1997 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

6-10-1997

In Re: Burlington

Precedential or Non-Precedential:

Docket 96-5187

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Recommended Citation

"In Re: Burlington" (1997). 1997 Decisions. Paper 127.

http://digitalcommons.law.villanova.edu/thirdcircuit_1997/127
Filed June 10, 1997 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

No. 96-5187 

IN RE BURLINGTON COAT FACTORY 

SECURITIES LITIGATION 

P. GREGORY BUCHANAN, JACOB TURNER AND 

RONALD ABRAMOFF, 

Appellants 

ON APPEAL FROM THE 

UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF NEW JERSEY 

(D.C. Civil Nos. 94-04663, 94-04737, 94-04751) 

Argued: December 12, 1996 

Before: GREENBERG, ALITO, and ROTH, Circuit Judges. 

(Opinion Filed: June 10, 1997) 
Jeffrey W. Golan (argued) 

Leonard Barrack 

Gerald J. Rodos 

Robert A. Hoffman 

BARRACK, RODOS & BACINE 

3300 Two Commerce Street 

2001 Market Street 

Philadelphia, PA 19103 

David J. Bershad 

Sharon Levine Mirsky 

Edith M. Kallas 

MILBERG WEISS BERSHAD HYNES 

 & LERACH, LLP 

One Pennsylvania Plaza 

49th Floor 

New York, NY 10119 

Howard D. Finkelstein 

FINKELSTEIN & ASSOCIATES 

600 B Street 

Suite 1400 

San Diego, CA 92101 

Alfred G. Yates, Jr. 

ALFRED G. YATES, JR. & 

 ASSOCIATES 

429 Forbes Avenue, Room 519 

Allegheny Building 

Pittsburgh, PA 15219 

Attorneys for Appellants

 2 
Robert A. Alessi (argued) 

CAHILL GORDON & REINDEL 

Eighty Pine Street 

New York, NY 10005 

John L. Thurman 

MASON, GRIFFIN & PIERSON, P.C. 

101 Poor Farm Road 

Princeton, New Jersey 08540 

Attorneys for Appellees

OPINION OF THE COURT 

ALITO, Circuit Judge: 

Burlington Coat Factory Warehouse Corporation ("BCF "), 

a Delaware corporation based in New Jersey, announced its 

fourth quarter and full fiscal year results for 1994 on 

September 20, 1994. The results were below the investment 

community's expectations, and BCF's common stock fell 

sharply, losing approximately 30% in one day. Within a day 

of the initial announcement, the first investor suit was filed. 

In the next few days, the company made additional 

explanatory disclosures, and the stock price fell even 

further. More investor suits were filed. The action at hand 

is the product of the consolidation of these suits.

BCF and certain of its principal officers and directors 

were sued under Sections 10(b) and 20(a) of the Securities 

Exchange Act of 1934 (the "Exchange Act"). 15 U.S.C. 

§§ 78j(b), 78(t)(a). Section 10(b) provides a broad prohibition 

on the use of "manipulative or deceptive devices" in 

connection with the purchase or sale of a security. 15 

U.S.C. § 78j(b). Section 20, in turn, provides liability for 

"controlling persons." 15 U.S.C. § 78(t)(a). Plaintiffs assert 

that they represent the class of investors who purchased 

BCF common stock between October 4, 1993, and 

September 23, 1994. Plaintiffs claim that, as a result of 

BCF's misleading statements and omissions during the 

class period, the company's stock price was artificially 

inflated. 

 3 
The district court dismissed the case both for failure to 

state claims on which relief could be granted and for failure 

to plead those claims with adequate particularity. The court 

also denied plaintiffs' request that they be allowed to 

amend and replead their claims in the event of a dismissal. 

On appeal, plaintiffs challenge the dismissal of four of 

their six original claims. Since the fourth claim has two 

distinct parts, we describe the four claims as five. 

According to plaintiffs, the district court erred in ruling: (1) 

that the alleged earnings overstatements during fiscal year 

1994 were not materially misleading because no violation of 

GAAP had been shown and that, in any event, the claim 

stated was, at most, a claim for negligence; (2) that the 

failure to disclose that the company had not received its 

usual discounts in its inventory build-up in January and 

February of 1994 was "largely irrelevant"; (3) that

overstatements regarding the sales attributable to an extra, 

53rd week in 1993 were not actionable; (4) that 

management's expression of "comfort" with certain specific 

earnings forecasts by analysts was not actionable because 

BCF did not "adopt" the analysts' estimates; and (5) that a 

statement that the company's earnings would continue to 

grow faster than revenues was not actionable because it 

was no more than "puffery." Plaintiffs argue that these were 

proper, viable claims under Section 10(b) and that they 

pled facts in support of their claims that met the 

particularity requirements for fraud claims. As afinal 

matter, plaintiffs contend that even if the district court's 

dismissal of their claims on particularity grounds was 

justified, they should have been given leave to amend and 

replead their claims. 

We affirm the district court's dismissals on claims (2), (3), 

and (5). Claims (1) and (4) were properly dismissed on 

particularity grounds, but we disagree with the district 

court's holding that these claims could not be viable. Since 

leave to amend appears to have been denied on the grounds 

of futility alone, we hold that plaintiffs may amend their 

complaint and replead claims (1) and (4). 

I. 

BCF is one of the leading retailers of coats in the United 

States. Its specialty is selling brand name clothes at 

 4 
discount prices. By mid-1993, BCF was operating a total of 

185 stores in 39 states. The stores ranged in size from 

16,000 to 133,000 square feet and featured outerwear 

(coats, jackets, and raincoats) and complete lines of 

clothing for men, women, and children. 

BCF opened in 1924, under the management of Abe 

Milstein, and specialized in wholesale outerwear. In the 

1950's, Abe's son, Monroe, joined the business. In 1972, 

BCF acquired a coat factory and outlet store in Burlington, 

New Jersey, and began operation as a retailer. 

BCF is a public company traded on the New York Stock 

Exchange. During the class period for this case, the average 

daily trading volume for BCF common stock was 100,000 

shares. Plaintiffs assert that BCF's securities are actively 

followed by numerous analysts and that the market in BCF 

stock was "efficient" at all periods relevant to this case.1 

BCF's fortunes have been on the rise over the past 

decade. BCF's 1992 Annual Report stated that "[t]he

Company's revenues have increased each year for the past 

13 years, from $24 million in 1978 to over $1 billion in 

1992." Further, BCF's earnings per share rose from $0.60 

in 1990 to $1.06 in 1993. 

BCF's top corporate officers, some of whom are 

defendants in this case, hold large portions of BCF's 

outstanding common stock. This seems especially true of 

those officers who are members of the Milstein family, 

which as a whole owned approximately 55% of BCF's 

common stock.2 

_________________________________________________________________ 

1. Asserting that the market in BCF's stock was "efficient" is relevant to 

plaintiffs, such as those here, who are attempting to use the "fraud on 

the market" theory to satisfy the reliance requirement in a Section 10(b) 

claim. See, e.g., Daniel R. Fischel, Efficient Capital Markets, The Crash,

and the Fraud on the Market Theory, 74 Cornell L. Rev. 907, 908-12 

(1989) (describing both the "fraud on the market" theory and its link to 

the efficient market hypothesis); Jonathan Macey, et al., Lessons From

Financial Economics: Materiality, Reliance, and Extending the Reach of

Basic v. Levinson, 77 Va. L. Rev. 1017 (1991); see also n.8, infra. 

2. As of May 11, 1994, there were 41,119,463 shares of BCF's common 

stock outstanding. The stock ownership figures and percentages are 

those alleged in the Complaint. 

 5 
The defendant-officers are: (1) Monroe G. Milstein, BCF's 

chief executive officer and chairman of the board, who 

owned approximately 30.7% of the stock; (2) Stephen E. 

Milstein, a vice-president, director, and general 

merchandise manager, who owned approximately 4.9% of 

the stock; (3) Andrew R. Milstein, a vice-president, director, 

and executive merchandise manager, who owned 

approximately 5.4% of the stock; (4) Robert R. LaPenta, 

controller, and chief accounting officer; and (5) Mark A. 

Nesci, vice-president for store operations, director, and 

chief operating officer. 

This case was brought as a class action on behalf of all 

purchasers of BCF common stock during the period from 

October 4, 1993, through and including September 23, 

1994.3 Plaintiffs claim that during this period defendants 

(the company and the individual officer-defendants), 

through a number of misstatements in and omissions from 

disclosures made to the public, defrauded plaintiffs into 

purchasing BCF stock at artificially high prices. 

Plaintiffs explain that the individual defendants, as a 

result of their positions of control in the company, were 

able to manipulate BCF's press releases and other 

disclosures so as to deceive the market into overpricing the 

company's stock. Allegedly, the individual defendants 

behaved in this manner so as to: 

(i) artificially inflate and maintain the market price of 

BCF's common stock during the Class Period and 

thereby cause plaintiffs and the other members of the 

Class to purchase such common stock at artificially

inflated prices and, in the case of certain of the 

defendants, to personally gain from the sale of inflated 

stock; and 

(ii) protect, perpetuate and enhance their executive 

positions and the substantial compensation, prestige 

and other perquisites of executive compensation 

obtained thereby. 

_________________________________________________________________ 

3. Excluded from the class are defendants, their immediate families, the 

officers, directors, and affiliates of BCF, members of their immediate 

families, and any trusts or entities which they control. 

 6 
Complaint, ¶ 15. 

Defendants who are alleged to have personally gained 

from selling their stock during the class period are Andrew 

R. Milstein (who sold 10,000 shares on March 17 and

March 21, 1994, at $27.75 per share), Mark A. Nesci (who 

sold 10,000 shares on March 18 and March 25, 1994, at 

$27.50), and Robert R. LaPenta (who sold 1,500 shares on 

March 4, 1994 at $28.00 per share and 2,500 shares on 

April 6, 1994, at $26.25 per share). The price drop between 

September 20 and September 23, 1994 -- the days of the 

announcements that allegedly caused a correction in the 

stock price to reflect the true state of BCF's fortunes -- 

was from a high of $23.25 to a low of $13.63. Assuming 

that the price drop of approximately $10 was due entirely 

to the correction of false information, Andrew Milstein's and 

Mark Nesci's trading gains would each amount to 

approximately $100,000, and Robert LaPenta's gains would 

be approximately $40,000. 

II. 

On September 20, 1994, BCF reported its year-end 

revenues and earnings for fiscal 1994. These results were 

below the market's expectations, with the earnings per 

share for fiscal 1994 being $1.12 as compared to the $1.37 

that analysts had been predicting. On September 20 itself, 

the price of BCF stock fell almost 30%, from $23.25 to 

$15.75 per share. Between September 20 and September 

23 both BCF and outside analysts attempted to explain the 

reasons for the worse-than-expected results. By the close of 

the market on September 23, 1994, the price of BCF stock 

had fallen to $13.63. 

The first of plaintiffs' three suits was filed within a day of 

the first price drop on September 20, alleging that BCF had 

violated Sections 10(b) and 20(a) of the Exchange Act. Two 

other similar actions were filed two days later, on

September 23, 1994. The three actions were consolidated, 

and the consolidation resulted in the filing, in January 

1995, of the "Consolidated Amended and Supplemental

Class Action Complaint" (the "Complaint"). 

 7 
Defendants moved to dismiss the Complaint under 

Federal Rule of Civil Procedure 12(b)(6) for failure to state 

a claim upon which relief could be granted and under 

Federal Rule of Civil Procedure 9(b) for failure to plead 

fraud with particularity. 

The district court determined that the Complaint 

contained six distinct claims: 

First, plaintiffs allege that BCF's 1993 annual report 

misrepresented the impact of an additional week (the 

"fifty-third week") on the fiscal year-end sales revenue. 

. . . 

Second, plaintiffs allege that defendants failed to

announce that the discounts BCF received on 

merchandise purchased for January, 1994, and 

February, 1994, were substantially less than the 

discounts received in previous years. . . . 

Third, plaintiffs claim that "during each quarter during 

the Class Period, defendants overstated BCF's profits 

from operations by 2-3 cents EPS (earnings per share) 

per quarter by failing to properly match their operating 

expenses with sales." . . . 

Fourth, plaintiffs allege that defendants, in a press 

release of March 1, 1994, stated that BCF's store 

expansion program would be internally funded, when,

in truth, BCF was borrowing heavily to fund that 

expansion. . . . 

Fifth, plaintiffs claim that defendants, in promoting the 

store expansion program, asserted in various reports 

. . . that 95% of all new stores were profitable within 

six months, and that the new stores were opened 

efficiently and without great expense. . . . 

Finally, plaintiffs allege that throughout the putative 

class period, defendants championed their growth in

revenue, profit margins and earnings, but did not 

disclose shortcomings in their accounting and cost 

control systems. 

(Dist. Ct. Op. at 3). 

 8 
On February 20, 1996, the district court dismissed 

plaintiffs' claims pursuant to Rules 12(b)(6) and 9(b). 

Plaintiffs had requested leave to amend should the 

Complaint be dismissed, but the district court dismissed 

the action in its "entirety." 

Plaintiffs then took this appeal. Plaintiffs contest the 

district court's dismissal of four of the six claims.4 Plaintiffs 

also challenge the court's denial of their request for leave to 

amend. 

III. 

A. Section 10(b) Claims

Plaintiffs assert claims under Sections 10(b) and 20(a) of 

the Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The 

private right of action under Section 10(b) and Rule 10b-55 

reaches beyond statements and omissions made in a 

registration statement or prospectus or in connection with 

an initial distribution of securities and creates liability for 

false or misleading statements or omissions of material fact 

that affect trading on the secondary market. See Central

Bank of Denver, N.A. v. First Interstate Bank of Denver,

N.A., 511 U.S. 164, 171 (1994); Shaw v. Digital Equip.

_________________________________________________________________ 

4. The claims abandoned on appeal are (1) that BCF, by stating that the 

company " `[c]ontinue[s] to anticipate funding most of [its] growth 

through internal profits[,]' " misrepresented "that BCF's store expansion 

program would be internally funded, when in truth BCF was borrowing 

heavily to fund that expansion" and (2) that "defendants, in promoting 

the store expansion program, [misrepresented] . . . that 95% of all new 

stores were profitable within six months, and that the new stores were 

opened efficiently and without great expense." 

5. Section 10(b) prohibits the "use or employ[ment], in connection with 

the purchase or sale of any security, . . . [of] 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, in turn, makes it illegal "[t]o make any untrue statement of a 

material fact or to omit to state a material fact necessary in order to 

make the 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). 

 9 
Corp., 82 F.3d 1194, 1216-17 (1st Cir. 1996); Eckstein v.

Balcor Film Investors, 8 F.3d 1121, 1123-24 (7th Cir. 1993). 

The first step for a Rule 10b-5 plaintiff is to establish 

that defendant made a materially false or misleading 

statement or omitted to state a material fact necessary to 

make a statement not misleading. See In re Phillips

Petroleum Sec. Litig., 881 F.2d 1236, 1243 (3d Cir. 1989); 

Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018 

(5th Cir. 1996). Next, plaintiff must establish that 

defendant acted with scienter and that plaintiff's reliance 

on defendant's misstatement caused him or her injury. See

Phillips, 881 F.2d at 1244; San Leandro Emergency Medical

Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 

801, 808 (2d Cir. 1996). Finally, since the claim being 

asserted is a "fraud" claim, plaintiff must satisfy the 

heightened pleading requirements of Federal Rule of Civil 

Procedure 9(b). See Suna v. Bailey Corp., 107 F.3d 64, 68 

(1st Cir. 1997). 

Rule 9(b) requires that "[i]n all averments of fraud or 

mistake, the circumstances constituting fraud or mistake 

shall be stated with particularity." This particularity 

requirement has been rigorously applied in securities fraud 

cases. See Suna, 107 F.3d at 73; Gross v. Summa Four,

Inc., 93 F.3d 987, 991 (1st Cir. 1996). For example, where 

plaintiffs allege that defendants distorted certain data 

disclosed to the public by using unreasonable accounting 

practices, we have required plaintiffs to state what the 

unreasonable practices were and how they distorted the 

disclosed data. See Shapiro v. UJB Fin. Corp., 964 F.2d 272, 

284-85 (3d Cir. 1992). Rule 9(b)'s heightened pleading 

standard gives defendants notice of the claims against 

them, provides an increased measure of protection for their 

reputations, and reduces the number of frivolous suits 

brought solely to extract settlements. See Tuchman v. DSC

Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994); 

Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). Despite 

Rule 9(b)'s stringent requirements, however, we have stated 

that "courts should be `sensitive' to the fact that application 

of the Rule prior to discovery `may permit sophisticated 

defrauders to successfully conceal the details of their 

fraud.' " Shapiro, 964 F.2d at 284 (citing Christidis v. First

 10 
Pa. Mortgage Trust, 717 F.2d 96, 99 (3d Cir. 1983)). 

Accordingly, the normally rigorous particularity rule has 

been relaxed somewhat where the factual information is 

peculiarly within the defendant's knowledge or control. See

Shapiro, 964 F.2d at 285. But even under a relaxed 

application of Rule 9(b), boilerplate and conclusory 

allegations will not suffice. Id. Plaintiffs must accompany 

their legal theory with factual allegations that make their 

theoretically viable claim plausible. Id.

Rule 9(b) also says that "[m]alice, intent, knowledge, and 

other condition of mind of a person may be averred 

generally." The meaning of this sentence has been the 

source of considerable debate. The Second Circuit, among 

others, has emphasized that although state of mind may be 

"averred generally," a plaintiff alleging securities fraud must 

still allege specific facts that give rise to a "strong inference" 

that the defendant possessed the requisite intent. See, e.g., 

Acito v. IMCERA Group, Inc., 47 F.3d 47, 53 (2d Cir. 1995); 

see also Suna, 107 F.3d at 68; Tuchman, 14 F.3d at 1068. 

"The requisite `strong inference' of fraud may be established 

either (a) by alleging facts to show that defendants had both 

motive and opportunity to commit fraud, or (b) by alleging 

facts that constitute strong circumstantial evidence of 

conscious misbehavior or recklessness." Acito, 47 F.3d at 

52; see also Dileo v. Ernst & Young, 901 F.2d 624, 629 (7th 

Cir. 1990) ("People sometimes act irrationally, but indulging 

ready inferences of irrationality would too easily allow the 

inference that ordinary business reverses are fraud"). 

By contrast, the Ninth Circuit has rejected such a 

requirement that plaintiff allege facts from which intent to 

commit fraud may be inferred. See In re GlenFed, Inc. Sec.

Litig., 42 F.3d 1541 (9th Cir. 1994) (in banc). In GlenFed, 

the court argued that since the second sentence of Rule 

9(b) states that "malice, intent, knowledge, and other 

condition of mind may be averred generally," the Rule 

leaves no room for requiring specific facts to be pled. Id. at 

1545-47. 

We agree with the Second Circuit's approach. Cf. In re

ValueVision Int'l, Inc., Sec. Litig., 896 F. Supp. 434, 446 

(E.D. Pa. 1995) (noting the Third Circuit's silence on the 

issue). While state of mind may be averred generally, 

 11 
plaintiffs must still allege facts that show the court their 

basis for inferring that the defendants acted with "scienter." 

Otherwise, strike suits based on no more than plaintiffs' 

detection of a few negligently made errors in company 

documents or statements (errors detected in the aftermath 

of a stock price drop) could survive the pleading threshold 

and subject public companies to unneeded litigation

expenditures. Public companies make large quantities of 

information available to the public, as a result of both 

mandatory disclosure requirements and self-initiated 

voluntary disclosure. Cf. Roberta Romano, The Genius of

American Corporate Law 93-95 (1993). Large volumes of 

disclosure make for a high likelihood of at least a few 

negligent errors. To allow plaintiffs and their attorneys to 

subject companies to wasteful litigation based on the 

detection of a few negligently made errors found 

subsequent to a drop in stock price would be contrary to 

the goals of Rule 9(b), which include the deterrence of 

frivolous litigation based on accusations that could hurt the 

reputations of those being attacked.6 See Tuchman, 14 F.3d 

at 1067; In re Discovery Zone Sec. Litig., 943 F. Supp. 924, 

934 (N.D. Ill. 1996). 

Plaintiffs' Complaint advances numerous claims of 

nondisclosure and misstatement. On appeal, the myriad 

allegations have been whittled down to five: (1) that BCF 

overstated certain quarterly earnings reports; (2) that BCF 

wrongfully failed to disclose the receipt of certain reduced 

discounts on purchases; (3) that BCF misrepresented the 

sales attributable to the 53rd week of 1993; and (4) & (5) 

that BCF made certain forward-looking statements without 

_________________________________________________________________ 

6. The parties do not contend that the recently enacted Private Securities 

Litigation Reform Act of 1995 (the "Reform Act") applies to this case. Cf.

Hockey v. Medhekar, 1997 WL 203704, *3-4 (N.D. Cal.) (holding that the 

Reform Act applies only to class actions filed after December 22, 1995). 

We note, however, that Section 21(D)(b)(2) of the Reform Act requires 

that complaints brought under Rule 10b-5 "state with particularity facts 

giving rise to a strong inference that the defendant acted with the 

requisite state of mind." 15 U.S.C. § 78u-4(b)(2); see also Friedberg v.

Discreet Logic, Inc., 1997 WL 109228, *5 (D. Mass.); John C. Coffee, Jr., 

The Future of the Private Securities Litigation Reform Act: Or, Why the Fat

Lady Has Not Yet Sung, 51 Bus. Law. 975, 978-79 (1996). 

 12 
a reasonable basis.7 Plaintiffs have further alleged that the 

nondisclosures and misstatements were made with 

fraudulent intent, that defendants' conduct artificially 

inflated the market price of BCF stock, and that this fraud 

on the market caused plaintiffs to suffer damages.8

_________________________________________________________________ 

7. Under existing law, where purchasers or sellers of stock have been 

able to identify a specific false representation of material fact or omission 

that makes a disclosed statement materially misleading, a private right 

of action lies under Section 10(b) and Rule 10b-5. See Hayes v. Gross, 

982 F.2d 104, 106 (3d Cir. 1992). Plaintiffs, however, did not merely 

assert that defendants made affirmative misstatements in and omissions 

from disclosed statements. They also alleged that defendants had failed 

to comply with affirmative disclosure requirements under "Item 303 of 

Regulation S-K." Complaint, ¶ 12. Plaintiffs tell us that under Item 303 

defendants had a duty to "report all trends, demands or uncertainties 

that were reasonably likely to (i) impact BCF's liquidity; (ii) impact 

BCF's net sales, revenue and/or income; and/or (iii) cause previously 

reported financial information not to be indicative of future operating 

results." Complaint, ¶ 12; see also 17 C.F.R. § 229.303. 

It is an open issue whether violations of Item 303 create an 

independent cause of action for private plaintiffs. See Shaw, 82 F.3d at 

1222 (declining to reach the issue); In re Wells Fargo Sec. Litig., 12 F.3d 

922, 930 n.6 (9th Cir. 1993) (same); In re Canandaigua Sec. Litig., 944 

F. Supp. 1202, 1209 n.4 (S.D.N.Y. 1996) ("far from certain that the 

requirement that there be a duty to disclose under Rule 10b-5 may be 

satisfied by importing the disclosure duties from S-K 303"). 

We do not need to reach this issue, however, because it has not been 

raised on appeal. 

8. The "fraud on the market" theory accords plaintiffs in Rule 10b-5 

class actions a rebuttable presumption of reliance if plaintiffs bought or 

sold their securities in an "efficient" market. See Donald C. Langevoort, 

Theories, Assumptions and Securities Regulation: Market Efficiency

Revisited, 140 U. Pa. L. Rev. 851, 889-91 (1992); see also Shaw, 82 F.3d 

at 1218. Plaintiffs using this theory need not show that they actually 

knew of the communication that contained the misrepresentation or 

omission. Instead, plaintiffs are accorded the presumption of reliance 

based on the theory that in an efficient market the misinformation 

directly affects the stock prices at which the investor trades and thus, 

through the inflated or deflated price, causes injury even in the absence 

of direct reliance. See Basic, Inc. v. Levinson, 485 U.S. 224, 241-42 

(1988) (theory presumes that the plaintiffs relied on market integrity to 

accurately and adequately incorporate the company's value into the price 

 13 
Defendants counter that none of the statements or 

omissions identified by plaintiffs was materially false, 

misleading, or otherwise actionable. Defendants protest 

that: 

This lawsuit constitutes a frivolous attempt by 

appellants to extort money from a healthy, successful 

company that saw its revenues and earnings per share 

increase steadily from fiscal 1990 through fiscal 1994. 

The Company's only alleged sin is to have reported 

accurately on September 20, 1994 its year-end 

revenues and earnings for fiscal 1994, which, while

surpassing the performance of any prior year in its

history, failed to meet the earnings-per-share 

projections of a handful of bullish securities analysts. 

(Appellees' Br. at 18) (internal citations omitted). We 

address each of plaintiffs' claims in turn. 

(1) Earnings Overstatements

Plaintiffs allege that "during each quarter during the 

Class Period, defendants overstated BCF's profits from 

operations by 2-3 cents [earnings per share] per quarter by 

failing to properly match their operating expenses with 

sales." Complaint, ¶ 73(c). The Complaint explains:

In order to achieve their goal of inflating the Company's 

stock price, defendants manipulated BCF's financial

statements through improper and misleading 

accounting practices in violation of GAAP. Statement of 

Financial Accounting Concepts 6 (SFAC [No.] 6), set

forth by the Financial Accounting Standards Board 

(FASB), provides that expenses -- which are defined as 

decreases in assets or increases in liabilities during a 

period resulting from delivery of goods, rendering of 

_________________________________________________________________ 

of the security); see also Langevoort, Market Efficiency at 890-91. 

Therefore, in order to avail themselves of the fraud on the market theory 

and the benefit of not having to plead specific reliance on the alleged 

misstatement or omission, plaintiffs have to allege that the stock in 

question traded on an open and efficient market. See Hayes v. Gross, 

982 F.2d 104, 107 (3d Cir. 1992); Peil v. Speiser, 806 F.2d 1154, 1161 

(3d Cir. 1986). It is undisputed that plaintiffs have met this burden. 

 14 
services, or other activities constituting the enterprise's 

central operations -- must be matched with revenues

resulting from those expenses. See SFAC[No.] 6 [ ]. The 

matching principle requires that all expenses incurred 

in the generating of revenue should be recognized in 

the same accounting period as the revenues are 

recognized. Defendants violated SFAC [No.] 6 by failing 

to properly account for the expenses associated with 

BCF's purchases of inventory during the Class Period, 

and thereby artificially inflated the reported net income

and earnings per share during the first, second and

third quarters of fiscal year 1994. Because of the 

Company's inadequate financial and accounting 

controls, defendants were able to and did, in fact, . . . 

materially understate BCF's expenses, on a quarterby-quarter basis during fiscal year 1994, and thereby

overstate very significantly during the Class Period

BCF's profitability, earnings and prospects for fiscal

year 1994.

Complaint, ¶ 67 (emphasis added). 

The court dismissed the earnings overstatement claim 

because it "fail[ed] to allege how defendants intentionally or 

recklessly deviated from generally accepted accounting 

principles." (Dist. Ct. Op. at 19). Although defendants 

argued that plaintiffs had failed to state a legally cognizable 

claim because they did not point to a violation of GAAP, the 

district court's decision to dismiss this claim is most easily 

read as being on Rule 9(b) grounds alone, i.e., a failure to 

plead with particularity. However, to read the district 

court's opinion as dismissing the claim under Rule 9(b) 

alone would be inconsistent with the court's simultaneous 

failure to grant leave to amend on the ground of futility. See

Section B, infra. Hence, we review the district court's 

dismissal as if it were based on both Rule 12(b)(6) and Rule 

9(b). In evaluating the Rule 12(b)(6) dismissal we assume 

that the district court accepted defendants' arguments on 

the issue. 

(i) Rule 12(b)(6)

Defendants argue here, as they did before the district 

court, that the earnings overstatement claim fails under 

 15 
Rule 12(b)(6). A motion to dismiss pursuant to Rule 12(b)(6) 

may be granted only if, accepting all well pleaded 

allegations in the complaint as true, and viewing them in 

the light most favorable to plaintiff, plaintiff is not entitled 

to relief. Bartholomew v. Fischl, 782 F.2d 1148, 1152 (3d 

Cir. 1986). "The issue is not whether a plaintiff will 

ultimately prevail but whether the claimant is entitled to 

offer evidence to support the claims." Scheuer v. Rhodes, 

416 U.S. 232, 236 (1974). 

Defendants argue that their earnings statements could 

not have been materially misleading because BCF's 

accounting practices were consistent with GAAP.9 

Defendants assert that violations of mere accounting 

"concepts" such as SFAC No. 6, which is what plaintiffs 

have alleged, are not violations of GAAP, and therefore are 

not enough to give rise to disclosure violations under the 

securities laws.10 Defendants suggest that the earnings 

_________________________________________________________________ 

9. Defendants do not attempt to suggest that the alleged earnings per 

share overstatements of 2-3 cents themselves should be ruled 

immaterial. Indeed, earnings reports are among the pieces of data that 

investors find most relevant to their investment decisions. In deciding 

whether to buy or sell a security, reasonable investors often rely on 

estimates or projections of the underlying firm's future earnings. See

Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 514 (7th Cir. 1989). 

Information concerning the firm's current and past earnings is likely to 

be relevant in predicting what future earnings might be. See Glassman

v. Computervision Corp., 90 F.3d 617, 626 (1st Cir. 1996). Thus, 

information about a company's past and current earnings is likely to be 

highly "material." Cf. Louis Lowenstein, Financial Transparency and

Corporate Governance: You Manage What You Measure, 96 Colum. L. 

Rev. 1335, 1355 (market places an "enormous emphasis" on earnings 

reports); Victor Brudney and William W. Bratton, Corporate Finance A-1 

(1993) ("The issuance of an income statement is often preceded or 

followed by increased market activity in the company's shares."). 

10. GAAP is not a set of rigid rules ensuring identical treatment of 

identical transactions, but rather characterizes the range of reasonable 

alternatives that management can use. See Thor Power Tool Co. v.

Commissioner, 439 U.S. 522, 544 (1979); Lovelace v. Software Spectrum,

Inc., 78 F.3d 1015, 1021 (5th Cir. 1996). "GAAP [is] an amalgam of 

statements issued by the [American Institute of Certified Public 

Accountants] through the successive groups it has established to 

promulgate accounting principles: the Committee on Accounting 

 16 
overstatement claim is based on no more than the fact that 

BCF uses one accounting method to value merchandise on 

a quarterly basis (the "gross profit" method) and a different 

method to value its merchandise on an annual basis (the 

"retail inventory" method). In addition, defendants inform 

us that the market knew about this practice because the 

use of the different methods was disclosed to investors in 

BCF's quarterly 10-Q filings with the SEC. 

If BCF is correct (a) that the alleged overstatements of 

quarterly earnings are merely the result of the use of valid, 

accepted, and understood accounting methods, and (b) that 

this concurrent use of different accounting methods was 

fully and adequately disclosed to the market (alleged here 

to be efficient), plaintiffs' claims would likely fail. However, 

at this stage, we cannot say, as a matter of law, that the 

alleged earnings overstatements can be fully explained by 

BCF's use of different accounting methods for analyzing 

quarterly versus annual data (even assuming that these 

were fully disclosed to the market). Moreover, assuming 

that consistency with GAAP is enough to preclude liability, 

it is a factual question whether BCF's accounting practices 

were consistent with GAAP. Cf. Discovery, 943 F. Supp. at 

935 n.9 ("This Court finds that whether FASB[SFAC] No. 6 

constitutes GAAP is best resolved by expert testimony, and 

thus should not be addressed on a motion to dismiss"); cf.

also In re Westinghouse Sec. Litig., 90 F.3d 696, 709 n.9 (3d 

Cir. 1996). And, of course, since the claim at issue was 

dismissed at the pleading stage, we are required to credit 

_________________________________________________________________ 

Procedure, the Accounting Principles Board, and the Financial 

Accounting Standards Board [(FASB)]. . . . GAAP include[s] broad 

statements of accounting principles amounting to aspirational norms as 

well as more specific guidelines and illustrations. The lack of an official 

compilation allows for some debate over whether particular 

announcements are encompassed within GAAP." Bily v. Arthur Young &

Co., 834 P.2d 745, 750-51 (Cal. 1992); see also Providence Hosp. of

Toppenish v. Shalala, 52 F.3d 213, 218 n.7 (9th Cir. 1995). At issue here 

is SFAC No. 6, which although issued by FASB, is allegedly not GAAP -- 

at least according to defendants. But cf. Anthony Phillips et al., Basic

Accounting for Lawyers 39 (4th ed. 1988) (including FASB's Statements 

of Financial Concepts within its table of "Sources of Generally Accepted 

Accounting Principles"). 

 17 
plaintiffs' allegations rather than defendants' responses. 

See, e.g., Westinghouse, 90 F.3d at 706 ("we must accept as 

true plaintiffs' factual allegations, and we may affirm the 

district court's dismissals only if it appears certain that 

plaintiffs can prove no set of facts entitling them to relief") 

(citation omitted). Consequently, we cannot sustain the 

district court's dismissal of this claim under Rule 12(b)(6). 

(ii) Rule 9(b)

The district court specifically ruled that the earnings 

overstatement claim failed the particularity requirements of 

Rule 9(b). Rule 9(b) requires a plaintiff to plead here (1) a 

specific false representation of material fact, (2) knowledge 

of its falsity by the person who made it, (3) ignorance of its 

falsity by the person to whom it was made, (4) the maker's 

intention that it should be acted upon, and (5) detrimental 

reliance by the plaintiff. Westinghouse, 90 F.3d at 710. The 

district court held that plaintiffs did not comply with Rule 

9(b) because they failed to allege: 

how defendants intentionally or recklessly deviated 

from generally accepted accounting principles. The 

Amended Consolidated Complaint is devoid of any 

indication as to the particular error(s), [and/or] the

standard(s) from which defendants deviated and even 

the allegation of scienter. 

(Dist. Ct. Op. at 19) (emphasis added). The court concluded 

that plaintiffs had offered no more than "rote allegations of 

fraud predicated on the drop in price of BCF stock," and 

that these allegations fell below the "who, what, when, 

where and how" elements necessary to establish an 

intentional or reckless misstatement or omission under 

Rule 9(b). (Dist. Ct. Op. at 19). See Dileo, 901 F.2d at 627 

(equating the particularity required by Rule 9(b) with "the 

first paragraph of any newspaper story"). In addition, 

according to the court, plaintiffs' claim sounded in 

"negligence." (Dist. Ct. Op. at 18). 

We disagree that plaintiffs' claim, at this stage, boils 

down to a blanket assertion of fraud premised on no more 

than a drop in stock price.11 Plaintiffs have alleged that 2-3 

_________________________________________________________________ 

11. The issue is not whether there was a deviation from any set of formal 

accounting practices, but whether BCF's earnings statements were 

 18 
cent overstatements of earnings occurred in the company's 

public announcements of results for the first, second, and 

third quarters of 1994 and that these overstatements 

occurred because BCF failed to account properly for

expenses associated with purchases of inventory and

thereby violated a specific accounting concept: SFAC No. 6. 

This is an adequate allegation of "how" BCF overstated its 

earnings, so we cannot say that plaintiffs have failed to 

state their claim with adequate particularity. Cf.

Westinghouse, 90 F.3d at 711 (where plaintiffs alleged that 

defendant had arbitrarily moved loans from non-earning to 

earning status just before mandated public reporting, when 

nothing had changed regarding the likelihood of collection 

on the loans, allegations were adequate under Rules

12(b)(6) and 9(b)). 

The district court also ruled that plaintiffs inadequately 

pled scienter. Here, we agree. To satisfy the scienter 

requirement, plaintiffs "must allege facts that give rise to an 

inference that [BCF] knew or was reckless in not knowing 

that [BCF's] financial statements" were misleading. Id. at 

712. It is not enough for plaintiffs to allege generally that 

defendants "knew or recklessly disregarded each of the 

false and misleading statements for which [they were] 

sued," Complaint, ¶ 16; plaintiffs must allege facts that 

could give rise to a "strong" inference of scienter. Suna, 107 

F.3d at 68; San Leandro, 75 F.3d at 813-14. Plaintiffs must 

either (1) identify circumstances indicating conscious or 

reckless behavior by defendants or (2) allege facts showing 

both a motive and a clear opportunity for committing the 

fraud. San Leandro, 75 F.3d at 813. 

In this case, plaintiffs have failed to allege facts that 

would constitute circumstantial evidence of reckless or 

conscious misbehavior on the part of defendants in making 

the overstatements of earnings. Cf. id. at 812-13 (describing 

_________________________________________________________________ 

materially misleading. Deviations from accounting standards are 

important insofar as reasonable investors expect those standards to be 

followed. Given that the market expects that a certain set of accounting 

standards will be followed, we imagine that a demonstration of explicit 

compliance with these standards will at least generally negate the 

possibility that reasonable investors were misled. 

 19 
the types of allegations of fact that would indicate 

conscious or reckless behavior). 

Plaintiffs have also endeavored to plead scienter by 

alleging facts that point towards motive and opportunity to 

commit fraud. Plaintiffs have alleged (and it is undisputed) 

that the individual defendants were top officers of BCF and 

hence had the opportunity to manipulate BCF's disclosures 

to the public. Id. at 813. In addition, plaintiffs have alleged 

that defendants artificially inflated the price of BCF's stock 

so as to enable certain top BCF officials to sell portions of 

their stock holdings at these prices.12 See Acito v. IMCERA

Group, Inc., 47 F.3d 47, 53 (2d Cir. 1995) ("Plaintiffs may 

plead scienter by alleging `facts establishing a motive to 

commit fraud and an opportunity to do so,' or alleging `facts 

_________________________________________________________________ 

12. Plaintiffs also allege, generally, that the individual officer-defendants 

sought to inflate the company's stock price so as to "protect, perpetuate 

and enhance their executive positions and the substantial compensation, 

prestige and other perquisites of executive employment obtained 

thereby." Complaint, ¶ 15. This general allegation, however, does not 

help plaintiffs in adequately alleging scienter because they fail to explain 

to us how a temporary inflation of BCF's stock price would help 

management increase its compensation or preserve its jobs. Cf. Acito v.

IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995) ("[T]he existence, 

without more, of executive compensation dependent upon stock value 

does not give rise to a strong inference of scienter."); cf. also In re

HealthCare Compare Corp. Sec. Litig., 75 F.3d 276, 284 (7th Cir. 1996); 

but cf. In re Wells Fargo Sec. Litig., 12 F.3d 922, 925 & 931 (9th Cir. 

1993). An example of a situation in which management might be able to 

preserve its compensation and job security by causing a temporary stock 

price increase could be where the incumbent management fears a 

specific takeover bid and is seeking to deter the takeover (by causing the 

target company's stock price to be artificially inflated for a short period). 

See Stransky v. Cummins Engine Co., Inc., 51 F.3d 1329, 1331 (7th Cir. 

1995) (where plaintiffs articulated such a theory); see also HealthCare, 

75 F.3d at 284. As a general matter, though, causing temporary 

inflations of price through the dissemination of false information hurts 

the long-term stock price of the company and thereby presumably hurts 

managerial compensation that may be tied to the long-term performance 

of the company. This is so because these disseminations of false 

information (that are eventually discovered by the market) increase the 

volatility of the company's stock and in turn increase its risk and longterm price. Cf. Marcel Kahan, Securities Laws and the Social Costs of

"Inaccurate" Stock Prices, 41 Duke L. J. 977, 1025-26 (1992). 

 20 
constituting circumstantial evidence of either reckless or 

conscious misbehavior.") (quoting In re Time Warner Sec.

Litig., 9 F.3d 259, 269 (2d Cir. 1993)); see also Shaw v.

Digital Equip. Corp., 82 F.3d 1194, 1224 (1st Cir. 1996). In 

support of this theory, plaintiffs' Complaint provides us 

with the names of the insiders who sold stock, the 

quantities of stock sold and the prices at which the sales 

occurred, and the dates of the sales. Complaint, ¶ 51. 

What these allegations boil down to is that two of the five 

officer-defendants made a profit of approximately $100,000 

each and that a third officer-defendant made a profit of 

approximately $40,000 as a result of the artificial inflation 

of the price of BCF's stock. The two officer-defendants who 

are not alleged to have traded are Monroe Milstein, the CEO 

and chairman of the board, who owned 30.7% of BCF's

stock, and Stephen Milstein, a vice-president and general 

merchandise manager, who owned 4.9% of the stock. 

Of the three defendants who are alleged to have traded 

on nonpublic information, plaintiffs have provided us with 

the total stock holdings of only one defendant. This 

defendant, Andrew Milstein, owned 5.4% of the stock. The 

Complaint tells us that as of May 11, 1994, there were 

41,119,463 shares of BCF's common stock outstanding. A 

5.4% holding, therefore, translates to approximately 

2,220,451 shares. Of these, Andrew Milstein is alleged to 

have profited on the sale of 10,000 shares, i.e., 

approximately 0.5% of his holdings. With respect to the 

other two officer-defendants who are alleged to have traded 

on the nonpublic information, the Complaint provides us 

with the number of shares they traded, but not what their 

total stock holdings were. 

These allegations are inadequate to produce a "strong" 

inference of "fraudulent intent." See San Leandro, 75 F.3d 

at 814. First, two officer-defendants are not alleged to have 

traded at all, and these two defendants appear to be two of 

the more powerful among the group of five. One of them 

was the CEO, chairman of the board, and holder of over 

30% of the stock. Second, the one defendant for whom we 

have information as to his total stock holdings appears to 

have sold no more than a minute fraction of his holdings, 

0.5%. Further, we have no information as to whether such 

 21 
trades were normal and routine for this defendant. Nor do 

we have information as to whether the profits made were 

substantial enough in relation to the compensation levels 

for any of the individual defendants so as to produce a 

suspicion that they might have had an incentive to commit 

fraud. Finally, for two of the officer-defendants who are 

alleged to have traded during the class period, we do not 

even have information as to their total BCF stock holdings, 

and we therefore have even less of a basis to infer that their 

sales were unusual or suspicious. To the extent plaintiffs 

choose to allege fraudulent behavior based on what they 

perceive as "suspicious" trading, they have to allege facts 

that support that suspicion. 

A large number of today's corporate executives are 

compensated in terms of stock and stock options. Cf. Elliott 

J. Weiss, The New Securities Fraud Pleading Requirement:

Speed Bump or Road Block?, 38 Ariz. L. Rev. 675, 687 

(1996). It follows then that these individuals will trade 

those securities in the normal course of events. We will not 

infer fraudulent intent from the mere fact that some officers 

sold stock. See Shaw, 82 F.3d at 1224; cf. Tuchman, 14 

F.3d at 1068 (noting that if "incentive compensation" could 

be the basis for an allegation of fraud, "the executives of 

virtually every corporation in the United States would be 

subject to fraud allegations") (citation omitted). Instead, 

plaintiffs must allege that the trades were made at times 

and in quantities that were suspicious enough to support 

the necessary strong inference of scienter. See Shaw, 82 

F.3d at 1224; see also Searls v. Glasser, 64 F.3d 1061, 

1068 (7th Cir. 1995); cf. Weiss, Securities Fraud Pleading at 

686-87 (question courts should ask is whether the benefits 

realized by executives as a result of the inflation in stock 

price are "sufficiently large to constitute evidence of motive" 

to commit fraud). 

We conclude, therefore, that while dismissal on Rule 

12(b)(6) alone would not have been proper, the dismissal on 

Rule 9(b) grounds was. We do not discard the possibility, 

however, that plaintiffs will be able to amend the Complaint 

to allege trading by the defendant-officers that adequately 

supports the requisite strong inference of scienter. 

 22 
(2) The 53rd Week

Fiscal year 1993 for BCF contained an extra, 53rd week. 

In its 1993 annual report, filed with the SEC on October 4, 

1993, BCF represented that this 53rd week had accounted 

for an increase of $12.2 million in sales. Specifically, the 

1993 annual report stated: 

Fiscal 1993 was a 53 week fiscal year compared with

52 week fiscal years in 1992 and 1991. Net sales for 

the 53rd week in fiscal 1993 amounted to $12.2 

million. 

(Dist. Ct. Op. at 15). According to plaintiffs, however, this 

statement was false when made. Claiming that the true 

increase in sales attributable to the 53rd week was $23.2

million, not $12.2 million, plaintiffs rely on the following 

statement made by BCF in a September 20, 1994, press 

release: 

[T]he fourth quarter of 1994 was a 13 week quarter 

compared with a 14 week fiscal quarter in 1993. This 

extra week, a year ago, added $23.2 million in sales, 

and approximately $5 million in pre-tax profit, to 

1993's fourth quarter. 

(Dist. Ct. Op. at 15). 

Plaintiffs claim that BCF's initial understatement of the 

effect of the 53rd week caused investors materially to 

overestimate BCF's future prospects. Complaint,¶ 35. 

The two BCF statements on which plaintiffs rely appear 

to be inconsistent with respect to the effect of the 53rd 

week. The district court, however, found them consistent 

and consequently rejected plaintiffs' claim. The court 

explained: 

The 1993 Annual Report and the September 20, 1994 

press release compare two separate periods. The 1993 

Annual Report focuses on the week of June 27, 1993 to

July 3, 1993 as the extra, non-comparable week 

between fiscal 1992 and fiscal 1993. That week, which 

was the fifty-third week in fiscal 1993, accounted for 

$12.2 million in sales. The September 20, 1994 press 

release, however, focuses on another week -- that of 

 23 
March 28, 1993 to April 3, 1993 -- as the noncomparable week between fifty-three-week fiscal 1993 

and fiscal 1994, which had only fifty-two weeks. 

(Dist. Ct. Op. at 16) (emphasis added; internal citations 

omitted). 

Unlike the district court, we see nothing in the 1993 

Annual Report or the September 20, 1994, press release 

that makes clear that the 53rd weeks discussed in the two 

documents were two different calendar weeks fromfiscal 

year 1993. As far as we can see, the only source of

information before the district court that could have 

provided a basis for the conclusion it reached was 

defendants' brief in support of their motion to dismiss. 

Indeed, the district court's opinion specifically cites to an 

affidavit proffered by defendants on this point. (Dist. Ct. 

Op. at 16). However, since the district court was ruling on 

a motion to dismiss, it was not permitted to go beyond the 

facts alleged in the Complaint and the documents on which 

the claims made therein were based. See Angelastro v.

Prudential-Bache Sec., Inc., 764 F.2d 939, 944 (3d Cir. 

1985); see also In re Donald J. Trump Casino Sec. Litig., 7 

F.3d 357, 368 n.9 (3d Cir. 1993). Thus, if we stopped our 

analysis here, we would have to reverse the district court's 

dismissal of this claim. There is an alternative basis, 

however, that warrants affirmance of the district court's 

decision. 

The district court's opinion notes that, on July 29, 1994, 

approximately two months prior to the September 20 press 

release (where it was disclosed that the 53rd week of 1993 

accounted for $23.2 million in sales), BCF had disclosed 

the information as to the $23.2 million in sales. (Dist. Ct. 

Op. at 16). Plaintiffs' Complaint tells us that this 

information, when released to the public, had "no 

appreciable effect on the market price of BCF common 

stock or on analysts' projections [as to the company's 

earnings for the year]." Complaint, ¶ 57. Plaintiffs' 

Complaint also informs us that BCF's stock was actively 

traded and carefully followed by market analysts and that 

the market for BCF stock was "efficient." Complaint, ¶ 23. 

Because the market for BCF stock was "efficient" and 

because the July 29 disclosure had no effect on BCF's 

 24 
price, it follows that the information disclosed on

September 20 was immaterial as a matter of law. 

Ordinarily, the law defines "material" information as 

information that would be important to a reasonable

investor in making his or her investment decision. See

Westinghouse, 90 F.3d at 714. In the context of an 

"efficient" market, the concept of materiality translates into 

information that alters the price of the firm's stock. Cf.

Shaw, 82 F.3d at 1218 (in cases involving the fraud on the 

market theory of liability, statements identified as 

actionably misleading are alleged to have caused injury, 

"not through the plaintiffs' direct reliance upon them, but 

by dint of the statements' inflating effect on the price of the

security purchased") (emphasis added); Raab v. General

Physics Corp., 4 F.3d 286, 289 (4th Cir. 1993) (" `Soft', 

`puffing' statements . . . generally lack materiality because

the market price of a share is not inflated by vague 

statements predicting growth") (emphasis added). This is so 

because efficient markets are those in which information 

important to reasonable investors (in effect, the market, see

Shaw, 82 F.3d at 1218) is immediately incorporated into

stock prices. See Langevoort, Market Efficiency, at 851; see

also Roots Partnership v. Lands' End, Inc., 965 F.2d 1411, 

1419 (7th Cir. 1992); Wielgos, 892 F.3d at 510 ("The 

Securities and Exchange Commission believes that markets 

correctly value the securities of well-followedfirms, so that 

new sales may rely on information that has been digested 

and expressed in the security's price."). Therefore, to the 

extent that information is not important to reasonable 

investors, it follows that its release will have a negligible 

effect on the stock price. In this case, plaintiffs have 

represented to us that the July 29 release of information 

had no effect on BCF's stock price. This is, in effect, a 

representation that the information was not material. See

Fischel, Efficient Capital Markets, at 909-910; cf. Roots

Partnership, 965 F.2d at 1419 (plaintiff asserting fraud on 

the market theory claimed to have been misled into 

purchasing company's securities on July 25, 1989 by 

earnings projection for the first quarter that was made on 

April 4, 1989; claim failed because company had disclosed 

its actual first quarter earnings on May 18 , 1989 and under 

plaintiffs' own efficient market theory this information 

 25 
should have been incorporated into the price prior to 

plaintiff's purchase on July 25). If the July 29 information 

was immaterial, its nondisclosure in the 1993 Annual 

Report is not actionable. 

(3) Reduced Supplier Discounts

Plaintiffs assert that "BCF purchased the bulk of its 

inventory of coats for 1994 in January and February 1994, 

yet defendants failed to disclose in its statements and 

reports from March 1, 1994 to September 23, 1994, that 

the discounts received were substantially less than in prior 

years." Complaint, ¶ 73(b). In order for an omission or 

misstatement to be actionable under Section 10(b) it is not 

enough that plaintiff identify the omission or misstatement. 

The omission or misstatement must also be material, i.e., 

something that would alter the total mix of relevant 

information for a reasonable investor making an investment 

decision. See Westinghouse, 90 F.3d at 714. Although 

questions of materiality have traditionally been viewed as 

particularly appropriate for the trier of fact, complaints 

alleging securities fraud often contain claims of omissions 

or misstatements that are obviously so unimportant that 

courts can rule them immaterial as a matter of law at the 

pleading stage. See, e.g., Shaw, 82 F.3d at 1217-18; 

Glassman, 90 F.3d at 635. Along these lines, the district 

court rejected plaintiffs' claim predicated on the 

undisclosed supplier discounts. The court made its ruling 

on the ground that the allegedly omitted information was 

too immaterial to form the basis for a legally viable claim. 

There is a threshold procedural question that we must 

address before reaching the merits of the district court's 

decision on materiality. Plaintiffs claim that the district 

court committed reversible error in using information 

contained in BCF's 1994 Annual Report as a basis for its 

materiality analysis because the 1994 Annual Report was 

neither attached to, nor referred to, in the Complaint. 

As a general matter, a district court ruling on a motion 

to dismiss may not consider matters extraneous to the 

pleadings. Angelastro, 764 F.2d at 944. However, an 

exception to the general rule is that a "document integral to

or explicitly relied upon in the complaint" may be 

 26 
considered "without converting the motion [to dismiss] into 

one for summary judgment." Shaw, 82 F.3d at 1220 

(emphasis added); see also Trump, 7 F.3d at 368 n.9 ("a 

court may consider an undisputedly authentic document 

that a defendant attaches as an exhibit to a motion to 

dismiss if the plaintiff's claims are based on the 

document.") (quoting Pension Benefit Guar. Corp. v. White

Consol. Indus., 998 F.2d 1192, 1196 (3d Cir. 1993)). 

The rationale underlying this exception is that the

primary problem raised by looking to documents outside 

the complaint -- lack of notice to the plaintiff-- is 

dissipated "[w]here plaintiff has actual notice . . . and has 

relied upon these documents in framing the complaint." 

Watterson v. Page, 987 F.2d 1, 3-4 (1st Cir. 1993) (quoting 

Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d 

Cir. 1991)); see also San Leandro, 75 F.3d at 808-09. What 

the rule seeks to prevent is the situation in which a plaintiff 

is able to maintain a claim of fraud by extracting an 

isolated statement from a document and placing it in the 

complaint, even though if the statement were examined in 

the full context of the document, it would be clear that the 

statement was not fraudulent. See Shaw, 82 F.3d at 1220. 

As best we can tell, plaintiffs are correct that the 

Complaint does not explicitly refer to or cite BCF's 1994 

Annual Report. But the language in both Trump and Shaw

makes clear that what is critical is whether the claims in 

the complaint are "based" on an extrinsic document and 

not merely whether the extrinsic document was explicitly 

cited. See Trump, 7 F.3d at 368 n.9; Shaw, 82 F.3d at 

1220. Plaintiffs cannot prevent a court from looking at the 

texts of the documents on which its claim is based by 

failing to attach or explicitly cite them. 

In this case, every time in the Complaint that plaintiffs 

refer to their claim that data as to lower discounts in 

January-February 1994 was required to be disclosed, but 

was not, plaintiffs support their claim by arguing that the 

data as to the January-February period was crucial to 

investors because this was the period during which BCF 

purchased the bulk of its 1994 inventory. Complaint,¶¶ 50, 

54(b), 62, 73(b). This is an unambiguous reference to fullyear cost data for 1994. The Complaint, however, does not 

 27 
provide a citation for the source of full-year data for 1994. 

In the absence of such a citation, we think it was 

reasonable for the district court to have looked to the 1994 

Annual Report that defendants provided. 

Plaintiffs next argue that, even if consideration of the 

1994 Annual Report were legitimate, the district court erred 

in dismissing their claim. The district court reasoned that 

to the extent the allegedly lower discounts in JanuaryFebruary 1994 were relevant to investors, they would be 

reflected in the 1994 "costs of goods sold." (Dist. Ct. Op. at 

12). Plaintiffs assert that the court erred in looking at total 

costs. We disagree. 

As previously noted, reasonable investors often rely on 

estimates of a firm's future earnings in deciding whether to 

invest in a firm's securities. See Glassman, 90 F.3d at 626. 

A reduction in discounts received on merchandise 

purchases would be material if it affected total costs and 

therefore earnings. In evaluating the materiality of the 

allegedly undisclosed lower discounts, therefore, the district 

court correctly looked to the effect of these allegedly lower 

discounts on total costs. The impact was negligible; total 

costs between 1993 and 1994 increased only 0.2%, and 

many factors other than merchandise discounts go into 

total costs. Where the data alleged to have been omitted 

would have had no more than a negligible impact on a 

reasonable investor's prediction of the firm's future 

earnings, the data can be ruled immaterial as a matter of 

law. Cf. Westinghouse, 90 F.3d at 714-15 (where plaintiffs 

alleged misstatements regarding loan loss reserves, but the 

claim was based on a failure to do a single write down that 

would have produced no more than a 0.54% change in the 

firm's net income, claim could be ruled immaterial as a 

matter of law); Glassman, 90 F.3d at 633 (where allegedly 

undisclosed information as to quarter-to-quarter changes in 

backlog was no more than a few percent, the claim of 

nondisclosure could be ruled immaterial as a matter of 

law). Hence, we affirm the district court's dismissal of this 

claim. 

(4) & (5) Forward-Looking Statements

Plaintiffs allege that BCF misrepresented its future 

prospects to the public by making two forward-looking 

 28 
statements that lacked a reasonable basis. The federal 

securities laws do not obligate companies to disclose their 

internal forecasts. See In re Lyondell Petrochemical Co. Sec.

Litig., 984 F.2d 1050, 1052 (9th Cir. 1993); see also

Glassman, 90 F.3d at 631; Shaw, 82 F.3d at 1209. 

However, if a company voluntarily chooses to disclose a 

forecast or projection, that disclosure is susceptible to 

attack on the ground that it was issued without a 

reasonable basis. See In re Craftmatic Sec. Litig., 890 F.2d 

628, 645-46 (3d Cir. 1990); Herskovitz v. Nutri/System,

Inc., 857 F.2d 179, 184 (3d Cir. 1988); Searls v. Glasser, 64 

F.3d 1061, 1067 (7th Cir. 1995) ("Before management

releases estimates to the public, it must ensure that the 

information is reasonably certain. If it discloses the 

information before it is convinced of its certainty, 

management faces the prospect of liability.") (citations 

omitted). The two forward-looking statements that plaintiffs 

attack are (1) a representation that BCF "believe[d] [it could] 

continue to grow net earnings at a faster rate than sales," 

and (2) a BCF officer's expression of "comfort" with analyst 

projections of $1.20 to $1.30 as a mid-range for earnings 

per share for fiscal year 1994. Complaint, ¶ 36. We examine 

the statements in turn, concluding that while the claims as 

to both were properly dismissed, plaintiffs should be given 

leave to amend their claims as to one. 

Statement of Belief

BCF's Chief Accounting Officer's statement on November 

1, 1993, that the company "believe[d] [it could] continue to 

grow net earnings at a faster rate than sales" can be broken 

down into two component parts. First, that as of November 

1, 1993, the company's earnings had grown at a faster rate 

than sales, and second, that the company believed that this 

trend would continue. As to the first part of the statement, 

plaintiffs have not alleged that as of November 1, 1993, 

earnings had not been growing faster than sales. Instead, 

plaintiffs' claim focuses on the second portion of the 

statement -- the forward-looking portion. 

The forward-looking portion of the statement here is a 

general, non-specific statement of optimism or hope that a 

trend will continue. Claims that these kinds of vague 

expressions of hope by corporate managers could dupe the 

 29 
market have been almost uniformly rejected by the courts. 

See San Leandro, 75 F.3d at 811 (subdued, generally 

optimistic statements constituted nothing more than

puffery and were not actionable); see also Shapiro v. UJB

Fin. Corp., 964 F.2d 272, 283 n.12 (3d Cir. 1992); 

Glassman, 90 F.3d at 636; Searls, 64 F.3d at 1066; Hillson

Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204, 212 

(4th Cir. 1994) (deeming prediction of "significant sales 

gains . . . as the year progresses" too vague to be material). 

We agree, and thus hold that the statement at issue is too 

vague to be actionable. Moreover, to the extent plaintiffs are 

asserting that there was either a duty to correct or update 

the forward-looking portion of the statement,13 those claims 

fail on account of the original statement's vagueness and 

resultant immateriality. See Gross v. Summa Four, Inc., 93 

F.3d 987, 994-95 (1st Cir. 1996); Shaw, 82 F.3d at 1219 

n.33 (cautiously optimistic statements, expressing at most 

a hope for a positive future, do not trigger a duty to 

update); In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 267 

(2d Cir. 1993) (statements at issue lacked "definite positive 

projections" of the sort that might require later correction), 

cert. denied, 114 S. Ct. 1397 (1994). 

Expression of Comfort

The second forward-looking statement at issue is BCF's 

Chief Accounting Officer's statement during a securities 

analysts' conference that he was "comfortable" with

analysts' estimates of $1.20 to $1.30 as a mid-range for 

fiscal 1994 earnings per share. This statement was reported 

by Reuters on November 1, 1993. Plaintiffs assert (1) that 

this statement was actionable because it was not made 

with a reasonable basis, and (2) that BCF failed to fulfill its 

duty to correct this unreasonable forecast in the period 

following November 1, 1993. The district court, however, 

ruled that a corporate officer's expression of comfort with 

an analyst's projection of earnings cannot be the basis for 

a Section 10(b), Rule 10b-5 claim. 

The Supreme Court has held that statements of opinion 

by top corporate officials may be actionable if they are 

_________________________________________________________________ 

13. As the district court noted, the Complaint is hardly a model of 

clarity. 

 30 
made without a reasonable basis. See Virginia Bankshares,

Inc. v. Sandberg, 501 U.S. 1083, 1098 (1991); see also

Trump, 7 F.3d at 372 n.14 (applying the rationale of 

Virginia Bankshares, a Section 14(a) proxy solicitation case, 

to the Section 10(b) context); Glassman, 90 F.3d at 627. In 

particular, in Virginia Bankshares, the Court held 

actionable a board of directors' expression of opinion 

concerning a specific merger price. Id. at 2758-59 (board of 

directors expressed the opinion that merger price was 

"fair"); see also Glassman, 90 F.3d at 627 (holding 

actionable representations by the company and its 

underwriters that the prices for a public offering were fair 

and estimated based on the most current information

available at the time of the offering). As explained by the 

Court in Virginia Bankshares, statements of opinion by 

corporate officials can be materially significant to investors 

because investors know that these top officials have 

knowledge and expertise far exceeding that of the ordinary 

investor. 501 U.S. at 1090-91; see also Glassman, 90 F.3d 

at 631. The rationale of Virginia Bankshares is applicable 

here, where BCF's Chief Accounting Officer expressed his 

agreement with certain projections by analysts.14 

The district court rejected plaintiffs' claim on the ground 

that a company is not liable for an analyst's projection 

unless the company expressly "adopted or endorsed" the 

analyst's report. (Dist. Ct. Op. at 10, citing Weisbergh v. St.

Jude Medical, Inc., 158 F.R.D. 638, 644 (D. Minn. 1994) 

("This Court will not hold defendants responsible for the 

projections of market analysts absent an indication that 

defendants were responsible for the projections or in a 

position to influence or control them"), aff'd, 62 F.3d 1422 

(8th Cir. 1985) and Raab v. General Physics Corp., 4 F.3d 

286, 288 (4th Cir. 1993) ("The securities laws require 

General Physics to speak truthfully to investors; they do 

_________________________________________________________________ 

14. Certain vague and general statements of optimism have been held 

not actionable as a matter of law because they constitute no more than 

"puffery" and are understood by reasonable investors as such. See, e.g., 

San Leandro, 75 F.3d at 810. The puffery defense does not apply here 

since the expression of comfort was not vague; it was an agreement with 

a specific forecast range. Cf. Glassman, 90 F.3d at 636 (distinguishing 

vague statements of optimism from specific projections). 

 31 
not require the company to police statements made by third 

parties for inaccuracies, even if the third party attributes 

the statement to General Physics)). Although we have no 

problem with the "adopt or endorse" test, we disagree with 

its application here. 

To say that one is "comfortable" with an analyst's 

projection is to say that one adopts and endorses it as 

reasonable. When a high-ranking corporate officer explicitly 

expresses agreement with an outside forecast, that is close, 

if not the same, to the officer's making the forecast.15 We 

see no reason why adopting an analyst's forecast by

reference should insulate an officer from liability where 

making the same forecast would not. 

The cases the district court cites in support of its 

conclusion concern attacks on statements by analysts and 

claims that those statements should be attributed to the 

defendant company because the company allegedly 

provided the analysts with information. See Raab, 4 F.3d at 

288; Weisbergh, 158 F.R.D. at 643. Plaintiffs' claim here, 

however, is not an indirect attempt to attribute an analyst's 

prediction to the company where the company itself has 

made no explicit statement (for example, because the 

company provided the analyst with all the relevant data or 

somehow controlled what the analyst was doing). Instead, 

plaintiffs directly attack BCF's CAO's own statement, as it 

was reported by Reuters. The attribution issue does not 

arise because at this stage we take as true the allegation 

that BCF's CAO did express comfort with the analyst

projections at issue. Cf. Elkind v. Liggett & Myers, Inc., 635 

F.2d 156, 163 (2d Cir. 1980) ("attribution" question is 

answered by asking whether company officials have, 

expressly or impliedly, made a representation that the 

analyst projections are in accordance with their views); In re

Adobe Systems, Inc. Sec. Litig., 767 F. Supp. 1023, 1027-28 

(N.D. Cal. 1991) (denying motion to dismiss where 

_________________________________________________________________ 

15. This is not to discount the possibility of situations where the 

expression of agreement is so unenthusiastic that no reasonable investor 

would attach relevance to it. Here, however, as alleged by plaintiffs, the 

CAO's expression of comfort was enthusiastic enough that we cannot 

deem it immaterial as a matter of law. 

 32 
corporate officer stated he "preferred" certain analyst 

estimates to others). Put differently, it is a statement by a 

BCF officer itself that is being attacked, not an analyst's 

statement.16 

The next question for us is whether there are sufficient 

factual allegations supporting plaintiffs' theory for the claim 

to survive the Rule 9(b) hurdle. To adequately state a claim 

under the federal securities laws, it is not enough merely to 

identify a forward-looking statement and assert as a general 

matter that the statement was made without a reasonable 

basis. Instead, plaintiffs bear the burden of "plead[ing] 

factual allegations, not hypotheticals, sufficient to 

reasonably allow the inference" that the forecast was made 

with either (1) an inadequate consideration of the available 

data or (2) the use of unsound forecasting methodology. 

Glassman, 90 F.3d at 628-29 (rejecting plaintiffs' earnings

projection claim on Rule 12(b)(6) grounds alone, albeit in 

the context of the plaintiffs having had the benefit of full 

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

(describing the type of hard contemporaneous facts that 

could show an opinion as to the fairness of a suggested 

price to have been unreasonable when made); cf. also

Shapiro, 964 F.2d at 284-85 (in attacking afirm's 

accounting practices with a claim that those practices 

resulted in the disclosure of misleading data, plaintiffs 

must (a) identify what those practices are and (b) specify 

how they were departed from)). In deciding a motion to 

dismiss, a court must take well-pleaded facts as true but 

need not credit a complaint's "bald assertions" or "legal 

_________________________________________________________________ 

16. The district court also noted that the earnings projections of $1.20- 

$1.30 per share for fiscal 1994 were not materially off the mark in that 

earnings turned out to be $1.12 per share. But this is an ex post

justification. Securities laws approach matters from an ex ante

perspective. See Pommer, 961 F.2d at 623. The fact that we see in 

hindsight that earnings per share did in fact turn out to be roughly 

within the range they were projected does not tell us conclusively that 

the forecasts were reasonable at the time they were made. Cf. Glassman, 

90 F.3d at 627 ("[W]hile forecasts are not actionable merely because they 

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

reasonably based on, or are inconsistent with, the facts at the time the 

forecast is made."). 

 33 
conclusions." Glassman, 90 F.3d at 628. In this case, 

plaintiffs identified the offending forecasts and then alleged: 

The foregoing statements were materially false and 

misleading when made since, at the time they were 

made, defendants knew, or recklessly disregarded, that 

their public statements and statements to analysts 

promoting BCF and its stock would artificially maintain 

and inflate the market price of BCF's common stock 

due to the false and misleading positive assurances

contained therein. In particular, defendants had no

reasonable basis to state publicly on November 1, 

1993, and not to correct the November 1, 1993 

statement in subsequent forward-looking projections, 

that Burlington Coat Factory would earn between 

$1.20 to $1.30 per share in fiscal year 1994 . . ..

Complaint, ¶ 37. 

Plaintiffs' allegations do not suffice. In asserting that 

there was "no reasonable basis" for the November 1, 1993, 

earnings projection, plaintiffs simply mouth the required 

conclusion of law. See Glassman, 90 F.3d at 629-30. 

Plaintiffs' Complaint contains a number of vague factual 

assertions regarding the period prior to November 1, 1993, 

but plaintiffs have failed to link any of these allegations to 

their claim that the November 1 forecast was actionably 

unsound when made. The earnings projection claim 

therefore fails Rule 9(b)'s heightened pleading requirements. 

The existence of these unlinked factual allegations, 

however, precludes us from holding that the Complaint is 

so bereft of facts, as the Glassman complaint was held to 

be, see id., that granting plaintiffs the opportunity to 

replead would be futile. On remand, therefore, plaintiffs 

should be given the opportunity to attempt to recast this 

claim in terms that satisfy Rule 9(b). 

We turn next to the duties to correct and update an

earnings projection. 

Duties to Update and Correct

Plaintiffs also assert that BCF had a duty to correct the 

November 1, 1993, expression of comfort with the analysts' 

projections. In particular, plaintiffs point to the refusal of 

 34 
BCF's CEO, Monroe Milstein, in an interview given to 

Reuters --reported on March 22, 1994 -- to comment on 

analysts' earnings projections for both the third quarter of 

1994 and the full year. Plaintiffs assert that on March 22, 

1994, and at other unspecified points in time after

November 1, 1993, defendants had had a duty to correct 

the November 1 earnings projection.17 Although plaintiffs 

characterize their claim as a "duty to correct" claim, they 

appear to be asserting both a duty to correct and a duty to 

update. 

The Seventh Circuit explained in Stransky v. Cummins

Engine Co., Inc., 51 F.3d 1329 (7th Cir. 1995), that the duty 

to correct is analytically different from the duty to update, 

although litigants, as appears to be the case here, often fail 

to distinguish between the two. Id. at 1331. As the Stransky

court pointed out, a Section 10(b) plaintiff ordinarily is 

required to identify a specific statement made by the 

company and then explain either (1) how the statement was 

materially misleading or (2) how it omitted a fact that made 

the statement materially misleading. Id. The duties to 

update and correct are two other avenues of finding a duty 

to disclose that "have been kicked around by courts, 

litigants and academics alike." Id.; cf. William B. Gwyn, Jr. 

and W. Christopher Matton, The Duty to Update the

Forecasts, Predictions, and Projections of Public Companies, 

24 Sec. Reg. L. J. 366 (1997); Robert H. Rosenblum, An

Issuer's Duty Under Rule 10b-5 to Correct and Update

Materially Misleading Statements, 40 Cath. U. L. Rev. 289 

(1991). 

(a) Duty to Correct

The Stransky court articulated the duty to correct as 

applying: 

_________________________________________________________________ 

17. Plaintiffs suggest that by March 22, 1994, analysts' projections for 

BCF's 1994 earnings per share had risen above the $1.20 to $1.30 midrange with which BCF's CAO had expressed comfort some months prior. 

Complaint ¶ 49. The fact that analysts' projections independently 

increased above the predicted range, however, has no relevance to the 

claim at hand because plaintiffs have not identified any free-standing 

duty on the part of a public company to "police" the forecasts being 

made by analysts. See Raab, 4 F.3d at 288 (no duty to police statements 

by third parties). 

 35 
when a company makes a historical statement that, at 

the time made, the company believed to be true, but as 

revealed by subsequently discovered information 

actually was not. The company then must correct the

prior statement within a reasonable time. 

51 F.3d at 1331-32 (emphasis added); see also Backman v.

Polaroid Corp., 910 F.2d 10, 16-17 (1st Cir. 1990) (in banc) 

("Obviously, if a disclosure is in fact misleading when

made, and the speaker thereafter learns of this, there is a 

duty to correct it.") (emphasis added). We have no quarrel 

with the Stransky articulation, except to note that we think 

the duty to correct can also apply to a certain narrow set 

of forward-looking statements. We will attempt to illustrate 

the kinds of circumstances we have in mind with an 

example. 

Imagine the following situation. A public company in 

Manhattan makes a forecast that appears to it to be

reasonable at the time made. Subsequently, the company 

discovers that it misread a vital piece of data that went into 

its forecast. Perhaps a fax sent by the company's factory 

manager in some remote location was blurry and was 

reasonably misread by management in Manhattan as 

representing sales for the past quarter as 100,000 units as 

opposed 10,000 units. Manhattan management then makes 

an erroneous forecast based on the information it has at 

the time. A few weeks later, management receives the 

correct sales figures by mail. So long as the correction in 

the sales figures was material to the forecast that was 

disclosed earlier, we think there would likely be a duty on 

the part of the company to disclose either the corrected 

figures or a corrected forecast. In other words, there is an 

implicit representation in any forecast (or statement of 

historical fact) that errors of the type we have identified will 

be corrected. This duty derives from the implicit factual 

representation that a public company makes whenever it 

makes a forecast, i.e., that the forecast was reasonable at 

the time made. What is crucial to recognize is that the 

error, albeit an honest one, was one that had to do with 

information available at the time the forecast was made and 

that the error in the information was subsequently 

discovered. Cf. Rudolph v. Arthur Andersen & Co., 800 F.2d 

 36 
1040, 1043-44 (11th Cir. 1986) (distinguishing between 

information that is subsequently discovered that shows a 

report to have been erroneous at the time made (where a 

duty to correct might exist) and ordinary subsequently 

developing information that might reflect on the report, but 

does not show it to have been inaccurate at the time made

(where there is no duty to correct)). 

Plaintiffs phrase their claim as based on a "duty to 

correct." Earlier in the opinion, we explained that plaintiffs' 

attack on the reasonableness of the earnings forecast failed 

because plaintiffs had not met their duty of pleading an 

adequate set of specific factual allegations from which one 

could reasonably infer that the November 1, 1993, forecast 

was made unreasonably. Similarly, as to the "duty to 

correct" claim, plaintiffs have failed to allege how and what 

the specific error or set of errors might have been that went 

into the November 1, 1993, forecast. Nor have the plaintiffs 

identified the specific times at which those errors were 

discovered, so as to allow correction and trigger defendants' 

alleged duty. Therefore, the "duty to correct" claim (to the 

extent one is being made) fails Rule 9(b)'s pleading 

standards. In any event, we think plaintiffs' claim is better 

characterized as a "duty to update" claim. 

(b) Duty to Update

The duty to update, in contrast to the duty to correct, 

concerns statements that, although reasonable at the time 

made, become misleading when viewed in the context of 

subsequent events. See Greenfield v. Heublein, Inc., 742 

F.2d 751, 758 (3d Cir. 1984); Backman, 910 F.2d at 17. In 

Greenfield, we explained that updating might be required if 

a prior disclosure "[had] become materially misleading in 

light of subsequent events." 742 F.2d at 758; cf. Time

Warner, 9 F.3d at 267. However, although we have 

generally recognized that a duty to update might exist 

under certain circumstances, we have not clarified when 

such circumstances might exist. Cf. Phillips, 881 F.2d at 

1245; Greenfield, 742 F.2d at 758-60; Backman, 910 F.2d 

at 17 (the duty arises only under "special circumstances"). 

Specifically, we have not addressed the question whether a 

duty to update might exist for ordinary, run-of-the-mill 

forecasts, such as the earnings projection in this case. 

 37 
At issue here is the statement of BCF's CAO on 

November 1, 1993, that he was comfortable with analyst 

projections of $1.20 to $1.30 as a mid-range for earnings 

per share in fiscal 1994. Plaintiffs' argument appears to be 

that, as BCF obtained information in the period subsequent 

to November 1, 1993, that would have produced a material 

change in the earnings projection for fiscal 1994, there was 

an ongoing duty to disclose this information. In essence 

then, the claim is that the disclosure of a single specific 

forecast produced a continuous duty to update the public 

with either forecasts or hard information that would in any 

way change a reasonable investor's perception of the 

originally forecasted range. We decline to hold that the 

disclosure of a single, ordinary earnings forecast can 

produce such an expansive set of disclosure obligations. 

For a plaintiff to allege that a duty to update a forwardlooking statement arose on account of an earlier-made 

projection, the argument has to be that the projection 

contained an implicit factual representation that remained 

"alive" in the minds of investors as a continuing 

representation. Cf. Stransky, 51 F.3d at 1333 (in 

determining the scope of liability that a forward-looking 

statement can produce, one looks to the implicit factual 

representations therein); Kowal v. MCI Communications

Corp., 16 F.3d 1271, 1277 (D.C. Cir. 1994). Determining 

whether such a representation is implicit in an ordinary 

forecast is a function of what a reasonable investor expects 

as a result of the background regulatory structure. In 

particular, we note three features of the existing federal 

securities disclosure apparatus: 

1. Except for specific periodic reporting requirements 

(primarily the requirements to file quarterly and annual 

reports), there is no general duty on the part of a company 

to provide the public with all material information. See Time

Warner, 9 F.3d at 267 ("a corporation is not required to 

disclose a fact merely because a reasonable investor would 

very much like to know that fact"). Thus, possession of 

material nonpublic information alone does not create a 

duty to disclose it. See Shaw, 82 F.3d at 1202; Roeder v.

Alpha Indus., Inc., 814 F.2d 22, 26 (1st Cir. 1987) (citing 

Chiarella v. United States, 445 U.S. 222, 235 (1980)). 

 38 
2. Equally well settled is the principle that an accurate 

report of past successes does not contain an implicit 

representation that the trend is going to continue, and 

hence does not, in and of itself, obligate the company to 

update the public as to the state of the quarter in progress. 

See Shaw, 82 F.3d at 1202; Raab v. General Physics Corp., 

4 F.3d 286, 289 (4th Cir. 1993); In re Convergent

Technologies Sec. Litig., 948 F.2d 507, 513-14 (9th Cir. 

1991) (rejecting plaintiffs' contention that accurate 

reporting of past results "misled investors by implying that 

[the company] expected the upward first quarter trend to 

continue throughout the year"); Zucker v. Quasha, 891 F. 

Supp. 1010, 1015 (D.N.J.), aff'd, 82 F.3d 408 (3d Cir. 

1996). 

3. Finally, the existing regulatory structure is aimed at 

encouraging companies to make and disclose internal

forecasts by protecting them from liability for disclosing 

internal forecasts that, although reasonable when made, 

turn out to be wrong in hindsight. See Stransky, 51 F.3d at 

1333. Companies are not obligated either to produce or 

disclose internal forecasts, and if they do, they are 

protected from liability, except to the extent that the 

forecasts were unreasonable when made. See Glassman, 90 

F.3d at 631. The regulatory structure seeks to encourage 

companies to disclose forecasts by providing companies 

with some protection from liability. However, where it 

comes to affirmative disclosure requirements, the current 

regulatory scheme focuses on backward-looking "hard" 

information, not forecasts. See id. (citing Frank H. 

Easterbrook and Daniel R. Fischel, The Economic Structure

of Corporate Law, 305-06 (1991)). Increasing the obligations 

associated with disclosing reasonably made internal

forecasts is likely to deter companies from providing this 

information -- a result contrary to the SEC's goal of 

encouraging the voluntary disclosure of company forecasts. 

Cf. Stransky, 51 F.3d at 1333; Raab, 4 F.3d at 290. 

Based on features one and two, we do not think it can be 

said that an ordinary earnings projection contains an 

implicit representation on the part of the company that it 

will update the investing public with all material 

information that relates to that forecast. Under existing law, 

 39 
the market knows that companies have neither a specific 

obligation to disclose internal forecasts nor a general 

obligation to disclose all material information. Shaw, 82 

F.3d at 1202 & 1209. We conclude that ordinary, run-ofthe-mill forecasts contain no more than the implicit 

representation that the forecasts were made reasonably and 

in good faith. Cf. Stransky, 51 F.3d at 1333; Kowal, 16 

F.3d at 1277. Just as the accurate disclosure of a line of 

past successes has been ruled not to contain the 

implication that the current period is going just as well, see

Gross, 93 F.3d at 994, disclosure of a specific earnings

forecast does not contain the implication that the forecast 

will continue to hold good even as circumstances change. 

Finally, the federal securities laws, as they stand today, 

aim at encouraging companies to disclose their forecasts. A 

judicially created rule that triggers a duty of continuous 

disclosure of all material information every time a single 

specific earnings forecast is disclosed would likely result in 

a drastic reduction in the number of such projections made 

by companies. It is these specific earnings projections that 

are the most useful to investors in deciding whether to 

invest in a firm's securities. Cf. Marx v. Computer Sciences

Corp., 507 F.2d 485, 489 (noting the importance of 

earnings projections to investors who are assessing the 

value of a stock); John S. Poole, Improving the Reliability of

Management Forecasts, 14 J. Corp. L. 547, 548 & 558 

(1989) (noting both the importance to investors of 

projections of future financial performance and the problem 

of using these forecasts where companies make them 

vague). The only types of projections that would be exempt 

from the duty of continuous disclosure advocated by

plaintiffs, and hence the only types of projections that 

would likely be disclosed under the rule proposed by 

plaintiffs, would be vague expressions of hope and 

optimism that are of little use to investors. See, e.g., Lewis

v. Chrysler Corp., 949 F.2d 644, 652-53 (3d Cir. 1991); 

Raab, 4 F.3d at 289. Therefore, apart from the fact that 

plaintiffs' disclosure theory has no support in the existing 

regulatory structure, adopting it would severely undermine 

the goal of encouraging the maximal disclosure of 

information useful to investors. Cf. Hillson, 42 F.3d at 219 

(increasing the level of liability for projections would 

 40 
produce a result contrary to the goals of full disclosure that 

underlie the federal securities laws). In sum, under the 

existing disclosure apparatus, the voluntary disclosure of 

an ordinary earnings forecast does not trigger any duty to 

update.18 

We pause to reemphasize that the circumstances in 

Greenfield and Phillips, two cases in which we recognized 

that a duty to update might exist, were vastly different from 

the situation at hand: the disclosure of an ordinary 

earnings projection. In both Greenfield and Phillips, the 

initial disclosures that were argued to have triggered the 

duty to update involved information about events that 

could fundamentally change the natures of the companies 

involved. Specifically, both cases involved takeover

attempts, and the plaintiffs were claiming that they should 

have been updated with information as to these attempts. 

See Greenfield, 742 F.2d at 758-59; Phillips, 881 F.2d at 

1239 & 1245.19 Where the initial disclosure relates to the 

announcement of a fundamental change in the course the 

company is likely to take, there may be room to read in an 

implicit representation by the company that it will update 

_________________________________________________________________ 

18. We do not need to decide now whether our analysis would differ if 

the context were one in which the company had a pattern or practice of 

disclosing periodic updates any time it made a forecast. Plaintiffs have 

not alleged that BCF had a practice of providing periodic updates on 

earnings projections; nor have they alleged that such was the industry 

or market practice. 

19. The "duty to update" claims were eventually rejected in both cases. 

In Greenfield, the court held that there had been no initial statement as 

to the existence of a takeover attempt or merger negotiations that could 

have triggered a subsequent duty. 742 F.2d at 759. In Phillips, although 

there was an initial triggering statement, plaintiffs did not produce 

evidence of any subsequently arising change of intent that might have 

been required to be disclosed. 881 F.2d at 1246. 

In addition, it is worth noting that the source of the "duty to update" 

requirement in Phillips was a specific regulation, 17 C.F.R. § 240.13d-1, 

that required that "where `any material change occur[ed] in the facts set 

forth' in a Schedule 13D," a company was required to " `promptly' file `an 

amendment disclosing such change' with the Securities and Exchange 

Commission, the issuer of the security, and with any exchange on which 

the security is traded." 881 F.2d at 1245. 

 41 
the public with news of any radical change in the 

company's plans -- e.g., news that the merger is no longer 

likely to take place.20 Cf. Phillips, 881 F.2d at 1246 (noting 

that "[f]ew markets shift as quickly and dramatically as the 

securities market, especially where a publicly traded 

company has been `put in play' by a hostile suitor. The . . . 

statements were broad and unequivocal, providing no

contingency for changing circumstances . . . [and could] 

fairly be read as a statement by the Partnership that, no 

matter what happened, it would not change its 

intentions."). But finding a duty to update a disclosure of a 

takeover threat is a far cry from finding a duty to update a 

simple earnings forecast which, if anything, contains a 

clear implication that circumstances underlying it are likely 

to change. 

B. Leave to Amend

Plaintiffs' final contention is that the district court erred 

in denying them leave to replead. The district court granted 

defendants' motion to dismiss on both Rule 12(b)(6) and 

Rule 9(b) grounds. Plaintiffs had requested that, in the 

event their Complaint was dismissed, they be given leave to 

replead. The court, however, dismissed the action in its 

entirety. 

As a general matter, we review the district court's denial 

of leave to amend for abuse of discretion. See Lorenz v. CSX

Corp., 1 F.3d 1406, 1413 (3d Cir. 1993); De Jesus v. Sears

Roebuck & Co., 87 F.3d 65, 71 (2d Cir. 1996). Federal Rule 

of Civil Procedure 15(a) provides that "leave[to amend] 

shall be freely given when justice so requires." Glassman, 

90 F.3d at 622. The Supreme Court has cautioned that 

although "the grant or denial of an opportunity to amend is 

_________________________________________________________________ 

20. We emphasize that we are not saying that once a fundamental 

change is announced the company faces a duty continuously to update 

the public with all material information relating to that change. Instead, 

we think that the duty to update, to the extent it might exist, would be 

a narrow one to update the public as to extreme changes in the 

company's originally expressed expectation of an event such as a 

takeover, merger, or liquidation. But cf. Eisenstadt v. Centel Corp., __ 

F.3d __, __ 1997 WL 242251, *8 (7th Cir.) (suggesting that even such a 

narrow duty might not exist). 

 42 
within the discretion of the District Court, . . . outright 

refusal to grant the leave without any justifying reason 

appearing for the denial is not an exercise of that

discretion; it is merely an abuse of that discretion and 

inconsistent with the spirit of the Federal Rules." Forman v.

Davis, 371 U.S. 178, 182 (1962). Among the grounds that 

could justify a denial of leave to amend are undue delay, 

bad faith, dilatory motive, prejudice, and futility. Id.; 

Lorenz, 1 F.3d at 1414; Glassman, 90 F.3d at 622. 

The district court made no finding that plaintiffs acted in 

bad faith or in an effort to prolong litigation; nor did the 

court find that defendants would have been unduly 

prejudiced by the amendment. Cf. Glassman, 90 F.3d at 

622. We are left to conclude, therefore, that the denial of 

leave to amend was based on the court's belief that

amendment would be futile. In fact, in discussing this 

issue, defendants' brief starts out by urging us to affirm the 

district court's denial of leave to amend because"any 

attempted additional amendment of that pleading would be 

futile." (Appellees' Br. at 43) (citation and internal quotation 

omitted). "Futility" means that the complaint, as amended, 

would fail to state a claim upon which relief could be 

granted. Glassman, 90 F.3d at 623 (citing 3 Moore's Federal

Practice ¶ 15.08[4], at 15-80 (2d ed. 1993)). In assessing 

"futility," the district court applies the same standard of 

legal sufficiency as applies under Rule 12(b)(6). Id. (citing 3 

Moore's at ¶ 15.08[4], at 15-81). The district court here 

rejected plaintiffs' claims on both Rule 12(b)(6) and Rule 

9(b) grounds. 

Ordinarily where a complaint is dismissed on Rule 9(b) 

"failure to plead with particularity" grounds alone, leave to 

amend is granted. See Shapiro, 964 F.2d at 278; Luce v.

Edelstein, 802 F.2d 49, 56-57 (2d Cir. 1987); Yoder v.

Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 561-62 & 

n.6 (2d Cir. 1985) (citation omitted). However, the

Complaint in this case was plaintiffs' second. Further, 

plaintiffs not only had approximately four months between 

the initially filed complaints and the revised, consolidated 

complaint that is at issue here, but the Complaint appears 

to have represented the efforts of not one, but four 

different, law firms. Hence, it is conceivable that the district 

 43 
court could have found undue delay or prejudice to the 

defendants. But the court made no such determination, 

and we cannot make that determination on the record

before us. Therefore, to the extent we can affirm the district 

court's determinations on Rule 12(b)(b) grounds alone (i.e., 

for futility, see Glassman, 90 F.3d at 623), we shall affirm 

the denial of leave to replead. These claims would not 

survive a Rule 12(b)(6) motion even if pled with more 

particularity. See Luce, 802 F.2d at 56-57. But, where the 

district court's dismissals can be justified only on Rule 9(b) 

particularity grounds we reverse the denial of leave to 

replead. See id. On the latter set of claims, we borrow the 

words of the Second Circuit that "because we are hesitant 

to preclude the prosecution of a possibly meritorious claim 

because of defects in the pleadings, we believe that the 

plaintiffs should be afforded an additional, albeitfinal 

opportunity, to conform the pleadings to Rule 9(b)." Ross v.

A.H. Robins Co., 607 F.2d 545, 547 (2d Cir. 1979). 

IV. 

We conclude that the Complaint survives scrutiny under 

Rule 12(b)(6) to the extent that it alleges: (1) that the 

defendants overstated BCF's quarterly income by 2-3 cents 

per share in each quarter of fiscal year 1994; (2) that 

management's expression of "comfort" with analysts'

projections of a mid-range of earnings of $1.20 to $1.30 per 

share for fiscal 1994 was unreasonable when made. Neither 

of these claims, however, survives Rule 9(b)'s particularity 

requirements.21 Ordinarily, complaints dismissed under 

Rule 9(b) are dismissed with leave to amend. See Luce, 802 

F.2d at 56. As best we can tell from the district court's 

opinion, the reason for the denial of leave to amend here 

appears to be that the court thought plaintiffs had failed 

the threshold burden of stating claims that could survive a 

Rule 12(b)(6) motion. However, since we hold that the 

above-mentioned claims did pass Rule 12(b)(6) we reverse 

_________________________________________________________________ 

21. The duty to update portion of the attack on the earnings projection 

fails altogether as we decline to recognize the existence of such a claim 

for an ordinary earnings forecast. 

 44 
the court's denial of leave to amend on these claims.22 In all 

other respects, we affirm the district court. 

A True Copy: 

Teste: 

Clerk of the United States Court of Appeals

for the Third Circuit

_________________________________________________________________ 

22. On remand, after plaintiffs tender their proposed amendments, the 

district court shall consider whether the amendments would be futile. 

 44