  that the  Shaw  plaintiffs may                                                       ____            pursue their Section 10(b) claim based on these alleged defects                                            ____________________            36.  For  example, the  article quotes  statements by  analysts            expressing  skepticism  about  DEC's prospects,  and  cautions:            "Reasonable as [Steul's comments  concerning a turn-around] may            sound,  recall  that it  was  only last  September  [1993] that            Steul's boss boasted  that Digital  was on its  way back  after            three  years and  over 83  billion of  red ink."   We  need not            decide here whether an allegedly misleading statement appearing            in one source can be rendered immaterial as a matter of law, at            the  pleading stage,  by third-party  commentary  in that  or a            different source.                                          -63-            in the registration statement and prospectus.  Because we  hold            that the  Shaw complaint  survives Rule  12(b)(6) only  to that                      ____            extent,  we also  conclude  that the  putative  class on  whose            behalf  the  Shaw  complaint   was  brought  must  be  narrowed                         ____            accordingly.                   Material  omissions  and   misleading  statements  in  a            registration statement and prospectus are, in addition to being            actionable  under  the  Securities  Act by  purchasers  in  the            offering, also actionable under Section 10(b) and Rule 10b-5 by            contemporaneous  purchasers  in the  aftermarket,  provided, of            course, that the additional elements of liability (scienter and            reliance)  are established.  See  In re Ames  Dept. Stores Inc.                                         ___  _____________________________            Stock  Litig., 991  F.2d 953,  963 (2d  Cir. 1993);  Fishman v.            _____________                                        _______            Raytheon Mfg. Co.,  188 F.2d  783, 786-87 (2d  Cir. 1951);  cf.            _________________                                           ___            Huddleston,  459  U.S.  at   383  ("[I]t  is  hardly  a   novel            __________            proposition that the 1934  Act and the 1933 Act  'prohibit some            of  the same conduct.'" (citation omitted)).  In the context of            a  fraud-on-the-market  claim,  this  principle  has  a  simple            rationale.  The registration statement and prospectus speak not            only to  those who purchase in the  offering, but to the entire            market.    If an  issuer's  registration  statement contains  a            misleading  statement of  fact  about  the company's  financial            condition  or   omits  material  information  required   to  be            disclosed, the impact of  such statements or omissions, to  the            extent  material,  would  not  necessarily be  limited  to  the            securities  covered by the registration statement.  There is no                                          -64-            logical  reason that  a registration  statement and  prospectus            could  not  serve as  a vehicle  for  an alleged  fraud  on the            market, affecting all of the company's securities.   Thus, even            though the Shaw plaintiffs purchased shares of DEC common stock                       ____            in  the  aftermarket,  not  shares of  preferred  stock  in the            offering,   their   fraud-on-the-market  claims   may  properly            encompass  any  material  misstatements  or  omissions  in  the            registration statement.  See In re Ames, 991 F.2d at 963-64.                                     ___ __________                   We hold,  then, that the same  allegations of misleading            statements and omissions in the Wilensky complaint that state a                                            ________            claim under Sections  11 and  12(2) also  form the  basis of  a            cognizable claim  under Section 10(b)  and Rule  10b-5.37   The            allegations in  the Wilensky  complaint which we  found lacking                                ________            are similarly without force in the Shaw complaint.                                               ____            D.  Limitation of the Shaw Class            __  _________________      _____                                            ____________________            37.  In so  holding, we do not intend to create a private right            of action under Section  10(b) for violations of any  SEC rule.            Our  holding is limited to the proposition that, in the context            of a  public offering, plaintiffs who (through the market) rely            upon the completeness of a registration statement or prospectus            may sue under Section  10(b) and Rule 10b-5  for nondisclosures            of material facts omitted from those documents in  violation of            the applicable  SEC rules  and regulations.   Cf. Backman,  910                                                          ___ _______            F.2d  at 12-13  (suggesting  that SEC  regulations and  insider            trading  may  create a  duty  to  disclose under  Rule  10b-5);            Roeder, 814 F.2d at 27 (same).   But cf. In re Wells Fargo,  12            ______                           _______ _________________            F.3d at  930 n.6 (declining to  reach the issue).   A different            rule  would  lead  to the  anomalous  result  of  a Rule  10b-5            plaintiff being able  to sue an individual  insider selling his            company's   securities  for   the  nondisclosure   of  material            nonpublic information,  but not being  able to  sue the  issuer            itself  for  failing  to   disclose  the  same  information  in            connection with an offering.                                          -65-                   Our conclusion  that the Shaw complaint  states a claim,                                            ____            but only to the extent  it is based on the same  statements and            omissions  that form the basis  of the surviving  claims in the            Wilensky complaint,  requires  an important  adjustment  to  be            ________            made.  The Shaw  plaintiffs allege that they were  injured when                       ____            they purchased DEC common stock at prices that were inflated as            a  result of misleading statements and omissions by DEC and the            individual  defendants.    The   named  plaintiffs  purport  to            represent a  class of persons  who purchased DEC  stock between            January  19  and April  15, 1994.    However, because  the only            allegations  in the Shaw complaint that state a claim are those                                ____            that depend  upon the purported misstatements  and omissions in            the registration statement  as of its  effective date --  March            21,  1994 --  it follows  that only  those who  purchased their            shares on or after  March 21, 1994 (and before  April 15, 1994,                   ___________            when   disclosure  occurred)  could  have  suffered  cognizable            injury.                   Of the four plaintiffs named in the Shaw complaint, only                                                       ____            Gary Phillips is alleged to have made his purchase within those            two limiting dates; thus only his claim may be reinstated.  The            district court's  dismissal of the  claims of  the three  other            named plaintiffs is  affirmed.  On  remand, the district  court            should require the Shaw plaintiffs to amend  their complaint to                               ____            redefine the "Class Period" accordingly.                                           V.                                       Rule 9(b)                                       _________                                          -66-                   Defendants argue, as  an alternative basis for affirming            the  district court's  dismissals, that  both the  Wilensky and                                                               ________            Shaw complaints fail to meet the requirement of Fed. R. Civ. P.            ____            9(b)  that claims of fraud be pleaded with "particularity."  We            ask first whether the dictates of Rule 9(b) apply to the claims            asserted in the Wilensky complaint, and answer in the negative.                            ________            We then test the allegations of the Shaw complaint and conclude                                                ____            that it satisfies Rule 9(b).            A.  Whether Rule 9(b) Applies to the Wilensky Complaint            __  ________________________________          _________                   Rule  9(b) mandates  that "[i]n  all averments  of fraud            . . ., the  circumstances  constituting fraud  . . .  shall  be            stated  with  particularity."   Fed.  R.  Civ.  P.  9(b).   The            threshold question  is whether  the  Wilensky complaint,  which                                                 ________            sets forth claims under Sections 11 and 12(2) of the Securities            Act, contains any "averments of fraud."                   Fraud is not an element of a claim under either  Section            11  or 12(2), and a  plaintiff asserting such  claims may avoid            altogether  any  allegations  of  scienter or  reliance.    See                                                                        ___            Shapiro, 964 F.2d  at 288;  Lucia v. Prospect  St. High  Income            _______                     _____    __________________________            Portfolio,  Inc., 769 F. Supp. 410, 416 (D. Mass. 1991), aff'd,            ________________                                         _____            36  F.3d 170  (1st Cir.  1994).   However, despite  the minimal            requirements of  Sections 11  and 12(2), a  complaint asserting            violations  of those statutes may yet "sound[] in fraud."  Haft                                                                       ____            v. Eastland  Financial Corp., 755  F. Supp. 1123,  1126 (D.R.I.               _________________________            1991).   For  example,  if  a  plaintiff  were  to  attempt  to            establish  violations of Sections 11  and 12(2) as  well as the                                          -67-            anti-fraud provisions  of the Exchange Act  through allegations            in  a  single  complaint  of a  unified  course  of  fraudulent            conduct, fraud  might  be said  to "lie[]  at the  core of  the            action."  Hayduk v.  Lanna, 775 F.2d 441, 443  (1st Cir. 1985).                      ______     _____            In  such a case,  the particularity  requirements of  Rule 9(b)            would  probably apply to the Sections 11, 12(2), and Rule 10b-5            claims alike.   "It is the allegation of fraud, not the 'title'            of the claim  that brings the policy concerns  [underlying Rule            9(b)] . . . to  the forefront."   Haft, 755 F.  Supp. at  1133;                                              ____            accord  Shapiro,  964 F.2d  at  287-88 (applying  Rule  9(b) to            ______  _______            Section 11 and 12(2) claims "grounded in fraud"); Lucia, 769 F.                                                              _____            Supp. at 416-17 (same).                   As  the  district  court noted,  the  Wilensky complaint                                                         ________            avoids  grounding  its  Section  11  and  12(2) claims  on  any            allegations of  fraud.  Although the complaint does assert that            defendants actually possessed the  information that they failed            to disclose, those allegations  cannot be thought to constitute            "averments  of  fraud,"  absent   any  claim  of  scienter  and            reliance.    Otherwise,  any  allegation  of  nondisclosure  of            material information would be transformed into a claim of fraud            for purposes of  Rule 9(b).  In the circumstances, we hold that            the  Wilensky  complaint  was   not  subject  to  the  pleading                 ________            requirements of Rule 9(b).            B.  Whether the Shaw Complaint Satisfies Rule 9(b)            __  ___________      _____________________________                   The defendants' primary challenge to  the sufficiency of            the Shaw complaint under  Rule 9(b) is that it  fails to allege                ____                                          -68-            specific facts  that would  permit a reasonable  inference that            defendants   had  knowledge  of   information  foretelling  the            financial results  for the third  quarter of  fiscal year  1994            prior to  the quarter's end.   We limit  our analysis to  those            allegations in the Shaw complaint that state a cognizable claim                               ____            for securities fraud.  The issue is thus whether the plaintiffs            have  sufficiently pleaded  that  defendants knew  facts as  of            March  21, 1994 that indicated  the third quarter  was going to            turn out as it did, and that the company would  soon thereafter            announce   further   restructuring  actions   necessitating  an            additional restructuring charge for  the fiscal year.  Although            the question  is close, we  think that  the complaint  survives            Rule 9(b) scrutiny.                   This court  has been  "especially rigorous" in  applying            Rule 9(b) in securities  fraud actions "to minimize the  chance            'that  a plaintiff with a largely groundless claim will bring a            suit  and conduct extensive discovery in the hopes of obtaining            an  increased settlement,  rather than  in the  hopes that  the            process will  reveal relevant evidence.'"  Romani,  929 F.2d at                                                       ______            878  (quoting New England Data Servs., Inc. v. Becher, 829 F.2d                          _____________________________    ______            286,  288  (1st  Cir. 1987)).    We  have  emphasized that  the            particularity requirement  cannot be avoided "simply  through a            general  averment that  defendants  'knew'  earlier what  later            turned out badly."  Greenstone v. Cambex Corp., 975 F.2d 22, 25                                __________    ____________            (1st Cir. 1992).   A securities plaintiff cannot  plead "'fraud            by  hindsight.'"  Id. (quoting  Denny v. Barber,  576 F.2d 465,                              ___           _____    ______                                          -69-            470  (2d Cir.  1978)).   This  means that  a plaintiff  may not            simply contrast a defendant's past optimism with less favorable            actual results, and then "contend[] that the difference must be            attributable  to fraud."  DiLeo v. Ernst & Young, 901 F.2d 624,                                      _____    _____________            627 (7th Cir.),  cert. denied,  498 U.S. 941  (1990).   Rather,                             _____ ______            Rule  9(b) requires  that the  complaint "set[]  forth specific            facts that make  it reasonable to  believe that defendant  knew            that  a   statement  was   materially  false   or  misleading."            Greenstone,  975  F.2d  at  25  (collecting  cases);  see  also            __________                                            _________            Serabian, 24 F.3d at 361 (quoting Greenstone).            ________                          __________                   Here,  the complaint cannot  fairly be  characterized as            resting on conclusory allegations of the defendants' knowledge.            The plaintiffs provide a series of factual allegations relating            to  a combination of  developments known to  the company (e.g.,                                                                      ____            failing product  pricing strategies,  market resistance  to new            products, wayward compensation  policies, failure to  implement            downsizing  plans) that could have provided a basis for advance            knowledge  of the  information disclosed  on April  15, 1994.38                                            ____________________            38.  In asserting that defendants had direct knowledge of DEC's            third quarter operating  results as they  developed, plaintiffs            allege that "[m]ore so  than the management of  most companies,            DEC's  management,  including  the Individual  Defendants,  was            virtually   immediately  cognizant   of  the   Company's  sales            information"  by  virtue of  the  company's use  of  "a highly-            efficient reporting system which  allows the Company to forward            sales and  cost information  to senior management  virtually as            sales are  made."  The defendants argue  that these allegations            should  be viewed with skepticism and as the product of nothing            more than  "pure speculation."   Speculation  or not,  we think            that  the  plaintiffs'   allegations  of  a   "highly-efficient            reporting  system" may speak to the  question of how defendants                                                             ___            might  have known  what they  allegedly  knew, but  absent some            indication of the specific factual content of any single report                                               _______                                          -70-            These factual  allegations, together with other  aspects of the            complaint  discussed below,  provide a  basis for  a reasonable            inference  that defendants  knew facts  by March  21 indicating            that the  third fiscal  quarter would  be disastrous, and  that            accelerated   restructuring   efforts   requiring   a   further            restructuring charge  were likely  to follow.39   Cf. Serabian,                                                              ___ ________            24 F.3d at 365; In re Wells Fargo, 12 F.3d at 931.                            _________________                   In  additional   support   of   their   allegations   of            defendants' knowledge,  plaintiffs assert that two  insiders of            the  company, neither  of whom  is a  defendant here,  sold DEC            stockholdings  during  the  third  fiscal quarter.    One,  the            company's treasurer,  sold 1,625  shares (68% of  the officer's            total holdings) on February  11, 1994.  The other,  the general            manager and  vice president of the  company's personal computer            business,  sold 2,000 shares (20% of his position) on March 22,            1994.                                            ____________________            generated by the alleged reporting system, do not independently            provide a factual basis  for inferring any such knowledge.   On            balance, we do not think that generalized allegations regarding            the existence of  an internal "reporting system"  substantially            assist a securities fraud complaint in overcoming the hurdle of            Rule 9(b).   See  Pitten v.  Jacobs, 903  F. Supp.  937, 949-50                         ___  ______     ______            (D.S.C.  1995); cf. Arazie v.  Mullane, 2 F.3d  1456, 1467 (7th                            ___ ______     _______            Cir. 1993) (refusing to credit "scanty" allegations  concerning            internal  documents, absent  indication  of  "who prepared  the            projected  figures,  when  they  were prepared,  how  firm  the            numbers were, or which . . . officers reviewed them").            39.  We  reject defendants' argument  that the  complaint fails            adequately  to  particularize  the   roles  of  the  individual            defendants  in the purported fraud.   Cf. Serabian,  24 F.3d at                                                  ___ ________            367-68.                                          -71-                   Of  course,  the  mere  fact  that insider  stock  sales            occurred does not  suffice to establish scienter.   See Tapogna                                                                ___ _______            v.  Egan,  141  F.R.D. 370,  373  (D.  Mass.  1992).   However,                ____            allegations  of "insider  trading in  suspicious amounts  or at            suspicious  times" may permit  an inference that  the trader --            and  by further  inference, the  company --  possessed material            nonpublic information at the time.  See Greenstone, 975 F.2d at                                                ___ __________            26 (citing  In re Apple Computer,  886 F.2d at 1117);  see also                        ____________________                       ________            Rubinstein,  20  F.3d  at 169-70  (characterizing  sufficiently            __________            suspicious trading as "presumptively probative of bad faith and            scienter").   Here,  the level  of suspicion  warranted by  the            alleged  insider  stock  sales  is  marginal:  the  first  sale            occurred more than a  month prior to the  date of concern  here            (March  21, 1994);  and the  second sale,  though made  at what            might  be  considered a  "suspicious"  time,  involved a  small            (albeit not  insignificant) percentage  of the  insider's total            holdings  of  DEC  stock.    Nonetheless,  we  think  that  the            plaintiffs'  allegations of insider  trading, inasmuch  as they            are  at least  consistent with their  theory of  fraud, provide            some support  against the  defendants' motion to  dismiss under            Rule 9(b).                   Finally,  in testing  the allegations  of  the complaint            against Rule 9(b), we need not turn a blind eye to the obvious:            the  proximity   of  the  date  of   the  allegedly  fraudulent            statements and omissions to both the end of the quarter then in            progress  and the date on which disclosure was eventually made.                                          -72-            While  the short  time  frame between  an allegedly  fraudulent            statement or  omission and  a later disclosure  of inconsistent            information  does  not, standing  alone,  provide  a sufficient            factual grounding to satisfy  Rule 9(b), see Arazie, 2  F.3d at                                                     ___ ______            1467-68,  there   is  nothing  in  Rule   9(b)  that  precludes            consideration  of  such temporal  proximity  as a  circumstance            potentially bolstering  the complaint's  claims of fraud.   See                                                                        ___            Fecht,  70 F.3d at  1083-84.  On  the facts as  alleged in this            _____            case, we think that the proximity of the date of  the allegedly            misleading statements  and omissions to the end  of the ongoing            quarter  (and the  date of  eventual disclosure)  provides some            circumstantial  factual support  to  be taken  into account  in            determining whether the complaint  pleads an adequate basis for            inferring defendants' culpable knowledge.                   We  have no  intention  here of  diluting  the stringent            mandate of  Rule 9(b).   But in  determining the adequacy  of a            complaint under  that  rule, we  cannot  hold plaintiffs  to  a            standard that would effectively require them, pre-discovery, to            plead evidence.  Rule 9(b) proscribes the pleading of "fraud by            hindsight," Denny, 576 F.2d at  470, but neither can plaintiffs                        _____            be  expected to plead fraud with complete insight.  We conclude            that  the  portions of  the  Shaw complaint  that  survive Rule                                         ____            12(b)(6)  scrutiny also satisfy  the particularity requirements            of Rule 9(b).                                          VI.                                       Conclusion                                       __________                                          -73-                   The district court erred  in dismissing the Wilensky and                                                               ________            Shaw complaints in their entirety.  Portions of both complaints            ____            survive Rule 12(b)(6), but only to the extent that they allege:                                       ____            (i) that  the registration  statement filed in  connection with            the public  offering  of March  21,  1994, failed  to  disclose            material information in DEC's  possession as of that date  that            would have alerted the  market to the likelihood  of disastrous            quarterly  results;   and  (ii)  that  the   statement  in  the            prospectus supplement as to the "adequacy" of the restructuring            reserve  remaining as of March 21, 1994 was materially false or            misleading.40   We hold,  however, that the  Wilensky complaint                                                         ________            fails  to state a claim  under Section 12(2)  of the Securities            Act as to DEC  and the individual defendants.   Furthermore, in            light of the limited basis  on which we permit the Shaw  action                                                               ____            to  go forward, only the  claims of the  single named plaintiff            who  purchased  DEC  shares   after  March  21,  1994   may  be            reinstated,  and  the   allegations  in   the  Shaw   complaint                                                           ____            pertaining to the scope of the putative plaintiff class must be            modified  accordingly.   Finally, the  requirements of  Fed. R.            Civ.  P. 9(b)  do  not  apply  to  the  Wilensky  complaint  as                                                    ________            currently  pleaded,  and  the  surviving portion  of  the  Shaw                                                                       ____            complaint  does satisfy  Rule 9(b).   On  remand,  the district                                            ____________________            40.  The district  court did not state  any independent reasons            for dismissing the Wilensky plaintiffs' derivative claims under                               ________            Section 15 of the Securities Act or the Shaw plaintiffs' claims                                                    ____            under  Section 20(a)  of the  Exchange Act  and for  common law            negligent misrepresentation.   Those claims  should, therefore,            be reinstated and permitted to proceed to the extent consistent            with this opinion.                                          -74-            court  may  choose to  require  the plaintiffs  to  amend their            complaints in accordance with these conclusions.                   In  closing,  we  note   that  although  the  issues  of            materiality and knowledge raised by the two complaints preclude            terminating this  litigation on  the pleadings, nothing  we say            here is  intended to foreclose  the possibility that  those and            other issues,  after discovery  and an opportunity  for factual            development, might be susceptible  to resolution on motions for            summary judgment.   To borrow wise words  from one of our prior            decisions:  "Despite  our conclusion  that  certain allegations            survive threshold consideration, we note that plaintiffs remain            a  great distance from actually proving"  any violations of the            federal securities laws.  Serabian, 24 F.3d at 365-66.                                      ________                   Affirmed in  part, reversed in part,  and remanded.   No                   ________________________________________________________            costs are awarded.            __________________                                          -75-
