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. e du/thir dc ir c uit_1997/127Filed 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

2Robert 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, announc ed its fourth quarter and full fiscal year results for 199 4 on September 20, 1994. The results were below the inve stment community's expectations, and BCF's common stock fe ll sharply, losing approximately 30% in one day. Withi n a day of the initial announcement, the first investor sui t was filed. In the next few days, the company made additional explanatory disclosures, and the stock price fell e ven 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 direc tors were sued under Sections 10(b) and 20(a) of the Sec urities 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" i n connection with the purchase or sale of a security. 15 U.S.C. § 78j(b). Section 20, in turn, provides liab ility for "controlling persons." 15 U.S.C. § 78(t)(a). Plaint iffs assert that they represent the class of investors who purc hased BCF common stock between October 4, 1993, and September 23, 1994. Plaintiffs claim that, as a res ult of BCF's misleading statements and omissions during th e class period, the company's stock price was artific ially
inflated.

3The district court dismissed the case both for fail ure to

state claims on which relief could be granted and f or failure to plead those claims with adequate particularity. The court also denied plaintiffs' request that they be allowe d to amend and replead their claims in the event of a di smissal.

On appeal, plaintiffs challenge the dismissal of fo ur of their six original claims. Since the fourth claim h as two distinct parts, we describe the four claims as five

. According to plaintiffs, the district court erred i n ruling: (1) that the alleged earnings overstatements during fis cal year 1994 were not materially misleading because no viol ation of GAAP had been shown and that, in any event, the cla im stated was, at most, a claim for negligence; (2) th at the failure to disclose that the company had not receiv ed its usual discounts in its inventory build-up in Januar y 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 s pecific earnings forecasts by analysts was not actionable b ecause BCF did not "adopt" the analysts' estimates; and (5 ) that a statement that the company's earnings would continu e to grow faster than revenues was not actionable becaus e it was no more than "puffery." Plaintiffs argue that t hese 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 afi nal matter, plaintiffs contend that even if the distric t court's dismissal of their claims on particularity grounds was justified, they should have been given leave to ame nd 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 dis trict court's holding that these claims could not be viab le. Since leave to amend appears to have been denied on the g rounds of futility alone, we hold that plaintiffs may amen d 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

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

185 stores in 39 states. The stores ranged in size from 16,000 to 133,000 square feet and featured outerwea r (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. I n the 1950's, Abe's son, Monroe, joined the business. In 1972, BCF acquired a coat factory and outlet store in Bur lington, New Jersey, and began operation as a retailer.

BCF is a public company traded on the New York Stoc k Exchange. During the class period for this case, th e average daily trading volume for BCF common stock was 100,0 00
shares. Plaintiffs assert that BCF's securities are actively followed by numerous analysts and that the market i n BCF stock was "efficient" at all periods relevant to th is 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 billi on 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 tru e of
those officers who are members of the Milstein fami ly, which as a whole owned approximately 55% of BCF's
common stock.2

___________________________________________________ ______________

1. Asserting that the market in BCF's stock was "ef ficient" is relevant to plaintiffs, such as those here, who are attempting to use the "fraud on the market" theory to satisfy the reliance requirem ent 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" t heory and its link to the efficient market hypothesis); Jonathan Macey, e t al., Lessons From Financial Economics: Materiality, Reliance, and Ext ending 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.

5The 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% o f 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. LaPe nta, controller, and chief accounting officer; and (5) M ark A. Nesci, vice-president for store operations, directo r, and chief operating officer.

This case was brought as a class action on behalf o f all purchasers of BCF common stock during the period fr om October 4, 1993, through and including September 23

, 1994.3 Plaintiffs claim that during this period def endants (the company and the individual officer-defendants)

, through a number of misstatements in and omissions from disclosures made to the public, defrauded plaintiff s 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 overpr icing the company's stock. Allegedly, the individual defendan ts
behaved in this manner so as to:

(i) artificially inflate and maintain the market pr ice of BCF's common stock during the Class Period and thereby cause plaintiffs and the other members of t he 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 inf lated stock; and

(ii) protect, perpetuate and enhance their executiv e positions and the substantial compensation, prestig e and other perquisites of executive compensation obtained thereby.

___________________________________________________ ______________

3. Excluded from the class are defendants, their im mediate families, the officers, directors, and affiliates of BCF, members of their immediate families, and any trusts or entities which they con trol.

6Complaint, ¶ 15.

Defendants who are alleged to have personally gaine d from selling their stock during the class period ar e 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 shar es 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 fort unes -- was from a high of $23.25 to a low of $13.63. Assum ing that the price drop of approximately $10 was due en tirely to the correction of false information, Andrew Mils tein'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 result s were below the market's expectations, with the earnings per share for fiscal 1994 being $1.12 as compared to th e $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 Septembe r 23 both BCF and outside analysts attempted to expla in 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 with in a day of the first price drop on September 20, alleging that BCF had violated Sections 10(b) and 20(a) of the Exchange A ct. Two other similar actions were filed two days later, on September 23, 1994. The three actions were consolid ated, and the consolidation resulted in the filing, in Ja nuary 1995, of the "Consolidated Amended and Supplemental Class Action Complaint" (the "Complaint").

7Defendants moved to dismiss the Complaint under

Federal Rule of Civil Procedure 12(b)(6) for failur e to state a claim upon which relief could be granted and unde r 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 rep ort misrepresented the impact of an additional week (th e "fifty-third week") on the fiscal year-end sales re venue.

. . .

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 d uring the Class Period, defendants overstated BCF's profi ts from operations by 2-3 cents EPS (earnings per shar e) per quarter by failing to properly match their oper ating expenses with sales." . . .

Fourth, plaintiffs allege that defendants, in a pre ss 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 promoti ng the store expansion program, asserted in various report s . . . that 95% of all new stores were profitable wi thin six months, and that the new stores were opened efficiently and without great expense. . . .

Finally, plaintiffs allege that throughout the puta tive 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).

8On 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 dism issed the action in its "entirety."

Plaintiffs then took this appeal. Plaintiffs contes t the
district court's dismissal of four of the six claim s.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 2 0(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. Th e private right of action under Section 10(b) and Rul e 10b-55 reaches beyond statements and omissions made in a registration statement or prospectus or in connecti on with
an initial distribution of securities and creates l iability for false or misleading statements or omissions of mate rial fact that affect trading on the secondary market. See Ce ntral Bank of Denver, N.A. v. First Interstate Bank of De nver, 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 B CF was borrowing heavily to fund that expansion" and (2) that "defen dants, 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] an y 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 unt rue statement of a
material fact or to omit to state a material fact n ecessary in order to make the statements made in the light of the circum stances under which they were made, not misleading . . . in conne ction with the purchase or sale of any security." 17 C.F.R. § 240. 10b-5(b).

9Corp. , 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 est ablish that defendant made a materially false or misleadin g statement or omitted to state a material fact neces sary 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 tha t defendant acted with scienter and that plaintiff's reliance on defendant's misstatement caused him or her injur y. See Phillips , 881 F.2d at 1244; San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., In c. , 75 F.3d 801, 808 (2d Cir. 1996). Finally, since the claim b eing 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 frau d or mistake, the circumstances constituting fraud or mi stake shall be stated with particularity." This particula rity requirement has been rigorously applied in securiti es fraud
cases. See Suna , 107 F.3d at 73; Gross v. Summa Four,

Inc. , 93 F.3d 987, 991 (1st Cir. 1996). For example, wh ere plaintiffs allege that defendants distorted certain data disclosed to the public by using unreasonable accou nting practices, we have required plaintiffs to state wha t 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 plead ing standard gives defendants notice of the claims agai nst them, provides an increased measure of protection f or their reputations, and reduces the number of frivolous su its 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 hav e stated
that "courts should be `sensitive' to the fact that application of the Rule prior to discovery `may permit sophisti cated defrauders to successfully conceal the details of t heir fraud.' " Shapiro , 964 F.2d at 284 (citing Christidis v. First

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

Accordingly, the normally rigorous particularity ru le has
been relaxed somewhat where the factual information is peculiarly within the defendant's knowledge or cont rol. See Shapiro , 964 F.2d at 285. But even under a relaxed application of Rule 9(b), boilerplate and conclusor y allegations will not suffice. Id. Plaintiffs must accompany their legal theory with factual allegations that ma ke their theoretically viable claim plausible. Id.

Rule 9(b) also says that "[m]alice, intent, knowled ge, and other condition of mind of a person may be averred generally." The meaning of this sentence has been t he source of considerable debate. The Second Circuit, among others, has emphasized that although state of mind may be "averred generally," a plaintiff alleging securitie s fraud must still allege specific facts that give rise to a "st rong 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 e stablished either (a) by alleging facts to show that defendant s had both motive and opportunity to commit fraud, or (b) by a lleging facts that constitute strong circumstantial evidenc e 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, In c. 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 ot her condition of mind may be averred generally," the Ru le leaves no room for requiring specific facts to be p led. 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 generall y,

11plaintiffs must still allege facts that show the co urt their

basis for inferring that the defendants acted with "scienter." Otherwise, strike suits based on no more than plain tiffs' detection of a few negligently made errors in compa ny documents or statements (errors detected in the aft ermath of a stock price drop) could survive the pleading t hreshold and subject public companies to unneeded litigation expenditures. Public companies make large quantitie s of information available to the public, as a result of both mandatory disclosure requirements and self-initiate d 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 att orneys to subject companies to wasteful litigation based on t he detection of a few negligently made errors found subsequent to a drop in stock price would be contra ry to the goals of Rule 9(b), which include the deterrenc e of frivolous litigation based on accusations that coul d 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 myri ad allegations have been whittled down to five: (1) th at BCF overstated certain quarterly earnings reports; (2) that BCF wrongfully failed to disclose the receipt of certai n 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 wi thout

___________________________________________________ ______________

6. The parties do not contend that the recently ena cted Private Securities Litigation Reform Act of 1995 (the "Reform Act") ap plies to this case. Cf. Hockey v. Medhekar , 1997 WL 203704, *3-4 (N.D. Cal.) (holding that th e Reform Act applies only to class actions filed afte r December 22, 1995). We note, however, that Section 21(D)(b)(2) of the R eform Act requires that complaints brought under Rule 10b-5 "state wit h particularity facts giving rise to a strong inference that the defendan t 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 Ref orm Act: Or, Why the Fat Lady Has Not Yet Sung , 51 Bus. Law. 975, 978-79 (1996).

12a reasonable basis.7 Plaintiffs have further allege d that the

nondisclosures and misstatements were made with fraudulent intent, that defendants' conduct artific ially inflated the market price of BCF stock, and that th is 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 mislead ing, 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, howev er, did not merely
assert that defendants made affirmative misstatemen ts in and omissions from disclosed statements. They also alleged that d efendants had failed to comply with affirmative disclosure requirements under "Item 303 of Regulation S-K." Complaint, ¶ 12. Plaintiffs tell u s that under Item 303 defendants had a duty to "report all trends, demand s or uncertainties that were reasonably likely to (i) impact BCF's liq uidity; (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 Fa rgo Sec. Litig. , 12 F.3d 922, 930 n.6 (9th Cir. 1993) (same); In re Canandai gua 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, becaus e it has not been raised on appeal.

8. The "fraud on the market" theory accords plainti ffs 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: Ma rket Efficiency
Revisited , 140 U. Pa. L. Rev. 851, 889-91 (1992); see also S haw , 82 F.3d at 1218. Plaintiffs using this theory need not show that they actually knew of the communication that contained the misrep resentation or omission. Instead, plaintiffs are accorded the pres umption of reliance based on the theory that in an efficient market the misinformation directly affects the stock prices at which the inve stor trades and thus, through the inflated or deflated price, causes inju ry 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

13Defendants counter that none of the statements or

omissions identified by plaintiffs was materially f alse, misleading, or otherwise actionable. Defendants pro test
that:

This lawsuit constitutes a frivolous attempt by appellants to extort money from a healthy, successf ul company that saw its revenues and earnings per shar e increase steadily from fiscal 1990 through fiscal 1 994. 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 anal ysts.

(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 f rom operations by 2-3 cents [earnings per share] per qu arter 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 Com pany's stock price, defendants manipulated BCF's financial statements through improper and misleading accounting practices in violation of GAAP. Statemen t 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 dur ing 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 frau d on the market theory and the benefit of not having to plead specific rel iance on the alleged misstatement or omission, plaintiffs have to allege that the stock in question traded on an open and efficient market. Se e 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 ha ve met this burden.

14services, or other activities constituting the ente rprise's

central operations -- must be matched with revenues resulting from those expenses. See SFAC[No.] 6 [ ]. The matching principle requires that all expenses incur red in the generating of revenue should be recognized i n the same accounting period as the revenues are recognized. Defendants violated SFAC [No.] 6 by fai ling to properly account for the expenses associated wit h BCF's purchases of inventory during the Class Perio d, 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 there by overstate very significantly during the Class Perio d BCF's profitability, earnings and prospects for fis cal year 1994.

Complaint, ¶ 67 (emphasis added).

The court dismissed the earnings overstatement clai m because it "fail[ed] to allege how defendants inten tionally or recklessly deviated from generally accepted account ing principles." (Dist. Ct. Op. at 19). Although defend ants argued that plaintiffs had failed to state a legall y 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 dist rict court's opinion as dismissing the claim under Rule 9(b)
alone would be inconsistent with the court's simult aneous failure to grant leave to amend on the ground of fu tility. 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' argume nts on
the issue.

(i) Rule 12(b)(6)

Defendants argue here, as they did before the distr ict court, that the earnings overstatement claim fails under

15Rule 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 t hem 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 w ill ultimately prevail but whether the claimant is enti tled to offer evidence to support the claims." Scheuer v. R hodes

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

Defendants argue that their earnings statements cou ld not have been materially misleading because BCF's accounting practices were consistent with GAAP.9
Defendants assert that violations of mere accountin g "concepts" such as SFAC No. 6, which is what plaint iffs have alleged, are not violations of GAAP, and there fore are not enough to give rise to disclosure violations un der the securities laws.10 Defendants suggest that the earn ings

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9. Defendants do not attempt to suggest that the al leged 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 de cisions. In deciding whether to buy or sell a security, reasonable inves tors often rely on estimates or projections of the underlying firm's f uture 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 migh t be. See Glassman v. Computervision Corp. , 90 F.3d 617, 626 (1st Cir. 1996). Thus, information about a company's past and current earn ings 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 emphasi s" on earnings reports); Victor Brudney and William W. Bratton, Co rporate Finance A-1 (1993) ("The issuance of an income statement is oft en preceded or followed by increased market activity in the compan y's shares.").

10. GAAP is not a set of rigid rules ensuring ident ical treatment of identical transactions, but rather characterizes th e range of reasonable alternatives that management can use. See Thor Powe r Tool Co. v.
Commissioner , 439 U.S. 522, 544 (1979); Lovelace v. Software Sp ectrum,
Inc. , 78 F.3d 1015, 1021 (5th Cir. 1996). "GAAP [is] an amalgam of statements issued by the [American Institute of Cer tified Public Accountants] through the successive groups it has e stablished to promulgate accounting principles: the Committee on Accounting

16overstatement claim is based on no more than the fa ct 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 inves tors in BCF's quarterly 10-Q filings with the SEC.

If BCF is correct (a) that the alleged overstatemen ts 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 (alleg ed here to be efficient), plaintiffs' claims would likely f ail. However, at this stage, we cannot say, as a matter of law, t hat the alleged earnings overstatements can be fully explai ned by BCF's use of different accounting methods for analy zing quarterly versus annual data (even assuming that th ese were fully disclosed to the market). Moreover, assu ming that consistency with GAAP is enough to preclude li ability, it is a factual question whether BCF's accounting p ractices 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 testimo ny, 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 issu e was dismissed at the pleading stage, we are required to credit

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Procedure, the Accounting Principles Board, and the Financial Accounting Standards Board [(FASB)]. . . . GAAP inc lude[s] broad statements of accounting principles amounting to as pirational norms as well as more specific guidelines and illustrations. The lack of an official compilation allows for some debate over whether par ticular announcements are encompassed within GAAP." Bily v. Arthur Young &
Co. , 834 P.2d 745, 750-51 (Cal. 1992); see also Provid ence Hosp. of Toppenish v. Shalala , 52 F.3d 213, 218 n.7 (9th Cir. 1995). At issue he re is SFAC No. 6, which although issued by FASB, is al legedly 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").

17plaintiffs' allegations rather than defendants' res ponses.

See , e.g. , Westinghouse , 90 F.3d at 706 ("we must accept as true plaintiffs' factual allegations, and we may af firm the district court's dismissals only if it appears cert ain 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 earn ings overstatement claim failed the particularity requir ements 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) ignor ance of its falsity by the person to whom it was made, (4) the maker's intention that it should be acted upon, and (5) det rimental 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 c oncluded that plaintiffs had offered no more than "rote alle gations of fraud predicated on the drop in price of BCF stock, " and that these allegations fell below the "who, what, w hen, where and how" elements necessary to establish an
intentional or reckless misstatement or omission un der Rule 9(b). (Dist. Ct. Op. at 19). See Dileo , 901 F.2d at 627 (equating the particularity required by Rule 9(b) w ith "the first paragraph of any newspaper story"). In additi on, according to the court, plaintiffs' claim sounded i n "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 alleg ed that 2-3

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11. The issue is not whether there was a deviation from any set of formal accounting practices, but whether BCF's earnings st atements were

18cent overstatements of earnings occurred in the com pany's public announcements of results for the first, seco nd, and third quarters of 1994 and that these overstatement s occurred because BCF failed to account properly for expenses associated with purchases of inventory and thereby violated a specific accounting concept: SFA C No. 6. This is an adequate allegation of "how" BCF oversta ted its earnings, so we cannot say that plaintiffs have fai led 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-earn ing to earning status just before mandated public reportin g, when nothing had changed regarding the likelihood of col lection on the loans, allegations were adequate under Rules 12(b)(6) and 9(b)).

The district court also ruled that plaintiffs inade quately pled scienter. Here, we agree. To satisfy the scien ter requirement, plaintiffs "must allege facts that giv e rise to an inference that [BCF] knew or was reckless in not kn owing that [BCF's] financial statements" were misleading. Id. at 712. It is not enough for plaintiffs to allege gene rally that defendants "knew or recklessly disregarded each of the false and misleading statements for which [they wer e] sued," Complaint, ¶ 16; plaintiffs must allege fact s 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 consci ous or reckless behavior by defendants or (2) allege facts showing both a motive and a clear opportunity for committin g the
fraud. San Leandro , 75 F.3d at 813.

In this case, plaintiffs have failed to allege fact s that
would constitute circumstantial evidence of reckles s or conscious misbehavior on the part of defendants in making the overstatements of earnings. Cf. id. at 812-13 (describing

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materially misleading. Deviations from accounting s tandards are important insofar as reasonable investors expect th ose standards to be followed. Given that the market expects that a cert ain set of accounting standards will be followed, we imagine that a demon stration of explicit compliance with these standards will at least gener ally negate the possibility that reasonable investors were misled.

19the types of allegations of fact that would indicat e

conscious or reckless behavior).

Plaintiffs have also endeavored to plead scienter b y alleging facts that point towards motive and opport unity to commit fraud. Plaintiffs have alleged (and it is un disputed) that the individual defendants were top officers of BCF and hence had the opportunity to manipulate BCF's discl osures 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 p ortions 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 mo tive to commit fraud and an opportunity to do so,' or alleg ing `facts

___________________________________________________ ______________

12. Plaintiffs also allege, generally, that the ind ividual officer-defendants sought to inflate the company's stock price so as t o "protect, perpetuate and enhance their executive positions and the subst antial compensation, prestige and other perquisites of executive employm ent obtained thereby." Complaint, ¶ 15. This general allegation, however, does not help plaintiffs in adequately alleging scienter bec ause they fail to explain to us how a temporary inflation of BCF's stock pric e would help management increase its compensation or preserve it s jobs. Cf. Acito v. IMCERA Group, Inc. , 47 F.3d 47, 54 (2d Cir. 1995) ("[T]he existence, without more, of executive compensation dependent u pon stock value does not give rise to a strong inference of sciente r."); 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 managemen t might be able to preserve its compensation and job security by causi ng a temporary stock price increase could be where the incumbent managem ent fears a specific takeover bid and is seeking to deter the t akeover (by causing the target company's stock price to be artificially inf lated 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, causin g temporary inflations of price through the dissemination of fa lse information hurts the long-term stock price of the company and thereb y presumably hurts managerial compensation that may be tied to the lon g-term performance of the company. This is so because these disseminat ions of false information (that are eventually discovered by the market) increase the volatility of the company's stock and in turn incre ase 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).

20constituting circumstantial evidence of either reck less 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 provi des us with the names of the insiders who sold stock, the quantities of stock sold and the prices at which th e 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 prof it of approximately $40,000 as a result of the artificial inflation of the price of BCF's stock. The two officer-defend ants 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 g eneral merchandise manager, who owned 4.9% of the stock.

Of the three defendants who are alleged to have tra ded on nonpublic information, plaintiffs have provided us with the total stock holdings of only one defendant. Thi s defendant, Andrew Milstein, owned 5.4% of the stock . The Complaint tells us that as of May 11, 1994, there w ere 41,119,463 shares of BCF's common stock outstanding . A 5.4% holding, therefore, translates to approximatel y 2,220,451 shares. Of these, Andrew Milstein is alle ged 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 hav e traded on the nonpublic information, the Complaint provide s us with the number of shares they traded, but not what their total stock holdings were.

These allegations are inadequate to produce a "stro ng"
inference of "fraudulent intent." See San Leandro , 75 F.3d at 814. First, two officer-defendants are not alleg ed to have traded at all, and these two defendants appear to b e two of the more powerful among the group of five. One of t hem was the CEO, chairman of the board, and holder of o ver 30% of the stock. Second, the one defendant for who m we have information as to his total stock holdings app ears to
have sold no more than a minute fraction of his hol dings, 0.5%. Further, we have no information as to whether such

21trades 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 produ ce a suspicion that they might have had an incentive to commit fraud. Finally, for two of the officer-defendants w ho are alleged to have traded during the class period, we do not
even have information as to their total BCF stock h oldings,
and we therefore have even less of a basis to infer that their sales were unusual or suspicious. To the extent pla intiffs choose to allege fraudulent behavior based on what they perceive as "suspicious" trading, they have to alle ge 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 Require ment: 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 som e officers
sold stock. See Shaw , 82 F.3d at 1224; cf. Tuchman , 14 F.3d at 1068 (noting that if "incentive compensatio n" could be the basis for an allegation of fraud, "the execu tives of virtually every corporation in the United States wo uld 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 su pport the necessary strong inference of scienter. See Sha w , 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 b enefits realized by executives as a result of the inflation in stock price are "sufficiently large to constitute evidenc e of motive" to commit fraud).

We conclude, therefore, that while dismissal on Rul e 12(b)(6) alone would not have been proper, the dism issal on Rule 9(b) grounds was. We do not discard the possib ility, however, that plaintiffs will be able to amend the Complaint to allege trading by the defendant-officers that ad equately supports the requisite strong inference of scienter

.

22(2) The 53rd Week

Fiscal year 1993 for BCF contained an extra, 53rd w eek. In its 1993 annual report, filed with the SEC on Oc tober 4, 1993, BCF represented that this 53rd week had accou nted for an increase of $12.2 million in sales. Specific ally, 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 fo r the 53rd week in fiscal 1993 amounted to $12.2

million.

(Dist. Ct. Op. at 15). According to plaintiffs, how ever, this statement was false when made. Claiming that the tr ue 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, pres s release:

[T]he fourth quarter of 1994 was a 13 week quarter compared with a 14 week fiscal quarter in 1993. Thi s extra week, a year ago, added $23.2 million in sale s, 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 app ear to be inconsistent with respect to the effect of th e 53rd week. The district court, however, found them consi stent and consequently rejected plaintiffs' claim. The co urt explained:

The 1993 Annual Report and the September 20, 1994 press release compare two separate periods. The 199 3 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, whi ch was the fifty-third week in fiscal 1993, accounted for $12.2 million in sales. The September 20, 1994 pres s release, however, focuses on another week -- that o f

23March 28, 1993 to April 3, 1993 -- as the noncomparable week between fifty-three-week fiscal 199 3 and fiscal 1994, which had only fifty-two weeks.

(Dist. Ct. Op. at 16) (emphasis added; internal cit ations omitted).

Unlike the district court, we see nothing in the 19 93 Annual Report or the September 20, 1994, press rele ase that makes clear that the 53rd weeks discussed in t he two
documents were two different calendar weeks fromfis cal year 1993. As far as we can see, the only source of
information before the district court that could ha ve provided a basis for the conclusion it reached was defendants' brief in support of their motion to dis miss. Indeed, the district court's opinion specifically c ites to an affidavit proffered by defendants on this point. (D ist. Ct. Op. at 16). However, since the district court was r uling on a motion to dismiss, it was not permitted to go bey ond 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. L itig. , 7 F.3d 357, 368 n.9 (3d Cir. 1993). Thus, if we stopp ed our analysis here, we would have to reverse the distric t court's
dismissal of this claim. There is an alternative ba sis, however, that warrants affirmance of the district c ourt'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 disc losed the information as to the $23.2 million in sales. ( Dist. Ct. Op. at 16). Plaintiffs' Complaint tells us that thi s information, when released to the public, had "no appreciable effect on the market price of BCF commo n stock or on analysts' projections [as to the compan y's earnings for the year]." Complaint, ¶ 57. Plaintiff s' Complaint also informs us that BCF's stock was acti vely traded and carefully followed by market analysts an d that the market for BCF stock was "efficient." Complaint , ¶ 23.

Because the market for BCF stock was "efficient" an d because the July 29 disclosure had no effect on BCF 's

24price, 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 tran slates into information that alters the price of the firm's sto ck. Cf.
Shaw , 82 F.3d at 1218 (in cases involving the fraud on the market theory of liability, statements identified a s actionably misleading are alleged to have caused in jury, "not through the plaintiffs' direct reliance upon t hem, 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 materiali ty because the market price of a share is not inflated by vague statements predicting growth") (emphasis added). Th is is so
because efficient markets are those in which inform ation important to reasonable investors (in effect, the m arket, 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 ma rkets correctly value the securities of well-followedfirm s, so that new sales may rely on information that has been dig ested and expressed in the security's price."). Therefore , to the extent that information is not important to reasona ble 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 infor mation had no effect on BCF's stock price. This is, in eff ect, a representation that the information was not materia l. 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 inform ation

25should 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 Annua l Report is not actionable.

(3) Reduced Supplier Discounts

Plaintiffs assert that "BCF purchased the bulk of i ts 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, t hat the discounts received were substantially less than in prior years." Complaint, ¶ 73(b). In order for an omissio n or misstatement to be actionable under Section 10(b) i t is not enough that plaintiff identify the omission or miss tatement. The omission or misstatement must also be material, i.e.

, something that would alter the total mix of relevan t information for a reasonable investor making an inv estment decision. See Westinghouse , 90 F.3d at 714. Although questions of materiality have traditionally been vi ewed as particularly appropriate for the trier of fact, com plaints alleging securities fraud often contain claims of o missions 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 informatio n was too immaterial to form the basis for a legally viab le claim.

There is a threshold procedural question that we mu st address before reaching the merits of the district court's decision on materiality. Plaintiffs claim that the district court committed reversible error in using informati on contained in BCF's 1994 Annual Report as a basis fo r its materiality analysis because the 1994 Annual Report was neither attached to, nor referred to, in the Compla int.

As a general matter, a district court ruling on a m otion to dismiss may not consider matters extraneous to t he pleadings. Angelastro , 764 F.2d at 944. However, an exception to the general rule is that a "document i ntegral to or explicitly relied upon in the complaint" may be

26considered "without converting the motion [to dismi ss] 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 docume nt
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 outs ide 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 complain t." 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 i n the complaint, even though if the statement were examin ed 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 th e 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 cl aims in the complaint are "based" on an extrinsic document and not merely whether the extrinsic document was expli citly cited. See Trump , 7 F.3d at 368 n.9; Shaw , 82 F.3d at 1220. Plaintiffs cannot prevent a court from lookin g 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 plai ntiffs
refer to their claim that data as to lower discount s 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, do es not

27provide 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 o f the 1994 Annual Report were legitimate, the district co urt erred in dismissing their claim. The district court reaso ned that to the extent the allegedly lower discounts in Janu aryFebruary 1994 were relevant to investors, they woul d be reflected in the 1994 "costs of goods sold." (Dist. Ct. Op. at 12). Plaintiffs assert that the court erred in look ing at total costs. We disagree.

As previously noted, reasonable investors often rel y on estimates of a firm's future earnings in deciding w hether 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 co sts and therefore earnings. In evaluating the materiality o f the allegedly undisclosed lower discounts, therefore, t he district court correctly looked to the effect of these alleg edly lower discounts on total costs. The impact was negligible ; total costs between 1993 and 1994 increased only 0.2%, an d many factors other than merchandise discounts go in to total costs. Where the data alleged to have been om itted would have had no more than a negligible impact on a reasonable investor's prediction of the firm's futu re earnings, the data can be ruled immaterial as a mat ter 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 d own 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 ch anges in backlog was no more than a few percent, the claim o f
nondisclosure could be ruled immaterial as a matter of law). Hence, we affirm the district court's dismiss al of this
claim.

(4) & (5) Forward-Looking Statements

Plaintiffs allege that BCF misrepresented its futur e prospects to the public by making two forward-looki ng

28statements that lacked a reasonable basis. The fede ral

securities laws do not obligate companies to disclo se their internal forecasts. See In re Lyondell Petrochemica l 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 disclo se a forecast or projection, that disclosure is suscepti ble 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/Sys tem,
Inc. , 857 F.2d 179, 184 (3d Cir. 1988); Searls v. Glass er , 64 F.3d 1061, 1067 (7th Cir. 1995) ("Before management releases estimates to the public, it must ensure th at the information is reasonably certain. If it discloses the information before it is convinced of its certainty

, management faces the prospect of liability.") (cita tions omitted). The two forward-looking statements that p laintiffs 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" wit h analyst projections of $1.20 to $1.30 as a mid-range for ea rnings per share for fiscal year 1994. Complaint, ¶ 36. We examine the statements in turn, concluding that while the c laims 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 Novem ber 1, 1993, that the company "believe[d] [it could] co ntinue to grow net earnings at a faster rate than sales" can be broken down into two component parts. First, that as of No vember 1, 1993, the company's earnings had grown at a fast er rate than sales, and second, that the company believed t hat this trend would continue. As to the first part of the s tatement, 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 i s a general, non-specific statement of optimism or hope that a trend will continue. Claims that these kinds of vag ue expressions of hope by corporate managers could dup e the

29market have been almost uniformly rejected by the c ourts.

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 pla intiffs are asserting that there was either a duty to correct o r update the forward-looking portion of the statement,13 tho se claims fail on account of the original statement's vaguene ss and resultant immateriality. See Gross v. Summa Four, I nc. , 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 "definit e positive projections" of the sort that might require later c orrection),
cert. denied , 114 S. Ct. 1397 (1994).

Expression of Comfort

The second forward-looking statement at issue is BC F's Chief Accounting Officer's statement during a secur ities analysts' conference that he was "comfortable" with analysts' estimates of $1.20 to $1.30 as a mid-rang e 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 ma de with a reasonable basis, and (2) that BCF failed to fulfill its duty to correct this unreasonable forecast in the p eriod following November 1, 1993. The district court, how ever, ruled that a corporate officer's expression of comf ort with an analyst's projection of earnings cannot be the b asis for a Section 10(b), Rule 10b-5 claim.

The Supreme Court has held that statements of opini on by top corporate officials may be actionable if the y are

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13. As the district court noted, the Complaint is h ardly a model of clarity.

30made without a reasonable basis. See Virginia Banks hares,

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 opin ion concerning a specific merger price. Id. at 2758-59 (board of directors expressed the opinion that merger price w as "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 explaine d by the Court in Virginia Bankshares , statements of opinion by corporate officials can be materially significant t o investors because investors know that these top officials hav e knowledge and expertise far exceeding that of the o rdinary 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 expresse d his agreement with certain projections by analysts.14

The district court rejected plaintiffs' claim on th e ground that a company is not liable for an analyst's proje ction unless the company expressly "adopted or endorsed" the analyst's report. (Dist. Ct. Op. at 10, citing Weis bergh v. St. Jude Medical, Inc. , 158 F.R.D. 638, 644 (D. Minn. 1994) ("This Court will not hold defendants responsible f or 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 requ ire General Physics to speak truthfully to investors; t hey do

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14. Certain vague and general statements of optimis m have been held not actionable as a matter of law because they cons titute no more than "puffery" and are understood by reasonable investor s as such. See , e.g. , San Leandro , 75 F.3d at 810. The puffery defense does not appl y here since the expression of comfort was not vague; it w as an agreement with a specific forecast range. Cf. Glassman , 90 F.3d at 636 (distinguishing vague statements of optimism from specific projecti ons).

31not require the company to police statements made b y third

parties for inaccuracies, even if the third party a ttributes the statement to General Physics)). Although we hav e no problem with the "adopt or endorse" test, we disagr ee with its application here.

To say that one is "comfortable" with an analyst's projection is to say that one adopts and endorses i t as reasonable. When a high-ranking corporate officer e xplicitly expresses agreement with an outside forecast, that is close, if not the same, to the officer's making the foreca st.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 it s conclusion concern attacks on statements by analyst s and
claims that those statements should be attributed t o 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 th e company provided the analyst with all the relevant data or somehow controlled what the analyst was doing). Ins tead, plaintiffs directly attack BCF's CAO's own statemen t, as it was reported by Reuters. The attribution issue does not arise because at this stage we take as true the all egation 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" questio n is answered by asking whether company officials have, expressly or impliedly, made a representation that the analyst projections are in accordance with their vi ews); In re Adobe Systems, Inc. Sec. Litig. , 767 F. Supp. 1023, 1027-28 (N.D. Cal. 1991) (denying motion to dismiss where

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15. This is not to discount the possibility of situ ations where the expression of agreement is so unenthusiastic that n o reasonable investor would attach relevance to it. Here, however, as all eged by plaintiffs, the CAO's expression of comfort was enthusiastic enough that we cannot
deem it immaterial as a matter of law.

32corporate officer stated he "preferred" certain ana lyst

estimates to others). Put differently, it is a stat ement by a BCF officer itself that is being attacked, not an a nalyst's
statement.16

The next question for us is whether there are suffi cient factual allegations supporting plaintiffs' theory f or the claim to survive the Rule 9(b) hurdle. To adequately stat e 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 reason able basis. Instead, plaintiffs bear the burden of "plea d[ing] factual allegations, not hypotheticals, sufficient to reasonably allow the inference" that the forecast w as made with either (1) an inadequate consideration of the available data or (2) the use of unsound forecasting methodol ogy. Glassman , 90 F.3d at 628-29 (rejecting plaintiffs' earnings projection claim on Rule 12(b)(6) grounds alone, al beit in the context of the plaintiffs having had the benefi t 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 sugge sted price to have been unreasonable when made); cf. als o Shapiro , 964 F.2d at 284-85 (in attacking afirm's accounting practices with a claim that those practi ces resulted in the disclosure of misleading data, plai ntiffs 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 tr ue but need not credit a complaint's "bald assertions" or "legal

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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 fro m 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 actionab le merely because they do not come true, they may be actionable because th ey are not reasonably based on, or are inconsistent with, the facts at the time the forecast is made.").

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

plaintiffs identified the offending forecasts and t hen alleged:

The foregoing statements were materially false and misleading when made since, at the time they were made, defendants knew, or recklessly disregarded, t hat their public statements and statements to analysts promoting BCF and its stock would artificially main tain 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 assertin g that there was "no reasonable basis" for the November 1, 1993, earnings projection, plaintiffs simply mouth the re quired
conclusion of law. See Glassman , 90 F.3d at 629-30. Plaintiffs' Complaint contains a number of vague fa ctual assertions regarding the period prior to November 1 , 1993, but plaintiffs have failed to link any of these all egations to
their claim that the November 1 forecast was action ably unsound when made. The earnings projection claim therefore fails Rule 9(b)'s heightened pleading req uirements.

The existence of these unlinked factual allegations

, however, precludes us from holding that the Complai nt 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, plai ntiffs should be given the opportunity to attempt to recas t 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 corre ct the November 1, 1993, expression of comfort with the an alysts' projections. In particular, plaintiffs point to the refusal of

34BCF's CEO, Monroe Milstein, in an interview given t o

Reuters --reported on March 22, 1994 -- to comment on analysts' earnings projections for both the third q uarter of 1994 and the full year. Plaintiffs assert that on M arch 22, 1994, and at other unspecified points in time after November 1, 1993, defendants had had a duty to corr ect the November 1 earnings projection.17 Although plai ntiffs characterize their claim as a "duty to correct" cla im, they appear to be asserting both a duty to correct and a duty to update.

The Seventh Circuit explained in Stransky v. Cummin s 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 ordina rily is required to identify a specific statement made by t he company and then explain either (1) how the stateme nt 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 C ompanies

, 24 Sec. Reg. L. J. 366 (1997); Robert H. Rosenblum, An Issuer's Duty Under Rule 10b-5 to Correct and Updat e Materially Misleading Statements , 40 Cath. U. L. Rev. 289 (1991).

(a) Duty to Correct

The Stransky

court articulated the duty to correct as applying:

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17. Plaintiffs suggest that by March 22, 1994, anal ysts' 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 so me months prior. Complaint ¶ 49. The fact that analysts' projections independently increased above the predicted range, however, has n o relevance to the claim at hand because plaintiffs have not identifie d any free-standing duty on the part of a public company to "police" th e forecasts being made by analysts. See Raab , 4 F.3d at 288 (no duty to police statements by third parties).

35when 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 Backm an 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 nar row set of forward-looking statements. We will attempt to i llustrate
the kinds of circumstances we have in mind with an example.

Imagine the following situation. A public company i n Manhattan makes a forecast that appears to it to be reasonable at the time made. Subsequently, the comp any discovers that it misread a vital piece of data tha t went into its forecast. Perhaps a fax sent by the company's f actory 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 mak es an erroneous forecast based on the information it h as at the time. A few weeks later, management receives th e correct sales figures by mail. So long as the corre ction 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 corr ected figures or a corrected forecast. In other words, th ere is an implicit representation in any forecast (or stateme nt of historical fact) that errors of the type we have identified will be corrected. This duty derives from the implicit f actual 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

361040, 1043-44 (11th Cir. 1986) (distinguishing betw een

information that is subsequently discovered that sh ows a report to have been erroneous at the time made (where a duty to correct might exist) and ordinary subsequen tly developing information that might reflect on the re port, but
does not show it to have been inaccurate at the tim e made (where there is no duty to correct)).

Plaintiffs phrase their claim as based on a "duty t o correct." Earlier in the opinion, we explained that plaintiffs' attack on the reasonableness of the earnings foreca st failed because plaintiffs had not met their duty of pleadi ng an adequate set of specific factual allegations from w hich one could reasonably infer that the November 1, 1993, f orecast was made unreasonably. Similarly, as to the "duty t o correct" claim, plaintiffs have failed to allege ho w and what the specific error or set of errors might have been that went into the November 1, 1993, forecast. Nor have the p laintiffs identified the specific times at which those errors were discovered, so as to allow correction and trigger d efendants' alleged duty. Therefore, the "duty to correct" clai m (to the extent one is being made) fails Rule 9(b)'s pleadin g 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 corr ect, concerns statements that, although reasonable at th e 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 mislead ing in light of subsequent events." 742 F.2d at 758; cf. T ime

Warner , 9 F.3d at 267. However, although we have generally recognized that a duty to update might ex ist 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 circumst ances"). Specifically, we have not addressed the question wh ether a duty to update might exist for ordinary, run-of-the -mill forecasts, such as the earnings projection in this case.

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

November 1, 1993, that he was comfortable with anal yst projections of $1.20 to $1.30 as a mid-range for ea rnings per share in fiscal 1994. Plaintiffs' argument appe ars to be that, as BCF obtained information in the period sub sequent to November 1, 1993, that would have produced a mat erial change in the earnings projection for fiscal 1994, there was an ongoing duty to disclose this information. In es sence then, the claim is that the disclosure of a single specific forecast produced a continuous duty to update the p ublic
with either forecasts or hard information that woul d in any way change a reasonable investor's perception of th e originally forecasted range. We decline to hold tha t the disclosure of a single, ordinary earnings forecast can produce such an expansive set of disclosure obligat ions.

For a plaintiff to allege that a duty to update a forwardlooking statement arose on account of an earlier-ma de projection, the argument has to be that the project ion contained an implicit factual representation that r emained "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-l ooking statement can produce, one looks to the implicit fa ctual representations therein); Kowal v. MCI Communicatio ns Corp. , 16 F.3d 1271, 1277 (D.C. Cir. 1994). Determining whether such a representation is implicit in an ord inary
forecast is a function of what a reasonable investo r 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 requireme nts (primarily the requirements to file quarterly and a nnual 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 investo r would very much like to know that fact"). Thus, possessio n of material nonpublic information alone does not creat e 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)).

382. Equally well settled is the principle that an ac curate

report of past successes does not contain an implic it representation that the trend is going to continue, and hence does not, in and of itself, obligate the comp any 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 accura te reporting of past results "misled investors by impl ying that [the company] expected the upward first quarter tre nd 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 ai med at encouraging companies to make and disclose internal forecasts by protecting them from liability for dis closing internal forecasts that, although reasonable when m ade, 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 a re 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 enco urage companies to disclose forecasts by providing compan ies with some protection from liability. However, where it comes to affirmative disclosure requirements, the c urrent regulatory scheme focuses on backward-looking "hard " information, not forecasts. See id. (citing Frank H. Easterbrook and Daniel R. Fischel, The Economic Str ucture of Corporate Law , 305-06 (1991)). Increasing the obligations associated with disclosing reasonably made internal forecasts is likely to deter companies from providi ng this information -- a result contrary to the SEC's goal of encouraging the voluntary disclosure of company for ecasts. Cf. Stransky , 51 F.3d at 1333; Raab , 4 F.3d at 290.

Based on features one and two, we do not think it c an 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 ex isting law,

39the market knows that companies have neither a spec ific

obligation to disclose internal forecasts nor a gen eral obligation to disclose all material information. Sh aw , 82 F.3d at 1202 & 1209. We conclude that ordinary, run -ofthe-mill forecasts contain no more than the implici t representation that the forecasts were made reasona bly 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 a s 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 ch ange.

Finally, the federal securities laws, as they stand today, aim at encouraging companies to disclose their fore casts. A judicially created rule that triggers a duty of con tinuous disclosure of all material information every time a single specific earnings forecast is disclosed would likel y result in a drastic reduction in the number of such projectio ns made by companies. It is these specific earnings project ions that are the most useful to investors in deciding whethe r 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 Rel iability 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 b y 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 tha t plaintiffs' disclosure theory has no support in the existing regulatory structure, adopting it would severely un dermine 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

40produce a result contrary to the goals of full disc losure that

underlie the federal securities laws). In sum, unde r the existing disclosure apparatus, the voluntary disclo sure 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 diff erent from
the situation at hand: the disclosure of an ordinar y earnings projection. In both Greenfield and Phillips , the initial disclosures that were argued to have trigge red the duty to update involved information about events th at could fundamentally change the natures of the companies involved. Specifically, both cases involved takeove r attempts, and the plaintiffs were claiming that the y should have been updated with information as to these atte mpts.
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 rea d in an implicit representation by the company that it will update

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18. We do not need to decide now whether our analys is would differ if the context were one in which the company had a pat tern or practice of disclosing periodic updates any time it made a fore cast. Plaintiffs have not alleged that BCF had a practice of providing pe riodic updates on earnings projections; nor have they alleged that su ch was the industry or market practice.

19. The "duty to update" claims were eventually rej ected in both cases.
In Greenfield , the court held that there had been no initial sta tement as to the existence of a takeover attempt or merger ne gotiations that could have triggered a subsequent duty. 742 F.2d at 759. In Phillips , although there was an initial triggering statement, plaintif fs did not produce evidence of any subsequently arising change of inte nt 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 occu r[ed] in the facts set forth' in a Schedule 13D," a company was required t o " `promptly' file `an amendment disclosing such change' with the Securiti es and Exchange Commission, the issuer of the security, and with an y exchange on which the security is traded." 881 F.2d at 1245.

41the 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 dramatical ly as the securities market, especially where a publicly trad ed company has been `put in play' by a hostile suitor. The . . . statements were broad and unequivocal, providing no contingency for changing circumstances . . . [and c ould] fairly be read as a statement by the Partnership th at, no matter what happened, it would not change its intentions."). But finding a duty to update a discl osure of a takeover threat is a far cry from finding a duty to update a simple earnings forecast which, if anything, contai ns a clear implication that circumstances underlying it are likely to change.

B. Leave to Amend

Plaintiffs' final contention is that the district c ourt erred in denying them leave to replead. The district cour t granted defendants' motion to dismiss on both Rule 12(b)(6) and Rule 9(b) grounds. Plaintiffs had requested that, i n the event their Complaint was dismissed, they be given leave to replead. The court, however, dismissed the action i n its entirety.

As a general matter, we review the district court's denial
of leave to amend for abuse of discretion. See Lore nz v. CSX Corp. , 1 F.3d 1406, 1413 (3d Cir. 1993); De Jesus v. Sea rs Roebuck & Co. , 87 F.3d 65, 71 (2d Cir. 1996). Federal Rule of Civil Procedure 15(a) provides that "leave[to am end] shall be freely given when justice so requires." Gl assman , 90 F.3d at 622. The Supreme Court has cautioned tha t although "the grant or denial of an opportunity to amend is

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20. We emphasize that we are not saying that once a fundamental change is announced the company faces a duty contin uously to update the public with all material information relating t o 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 ev ent such as a takeover, merger, or liquidation. But cf. Eisenstad t v. Centel Corp.

, __ F.3d __, __ 1997 WL 242251, *8 (7th Cir.) (suggesti ng that even such a narrow duty might not exist).

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

refusal to grant the leave without any justifying r eason appearing for the denial is not an exercise of that discretion; it is merely an abuse of that discretio n 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; no r 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 d enial of
leave to amend was based on the court's belief that amendment would be futile. In fact, in discussing t his issue, defendants' brief starts out by urging us to affirm the
district court's denial of leave to amend because"a ny attempted additional amendment of that pleading wou ld be futile." (Appellees' Br. at 43) (citation and inter nal quotation omitted). "Futility" means that the complaint, as a mended, 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 sta ndard of legal sufficiency as applies under Rule 12(b)(6). I d. (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. Furt her, plaintiffs not only had approximately four months b etween the initially filed complaints and the revised, con solidated complaint that is at issue here, but the Complaint appears to have represented the efforts of not one, but fou r different, law firms. Hence, it is conceivable that the district

43court could have found undue delay or prejudice to the

defendants. But the court made no such determinatio n, and we cannot make that determination on the record before us. Therefore, to the extent we can affirm t he district court's determinations on Rule 12(b)(b) grounds alo ne (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 mo re particularity. See Luce , 802 F.2d at 56-57. But, where the district court's dismissals can be justified only o n Rule 9(b) particularity grounds we reverse the denial of leav e to replead. See id. On the latter set of claims, we borrow the
words of the Second Circuit that "because we are he sitant to preclude the prosecution of a possibly meritorio us claim because of defects in the pleadings, we believe tha t the plaintiffs should be afforded an additional, albeit final 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 un der Rule 12(b)(6) to the extent that it alleges: (1) th at 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. N either of these claims, however, survives Rule 9(b)'s part icularity requirements.21 Ordinarily, complaints dismissed un der Rule 9(b) are dismissed with leave to amend. See Lu ce , 802
F.2d at 56. As best we can tell from the district c ourt's opinion, the reason for the denial of leave to amen d here appears to be that the court thought plaintiffs had failed the threshold burden of stating claims that could s urvive a Rule 12(b)(6) motion. However, since we hold that t he above-mentioned claims did pass Rule 12(b)(6) we re verse

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21. The duty to update portion of the attack on the earnings projection fails altogether as we decline to recognize the exi stence of such a claim for an ordinary earnings forecast.

44the court's denial of leave to amend on these claim s.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

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22. On remand, after plaintiffs tender their propos ed amendments, the
district court shall consider whether the amendment s would be futile.

44