Court Opinion

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Date Created: 2015-09-21 21:19:23.653476+00
Date Added: 2024-06-11T11:37:23.219549
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USCA1 Opinion

	

                            United States Court of Appeals
                                For the First Circuit
                                 ____________________

          No. 95-1995

                               MERRY LOU SHAW, ET AL.,

                               Plaintiffs, Appellants,

                                          v.

                           DIGITAL EQUIPMENT CORP., ET AL.,

                                Defendants, Appellees.

                                 ____________________

          No. 95-1996

                              LEONARD WILENSKY, ET AL.,

                               Plaintiffs, Appellants,

                                          v.

                           DIGITAL EQUIPMENT CORP., ET AL.,

                                Defendants, Appellees.

                                 ____________________

                    APPEALS FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                     [Hon. Joseph L. Tauro, U.S. District Judge]
                                            ___________________

                                 ____________________

                                        Before

                               Torruella, Chief Judge,
                                          ___________

                            Cyr and Lynch, Circuit Judges.
                                           ______________

                                 ____________________

               Sanford P.  Dumain,  with whom  David J.  Bershad, James  P.
               __________________              _________________  _________

          Bonner, Milberg, Weiss, Bershad,  Hynes & Lerach, Glen DeValerio,
          ______  ________________________________________  ______________
          Kathleen  Donovan-Maher,  Berman,   DeValerio  &  Pease,  Richard
          _______________________   _____________________________   _______
          Schiffrin, Schiffrin  & Craig, Ltd.,  Joseph D. Ament,  and Much,
          _________  ________________________   _______________       _____
          Shelist, Freed,  Denenberg, Ament, Bell &  Rubenstein, P.C., were
          ___________________________________________________________
          on brief, for the Shaw appellants.
                            ____

               Thomas  G.  Shapiro, with  whom  Edward  F. Haber,  Shapiro,
               ___________________              ________________   ________
          Grace,  Haber &  Urmy,  Glen  DeValerio, Kathleen  Donovan-Maher,
          _____________________   _______________  _______________________
          Berman, DeValerio & Pease, Fred Taylor Isquith,  Peter C. Harrar,
          _________________________  ___________________   _______________
          Wolf,  Haldenstein,  Adler,  Freeman   &  Herz,  L.L.P.,  Richard
          _______________________________________________________   _______
          Bemporad, and Lowey, Dannenberg,  Bemporad & Selinger, P.C., were
          ________      _____________________________________________
          on brief, for the Wilensky appellants.
                            ________

               Edmund C.  Case, with whom  Jordan D.  Hershman, Deborah  S.
               _______________             ___________________  ___________
          Birnbach,  Testa,  Hurwitz &  Thibeault,  John  D. Donovan,  Jr.,
          ________   ____________________________   ______________________
          Randall W.  Bodner,  Daniel J.  Klau, and  Ropes &  Gray were  on
          __________________   _______________       _____________
          brief, for the Shaw appellees.
                         ____

               Edmund  C. Case,  with whom Jordan  D. Hershman,  Deborah S.
               _______________             ___________________   __________
          Birnbach,  Testa,  Hurwitz &  Thibeault,  John  D. Donovan,  Jr.,
          ________   ____________________________   ______________________
          Randall W. Bodner, Daniel J. Klau, Ropes  & Gray, Gerald F. Rath,
          _________________  ______________  _____________  ______________
          Robert A. Buhlman,  Bingham, Dana  & Gould,  Michael J.  Chepiga,
          _________________   ______________________   ___________________
          Daniel  A. Shacknai,  and  Simpson, Thacher  &  Bartlett were  on
          ___________________        _____________________________
          brief, for the Wilensky appellees.
                         ________

                                 ____________________

                                     May 7, 1996
                                 ____________________

                   LYNCH,  Circuit Judge.   Plaintiffs,  purchasers  of the
                           _____________

            securities of Digital Equipment Corp., appeal from the district

            court's dismissal of  two consolidated  class actions  alleging

            violations  of the  federal securities  laws.   Both complaints

            assert that there were misleading statements and nondisclosures

            in  the  registration  statement  and  prospectus  prepared  in

            connection  with  a public  offering of  stock.   That offering

            commenced on March 21, 1994, just 11 days prior to the close of

            the  quarter then in progress,  and about three  weeks prior to

            the company's announcement of an unexpectedly negative earnings

            report for that quarter.  One of the complaints further alleges

            that defendants made fraudulently optimistic statements to  the

            public in the period  leading up to the offering.  The district

            court found that neither complaint identified any statements or

            omissions actionable  under the  securities laws  and dismissed

            both  for failure to state a claim.   We agree that many of the

            alleged misstatements  and omissions  do not provide  a legally

            cognizable  basis  for  the  plaintiffs' claims,  but  we  also

            conclude that  a limited set of allegations  in both complaints

            relating to  the registration statement and  prospectus for the

            March 1994 offering does state a  claim.  We further find  that

            the surviving  portions of the complaints  satisfy the pleading

            requirements of Fed. R.  Civ. P. 9(b).  Accordingly,  we affirm

            the  district court's  decision in  part, reverse in  part, and

            remand for further proceedings.

                                          -3-

                                           I.

                                       Background
                                       __________

                   Digital  Equipment  Corporation ("DEC")  is  one  of the

            world's  largest suppliers of  computer hardware,  software and

            services.  Founded  in 1957,  it first became  a publicly  held

            company  in 1966.  By  the early 1990's,  the company's success

            had  burgeoned  into  $14  billion  in yearly  revenues.    The

            company's success story,  however, would not last forever.   By

            1992, the company had fallen on hard times.  In January 1992 it

            reported  its  first-ever quarterly  operating  loss  of $138.3

            million.   Faced in the ensuing months with operating losses in

            the  range  of $30  million to  $311  million per  quarter, the

            company  decided to  engage in  radical surgery,  cutting loose

            some  35,000  employees over  the course  of  15 months  in the

            process,  including its founder and CEO.  To cover the costs of

            these  actions, the company accumulated "restructuring" charges

            totalling  close  to $3.2  billion  in  fiscal years  1990-1992

            combined.

                   In the midst of its financial woes, however, the company

            took some  steps to restore its health.   In February 1992, DEC

            had introduced a new product, the "Alpha" chip.  The Alpha chip

            was hailed  as a  technological advance that  could potentially

            restore  the  company's fortunes.    In  mid-1992, the  company

            installed a new CEO, Robert B. Palmer.  He took the helm in the

            fall  of  that  year, as  the  company  continued to  implement

            strategies  to help its Alpha technology gain acceptance in the

                                          -4-

            marketplace  and  to  bring   the  company  back  to  financial

            vitality.   At  the  time Palmer  took  over, the  company  had

            absorbed  over $3 billion in  losses for the  prior three years

            and  had  been losing  money at  the  rate of  approximately $3

            million  per day.  Under  the new management,  it appeared that

            the company's financial hemorrhaging had finally begun to slow.

                   On  January 14, 1993, DEC reported a loss for the second

            quarter of fiscal year 1993 that  was far smaller than had been

            anticipated by analysts.  That promising result was followed by

            another   quarter   of  losses,   but   within   Wall  Street's

            expectations.   Then, on July  28, 1993, the  company announced

            its first profitable quarter since before the 1992 fiscal year,

            reporting a net profit of $113.2 million for the fourth quarter

            of  fiscal year 1993.  That result was slightly below analysts'

            expectations, but  a stark improvement over  the operating loss

            of $188.1 million (and overall loss of $2 billion) reported for

            the comparable quarter in the prior year.

                   Still,  on October  20, 1993,  DEC announced  a  loss of

            $83.1  million for  the first quarter  of 1994,  an improvement

            over the $260.5  million loss  for the same  quarter the  prior

            year,  but worse than analysts had been predicting.  On January

            19,  1994, the  company  announced  another setback,  reporting

            losses for  the  second quarter  of  fiscal year  1994,  ending

            January  1, 1994,  of $72  million.   The loss  was  worse than

            analysts had expected and was virtually identical to the losses

            for that period the prior year.

                                          -5-

                   It was against  this backdrop that  DEC, on January  21,

            1994,  filed  with the  SEC  a  "shelf" registration  statement

            giving  the company the  option to  issue up  to $1  billion in

            various  classes of  debt and  equity securities.    Two months

            later, DEC  through its  underwriters conducted an  offering of

            $400 million in depositary  shares of preferred stock, pursuant

            to the "shelf" registration, a prospectus dated March 11, 1994,

            and a prospectus supplement dated March 21, 1994.  The offering

            commenced on the  date of the prospectus  supplement and closed

            one  week later on March 28, 1994,  four days before the end of

            the  third fiscal quarter.  All 16 million depositary shares of

            preferred stock were sold,  at an offering  price of $25.   DEC

            raised a badly needed $387.4 million.1

                   Less  than three  weeks later,  on April  15, 1994,  DEC

            announced  an  operating  loss of  over  $183  million  for the

            quarter that  had ended on April  2, 1994.  This  third quarter

            loss  was far greater than analysts had been expecting, and the

            largest that the  company had reported since  the first quarter

            of fiscal 1993.  It bucked the positive trend of reduced losses

            under the company's new management.   The announcement sent the

            price of  the newly  distributed preferred stock  tumbling from

            the offering price of $25 to $20.875 by the close of trading on

            April 15.  The common stock fell from $28.875 to $23 during the
                                
            ____________________

            1.  Because  the offering  was  conducted pursuant  to a  "firm
            commitment"  underwriting  arrangement,  DEC  sold  all of  the
            offered shares to the  underwriters at a discount, who  then in
            turn  sold the shares to the public.  Thus, DEC's proceeds were
            less than the total offering amount.

                                          -6-

            same period, and to  $21.125 by the  close of the next  trading

            day.

                   In its April 15 announcement, the company also disclosed

            that it had decided to "accelerate [its] on-going restructuring

            efforts" and  "also consider further restructuring."   This was

            despite a representation in  the March 21 prospectus supplement

            that   "[t]he   Corporation   believes   that   the   remaining

            restructuring  reserve of  $443  million is  adequate to  cover

            presently   planned   restructuring   actions."     Eventually,

            following  the close of fiscal year 1994, DEC announced on July

            14, 1994 that it  would cut almost one-fourth of  its remaining

            workforce and  take an additional  charge of  $1.2 billion  for

            fiscal year 1994  (beyond the $443 million remaining in reserve

            as  of March 21) to cover the costs of additional restructuring

            activities.

                                          II.

                               Description of the Actions
                               __________________________

                   These  two lawsuits  were  filed on  Tuesday, April  19,

            1994,  two business  days after  the company's  announcement of

            April 15, 1994.  One, the Wilensky action, brought on behalf of
                                      ________

            all  persons who  purchased  shares in  the  March 1994  public

            offering, asserts claims  under Sections 11,  12(2), and 15  of

            the Securities Act of 1933 ("Securities Act")  against DEC, its

            Chief Executive Officer (Robert B. Palmer), its Chief Financial

            Officer  (William Steul), and  seven underwriting or investment

            banking firms,  representing a purported defendant  class of 65

                                          -7-

            underwriters who participated in the offering.  The second, the

            Shaw action, advances claims under  Sections 10(b) and 20(a) of
            ____

            the  Securities Exchange Act of 1934  ("Exchange Act") and Rule

            10b-5,   and  a   pendent   claim  of   common  law   negligent

            misrepresentation, on  behalf of  all purchasers of  DEC common

            stock  between January  19  and  April  15,  1994  (the  "Class

            Period").

                   At  the heart of both complaints are two sets of claims.

            First, plaintiffs  assert that DEC management  had knowledge of

            material facts concerning  the large  losses developing  during

            the  third fiscal quarter of 1994, and that the defendants were

            under  a duty  to  disclose such  material  information to  the

            market  in connection  with  the public  offering conducted  on

            March  21, 1994.  Second, both the Wilensky and Shaw plaintiffs
                                               ________     ____

            contend that the representation made in the March 21 prospectus

            supplement  concerning the  "adequacy"  of  the  then-remaining

            "restructuring reserve" was  materially misleading.   The  Shaw
                                                                       ____

            plaintiffs  allege,  additionally,  that throughout  the  Class

            Period,  the defendants made fraudulently optimistic statements

            to  the  public  concerning  DEC's future  prospects  in  order

            artificially to  inflate the market  value of  DEC shares,  and

            that these statements were actionably false or misleading.

                   The defendants  filed motions  to dismiss under  Fed. R.

            Civ. P. 9(b) and 12(b)(6).  The district court consolidated the

            cases, stayed  all discovery, and then  dismissed both actions.

            The  district  court ruled,  inter  alia,  that defendants  had

                                          -8-

            violated  no   duty  to  disclose  and   that  the  defendants'

            statements  were  not  misleading,  bespoke  caution,  or  were

            otherwise not actionable as a matter of law.  The court granted

            the defendants' motions to dismiss under Rule 12(b)(6), without

            reaching   whether  the   complaints  satisfied   the  pleading

            requirements  of Rule 9(b).  These appeals followed.  We affirm

            in  part and reverse in part.   For clarity, we discuss each of

            the two actions in turn.

                                          III.

                            The Section 11 and 12(2) Claims
                            _______________________________

                                   (Wilensky Action)
                                    ________

                   Sections 11 and 12(2) are enforcement mechanisms for the

            mandatory  disclosure  requirements of  the  Securities Act  of

            1933.     Section  11   imposes  liability  on   signers  of  a

            registration   statement,   and   on   underwriters,   if   the

            registration  statement "contained  an  untrue  statement of  a

            material fact or omitted  to state a material fact  required to

            be stated therein  or necessary to make  the statements therein

            not misleading."  15 U.S.C.   77k.  Section 12(2) provides that

            any person  who "offers  or  sells" a  security by  means of  a

            prospectus or  oral communication containing a materially false

            statement  or that "omits to state a material fact necessary to

            make  the statements, in  the light of  the circumstances under

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

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

            77l(2).

                                          -9-

                   The Wilensky plaintiffs assert claims under Sections 11,
                       ________

            12(2), and  15,2 alleging  that the registration  statement and

            prospectus  filed  in connection  with  the  March 1994  public

            offering  contained materially false  statements and omitted to

            state  material information  required  to be  provided therein.

            The thrust of the Wilensky complaint is that defendants knew as
                              ________

            of the March 21 date  of the 1994 public offering,  of material

            facts portending  the unexpectedly  large losses for  the third

            quarter  of fiscal  1994 that  were announced  later, and  that

            failure to  disclose these  material facts in  the registration

            statement  and prospectus violated  Section 11.   Additionally,

            the  Wilensky  plaintiffs contend  that  the  statement in  the
                 ________

            registration   statement   and  prospectus   characterizing  as

            "adequate" the company's then-remaining "restructuring reserve"

            of  $443  million  was  materially  false  and  misleading,  in

            violation of both Sections 11 and 12.

                   The defendants parry by attempting to reduce plaintiffs'

            claims to an argument that the company was required to disclose

            its internal forecasts about the outcome of the third  quarter.
                         _________

            They argue  that the plaintiffs' position  is untenable because

            the securities laws impose  no duty upon a company  to disclose

            internal projections, estimates of  quarterly results, or other

            forward-looking information.  They  also say that the statement

            concerning the adequacy of the company's restructuring reserves
                                
            ____________________

            2.  Section 15  imposes derivative  liability upon  persons who
            "control" those  liable under Section 11 or 12.  See 15  U.S.C.
                                                             ___
              77o.

                                          -10-

            is  not  actionably  misleading  when  considered  in  context.

            Finally, defendants contend that  the complaint fails to allege

            sufficient  facts  establishing that  DEC  and  the underwriter

            defendants were statutory "sellers" subject to  liability under

            Section 12(2).  We evaluate each set of arguments separately.

            A.  Actionability of Alleged Nondisclosures Under Section 11
            __  ________________________________________________________

                   The proposition that silence, absent a duty to disclose,

            cannot  be  actionably  misleading,  is a  fixture  in  federal

            securities law.  See, e.g., Backman v. Polaroid Corp., 910 F.2d
                             ___  ____  _______    ______________

            10,  13 (1st  Cir. 1990)  (en banc).   Equally settled  is that

            accurate reports of past successes  do not themselves give rise

            to  a duty to inform the  market whenever present circumstances

            suggest that  the future may bring  a turn for the  worse.  See
                                                                        ___

            Serabian v. Amoskeag Bank  Shares, Inc., 24 F.3d 357,  361 (1st
            ________    ___________________________

            Cir.  1994);  Capri Optics  Profit  Sharing  v. Digital  Equip.
                          _____________________________     _______________

            Corp., 950 F.2d  5, 7-8 (1st  Cir. 1991).   In short, the  mere
            _____

            possession of material nonpublic  information does not create a

            duty  to disclose  it.  See  Roeder v. Alpha  Indus., Inc., 814
                                    ___  ______    ___________________

            F.2d 22, 26 (1st Cir. 1987) (citing Chiarella v. United States,
                                                _________    _____________

            445 U.S. 222, 235 (1980)).

                   To focus here  on a  duty to disclose  in the  abstract,

            however, would be to miss the obvious  in favor of the obscure.

            This action  arises out of an  allegedly defective registration

            statement  and prospectus  filed  in connection  with a  public

            stock offering.  The obligations that attend the preparation of

            those  filings embody  nothing if  not  an affirmative  duty to

                                          -11-

            disclose a broad range  of material information.  Cf.  Herman &
                                                              ___  ________

            MacLean v. Huddleston, 459 U.S.  375, 381-82 (1983). Indeed, in
            _______    __________

            the context of a public offering, there is a strong affirmative

            duty  of disclosure.3   See  Ernst &  Ernst v.  Hochfelder, 425
                                    ___  ______________     __________

            U.S. 185,  195  (1976) (the  Securities  Act "was  designed  to

            provide  investors with full disclosure of material information

            concerning public offerings").

                   The question  here is not whether  defendants were under

            an abstract duty to disclose information -- clearly, they were.

            The  issue, rather,  is whether the  defendants had  a specific

            obligation  to  disclose  information  of  the  type  that  the

            plaintiffs complain was omitted from the registration statement

            and  prospectus.    The  task of  deciding  whether  particular

            information is  subject to  mandatory disclosure is  not easily

            separable  from   normative  judgments   about  the   kinds  of

            information  that  the securities  laws  should  require to  be
                                                     ______

            disclosed,  which  depend,   in  essence,  on  conceptions   of

            materiality.     See  generally  Victor  Brudney,   A  Note  On
                             ______________                     ___________
                                
            ____________________

            3.  In  Roeder, this  court  alluded to  three situations  that
                    ______
            could give rise to a duty to disclose material facts:  (i) when
            an insider trades in  the company's securities on the  basis of
            material  nonpublic  information;  (ii)   when  a  statute   or
            regulation requires disclosure; and  (iii) when the company has
            previously made  a statement  of material  fact that is  false,
            inaccurate,  incomplete,   or  misleading  in   light  of   the
            undisclosed information.  Roeder,  814 F.2d at 27; see  also In
                                      ______                   _________ __
            re Time  Warner, Inc.  Sec. Litig.,  9 F.3d 259,  267 (2d  Cir.
            __________________________________
            1993),  cert. denied, 114 S. Ct. 1397 (1994); Backman, 910 F.2d
                    _____ ______                          _______
            at 12-13; Greenfield v.  Heublein, Inc., 742 F.2d 751,  758 (3d
                      __________     ______________
            Cir.  1984), cert. denied,  469 U.S.  1215 (1985).   We  do not
                         ____________
            decide here  whether these three  situations are the  only ones
            that  could  trigger a  duty  of  disclosure,  or whether  they
            necessarily would do so in every case.

                                          -12-

            Materiality and  Soft Information Under the  Federal Securities
            _______________________________________________________________

            Laws,  75 Va. L.  Rev. 723, 728  (1989).  For  our purposes, it
            ____

            suffices  to say that the determination  of whether the alleged

            nondisclosures in this case  provide a legally sufficient basis

            for the plaintiffs' claims cannot be severed from consideration

            of the basic policies  underlying the disclosure obligations of

            the applicable statutes and regulations.

                   We conclude that we cannot say that DEC was not required

            to disclose material information  concerning its performance in

            the quarter  in progress  at the  time of  the  March 21,  1994

            public offering.  Nor can  we conclude, as a matter of  law and

            on  these pleadings,  that DEC  was not  in possession  of such

            material nonpublic information at the time of the offering.

                   1.  The Insider Trading Analogy
                   __  ___________________________

                   In   understanding   the   nature  of   the   disclosure

            requirements  attending  a  public  offering of  stock,  it  is

            helpful  to  conceptualize DEC  (the  corporate  issuer) as  an

            individual insider transacting in the company's securities, and

            to examine the disclosure obligations that would then arise.

                   There is  no doubt that an  individual corporate insider

            in possession of material  nonpublic information is  prohibited

            by the federal securities laws from trading on that information

            unless he makes public disclosure.  He must disclose or abstain

            from trading.  See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833,
                           ___ ___    ______________________

            848  (2d Cir.  1968)  (en banc),  cert.  denied, 394  U.S.  976
                                              _____________

            (1969);  see also SEC v.  MacDonald, 699 F.2d  47, 50 (1st Cir.
                     ________ ___     _________

                                          -13-

            1983)  (en banc).  A central justification for the "disclose or

            abstain" rule is to deny  corporate insiders the opportunity to

            profit  from the inherent trading advantage  they have over the

            rest of the contemporaneously trading market by reason of their

            superior access to information.  See Shapiro  v. Merrill Lynch,
                                             ___ _______     ______________

            Pierce, Fenner & Smith, Inc., 495 F.2d 228, 235 (2d Cir. 1974);
            ____________________________

            SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968)
            ___    ______________________

            (en banc).4    The rule  eliminates  both the  incentives  that

            insiders  would  otherwise  have  to delay  the  disclosure  of

            material  information,  and  minimizes  any  efficiency  losses

            associated  with  the diversion  of  resources  by insiders  to

            "beating  the market."    See Robert  C.  Clark, Corporate  Law
                                      ___                    ______________

              8.2,  at  273-75 (1986);  Frank  H. Easterbrook  &  Daniel R.

            Fischel,  The Economic  Structure of  Corporate Law  288 (1991)
                      _________________________________________

            ("The  lure of trading profits may induce people to spend a lot

            of effort and other resources "beating the market"; . . . [T]he

            prompt  disclosure of  information  by the  affected firm  will

            extinguish the  trading opportunity.   When everyone  knows the

            truth, no one can speculate on it."5).
                                
            ____________________

            4.  See  also  Brudney, supra,  at 735  (noting that  the other
                _________           _____
            major justification  for requiring trading insiders to disclose
            is  to  increase  the   quality  and  quantity  of  information
            available to investors, thereby  facilitating efficiency in the
            allocation of capital).

            5.  Judge Easterbrook and  Professor Fischel ultimately  reject
            this   beating-the-market  concern   as  a   justification  for
            mandatory disclosure.  They  argue that companies normally will
            _________
            voluntarily  disclose material bad  news, because,  among other
            reasons,  if   a  company  consistently  fails   to  make  such
            disclosure, the market will discount the value of the company's
            securities  by   the  increased  probability  that   it  is  in

                                          -14-

                   The policy rationale for  the "disclose or abstain" rule

            carries over to  contexts where a corporate  issuer, as opposed

            to  an   individual,  is   the  party  contemplating   a  stock

            transaction.    Courts,  including  this one,  have  treated  a

            corporation trading in its own  securities as an "insider"  for

            purposes  of the  "disclose  or  abstain"  rule.    See,  e.g.,
                                                                ___   ____

            McCormick  v. Fund American Cos.,  Inc., 26 F.3d  869, 876 (9th
            _________     _________________________

            Cir.  1994)  (collecting  cases) ("[T]he  corporate  issuer  in

            possession of material nonpublic  information, must, like other

            insiders in  the same  situation, disclose that  information to

            its shareholders or refrain from trading with them."); Rogen v.
                                                                   _____

            Ilikon  Corp., 361  F.2d 260,  268 (1st  Cir. 1966);  Kohler v.
            _____________                                         ______

            Kohler  Co.,  319  F.2d 634,  638  (7th  Cir.  1963); Green  v.
            ___________                                           _____

            Hamilton Int'l Corp., 437 F. Supp. 723, 728-29 (S.D.N.Y. 1977);
            ____________________

            VII Louis  Loss & Joel Seligman, Securities Regulation 1505 (3d
                                             _____________________

            ed. 1991) ("When the issuer itself wants to buy or sell its own

            securities, it has  a choice: desist or disclose.");  18 Donald

            C.  Langevoort,  Insider  Trading:  Regulation,  Enforcement  &
                             ______________________________________________

            Prevention    3.02[1][d],   at  5  (3d   rel.  1994)  ("Issuers
            __________

            themselves  may buy or sell their own securities, and have long

                                
            ____________________

            possession  of  undisclosed   material  negative   information,
            thereby  increasing the  company's  long-run costs  of  raising
            capital.   Id.  at  288-89.    However,  as  the  authors  also
                       ___
            recognize,   the  argument  for  voluntary  disclosure  becomes
            considerably weaker in contexts where  the short-term interests
            of the company's managers  differ from its long-term interests,
            for example, where management  is under pressure to  engineer a
            rapid turnaround  in the company's financial  performance.  See
                                                                        ___
            id. at 169 (discussing  the "agency" problem in the  context of
            ___
            tender offers).

                                          -15-

            been  held   to  an  obligation  of   full  disclosure  . . . .

            Conceptually,  extending  the  insider  trading  prohibition to

            instances of issuer insider trading makes perfect sense.").

                   Just  as an individual  insider with  material nonpublic

            information about pending merger or license negotiations  could

            not   purchase   his   company's  securities   without   making

            disclosure,  the  company  itself  may  not engage  in  such  a

            purchase  of its  own stock,  if it  is in  possession of  such
            ________

            undisclosed information.   See, e.g.,  Rogen, 361 F.2d  at 268.
                                       ___  ____   _____

            By extension, a comparable rule should apply to issuers engaged

            in a stock offering.  Otherwise, a corporate issuer selling its
                       ________

            own securities would be left free to exploit  its informational

            trading  advantage, at  the expense  of investors,  by delaying

            disclosure  of  material  nonpublic negative  news  until after

            completion of the  offering.   Cf. Ian Ayres,  Back to  Basics:
                                           ___             ________________

            Regulating How Corporations Speak to the Market, 77 Va. L. Rev.
            _______________________________________________

            945,  959-60  (1991) (describing  the argument  that securities

            laws impose needed discipline,  because companies do not always

            internalize  the costs  of failing to  provide the  market with

            accurate information that would lower stock prices).

                   2.  The Statutory and Regulatory Scheme
                       ___________________________________

                   Analogizing a corporate issuer  to an individual insider

            subject  to the "disclose  or abstain" rule  of insider trading

            law  illustrates  the policy  reasons  supporting  a comparably

            strong  disclosure  mechanism  in   the  context  of  a  public

            offering.   We look  to the explicit  statutory and  regulatory

                                          -16-

            framework to determine whether the Securities Act provides such

            a  mechanism,  and  whether  the Wilensky  complaint  states  a
                                             ________

            legally cognizable claim for nondisclosure under Section 11.

                   Section  11 by its terms  provides for the imposition of

            liability  if a  registration  statement, as  of its  effective

            date: (1) "contained an untrue statement of material fact"; (2)

            "omitted  to  state  a  material  fact required  to  be  stated

            therein"; or (3) omitted to state a material fact "necessary to

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

              77k(a).  The plaintiffs' claim of nondisclosure relies on the

            second  of these three bases  of liability.   That predicate is

            unique  to Section 11; neither Section  12(2) of the Securities

            Act  nor Section  10(b) or  Rule 10b-5  under the  Exchange Act

            contains  comparable language.   It is intended  to ensure that

            issuers, under  pain of  civil liability,  not  cut corners  in

            preparing registration  statements and  that they  disclose all

            material information required  by the  applicable statutes  and

            regulations.   See Huddleston,  459 U.S.  at 381-82;  Harold S.
                           ___ __________

            Bloomenthal  et al.,  Securities Law  Handbook   14.08,  at 663
                                  ________________________

            (1996  ed.)   ("Congress  . . .  devised  Section   11  of  the

            Securities Act  as  an  in  terrorem remedy  that  would  . . .

            encourage careful preparation of the registration statement and

            prospectus.").

                   The   information   "required  to   be   stated"   in  a

            registration statement is  spelled out  both in  Schedule A  to

            Section 7(a)of  the Securities Act, 15  U.S.C.    77g(a), 77aa,

                                          -17-

            and in  various regulations promulgated by the  SEC pursuant to

            its statutory authority.6   Those rules and  regulations are no

            less  essential  to  the  statutory  scheme  than  the  general

            outlines of the statute itself.  Cf. Touche Ross &  Co. v. SEC,
                                             ___ __________________    ___

            609 F.2d 570, 580 (2d Cir. 1979).

                   In  this  case,  DEC  conducted its  March  1994  public

            offering pursuant to a registration statement  on SEC Form S-3.

            Item 11(a) of the  instructions to Form S-37 requires  that the

            issuer (registrant) describe in the portion of the registration

            statement comprising the prospectus:

                   any and all material changes  in the registrant's
                   _________________________________________________
                   affairs which have occurred  since the end of the
                   _______
                   latest fiscal year  for which certified financial
                   statements  were included  in the  latest  annual
                   report to  security  holders and  which have  not
                   been described  in a report on  Form 10-Q or Form
                   8-K filed under the Exchange Act.

            Instructions to Form S-3, Item 11(a) (emphasis added).

                   To  understand  the  scope  of  the  "material  changes"

            disclosure requirement, it is  helpful to understand the nature

                                
            ____________________

            6.  Section  7(a)  of  the  Securities Act  provides  that  the
            "registration statement  shall contain such  other information,
            and be accompanied  by such other documents,  as the Commission
            may  by  rules or  regulations  require as  being  necessary or
            appropriate in  the public interest  or for  the protection  of
            investors."   15 U.S.C.    77g(a); see also  15 U.S.C.   77j(d)
                                               ________
            (granting SEC similar authority  with respect to prospectuses);
            15  U.S.C.   77s(a)  (granting  SEC broad  authority to  "make,
            amend,  and  rescind  such  rules  and  regulations as  may  be
            necessary to carry out the provisions of this [Act],  including
            rules  and regulations  governing  registration statements  and
            prospectuses").

            7.  The provisions of the  registration forms prescribed by the
            SEC constitute  an integral  part of the  regulatory disclosure
            framework.  See 17 C.F.R.    230.400, 230.401, 239.0-1 et seq.
                        ___                                        _______

                                          -18-

            of  Form  S-3.   Form S-3  is  a streamlined  registration form

            available only to certain  well-capitalized and widely followed

            issuers about which a  significant amount of public information

            is  already available.8  A  registrant on Form S-3 accomplishes

            disclosure  in  part  by  incorporating in  the  prospectus  by

            reference  its  most  recent Form  10-K  and  Forms  10-Q filed

            pursuant  to the Exchange Act.   See Instructions  to Form S-3,
                                             ___

            Item 12(a).  Unlike registrants on more broadly available forms

            (such as S-1), a Form S-3 registrant is not required separately

            to furnish  in the prospectus the information  required by Item

            303(a) of Regulation S-K, 17 C.F.R.   229.303(a) ("Management's

            discussion and  analysis of financial condition  and results of

            operations"),9 because  that  information  is  presumed  to  be

            contained   in  the   Exchange  Act   filings  that   Form  S-3

            incorporates by reference, which  are themselves subject to the

            requirements of Regulation S-K.10   The primary purpose  of the
                                
            ____________________

            8.  To be eligible to register on Form S-3, an issuer must have
            been subject to public reporting  requirements for at least one
            year, filed all reports required  under the Exchange Act  (such
            as Forms 10-Q  and 10-K) timely during the past  year, and must
            meet certain other requirements  relating to financial strength
            and stability.  See 17 C.F.R.   239.13; see also Bloomenthal et
                            ___                     ________
            al., supra,   5.05[1][b], at 212-13.
                 _____

            9.  Item   303(a)   requires   the   disclosure,   among  other
            information, of  "any known  trends or uncertainties  that have
            had  or that  the  registrant reasonably  expects  will have  a
            material  favorable  or  unfavorable  impact on  net  sales  or
            revenues  or income  from  continuing operations."   17  C.F.R.
              229.303(a)(3)(ii).

            10.  By  contrast,  a registrant  on Form  S-1 (which  does not
            permit incorporation  by reference) must  independently furnish
            in the  prospectus  the information  required  by Item  303  of
            Regulation S-K.  See Instructions to Form S-1, Item 11(h).
                             ___

                                          -19-

            "material changes" disclosure requirement  of Item 11(a), then,

            is to  ensure that  the prospectus  provides investors  with an

            update  of the  information  required to  be  disclosed in  the
            ______

            incorporated  Exchange Act  filings, including  the information

            provided  in   those  filings  concerning   "known  trends  and

            uncertainties" with respect to "net sales or revenues or income

            from continuing operations."  17 C.F.R.   229.303(a)(3)(ii).

                   In this case, the  date of the final prospectus  for the

            March 1994 offering and the  effective date of the registration

            statement was March  21, 1994.11  Prior  to that date,  the end

            of  DEC's  latest fiscal  year was  July  3, 1993  (fiscal year

            1993), and the last Form 10-Q  filed by the company was for the

            quarter  that had ended on January 1, 1994 (DEC's second fiscal

            quarter).    The  question,  then,  is  whether  the  complaint

            contains  sufficient  allegations  that  defendants  failed  to

            disclose   in  the   registration  statement   any  information

            regarding "material changes" in DEC's "affairs" as of March 21,

            1994,  that had  occurred since July  3, 1993 and  had not been

            reported  in  the Form  10-Q filed  for  the second  quarter of

            fiscal  year 1994.   If  the Wilensky  complaint adequately  so
                                         ________

            alleges, then  the complaint sets  forth a cognizable  claim of

            nondisclosure under Section 11,  namely, that defendants failed

                                
            ____________________

            11.  The  effective date  of  the  registration  statement  for
            purposes of Securities Act liability is  the "speaking date" of
            the  final   prospectus.    See  Bloomenthal   et  al.,  supra,
                                        ___                          _____
              5.05[2][f] at 216.  The parties do not dispute that March 21,
            1994 was the effective date of the registration statement.

                                          -20-

            to include in the  registration statement information "required

            to be stated therein."

                   3.  The Alleged Nondisclosures
                   __  __________________________

                   Plaintiffs argue that defendants  failed to comply  with

            Item 11(a) by omitting three categories of information from the

            registration  statement  and  prospectus.    First,  plaintiffs

            contend  that  defendants  failed  to  disclose  that  DEC  had

            embarked on  a risky marketing strategy  that involved slashing

            prices  and   sacrificing  profit  margins  in   the  hopes  of

            increasing  "market  penetration" of  the company's  Alpha chip

            products.  Second, plaintiffs  assert that defendants failed to

            disclose  that under  the  company's compensation  scheme,  its

            sales  representatives  were being  paid  "double commissions,"

            again to the detriment of the company's profit margins.  Third,

            and  most centrally, plaintiffs allege that, by the date of the

            March 21 offering, defendants were in possession of, yet failed

            to disclose,  material knowledge  of facts indicating  that the

            third fiscal  quarter would be an  unexpectedly disastrous one.

            We dispose of the  first two claims of nondisclosure,  and then

            focus our discussion on the third.

                      a.  Marketing Strategy
                      __  __________________

                   The  defendants  provide  a  decisive rejoinder  to  the

            plaintiffs'  claim of  nondisclosure concerning  the "marketing

            strategy":  the  relevant  aspects  and   consequences  of  the

            strategy were in fact  prominently disclosed, both in  the text

                                          -21-

            of   the   prospectus   and  in   documents   incorporated   by

            reference.12   For  example, in  its Form  10-Q filing  for the

            quarter ending  October 2, 1993  (the first  quarter of  fiscal

            year 1994), the company explained its reported decline in gross

            profit margins as follows:13

                   The decline in product gross margin resulted from
                   the decrease in product  sales, a continued shift
                   in  the  mix  of  product  sales  toward  low-end
                   systems  which  typically  carry  lower  margins,
                   competitive  pricing  pressures  and  unfavorable
                   currency   fluctuations,   partially  offset   by
                   manufacturing cost efficiencies.

                   The  Corporation  has   adopted  an   aggressive,
                   competitive  price structure  for  its  Alpha AXP
                   systems.   Given  this  pricing, as  well  as the
                   factors described in the preceding paragraph, the
                   Corporation   expects  to   experience  continued
                   downward pressure on product gross margins.

            This statement, in  conjunction with related disclosures  found

            elsewhere  in the prospectus  and incorporated filings relating

            to  "competitive  pricing  pressures,"  declining  gross profit

            margins,   "competitive   pricing    actions   taken   by   the

            Corporation,"  an "industry  trend toward  lower  product gross

                                
            ____________________

            12.  As  required by Item 12  of the instructions  to Form S-3,
            the  March  11, 1994  prospectus  specifically incorporated  by
            reference the company's Form  10-K filing for fiscal  year 1993
            (as amended by  Form 10-K/A dated March 11, 1994), and its Form
            10-Q filings for the quarterly periods that ended on October 2,
            1993 and January 1, 1994.

            13.  Since   the  complaint   alleges  nondisclosures   in  the
            registration statement  and prospectus,  the court may  look to
            the text of those materials and the incorporated SEC filings to
            determine whether the plaintiffs' allegations are well founded.
            See  Kramer v. Time  Warner, Inc., 937  F.2d 767,  774 (2d Cir.
            ___  ______    __________________
            1991).   We discuss more fully later the circumstances in which
            a court  may look outside  the four corners  of a complaint  in
            deciding a motion to dismiss.

                                          -22-

            margins,"   and   "persistent  intense   pricing  competition,"

            together obviate  the plaintiffs' claim that  defendants failed

            to disclose the company's  adoption of a price-cutting strategy

            to boost the "market penetration" of its Alpha-based systems.

                      b.  "Double Commissions"
                      __  ____________________

                   The plaintiffs'  claim of a failure  to disclose "double

            commissions" also fails to make out a Section 11 violation.  To

            the   extent   that   the  claim   comprises   allegations   of

            mismanagement,14  it is  not  cognizable  under the  securities

            laws.  See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477-80
                   ___ _____________________    _____

            (1977);  In re Craftmatic Sec. Litig., 890 F.2d 628, 638-39 (3d
                     ____________________________

            Cir. 1989) (stating that  plaintiffs cannot circumvent Santa Fe
                                                                   ________

            by simply  pleading  a  mismanagement claim  as  a  failure  to

            disclose management  practices); see  also Hayes v.  Gross, 982
                                             _________ _____     _____

            F.2d 104, 106 (3d  Cir. 1992).  Otherwise, the  claim fails for

            lack  of any  allegations  establishing a  plausible theory  of

            materiality.

                   The complaint does not allege that  "double commissions"

            have  some intrinsic  significance  to investors.    Plaintiffs

            complain, rather, that DEC  failed to tell the market  that the

            commission-based compensation scheme, instead of boosting sales

            as it was  supposed to  do, was contributing  to the  company's

            losses.  This argument is problematic.  As the complaint itself

            acknowledges, DEC publicly announced  the switch from a salary-
                                
            ____________________

            14.  The  complaint's  assertion   that  "DEC  implemented  its
            commission  program  and  set  sales  quotas  without   careful
            evaluation" is an example of such an allegation.

                                          -23-

            based  compensation scheme  to the  incentive-based model  that

            produced the double commissions.  Furthermore, according to the

            complaint,  the switch  was  made not  during the  third fiscal
                                              ___

            quarter  of 1994,  but some  two years earlier,  in 1992.   The
                                                                ____

            plaintiffs do  not  allege that  any  material changes  to  the

            compensation scheme were implemented after that time.  Whatever

            the bearing of DEC's incentive-based compensation scheme on the

            company's expenses  in relation to its  revenues, the investing

            public  had  at least  a year's  worth  of hard  financial data

            (through the second quarter of fiscal 1994) to evaluate whether

            the  commission   system   was  working   to   increase   gross

            margins,15 or  instead, as  plaintiffs allege, to  shrink them.

            Plaintiffs  do not allege that  there were any material changes

            in the payment  of commissions  between the time  of the  March

            public  offering  and the  last prior  Form  10-Q filed  by the

            company  (for the  second fiscal  quarter of  1994), and  so on

            their  own theory  the claim  that DEC  failed to  disclose the

            payment of "double commissions" amounts to naught.

                      c.  Operating Results Prior to End of Quarter
                      __  _________________________________________

                   We  turn to  the complaint's central,  overarching claim

            that  defendants failed,  in connection  with the  March public

            offering,  to disclose material factual developments foreboding

            disastrous quarter-end  results.  In evaluating  this claim, we
                                
            ____________________

            15.  The payments made to  sales representatives constituted  a
            component   of  the  company's   quarterly  expenses,  and  the
            aggregate effect of such payments could have been determined by
            examining the  company's quarterly earnings  data, as disclosed
            in the required SEC filings.

                                          -24-

            accept arguendo  the complaint's allegations16 that  DEC had in
                   ________

            its  possession as  of  the March  21  offering date  nonpublic

            information  concerning  the company's  ongoing quarter-to-date

            performance,   indicating   that  the   company   would  suffer

            unexpectedly large  losses  for that  quarter.   We ask,  then,

            whether  there was a duty  to disclose such  information in the

            registration  statement and  prospectus  under  the  rubric  of

            "material changes" under Item 11(a) of Form S-3.  We focus upon

            the defendants' primary legal arguments on this point: that DEC

            was under no duty to disclose "intra-quarterly" results or  any

            other  information  concerning  its  third  quarter performance

            until  after the quarter ended; and that defendants had no duty

            as  of March 21, 1994  to disclose any  internal projections or

            predictions concerning the expected outcome of the quarter.

                   A central  goal underlying the  disclosure provisions of

            the securities laws  is to promote  fairness and efficiency  in

            the  securities markets.  See  Central Bank of  Denver, N.A. v.
                                      ___  _____________________________

            First  Interstate Bank of Denver,  N.A., 114 S.  Ct. 1439, 1445
            _______________________________________

            (1994) ("Together, the Acts embrace a fundamental purpose . . .

            to  substitute   a  philosophy  of  full   disclosure  for  the

            philosophy of caveat emptor." (internal quotation omitted)); In
                                                                         __

            re  LTV Sec. Litig., 88 F.R.D. 134,  145 (N.D. Tex. 1980).  The
            ___________________

            disclosure  of  accurate   firm-specific  information   enables

                                
            ____________________

            16.  As  discussed  below,  based   on  the  character  of  the
            allegations in  the Wilensky complaint, the  plaintiffs' claims
                                ________
            under  the  Securities Act  are  not  subject  to the  pleading
            requirements of Fed. R. Civ. P. 9(b).

                                          -25-

            investors  to compare  the prospects of  investing in  one firm

            versus  another,  and  enables  capital to  flow  to  its  most

            valuable uses.  LHLC Corp.  v. Cluett, Peabody & Co., 842  F.2d
                            __________     _____________________

            928, 931 (7th  Cir.), cert.  denied, 488 U.S.  926 (1988);  cf.
                                  _____  ______                         ___

            Acme Propane, Inc. v.  Tenexco, Inc., 844 F.2d 1317,  1323 (7th
            __________________     _____________

            Cir. 1988) (securities laws aim at ensuring the availability to

            the investing public of information not otherwise in the public

            domain).      The   availability   of   reliable  firm-specific

            information is also essential to  the market's ability to align

            stock price with a security's "fundamental value."  See  Marcel
                                                                ___

            Kahan,  Securities Laws  and the  Social Costs  of "Inaccurate"
                    _______________________________________________________

            Stock Prices, 41 Duke L. J. 977, 988-89 (1992).
            ____________

                   The need for issuers to disclose material information is

            crucial  in the context  of a public  offering, where investors

            typically must rely (unless the offering is "at the market") on

            an  offering   price  determined  by  the   issuer  and/or  the

            underwriters of  the offering.   See Kahan,  supra, at  1014-15
                                             ___         _____

            (explaining   the   heightened   need  to   target   disclosure

            requirements  to  companies   engaged  in  public   offerings).

            Accordingly,  the  disclosure  requirements  associated  with a

            stock  offering  are  more  stringent than,  for  example,  the

            regular periodic disclosures called for in the company's annual

            Form  10-K or quarterly  Form 10-Q  filings under  the Exchange

            Act.  See id. at 1014-15 & n.163.
                  ___ ___

                   The   need  for  complete   and  prompt   disclosure  is

            particularly keen when a corporation issues stock pursuant to a

                                          -26-

            "shelf registration" under SEC  Rule 415(a), as DEC did  in its

            public  offering of  March 1994.   See  17 C.F.R.    230.415(a)
                                               ___

            (permitting  registration  of  securities  to be  issued  on  a

            "continuous" or "delayed" basis).   The shelf registration rule

            permits  a  company to  file  a  single registration  statement

            covering  a certain quantity of securities (register securities

            "for  the shelf"),  and  then  over  a  period  of  up  to  two

            years,17   with  the  appropriate   updates  of  information,18

            issue  installments  of   securities  under  that  registration

            statement (take  the securities  "down from the  shelf") almost

            instantly,  in  amounts  and  at  times  the  company  and  its

            underwriters deem  most propitious.   See Clark, supra,  at 751
                                                  ___        _____

            (explaining that the  shelf registration process  enables firms

            to pinpoint the timing of offerings to the issuer's advantage);

            see  generally  Jeffrey  N.   Gordon  &  Lewis  A.  Kornhauser,
            ______________

            Efficient Markets, Costly Information, and Securities Research,
            ______________________________________________________________

            60 N.Y.U. L. Rev. 761, 819-20 (1985).

                                
            ____________________

            17.  A  shelf registration  under Rule  415 may  only cover  an
            amount of securities that "is reasonably expected to be offered
            and  sold within two years  from the initial  effective date of
            the registration."  17 C.F.R.   230.415(a)(2).

            18.  For  example,   Rule  415(a)(3)  requires   that  a  shelf
            registrant comply with Item 512(a) of Regulation S-K, 17 C.F.R.
              229.512(a)(ii), which requires that a registrant file a post-
            effective amendment to an initial  registration statement "[t]o
            reflect in the prospectus any facts or events arising after the
            effective  date  of  the  registration  statement . . .  which,
            individually  or  in  the aggregate,  represent  a  fundamental
            change  in  the  information  set  forth  in  the  registration
            statement."

                                          -27-

                   The  social benefit  of the  shelf registration  rule is

            that  it can enable an issuer to  decrease its costs of raising

            capital.   See Clark,  supra, at 751.   The concomitant risk is
                       ___         _____

            that, by  permitting securities  to be  offered on a  "delayed"

            basis, the rule may adversely affect the quality and timeliness

            of the  disclosures made in connection with the actual issuance

            of securities.   See Shelf Registration,  SEC Release Nos.  33-
                             ___

            6499,  34-20384, 35-23122, 1983 WL 35832 (SEC), *2 ("Shelf Reg.

            Rel.");  see  also  I Loss  &  Seligman,  supra,  at 355  ("The
                     _________                        _____

            rationale  for  limiting  the  time   during  which  registered

            securities  may   be  sold  is  that   investors  need  current

            information   when  considering   an   offering.     To  permit

            'registration  for  the shelf'  runs  the  risk that  investors

            subsequently  will  be  offered  securities  on  the  basis  of

            outdated  or  stale  information.").    In  response  to  these

            concerns,  the SEC, in adopting  Rule 415 in  its current form,

            assured  that  "[p]ost-effective  amendments  [to  the  initial

            registration  statement]  and  prospectus  supplements  [would]

            serve  to ensure  that  investors are  provided with  complete,

            accurate and current information at the time of the offering or

            sale of securities."   Shelf  Reg. Rel., supra,  1983 WL  35832
                                                     _____

            (SEC), *9.   The SEC  explained that registrants  would not  be

            permitted  "to use the shelf  registration rule as  a basis for

            omitting   required   information   from   their   registration

            statements when they  become effective."   Id.,  1983 WL  35832
                                                       ___

            (SEC), *10.

                                          -28-

                   Based  on  concerns  about  Rule  415's  effect  on  the

            adequacy and timeliness  of disclosure, the SEC  chose to limit

            the availability of the  rule, in the context of  primary stock

            offerings, to the widely-followed companies (like DEC) that are

            eligible  to register  securities on  SEC Form  S-3.19   See 17
                                                                     ___

            C.F.R.   230.415(a)(1)(x); SEC Rel.  No. 33-6499, 1983 WL 35832

            (SEC) at  *5; I  Loss & Seligman,  supra, at  361 & n.90.   The
                                               _____

            theory  was that the concerns about adequacy of disclosure were

            less prominent in the case  of "S-3" registrants, because those

            companies are precisely the ones that in the ordinary course of

            their  businesses  "provide a  steady  stream  of high  quality

            corporate information  to the marketplace  and whose  corporate

            information is broadly  disseminated[] . . . and  is constantly

            digested and  synthesized by  financial analysts."   Shelf Reg.

            Rel., supra, 1983 WL 35832 (SEC), *5.
                  _____

                   Defendants  assert here that the disclosure requirements

            of  the Securities Act and regulations, including Item 11(a) of

            Form  S-3,  should be  interpreted  so  that they  would  never
                                                                      _____

            mandate the provision of  current information about a company's

            performance in the quarter in progress at the time of  a public

            offering, so  long as the  company satisfies its  quarterly and

            annual periodic disclosure obligations  under the Exchange Act.

            That argument cuts severely against  the very reason the  shelf
                                
            ____________________

            19.  As an exception to  the Form S-3 limitation, the  SEC also
            made  the shelf  registration rule  available in  certain other
            limited  circumstances  not  relevant  here.    See  17  C.F.R.
                                                            ___
              230.415(a)(1)(i)-(ix); Bloomenthal et  al., supra,    5.12[1]
                                                          _____
            at 235-36; I Loss & Seligman, supra, at 362-63.
                                          _____

                                          -29-

            registration rule was made available to issuers like DEC:  that

            "S-3"  companies would  provide  the market  with a  continuous

            stream of high quality corporate information.  The rule permits

            offerings  to  be made  on  a "continuous"  or  "delayed" basis

            because  it envisions  "continuous"  disclosure.   It would  be

            inconsistent with  this rationale to  permit an issuer  to take

            refuge in its  periodically-filed Forms 10-Q  or 10-K to  avoid

            the  obligation to disclose current material facts in its shelf

            offering prospectus.

                   Absent some mechanism requiring a registrant to disclose

            internally known, material nonpublic information  pertaining to

            a  quarter in  progress, the  shelf registration  procedure, by

            enabling the  issuer to  pinpoint the  timing of its  offering,

            would  give   a  company   anticipating  a  negative   earnings

            announcement the  ability to  time its offerings  of securities

            from the shelf  to be completed prior to the  public release of

            the known negative news.  This would allow companies to exploit

            what amounts to  a naked informational trading  advantage.  Cf.
                                                                        ___

            Gordon & Kornhauser, supra, at 819-20.  Item 11(a) of Form S-3,
                                 _____

            by   requiring  the  issuer  to  disclose  current  information

            concerning  "material changes"  from previously  reported data,

            provides  a mechanism -- comparable  in effect to the "disclose

            or abstain" rule governing insider  trading -- to prevent  such

            strategic behavior.20
                                
            ____________________

            20.  Of  course, if  the  issuer desires  not  to disclose  the
            information prior to quarter's end, then the flexibility of the
            shelf registration  procedure permits  the issuer to  "delay" a

                                          -30-

                   In  the  face of  these  concerns, DEC  argues  that the

            plaintiffs' claims of nondisclosure  are without merit, because

            they  seek  to  impose liability  upon  DEC  for  a failure  to

            disclose  its internal  projections  about the  outcome of  the
                                    ___________

            third quarter  of  fiscal 1994.   The  federal securities  laws

            impose no obligation upon an issuer to disclose forward-looking

            information such as internal  projections, estimates of  future

            performance, forecasts, budgets, and  similar data.  See, e.g.,
                                                                 ___  ____

            In re  Verifone Sec. Litig., 11 F.3d  865, 869 (9th Cir. 1993);
            ___________________________

            In re Convergent  Technologies Sec. Litig.,  948 F.2d 507,  516
            __________________________________________

            (9th  Cir.  1991).    Plaintiffs, however,  insist  that  their

            Section 11  claim is concerned  not with  the nondisclosure  of

            projections, but of current  information that DEC allegedly had

            in  its  possession as  of March  21,  1994 about  "losses" the

            company  was  incurring in  the  ongoing  quarter.   Defendants

            respond, in turn, that  under a system of  quarterly reporting,

            "losses" cannot be realized until a quarter has ended, and that

            because  the quarter  in question  did not  end until  April 2,

            1994, whatever information  DEC had as  of March 21  concerning

            that quarter necessarily must have been forward-looking, in the

            nature  of a projection or forecast, which it had no obligation

            to disclose.

                   DEC's  argument elevates  form  over  substance.   DEC's

            assertion that  companies do not realize "losses" as such until

                                
            ____________________

            planned offering until  after the quarter is completed  and the
            results from the quarter are publicly reported.

                                          -31-

            a  quarter has  ended is,  of course,  largely unexceptionable.

            But it does  not follow that DEC's  only information concerning

            the  ongoing quarter  as of  March 21  must have  been forward-

            looking.   That  contention  relies on  two faulty  components.

            First,  it assumes  that plaintiffs  could not  adduce adequate

            evidence   that  defendants  were  actually  in  possession  of

            material information about the  ongoing quarter at the relevant

            time.  Second,  it assumes that the potential  unreliability of

            inferences that  could be drawn from  current information about

            operating results as of eleven days before the end of a quarter

            absolutely protects that information from mandatory disclosure.

            The first premise is  inconsistent with the standards governing

            a Rule 12(b)(6)  motion to  dismiss.  The  second confuses  the

            issue of materiality with the duty to disclose.

                   Defendants  posit, in essence, that there can never be a

            duty to disclose internally known, pre-end-of-quarter financial

            information,  because  any inferences  about  the  quarter that

            might  be  drawn  from   such  information  could  be  rendered

            unreliable by later developments in the same quarter, such as a

            sudden  surge of  profitable  sales.   This  position does  not

            withstand scrutiny.  Present,  known information that  strongly

            implies  an  important  future   outcome  is  not  immune  from

            mandatory disclosure merely because  it does not foreordain any

            particular  outcome.     The  question  whether  such   present

            information  must be  disclosed  (assuming the  existence of  a

            duty), poses  a classic  materiality issue: given  that at  any

                                          -32-

            point in a quarter, the remainder of the period may not  mirror

            the  quarter-to-date, is  there a  sufficient probability  that

            unexpectedly disastrous quarter-to-date performance  will carry

            forward  to  the end  of the  quarter,  such that  a reasonable

            investor   would  likely   consider  the   interim  performance

            important to the overall mix of information available?

                   As desirable as bright-line  rules may be, this question

            cannot be answered by reference to  such a rule.  To try  to do

            so would  be contrary to Basic, Inc.  v. Levinson, 485 U.S. 224
                                     ___________     ________

            (1988).  The Supreme Court there refused to adopt a bright-line

            approach   to  determine  at   what  stage  preliminary  merger

            discussions   create  a   sufficient   probability  of   actual

            consummation to become  material.  See id. at 237-39 (rejecting
                                               ___ ___

            "agreement-in-principle" test).  So here.  We decline to adopt,

            as defendants  would have  us do,  a  hard and  fast rule  that

            current information concerning a company's operating experience

            is  never  subject to  disclosure until  after  the end  of the

            quarter  to  which  the  information  pertains.    Rather,  the

            question is whether the nondisclosure of interim facts rendered

            the prospectus materially  incomplete.  An  issuer's compliance

            with the  periodic disclosure requirements of  the Exchange Act

            does  not per  se preclude  such undisclosed  facts  from being
                      _______

            material.

                   By the same token,  we reject any bright-line rule  that

            an  issuer  engaging  in  a  public offering  is  obligated  to

            disclose interim operating results  for the quarter in progress

                                          -33-

            whenever it perceives a  possibility that the quarter's results

            may  disappoint the market.  Far from it.  Reasonable investors

            understand that businesses fluctuate,  and that past success is

            not a guarantee of more of the same.  There is always some risk

            that the quarter in progress at  the time of an investment will

            turn out  for the issuer  to be  worse than  anticipated.   The

            market  takes   this  risk  of  variability   into  account  in

            evaluating the company's prospects based on the available facts

            concerning  the  issuer's   past  historical  performance,  its

            current   financial  condition,   present  trends   and  future

            uncertainties.    But,  strong-form  efficient  market theories

            aside, the  ability of market  observers to evaluate  a company

            depends  upon the information publicly  available to them.  If,

            as plaintiffs  allege  here, the  issuer  is in  possession  of

            nonpublic information  indicating that the quarter  in progress

            at the time of the public offering will be an extreme departure

            from the range of  results which could be anticipated  based on

            currently available  information,  it is  consistent  with  the

            basic  statutory  policies   favoring  disclosure  to   require

            inclusion of that information in the registration statement.

                   We  do not  mean to  imply, however,  that nondisclosure

            claims  similar to those asserted  by plaintiffs here can never

            be disposed  of as a matter of law.  In many circumstances, the

            relationship between the  nonpublic information that plaintiffs

            claim  should  have been  disclosed and  the actual  results or

            events that  the undisclosed information  supposedly would have

                                          -34-

            presaged will be so attenuated that the undisclosed information

            may be  deemed immaterial as a matter of law.  Cf. Verifone, 11
                                                           ___ ________

            F.3d at 867-70 (affirming  dismissal of claim that registration

            statement allegedly failed  to disclose information  concerning

            development that  came  to light  six  months later);  Krim  v.
                                                                   ____

            BancTexas Group, Inc., 989  F.2d 1435, 1439, 1449-50 (5th  Cir.
            _____________________

            1993)   (affirming  summary  judgment  disallowing  claim  that

            prospectus failed to disclose  information of developments that

            matured  four months  later); Convergent,  948 F.2d  at 509-11,
                                          __________

            515-16  (same,  where prospectuses  in  March  and August  1983

            allegedly failed to disclose negative developments announced in

            February 1984); Zucker v. Quasha, 891 F. Supp. 1010, 1012, 1018
                            ______    ______

            (D.N.J.   1995)  (dismissing   complaint   based   on   alleged

            nondisclosure in March 31 registration statement of information

            relating to results of period ending July 2), aff'd, __ F.3d __
                                                          _____

            (3d Cir. 1996)  (table, No. 95-5428).   In such  circumstances,

            where the  allegedly  undisclosed information  is  sufficiently

            remote in time or  causation from the ultimate events  of which

            it   purportedly   forewarned,   the   plaintiff's   claim   of

            nondisclosure may  be indistinguishable  from a claim  that the

            issuer should have divulged its internal predictions about what

            would come of  the undisclosed information.   Cf. Verifone,  11
                                                          ___ ________

            F.3d at 869 (characterizing plaintiffs' claims of nondisclosure

            of "adverse material facts and trends" as of March 13 as claims

            that defendants  failed to disclose forecasts  of news actually

            released to public on September 17).

                                          -35-

                   Here, however,  the prospectus in question  was filed 11

            days prior  to the end of the quarter in progress.  The results

            for that quarter turned out to be, by all accounts, the product

            of  more than a minor  business fluctuation.   Accepting, as we

            must, the plaintiffs' allegation that  DEC, by March 21,  1994,

            was in  possession of information about  the company's quarter-

            to-date performance (e.g.,  operating results) indicating  some
                                 ____

            substantial likelihood that the quarter would turn out to be an

            extreme departure from publicly known trends and uncertainties,

            we  cannot conclude as a matter of  law and at this early stage

            of  the litigation  that such  information was  not subject  to

            mandatory disclosure under the  rubric of "material changes" in

            Item 11(a) of  Form S-3.   We conclude,  accordingly, that  the

            Wilensky   plaintiffs'  complaint as  to this  theory states  a
            ________

            legally cognizableclaim under Section11 of theSecurities Act.21
                                
            ____________________

            21.  It bears  reemphasizing  that  the  plaintiffs'  claim  is
            sustainable  only to the extent it relates to the nondisclosure
            of   "hard"  material   information,  as   opposed   to  "soft"
            information in the nature  of projections.  See In  re Verifone
                                                        ___ _______________
            Sec. Litig., 784 F.  Supp. 1471, 1482 (N.D. Cal.  1992), aff'd,
            ___________                                              _____
            11 F.3d 865  (9th Cir. 1993); see generally 2  Loss & Seligman,
                                          _____________
            supra, at 622 n.66.  Although DEC had no obligation to disclose
            _____
            a forecast  of results for the quarter  in progress at the time
            of  the offering, it was permitted to  do so.  If it had chosen
            to  disclose  such a  forward-looking  projection,  and if  the
            projection was made with reasonable basis and in good faith, it
            would  have been protected by  the SEC's safe harbor provision.
            See  SEC  Rule 175,  17 C.F.R.    230.175;  see also  Arazie v.
            ___                                         ________  ______
            Mullane,  2 F.3d 1456, 1468 (7th Cir. 1993); Searls v. Glasser,
            _______                                      ______    _______
            64 F.3d  1061, 1066  (7th  Cir. 1995);  cf. Private  Securities
                                                    ___
            Litigation Reform Act of  1995, Pub. L. No. 104-67,    102, 109
            Stat. 737, 749-55 (creating  expanded statutory protection  for
            forward-looking  statements).  Furthermore,  had DEC  chosen to
            disclose projected  results, such a disclosure  (if reasonable)
            could very  well have  rendered the "hard"  interim information
            underlying  the projection immaterial as a matter of fact or of

                                          -36-

            B.    Actionability   of  Statement  Concerning   Restructuring
            __    _________________________________________________________

            Reserves 
            ________

                   The   Wilensky   plaintiffs   also   allege   that   the
                         ________

            registration statement and prospectus for the March 21 offering

            contained  a   materially   false  and   misleading   statement

            actionable under both Sections 11 and 12(2).  They contend that

            the statement of DEC's  "belie[f]" as to the "adequacy"  of the

            then-remaining $443  million  restructuring reserve  "to  cover

            presently   planned  restructuring   actions"  was   false  and

            misleading, in light of information  contemporaneously known to

            the company.

                   1.  Background
                   __  __________

                   The   "restructuring   reserve"  referred   to   in  the

            prospectus supplement originated as a $1.5 billion charge taken

            by DEC  at the close  of its fiscal  year 1992 (ended  June 27,

            1992) as part  of the company's  ongoing efforts to  streamline

            the company  "to achieve  a competitive cost  structure."   The

            reserve was intended to cover the anticipated costs of employee

            separations,  facilities   consolidations,  asset  retirements,

            relocations, and  related expenses.   The company  had absorbed

            similar restructuring charges of  $1.1 billion and $550 million

            in fiscal years 1991 and 1990, respectively.

                                
            ____________________

            law,  unless the market would have had some reason to discredit
            the projection, thereby creating a substantial  likelihood that
            a  reasonable investor  might still  have found  the underlying
            information  important   to  the  total   mix  of   information
            available.

                                          -37-

                   During fiscal year  1993, DEC took  a number of  actions

            consistent with the $1.5 billion dollar reserve recorded at the

            end  of fiscal year 1992.  By the  end of the fiscal year (July

            3,   1993),  the   remaining   reserve  was   reported  to   be

            approximately $739 million.  During  the first two quarters  of

            the  next fiscal year, the  company continued to  draw from the

            reserve, so that by the  end of the second quarter  (January 1,

            1994), the reserve stood at approximately $443 million.  In its

            Form  10-Q  for  that  quarter, dated  February  4,  1994  (and

            incorporated by reference  into the registration statement  and

            prospectus  at issue here), DEC stated its belief that the $443

            million   reserve  was   "adequate"   to  cover   restructuring

            activities  planned at that time.   This statement was repeated

            in  the prospectus supplement dated  March 21, 1994.   The full

            statement,  with its  immediately surrounding  context, was  as

            follows:

                   While spending for R&E  [research &  engineering]
                   and SG&A  [selling, general & administrative]  is
                   declining, the Corporation  believes its cost and
                   expense levels  are still too high  for the level
                   and  mix  of  total  operating  revenues.     The
                   Corporation is reducing  expenses by streamlining
                   its   product   offerings    and   selling    and
                   administrative practices, resulting in reductions
                   in employee population, closing and consolidation
                   of  facilities  and  reductions  in discretionary
                   spending.    The Corporation  believes  that  the
                   remaining restructuring reserve  of $443  million
                   is   adequate   to    cover   presently   planned
                   restructuring  actions.    The  Corporation  will
                   continue to take  actions necessary to  achieve a
                   level of costs  appropriate for its revenues  and
                   competitive for its business.

                                          -38-

                   As events turned  out, additional restructuring  charges

            were in fact taken  later in fiscal year 1994.  At  the time of

            the company's  announcement  on  April  15, 1994  of  the  $183

            million loss for  the third fiscal  quarter of 1994,  defendant

            Palmer  stated that  he  had already  instructed management  to

            "accelerate [the company's] on-going restructuring efforts" and

            that  the company  would  "consider  further  restructuring  to

            achieve [its]  goals."   In  line  with these  statements,  the

            company announced on  July 20,  1994 (just after  the close  of

            fiscal year 1994)  that it  had decided to  take an  additional

            restructuring charge of $1.2 billion in fiscal year 1994 (ended

            June 30, 1994).

                   2.  Whether the Statement Was Misleading
                   __  ____________________________________

                   Although defendants were  required to disclose the  size

            of  the remaining  restructuring  reserve  in the  registration

            statement and  prospectus as affecting the  company's liquidity

            and capital resources,22  the characterization  of the  reserve

            as adequate was  arguably voluntary.  But  whether voluntary or
               ________

            not, DEC's description of its belief  as of March 21, 1994 that

            the remaining $443 million  reserve was "adequate" carried with

            it  an obligation  to  ensure that  the representation  was not

                                
            ____________________

            22.  Item 303(a)  of Regulation S-K requires  the registrant to
            include in its Exchange  Act filings (e.g., Forms 10-Q  and 10-
                                                  ____
            K),  which   in  turn   are  incorporated  by   reference  into
            registration statements  on Form S-3, a  description of "trends
            or any  known  demands, commitments,  events or  uncertainties"
            affecting the  registrant's liquidity, and of  the registrant's
            "material  commitments for  capital  expenditures."   17 C.F.R.
              229.303(a)(1)-(2).

                                          -39-

            misleading.   See  Roeder,  814 F.2d  at  26; cf.  Serabian  v.
                          ___  ______                     ___  ________

            Amoskeag  Bank Shares, Inc., 24  F.3d 357, 365  (1st Cir. 1994)
            ___________________________

            ("[I]f a defendant  characterizes . . . reserves as  'adequate'

            or  'solid'  even  though  it  knows  they  are  inadequate  or

            unstable, it  exposes itself  to possible liability  [under the

            securities laws]." (quoting Shapiro v. UJB Financial Corp., 964
                                        _______    ___________________

            F.2d 272, 282 (3d  Cir.), cert. denied, 506 U.S.  934 (1992)));
                                      _____ ______

            cf. also In re Wells  Fargo Sec. Litig., 12 F.3d 922,  930 (9th
            ________ ______________________________

            Cir.  1993), cert. denied, 115  S. Ct. 295  (1994).  Plaintiffs
                         _____ ______

            assert that defendants failed to meet that obligation.

                   The  undeniable purport of  the "adequacy"  statement is

            that  DEC  had no  plans  as  of  the date  of  the  prospectus

            supplement  to engage in actions  that would require the taking

            of  a  restructuring  charge   beyond  the  $443  million  then

            remaining  in  "reserve."     This  was  false  or  misleading,

            plaintiffs  say, because  DEC knew  as of  March 21,  1994 that

            further  restructuring actions  would be  necessary to  put the

            company  back on  the  right track  after  its impending  third

            quarter  setback,  and that  these  actions  would deplete  the

            remaining  reserve and require further restructuring charges to

            be  taken.  Defendants reply, as the district court noted, that

            whatever the  natural implication of the  "adequacy" statement,

            its  context  sufficiently  "bespeaks caution"  to  render  any

            misleading inference from the  statement immaterial as a matter

            of law.  We do not agree.

                                          -40-

                   The   "bespeaks   caution"   doctrine  "is   essentially

            shorthand for  the well-established principle that  a statement

            or  omission must be  considered in context."   In re Donald J.
                                                            _______________

            Trump Casino Sec. Litig., 7 F.3d 357, 364 (3d Cir. 1993), cert.
            ________________________                                  _____

            denied, 114 S. Ct. 1219 (1994); see also Rubinstein v. Collins,
            ______                          ________ __________    _______

            20 F.3d  160, 167 (5th  Cir. 1994).  It  embodies the principle

            that when  statements of "soft" information  such as forecasts,

            estimates,   opinions,  or   projections  are   accompanied  by

            cautionary disclosures that adequately  warn of the possibility

            that  actual results  or events may  turn out  differently, the

            "soft" statements  may not  be materially misleading  under the

            securities  laws.23  See Romani v.  Shearson Lehman Hutton, 929
                                 ___ ______     ______________________

            F.2d   875,  879   (1st  Cir.   1991);  see   also   Harden  v.
                                                    __________   ______

            Raffensperger, Hughes  &  Co., 65  F.3d  1392, 1404  (7th  Cir.
            _____________________________

            1995);  In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413-
                    __________________________________

            14 (9th Cir. 1994) (collecting cases), cert. denied, 116 S. Ct.
                                                   _____ ______

            185 (1995); Rubinstein, 20 F.3d at 166-68; In re  Trump, 7 F.3d
                        __________                     ____________

            at 371-72;  I. Meyer Pincus & Assocs. v. Oppenheimer & Co., 936
                        _________________________    _________________

            F.2d  759, 763  (2d Cir. 1991).   In  short, if  a statement is

            couched in or accompanied by prominent cautionary language that

            clearly  disclaims or  discounts  the drawing  of a  particular

            inference,  any   claim  that  the  statement   was  materially

            misleading because it gave rise to that very inference may fail

            as a matter of law.  In re Trump, 7 F.3d at 364.
                                 ___________
                                
            ____________________

            23.  The  doctrine   has  been   codified  in   the  Securities
            Litigation  Reform Act, supra,  Pub. L. No.  104-67,   102, 109
                                    _____
            Stat. at 750.

                                          -41-

                   Here, however,  the bespeaks  caution doctrine  does not

            preclude  a claim  that  the reserve  "adequacy" statement  was

            materially  misleading.   The "adequacy"  statement has  both a

            forward-looking  aspect  and  an  aspect  that   encompasses  a

            representation of present fact.  In its forward-looking aspect,

            the  statement   suggests  that  DEC  would   take  no  further

            restructuring charges in the near-term future.  In its present-

            oriented aspect, it represents  that as of March 21,  1994, DEC

            had  no  current  intent  to undertake  activities  that  would

            require any such further restructuring charges to be taken.  To

            the extent  that plaintiffs allege that  the reserve "adequacy"

            statement  encompasses  the  latter representation  of  present
                                                                    _______

            fact, and that  such a representation  was false or  misleading
            ____

            when made,  the surrounding cautionary language  could not have

            rendered  the statement  immaterial as  a matter  of law.   See
                                                                        ___

            Harden,  65  F.3d  at  1405-06 (explaining  that  the  bespeaks
            ______

            caution doctrine  cannot  render misrepresentations  of  "hard"

            fact nonactionable).24

                   Furthermore,  to the extent that  plaintiffs allege that

            the "adequacy" statement implies  a hiatus on new restructuring

            charges  for  the  near  future,  we  do  not  think  that  the

            surrounding  context warns  against  such  an implication  with

            sufficient clarity to be thought to bespeak caution.  See Fecht
                                                                  ___ _____

                                
            ____________________

            24.  Cf. also Securities Litigation  Reform Act, supra, Pub. L.
                 ________                                    _____
            No. 104-67,   102, 109  Stat. at 750 (providing safe  harbor to
            statements  couched   in  cautionary  language   only  if   the
            statements are identified as forward-looking).

                                          -42-

            v. Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995), cert. denied,
               _________                                      _____ ______

            64 U.S.L.W. 3688 (1996).   The prospectus supplement does state

            that  DEC will "continue  to take actions,"  but it  is at best

            ambiguous  whether those "actions"  refer to  any restructuring

            activities  other than  those "presently  planned."   Thus, one

            might  easily interpret  the purportedly  cautionary statement,

            especially in light of the "adequacy" characterization, to mean

            that  the  company's  ongoing  "actions" will  continue  to  be

            covered by the existing restructuring reserve.  If it was true,

            as plaintiffs allege, that defendants knew as of March 21, 1994

            that DEC's  performance in the third  quarter would precipitate

            actions  on a  scale  and schedule  that would  necessitate the

            taking  of additional  restructuring  charges,  the  "adequacy"

            statement may well have been materially misleading.

                   We  cannot conclude,  as a  matter of  law and  on these

            pleadings,  that the  actionability of  the "reserve  adequacy"

            statement is precluded by a context that bespeaks caution.  The

            cautionary statements to which defendants point did not provide

            an unambiguous  warning of the possibility that  DEC might take

            additional restructuring  charges in the  near future --  as it

            turned out, a charge of $1.2 billion in the fiscal year then in

            progress.  See  id. at 1082 (bespeaks caution doctrine provides
                       ___  ___

            basis for  dismissal  as matter  of law  "only when  reasonable

            minds could not disagree  as to whether the mix  of information
                                                        ___

            in the [allegedly actionable] document is misleading" (emphasis

            in  original)); Rubinstein,  20  F.3d at  167-68 (stating  that
                            __________

                                          -43-

            questions of whether  disclosures were sufficiently  cautionary

            may  not always be resolved as a  matter of law).  Accordingly,

            we  hold that the district  court erred in  concluding that the

            plaintiffs'   allegations   pertaining   to    the   prospectus

            supplement's  description  of  the  restructuring   reserve  as

            "adequate"  fail  to  state  a  claim  under  Sections  11  and

            12(2).25

            C.  Whether Defendants Are Statutory "Sellers"
            __  __________________________________________

                   As  an  alternative  basis  for affirming  the  district

            court's dismissal of the  Section 12(2) claim, defendants argue

            that the  Wilensky plaintiffs have failed  adequately to allege
                      ________

            their status  as statutory "sellers."26   We conclude  that the

            complaint  adequately alleges  "seller" status  only as  to the

            underwriter  defendants.   The dismissal  of the  Section 12(2)

            claim as to the other defendants will accordingly be affirmed.

                                
            ____________________

            25.  Defendants argue that, as a matter of fact, the market was
            well aware in January 1994 or earlier that DEC might eventually
            be forced to take further restructuring charges in fiscal  year
            1994.   This, however, does not address whether the disclosures
            in the prospectus supplement  themselves "bespeak caution" as a
            matter of law.   Moreover, the evidence cited by  defendants on
            this point  goes far beyond  the allegations of  the complaint.
            While evidence of actual market knowledge might be proper grist
            for  the summary judgment mill  on the question of materiality,
            it  cannot properly  be  considered in  evaluating whether  the
            plaintiffs' complaint is legally sufficient to survive a motion
            to dismiss under Rule 12(b)(6).

            26.  The  district  court,  having  dismissed  the  plaintiffs'
            claims on other grounds, did not reach this issue.   We may, of
            course,   affirm  the   district  court's   dismissal  on   any
            independently sufficient  ground.   See  Crellin  Technologies,
                                                ___  ______________________
            Inc. v. Equipmentlease Corp., 18 F.3d 1, 13 (1st Cir. 1994).
            ____________________________

                                          -44-

                   In Pinter  v.  Dahl, 486  U.S. 622  (1988), the  Supreme
                      ______      ____

            Court  described in detail the  class of defendants  who may be

            sued as  "sellers" under Section  12(1) of the  Securities Act.

            See id. at 641-44.   Section 12(2) defines the  persons who may
            ___ ___

            sue  and  be  sued  thereunder  in  language identical  to  the

            language  used in  Section 12(1).   Thus, Pinter's  analysis of
                                                      ______

            "seller" for purposes of Section 12(1) applies with equal force

            to  the interpretation of  "seller" under Section  12(2).  See,
                                                                       ___

            e.g.,  Ackerman v.  Schwartz, 947  F.2d 841,  844-45 (7th  Cir.
            ____   ________     ________

            1991); In re Craftmatic Sec. Litig., 890 F.2d 628, 635 (3d Cir.
                   ____________________________

            1989); Moore  v. Kayport Package  Express, Inc., 885  F.2d 531,
                   _____     ______________________________

            536 (9th Cir. 1989); Wilson v. Saintine Exploration  & Drilling
                                 ______    ________________________________

            Corp., 872 F.2d 1124,  1125-26 (2d Cir. 1989); Dawe v. Main St.
            _____                                          ____    ________

            Management Co., 738 F. Supp. 36, 37 (D. Mass. 1990).
            ______________

                   A  person who "offers or sells" a security may be liable

            under Section 12 to  any person "purchasing such  security from
                                             __________                ____

            him."   15  U.S.C.   77l(2)  (emphasis  added).   Although  the

            "purchasing from" language in  the statute literally appears to

            contemplate a relationship between defendant and plaintiff "not

            unlike  traditional contractual  privity," Pinter, 486  U.S. at
                                                       ______

            642, the Pinter  Court held  that Section 12  liability is  not
                     ______

            limited  to  those   who  actually  pass  title  to  the  suing

            purchaser.   See id. at  645.   This is so  because even  "[i]n
                         ___ ___

            common parlance," a person may "offer or sell" property without

            actually passing title.  Id. at 642.  For example,  a broker or
                                     ___

            agent  who solicits a purchase "would commonly be said . . . to

                                          -45-

            be among  those 'from' whom the buyer  'purchased,' even though

            the  agent  himself  did   not  pass  title."    Id.   at  644.
                                                             ___

            Furthermore,  because "solicitation  is the  stage at  which an

            investor is most likely  to be injured," id. at  646, the Court
                                                     ___

            found  it consistent with the policies of the statute to permit

            imposition  of  liability  on  a non-owner  of  securities  who

            "successfully  solicits"27  the  plaintiff's  purchase  of  the

            securities, provided that the  solicitor is "motivated at least

            in part by  a desire to  serve his own  financial interests  or

            those of the securities owner."  Id. at 647.28
                                             ___

                   The Pinter Court limited its holding in ways that govern
                       ______

            the result here.   The  Court held that  the "purchasing  . . .

            from"  requirement  of  Section  12 limits  the  imposition  of

            liability to "the buyer's immediate seller" and  thus, "a buyer

            cannot recover  against his seller's seller."  Pinter, 486 U.S.
                                                           ______

            at 643 n.21 (citations omitted).  Second, the Court stated that

            proof the defendant caused a plaintiff's purchase of a security
                                ______

            is not enough  to establish that the  defendant "solicited" the

            sale for Section 12 purposes.   See id. at 651 (explaining that
                                            ___ ___

                                
            ____________________

            27.  Section  2(3)  of the  Securities  Act  defines "sale"  or
            "sell"  to   include,   among  other   notions,  "every   . . .
            solicitation of an  offer to buy, a  security or interest in  a
            security, for value."  15 U.S.C.   77b(3); see Pinter, 486 U.S.
                                                       ___ ______
            at 643.

            28.  The  Court reasoned  that where  a person's  motivation in
            persuading another to purchase  securities is solely to benefit
            the  buyer, it  would  be  "uncommon  to  say  that  the  buyer
            'purchased'  from  him,"  and  that such  motivation  makes  it
            difficult to  characterize the person's  act as "solicitation."
            Pinter, 486 U.S. at 647.
            ______

                                          -46-

            "[t]he  'purchase  from' requirement  of    12  focuses on  the

            defendant's  relationship  with  the  plaintiff-purchaser"  and

            rejecting  use of a test under which defendant could qualify as

            a  seller if  he  was a  "substantial  factor" in  causing  the

            transaction to take place).  Finally, the  Court indicated that

            a person's "remote" involvement  in a sales transaction or  his

            mere  "participat[ion]  in  soliciting the  purchase"  does not

            subject him to Section 12 liability.   See id. at 651 n.27.   A
                                                   ___ ___

            defendant must be directly  involved in the actual solicitation

            of a securities purchase in order to qualify, on that basis, as

            a Section  12 "seller."  See In re Craftmatic, 890 F.2d at 636;
                                     ___ ________________

            Capri v. Murphy, 856 F.2d 473, 478-79 (2d Cir. 1988); Dawe, 738
            _____    ______                                       ____

            F. Supp. at 37.

                   We  apply these  principles  to the  Wilensky complaint.
                                                        ________

            The March 1994  public offering  was made pursuant  to a  "firm

            commitment"  underwriting, as  disclosed  in  the  registration

            statement  and prospectus  supplement.   The plaintiffs  do not

            contend  otherwise.   In  a firm  commitment underwriting,  the

            issuer of the securities sells all  of the shares to be offered

            to one or more underwriters, at some discount from the offering

            price.  Investors thus purchase shares in the offering directly

            from the underwriters (or  broker-dealers who purchase from the

            underwriters), not  directly  from the  issuer.   In fact,  the

            March 21, 1994  prospectus supplement  represented that  "[DEC]

            has agreed not to, directly or indirectly, sell, offer or enter

                                          -47-

            into any agreement  to offer  or sell, shares  of [the  offered

            stock]."

                   Because the  issuer in  a firm  commitment  underwriting

            does not pass  title to  the securities, DEC  and its  officers

            cannot be held liable as  "sellers" under Section 12(2)  unless

            they   actively  "solicited"   the   plaintiffs'  purchase   of

            securities  to  further their  own  financial  motives, in  the

            manner of a broker or  vendor's agent.  See Pinter 486  U.S. at
                                                    ___ ______

            644-47.  Absent such solicitation, DEC can be viewed as no more

            than a  "seller's seller," whom plaintiffs would  have no right

            to sue under Section 12(2).  See id. at 644 n.21; PPM Am., Inc.
                                         ___ ___              _____________

            v.  Marriott Corp.,  853 F.  Supp. 860,  874-75 (D.  Md. 1994);
                ______________

            Louis  Loss  &   Joel  Seligman,  Fundamentals   of  Securities
                                              _____________________________

            Regulation 1000-01 (3d ed. 1995) ("[I]t seems  quite clear that
            __________

              12  contemplates only an action by a buyer against his or her
                                                                 __________

            immediate  seller.  That is to say,  in the case of the typical
            _________________

            'firm-commitment  underwriting,'  the  ultimate   investor  can

            recover only from the dealer who sold to him or her." (emphasis

            in original; footnotes omitted)).

                   The  factual allegations in the complaint supporting the

            purported  status  of  DEC  and the  individual  defendants  as

            Section  12(2) sellers  are sparse,  and all  pertain  to those

            defendants'   involvement   in   preparing   the   registration

            statement,  prospectus,  and  other  "activities  necessary  to

            effect the sale of  the[] securities to the  investing public."

            Under Pinter, however, neither  involvement in preparation of a
                  ______

                                          -48-

            registration  prospectus  nor  participation   in  "activities"

            relating   to  the   sale   of   securities,  standing   alone,

            demonstrates  the  kind of  relationship between  defendant and
                                        ___________________________________

            plaintiff that  could establish  statutory seller status.   See
            _________                                                   ___

            Pinter,  486 U.S.  at 651  & n.27;  Shapiro, 964  F.2d at  286.
            ______                              _______

            Although  the complaint  also contains a  conclusory allegation

            that each defendant "solicited  and/or was a substantial factor

            in the purchase  by plaintiffs" of securities in  the offering,

            the Supreme  Court specifically rejected a  proposed test under

            which a  defendant's being  a "substantial factor"  in bringing

            about  a sale  could establish  statutory seller  status.   See
                                                                        ___

            Pinter, 486 U.S. at 651.  Furthermore, the  term "solicitation"
            ______

            is a legal term  of art in this context.   In deciding a motion

            to dismiss under  Rule 12(b)(6),  a court must  take all  well-

            pleaded facts as  true, but  it need not  credit a  complaint's

            "bald  assertions"  or  legal conclusions.    Washington  Legal
                                                          _________________

            Found. v. Massachusetts Bar Found., 993 F.2d 962, 971 (1st Cir.
            ______    ________________________

            1993)  (quoting United States v.  AVX Corp., 962  F.2d 108, 115
                            _____________     _________

            (1st  Cir. 1992)).    Here it  is  undisputed that  the  public

            offering  was   conducted  pursuant   to   a  firm   commitment

            underwriting,  and plaintiffs'  bald and  factually unsupported

            allegation  that  the issuer  and  individual  officers of  the

            issuer "solicited" the plaintiffs' securities purchases is not,

            standing alone, sufficient.

                   While,  on a  different  set of  allegations, an  issuer

            involved  in a firmly  underwritten public offering  could be a

                                          -49-

            "seller"  for purposes  of  Section  12(2),  we hold  that  the

            Wilensky  complaint does not  contain sufficient non-conclusory
            ________

            factual allegations which, if true, would establish that DEC or

            the  individual  defendants  qualify  as such.    However,  the

            complaint  does   adequately   allege  that   the   underwriter

            defendants directly  sold securities to the  plaintiffs (in the

            literal   sense  of   passing  title),   consistent   with  the

            underwriting   arrangements   disclosed   in   the   prospectus

            supplement  of March 21, 1994.  We conclude that the plaintiffs

            have adequately alleged statutory  seller status as against the

            underwriter defendants,  but not against DEC  or the individual

            defendants.

                                          IV.

                                The Section 10(b) Claims
                                ________________________

                                     (Shaw Action)
                                      ____

                   The plaintiffs  in the  Shaw action assert  claims under
                                           ____

            Sections  10(b) and 20(a)29  of the Securities  Exchange Act of

            1934, 15  U.S.C.    78j(b), 78t(a), and  Rule 10b-5 promulgated

            thereunder,  17  C.F.R.    240.10b-5.   The  implied  right  of

            private   action   under  Section   10(b)   and  Rule   10b-530
                                
            ____________________

            29.  Section 20(a) provides for derivative liability of persons
            who "control"  others found  to be  primarily liable under  the
            Exchange Act.

            30.  Section  10(b)  proscribes the  "use  or employ[ment],  in
            connection with the purchase or sale of any security, . . . any
            manipulative   or   deceptive   device   or    contrivance   in
            contravention of  such rules and regulations  as the Commission
            may  prescribe."   15  U.S.C.   78j(b).    Rule 10b-5  makes it
            unlawful  "[t]o make any untrue statement of a material fact or
            to omit to state a material fact necessary in order to make the

                                          -50-

            complements the civil enforcement function provided by Sections

            11  and  12(2)  of  the   Securities  Act  by  reaching  beyond

            statements  and  omissions made  in  a  registration statement,

            prospectus, or  in connection  with an initial  distribution of

            securities,  to  create  liability  for  false  or   misleading

            statements  or omissions  of material  fact in  connection with

            trading in the secondary  market.  See Central Bank  of Denver,
                                               ___ _______________________

            114 S. Ct.  at 1445; Eckstein v. Balcor Film  Investors, 8 F.3d
                                 ________    ______________________

            1121, 1123-24 (7th  Cir. 1993),  cert. denied, 114  S. Ct.  883
                                             _____ ______

            (1994).

                   In  addition  to  proving  that  the  defendant  made  a

            materially false or misleading statement or omitted to  state a

            material  fact necessary to make  a statement not misleading, a

            Rule 10b-5 plaintiff, unlike a plaintiff asserting claims under

            Section  11 or 12(2) of the Securities Act, must establish that

            the  defendant acted  with scienter,  and that  the plaintiff's

            reliance  on  the defendant's  misstatement caused  his injury.

            See Holmes v. Bateson, 583  F.2d 542, 551 (1st Cir.  1978); see
            ___ ______    _______                                       ___

            also San Leandro Emergency Medical Group Profit Sharing Plan v.
            ____ _______________________________________________________

            Philip Morris Cos., Inc., 75 F.3d 801, 808 (2d Cir. 1996).  The
            ________________________

            same standard of materiality,  however, applies to claims under

            Section 10(b) and Rule 10b-5 as to claims under Sections 11 and

            12(2) of the Securities  Act.  See  Lucia v. Prospect St.  High
                                           ___  _____    __________________

            Income Portfolio, Inc., 36  F.3d 170, 172 n.3 (1st  Cir. 1994).
            ______________________
                                
            ____________________

            statements made, in the light of the circumstances  under which
            they were  made, not  misleading . . . in  connection with  the
            purchase or sale of any security."  17 C.F.R.   240.10b-5(b).

                                          -51-

            Finally, a plaintiff asserting  securities fraud must plead the

            alleged   "circumstances   constituting   fraud    . . .   with

            particularity."  Fed. R. Civ. P. 9(b).

                   The   Shaw  plaintiffs  advance   the  same   claims  of
                         ____

            nondisclosure  and  misstatement  championed  by  the  Wilensky
                                                                   ________

            plaintiffs.      They  allege   further   that  those   alleged

            nondisclosures  and misstatements  were  made  with  fraudulent

            intent,  that  defendants'  conduct  artificially  inflated the

            market price of  DEC common stock,  and that this fraud  on the

            market  caused  the plaintiffs  to  suffer damages.    The Shaw
                                                                       ____

            plaintiffs also  allege  that defendants  committed  actionable

            fraud by making optimistic statements to the public (outside of

            any SEC filing)  concerning the company's  prospects throughout

            the  Class  Period,31  even  though  they  knew  or  recklessly

            disregarded nonpublic  information indicating that  the company

            was  then in dire straits, as was ultimately disclosed on April

            15, 1994.  The defendants respond that they were  under no duty

            to disclose  the information identified by  plaintiff, and that

            none of the statements attributed to them was materially false,

            misleading, or otherwise actionable.

            A.  Nonactionability of Loosely Optimistic Statements
            __  _________________________________________________

                                
            ____________________

            31.  The Class Period (here, January 19 through April 15, 1994)
            constitutes  the  time  period  during  which  members  of  the
            putative plaintiff class purchased  shares of DEC common stock.
            We  limit  our  analysis  of  the Shaw  plaintiffs'  claims  of
                                              ____
            affirmative misrepresentation to  the statements allegedly made
            by  defendants  within the  Class Period.    See In  re Clearly
                                                         ___ ______________
            Canadian Sec. Litig., 875 F. Supp. 1410, 1420 (N.D. Cal. 1995).
            ____________________

                                          -52-

                   The Shaw  plaintiffs allege  that the defendants  made a
                       ____

            number of fraudulently optimistic  statements about DEC through

            media  outlets  (e.g., newspapers  and trade  publications) and
                             ____

            press  releases issued  by the  company.   The  district court,

            after  analyzing  each  of  the statements  identified  by  the

            plaintiffs,  held as a matter of law that none was sufficiently

            material to support a claim of securities fraud.  We agree.

                   In most circumstances, disputes  over the materiality of

            allegedly false  or misleading statements must  be reserved for

            the trier of  fact.  See Basic, 485 U.S. at 236; Lucia, 36 F.3d
                                 ___ _____                   _____

            at  176.   But not  every unfulfilled  expression of  corporate

            optimism, even if characterized  as misstatement, can give rise

            to a genuine  issue of materiality  under the securities  laws.

            See Lucia, 36 F.3d  at 176 (leaving open possibility  that some
            ___ _____

            materiality determinations may be made as a matter of law).  In

            particular,  courts have  demonstrated  a  willingness to  find

            immaterial   as  a  matter  of  law  a  certain  kind  of  rosy

            affirmation   commonly  heard   from  corporate   managers  and

            numbingly  familiar to  the  marketplace --  loosely optimistic

            statements  that are so vague, so lacking in specificity, or so

            clearly  constituting  the opinions  of  the  speaker, that  no

            reasonable investor could  find them important to the total mix

            of  information available.32   See, e.g., San  Leandro, 75 F.3d
                                           ___  ____  ____________
                                
            ____________________

            32.  Under the common law of fraud, courts typically would find
            such statements to be  mere "puffing" or sales talk  upon which
            no  reasonable  person  could  rely,  and  thus  to be  legally
            insufficient  to   support  a  claim.     See,  e.g.,  Greenery
                                                      ___   ____   ________
            Rehabilitation Group, Inc. v. Antaramian, 628 N.E.2d 1291, 1293
            __________________________    __________

                                          -53-

            at 807, 811 (holding not actionable statement that the  company

            "expect[ed] . . . another year of strong growth in earnings per

            share"); Hillson  Partners Ltd. Partnership v.  Adage, Inc., 42
                     __________________________________     ___________

            F.3d  204,   213  (4th  Cir.  1994)   (similar,  where  alleged

            fraudulent statement  was: "[the  company] is on  target toward

            achieving the  most profitable  year in  its  history"); In  re
                                                                     ______

            Caere Corporate Sec. Litig.,  837 F. Supp. 1054,  1057-58 (N.D.
            ___________________________

            Cal. 1993) ("[The company  is] 'well-positioned' for growth.");

            Colby v.  Hologic, Inc., 817 F. Supp.  204, 211 (D. Mass. 1993)
            _____     _____________

            ("Prospects for long term growth are bright.").

                   Review   of    vaguely   optimistic    statements    for

            immateriality  as a matter of  law may be  especially robust in

            cases involving a fraud-on-the-market  theory of liability.  In

            such  cases,  the  statements   identified  by  plaintiffs   as

            actionably misleading  are alleged to have caused injury, if at

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

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

            of the security purchased.  See Basic, 485 U.S. at 241-47; Rand
                                        ___ _____                      ____

            v. Cullinet Software,  Inc., 847  F. Supp. 200,  205 (D.  Mass.
               ________________________

            1994).   When  the  truth is  disclosed  and the  market  self-

            corrects,  investors who  bought at  the inflated  price suffer

            losses.  Those losses can be deemed to have been  caused by the

            defendants'   statements,  even   absent  direct   reliance  by

                                
            ____________________

            (Mass. App. Ct. 1994), rev. denied, 417 Mass. 1103 (1994); Webb
                                   ____ ______                         ____
            v. First of Mich. Corp., 491 N.W.2d 851, 853 (Mich. App. 1992);
               ____________________
            Rodio  v. Smith,  587  A.2d 621,  624  (N.J. 1991);  Hauter  v.
            _____     _____                                      ______
            Zogarts, 14 Cal.3d 104, 111-12 (1975) (en banc).
            _______

                                          -54-

            plaintiffs,  because the statements were presumptively absorbed

            into and reflected  by the  security's price.   See Basic,  486
                                                            ___ _____

            U.S. at 243-44 (quoting In re LTV, 88 F.R.D. at 143).
                                    _________

                   This presumption of investor  reliance on the  integrity

            of  stock prices has the  primary effect of  obviating the need

            for plaintiff  purchasers to plead individual reliance.  But by

            its  underlying rationale,  the  presumption  also  shifts  the

            critical  focus of the materiality inquiry.  In a fraud-on-the-

            market   case  the   hypothetical  "reasonable   investor,"  by

            reference to  whom materiality is gauged, must  be "the market"

            itself, because it is the market, not any single investor, that

            determines the price of a publicly traded security.  See In  re
                                                                 ___ ______

            Verifone Securities  Litigation, 784 F. Supp.  1471, 1479 (N.D.
            _______________________________

            Cal.  1992) ("The  fraud-on-the-market theory  thus  shifts the

            inquiry  from  whether an  individual  investor  was fooled  to

            whether the market as a whole was fooled."), aff'd, 11 F.3d 865
                                                         _____

            (9th Cir. 1993); see also In re Apple Computer Sec. Litig., 886
                             ________ ________________________________

            F.2d  1109, 1113-14 (9th Cir. 1989), cert. denied, 496 U.S. 943
                                                 _____ ______

            (1990); cf. Easterbrook & Fischel, Corporate Law, supra, at 297
                    ___                        _____________  _____

            (explaining how unsophisticated investors  "take a free ride on

            the information impounded by the market").

                   Thus, a claim that a fraud was perpetrated on the market
                                                                     ______

            can draw  no sustenance  from allegations that  defendants made

            overly-optimistic statements, if those statements are ones that

            any  reasonable  investor  (ergo,  the  market)   would  easily

            recognize  as  nothing  more   than  a  kind  of  self-directed

                                          -55-

            corporate puffery.   The market  is not so  easily duped,  even

            granted that  individual investors  sometimes are.   See  In re
                                                                 ___  _____

            Apple  Computer,  886 F.2d  at  1114;  Wielgos v.  Commonwealth
            _______________                        _______     ____________

            Edison Co., 892 F.2d 509, 515 (7th Cir. 1989); see also Raab, 4
            __________                                     ________ ____

            F.3d at 289-90 ("[T]he market price  of a share is not inflated

            by vague  statements  predicting  growth.  . . .  Analysts  and

            arbitrageurs  rely  on  facts in  determining  the  value of  a

            security,  not  mere  expressions   of  optimism  from  company

            spokesmen." (citations omitted)).  This is particularly so with

            respect  to the  securities of an  actively traded  and closely

            followed company like DEC.   Cf. LTV, 88 F.R.D. at  144 (citing
                                         ___ ___

            empirical studies  demonstrating that assumptions  about market

            efficiency  are strongest  with  respect to  "[t]the prices  of

            stocks  of larger corporations, such as those listed on the New

            York Stock Exchange").

                   While we have no  occasion or intention to adopt  here a

            per se rule  that expressions of optimism uttered  by corporate
            ___ __

            managers  can never  support a  claim of  securities fraud,  we
                          _____

            think  that  in  this  case,  the  statements  outside  of  the

            registration statement and prospectus identified  by plaintiffs

            as actionably  misleading are  -- with one  exception discussed

            separately below -- by their nature, too patently immaterial to

            support a fraud-on-the-market claim.

                   We agree  with the district  court, for example,  that a

            claim  of securities  fraud  cannot lie  on  the basis  of  the

            statements  made  by  defendant  Steul  (DEC's  chief financial

                                          -56-

            officer)  in January  1994,  in reaction  to the  disappointing

            earnings  results for the quarter just ended.  Steul was quoted

            as saying  that the company's  transition to selling  its Alpha

            chip products was  "going reasonably well" and that the company

            "should show  progress quarter  over quarter, year  over year."

            We  hold  to  be  similarly not  actionable  (because  patently

            immaterial)  Steul's  comment  of  January 19,  1994  that  the

            company  was "basically on  track"; his comment  of January 20,

            1994 that  "DEC was a  very healthy company";  defendant Robert

            Palmer's statement of the same date that he was "confident that

            DEC  was pursuing the right strategy"; and the February 8, 1994

            statement by DEC's head of European operations (not a defendant

            here) that he  was "pretty optimistic"  that the company  would

            "be  able  to stabilize  [its] revenue"  in  the first  half of

            calendar  year 1994 and "start  to grow revenue"  in the second

            half.    These statements  all so  obviously  fail to  pose any

            "substantial  likelihood"  of being  "viewed by  the reasonable

            investor" -- let  alone the market --  "as having significantly

            altered  the total  mix of  information available,"  Basic, 485
                                                                 _____

            U.S.  at 231-32  (quotation  omitted), that  they are  properly

            deemed immaterial as a matter of law.33
                                
            ____________________

            33.  Plaintiffs additionally argue that several forward-looking
            statements   allegedly  made   by  defendants   prior  to   the
                                                            _____
            commencement of  the Class Period (January 19,  1994) gave rise
            to a  "duty to  update," which defendants  purportedly violated
            during  the Class Period.   Plaintiffs point to  a statement by
            Steul  in  October  of   1993  that  the  company's  continuing
            restructuring actions  over the  fiscal year "will  probably be
            smaller  than  the  last   four  quarters";  a  September  1993
            statement that "[s]ervice revenues have continued to grow"; and

                                          -57-

            B.  Importance of Context: the "Break-Even" Statements
            __  __________________________________________________

                   The Shaw plaintiffs allege  that on January 20, February
                       ____

            23,  and March 29,  1994, DEC made  or was  responsible for the

            following statements to the  public, on those respective dates:

            "[w]e are  operating very close to  break-even"; "we're running

            very close to  break-even"; and  "we are very  close to  break-

            even."    Plaintiffs assert  that  given the  magnitude  of the

            losses  actually disclosed to the public on April 15, 1994, the

            "break-even"  statements must  have  been false  when made  and

            constituted actionable fraud.

                   Putting  aside for  the moment  whether plaintiffs  have

            adequately  alleged  that  these  statements  were  made   with

            fraudulent  intent,  the statements,  when  read in  isolation,

                                
            ____________________

            a  statement by defendant Palmer  on November 4,  1993 that the
            prospect of turning a profit  was a "reasonable expectation" in
            fiscal  year  1994.   Whatever  the  circumstances  in which  a
            company  might be  subject  to a  duty to  "update" information
            previously disclosed, we do not think that the pre-Class Period
            statements identified by  plaintiffs are of the kind that could
            trigger  any  such  duty.    The  alleged  statement  regarding
            "service revenues"  constitutes a statement of  historical fact
            not alleged  to be  false, and  as such,  does not  provide the
            basis for a duty to update.  See Serabian, 24 F.3d at 361.  The
                                         ___ ________
            other alleged  statements  are cautiously  optimistic  comments
            that  would not be actionable  in the first  instance.  See San
                                                                    ___ ___
            Leandro, 75 F.3d at 811.  They express, at most, "only the hope
            _______
            of any  company" for a positive  future, and "lack the  sort of
            definite   positive  projections   that  might   require  later
            correction."  In re Time Warner, Inc. Sec. Litig.,  9 F.3d 259,
                          ___________________________________
            267 (2d Cir.  1993), cert. denied, 114 S.  Ct. 1397 (1994); see
                                 _____ ______                           ___
            also  San Leandro,  75 F.3d at  811 (finding no  duty to update
            ____  ___________
            "subdued general  comments" of  optimism).  Moreover,  it seems
            likely  that  any  "duty  to  update"  DEC's  pre-Class  Period
            statements  would  have  been  extinguished  by  the  company's
            disclosure of  financial information  in the  negative earnings
            announcement  of January 19, 1994, the first day of the alleged
            Class Period.

                                          -58-

            provide reason for pause.  The statements cannot accurately  be

            described  as the  kind of  diffuse expressions  of opinion  or

            optimism  that  can  be  deemed,  by  their  nature,  obviously

            immaterial  as  a  matter of  law.    Rather,  they appear,  in

            isolation, to  be statements quantifying  the company's current

            operating inflows as more  or less approximating outflows, thus

            inviting  an  inference  that the  end  results  for the  third

            quarter  might turn  out likewise.   The  rub, however,  is the

            context surrounding the statements.  When evaluated in context,

            the  "break-even" statements  do not  give rise  to a  claim of

            securities fraud.

                   In  deciding a motion to dismiss  a securities action, a

            court may properly consider the relevant entirety of a document

            integral  to or explicitly  relied upon in  the complaint, even

            though not  attached to  the complaint, without  converting the

            motion into one for  summary judgment.  See Watterson  v. Page,
                                                    ___ _________     ____

            987  F.2d  1, 3-4  (1st Cir.  1993)  (explaining that  the main

            problem of looking  to documents outside the  complaint -- lack

            of notice to plaintiff -- is dissipated "[w]here plaintiff  has

            actual  notice . . .  and has  relied upon  these documents  in

            framing  the complaint"  (quoting  Cortec Indus.,  Inc. v.  Sum
                                               ____________________     ___

            Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991), cert. denied, 112
            ____________                                  _____ ______

            S. Ct. 1561  (1992)); see also San Leandro,  75 F.3d at 808-09;
                                  ________ ___________

            Romani,  929  F.2d at  879 n.3.    Were the  rule  otherwise, a
            ______

            plaintiff  could  maintain  a claim  of  fraud  by excising  an

            isolated  statement from a  document and importing  it into the

                                          -59-

            complaint,  even  though  the  surrounding  context  imparts  a

            plainly  non-fraudulent  meaning  to  the   allegedly  wrongful

            statement.  We  look to  the full context  of the  "break-even"

            statements attributed to defendant Steul.34

                   The  first time the "break-even"  statement appeared was

            in a  Boston Herald article headlined "Digital falls short with

            $72.1M  loss," published on January 20, 1994, the day after DEC

            had announced its disappointing earnings results for the second

            quarter  of  fiscal year  1994.    The article  attributed  the

            following statement to Steul:

                   The $72 million loss represents  only 2.2 percent
                   of revenues, Steul said.   "We are operating very
                   close to break-even.  It's a lot of money, but on
                   the other hand it's small compared to what losses
                   have been in the past."  Steul would not say when
                   Digital will again be profitable.  "I hesitate to
                   give  you an  estimate because  we just  have too
                   much  uncertainty   in  the   immediate   future"
                   [paragraph structure omitted].

            It is  plain that Steul's "break-even"  characterization refers

            to  the fact  that  the $72  million  loss that  had just  been

            reported for the  second quarter  of fiscal year  1994 was,  in
                              ______

            fact, only a small percentage of the company's total  revenues.

            The  statement cannot  reasonably be  understood as  a material

            comment on  the current status  or anticipated  results of  the

            company's  third quarter.  Since  plaintiffs do not allege that

                                
            ____________________

            34.  The  full text of the  news articles in  which the "break-
            even"  statements   appeared,  and  which  are   cited  in  the
            complaint,  have  been provided  to  us  in a  jointly-prepared
            appendix.  Plaintiffs have not objected to the district court's
            nor  the defendants' making reference to the full text of those
            articles.

                                          -60-

            the  characterization  of  "close   to  break-even"  placed  an

            actionably fraudulent spin on DEC's second quarter results, the
                                                ______

            statement in that context can be of no moment.

                   The second "break-even" statement appeared in a February

            23, 1994 Wall Street Journal article.  The article's author had
                     ___________________

            obtained  an "internal"  DEC finance  review, and  divulged its

            contents as follows:

                   "We're  running very  close to  break-even,"  the
                   [internal]  review  says,   though  "revenue   is
                   uncertain  for  next  two-plus  quarters."    The
                   review concludes  that Digital "will still  be in
                   turnaround for the  next two  or three  quarters"
                   and that managers  should "focus heavily on  cash
                   conservation."   There is a chance,  it adds, "if
                   we keep at Q2 spending levels, that we can make a
                   profit this  fiscal  year."    While  Mr.  Palmer
                   confirmed many  of these points  in an interview,
                   he wouldn't  make any forecast.  "This is a large
                   organization that  was  in deep  trouble  when  I
                   started,  and   we  still  have  a   way  to  go"
                   [paragraph structure omitted].

            The  context  of the  "break-even"  statement  in the  internal

            review,  as reported,  sufficiently bespeaks caution  to render

            any forward-looking connotation that  could otherwise be  taken

            from the statement immaterial as a matter of law.  Cf. Polin v.
                                                               ___ _____

            Conductron  Corp.,  552  F.2d 797,  806  n.28  (8th  Cir. 1976)
            _________________

            (holding that statement by company that it "saw a 'possibility'

            of a break-even soon" was immaterial as matter of law, since it

            was  phrased so  as  to "bespeak  caution  in outlook"),  cert.
                                                                      _____

            denied, 434  U.S. 857 (1977).  Given  the statements attributed
            ______

            to the internal review that "revenue is uncertain for next two-

            plus quarters"; that "[DEC] will still be in turnaround for the

            next two or three quarters"; that "we still have a  way to go";

                                          -61-

            and  given  Palmer's reported  refusal  to  make any  forecast,

            coupled  with  the  absence  of  any  specifics  regarding  the

            authoritativeness or timeliness  of the  "internal" report,  no

            reasonable  investor  (nor  the  market)  could  have  attached

            importance to  any forward-looking connotation  of the  "break-

            even" statement described in the article.

                   A similar analysis applies to the "break-even" statement

            that appeared in the  March 29, 1994 issue of  Financial World.
                                                           _______________

            In that article, defendant  Steul was quoted as saying  "We are

            very  close to break-even.   If it hadn't  been for currencies,

            and had we been able to ship  everything ordered, we would have

            been in  the black in  the second quarter."   As with  the Wall
                                                                       ____

            Street Journal piece, neither  the Financial World piece itself
            ______________                     _______________

            nor  the  Shaw  complaint  specifies  the  date  on  which  the
                      ____

            statement was  actually made.35   But, again, Rule  9(b) issues

            aside, the "break-even" comment is most naturally understood as

            looking backward to the  second quarter of fiscal 1994,  not to

            the  future.  Furthermore, to the extent that any other meaning

            could be discerned, it is directly negated by other  qualifying

            comments attributed to Steul in the same article, including the

            following:

                   What Digital needs at  this point is time.   Says
                   Steul, "Wall  Street always  wants quick results,
                   but it took a couple of years to get where we are
                   and  it will take more than  a couple of quarters
                   to turn it around."  
                                
            ____________________

            35.  It is  unclear whether  the statement quoted  in Financial
                                                                  _________
            World had been freshly made by Steul, or was recycled from pre-
            _____
            existing sources.  The Shaw complaint does not specify.
                                   ____

                                          -62-

            This warning that favorable results would be slow to come is  a

            far cry from a  "prediction of a break-even year," which is how

            plaintiffs  characterize  Steul's   comments.     Additionally,

            because plaintiffs  allege  that  a fraud  on  the  market  was

            committed   by  statements   communicated  in   this  financial

            analyst's article,  it is only  fair to note that  the tenor of

            the   article  is   one  of   skepticism  about   DEC's  future

            prospects.36  On the  facts as alleged, the district  court did

            not err  in concluding that  the "break-even" statement  in the

            Financial World piece was immaterial as a matter of law.
            _______________

            C.   Actionability under Section 10(b) of Omissions
            __   ______________________________________________
                 and Misleading Statements in the Registration
                 _____________________________________________
                 Statement and Prospectus 
                 ________________________

                   The  remaining statements  and omissions alleged  by the

            Shaw plaintiffs to be fraudulent  under Section 10(b) and  Rule
            ____

            10b-5 relate  to the registration statement  and prospectus for

            DEC's March  1994 stock offering.   These alleged misstatements

            and omissions are identical to those that underlie the Wilensky
                                                                   ________

            plaintiffs'  claims   under  Sections  11  and   12(2)  of  the

            Securities  Act.   We  conclude  that the  Shaw  plaintiffs may
                                                       ____

            pursue their Section 10(b) claim based on these alleged defects

                                
            ____________________

            36.  For  example, the  article quotes  statements by  analysts
            expressing  skepticism  about  DEC's prospects,  and  cautions:
            "Reasonable as [Steul's comments  concerning a turn-around] may
            sound,  recall  that it  was  only last  September  [1993] that
            Steul's boss boasted  that Digital  was on its  way back  after
            three  years and  over 83  billion of  red ink."   We  need not
            decide here whether an allegedly misleading statement appearing
            in one source can be rendered immaterial as a matter of law, at
            the  pleading stage,  by third-party  commentary  in that  or a
            different source.

                                          -63-

            in the registration statement and prospectus.  Because we  hold

            that the  Shaw complaint  survives Rule  12(b)(6) only  to that
                      ____

            extent,  we also  conclude  that the  putative  class on  whose

            behalf  the  Shaw  complaint   was  brought  must  be  narrowed
                         ____

            accordingly.

                   Material  omissions  and   misleading  statements  in  a

            registration statement and prospectus are, in addition to being

            actionable  under  the  Securities  Act by  purchasers  in  the

            offering, also actionable under Section 10(b) and Rule 10b-5 by

            contemporaneous  purchasers  in the  aftermarket,  provided, of

            course, that the additional elements of liability (scienter and

            reliance)  are established.  See  In re Ames  Dept. Stores Inc.
                                         ___  _____________________________

            Stock  Litig., 991  F.2d 953,  963 (2d  Cir. 1993);  Fishman v.
            _____________                                        _______

            Raytheon Mfg. Co.,  188 F.2d  783, 786-87 (2d  Cir. 1951);  cf.
            _________________                                           ___

            Huddleston,  459  U.S.  at   383  ("[I]t  is  hardly  a   novel
            __________

            proposition that the 1934  Act and the 1933 Act  'prohibit some

            of  the same conduct.'" (citation omitted)).  In the context of

            a  fraud-on-the-market  claim,  this  principle  has  a  simple

            rationale.  The registration statement and prospectus speak not

            only to  those who purchase in the  offering, but to the entire

            market.    If an  issuer's  registration  statement contains  a

            misleading  statement of  fact  about  the company's  financial

            condition  or   omits  material  information  required   to  be

            disclosed, the impact of  such statements or omissions, to  the

            extent  material,  would  not  necessarily be  limited  to  the

            securities  covered by the registration statement.  There is no

                                          -64-

            logical  reason that  a registration  statement and  prospectus

            could  not  serve as  a vehicle  for  an alleged  fraud  on the

            market, affecting all of the company's securities.   Thus, even

            though the Shaw plaintiffs purchased shares of DEC common stock
                       ____

            in  the  aftermarket,  not  shares of  preferred  stock  in the

            offering,   their   fraud-on-the-market  claims   may  properly

            encompass  any  material  misstatements  or  omissions  in  the

            registration statement.  See In re Ames, 991 F.2d at 963-64.
                                     ___ __________

                   We hold,  then, that the same  allegations of misleading

            statements and omissions in the Wilensky complaint that state a
                                            ________

            claim under Sections  11 and  12(2) also  form the  basis of  a

            cognizable claim  under Section 10(b)  and Rule  10b-5.37   The

            allegations in  the Wilensky  complaint which we  found lacking
                                ________

            are similarly without force in the Shaw complaint.
                                               ____

            D.  Limitation of the Shaw Class
            __  _________________      _____

                                
            ____________________

            37.  In so  holding, we do not intend to create a private right
            of action under Section  10(b) for violations of any  SEC rule.
            Our  holding is limited to the proposition that, in the context
            of a  public offering, plaintiffs who (through the market) rely
            upon the completeness of a registration statement or prospectus
            may sue under Section  10(b) and Rule 10b-5  for nondisclosures
            of material facts omitted from those documents in  violation of
            the applicable  SEC rules  and regulations.   Cf. Backman,  910
                                                          ___ _______
            F.2d  at 12-13  (suggesting  that SEC  regulations and  insider
            trading  may  create a  duty  to  disclose under  Rule  10b-5);
            Roeder, 814 F.2d at 27 (same).   But cf. In re Wells Fargo,  12
            ______                           _______ _________________
            F.3d at  930 n.6 (declining to  reach the issue).   A different
            rule  would  lead  to the  anomalous  result  of  a Rule  10b-5
            plaintiff being able  to sue an individual  insider selling his
            company's   securities  for   the  nondisclosure   of  material
            nonpublic information,  but not being  able to  sue the  issuer
            itself  for  failing  to   disclose  the  same  information  in
            connection with an offering.

                                          -65-

                   Our conclusion  that the Shaw complaint  states a claim,
                                            ____

            but only to the extent  it is based on the same  statements and

            omissions  that form the basis  of the surviving  claims in the

            Wilensky complaint,  requires  an important  adjustment  to  be
            ________

            made.  The Shaw  plaintiffs allege that they were  injured when
                       ____

            they purchased DEC common stock at prices that were inflated as

            a  result of misleading statements and omissions by DEC and the

            individual  defendants.    The   named  plaintiffs  purport  to

            represent a  class of persons  who purchased DEC  stock between

            January  19  and April  15, 1994.    However, because  the only

            allegations  in the Shaw complaint that state a claim are those
                                ____

            that depend  upon the purported misstatements  and omissions in

            the registration statement  as of its  effective date --  March

            21,  1994 --  it follows  that only  those who  purchased their

            shares on or after  March 21, 1994 (and before  April 15, 1994,
                   ___________

            when   disclosure  occurred)  could  have  suffered  cognizable

            injury.

                   Of the four plaintiffs named in the Shaw complaint, only
                                                       ____

            Gary Phillips is alleged to have made his purchase within those

            two limiting dates; thus only his claim may be reinstated.  The

            district court's  dismissal of the  claims of  the three  other

            named plaintiffs is  affirmed.  On  remand, the district  court

            should require the Shaw plaintiffs to amend  their complaint to
                               ____

            redefine the "Class Period" accordingly.

                                           V.

                                       Rule 9(b)
                                       _________

                                          -66-

                   Defendants argue, as  an alternative basis for affirming

            the  district court's  dismissals, that  both the  Wilensky and
                                                               ________

            Shaw complaints fail to meet the requirement of Fed. R. Civ. P.
            ____

            9(b)  that claims of fraud be pleaded with "particularity."  We

            ask first whether the dictates of Rule 9(b) apply to the claims

            asserted in the Wilensky complaint, and answer in the negative.
                            ________

            We then test the allegations of the Shaw complaint and conclude
                                                ____

            that it satisfies Rule 9(b).

            A.  Whether Rule 9(b) Applies to the Wilensky Complaint
            __  ________________________________          _________

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

            . . ., the  circumstances  constituting fraud  . . .  shall  be

            stated  with  particularity."   Fed.  R.  Civ.  P.  9(b).   The

            threshold question  is whether  the  Wilensky complaint,  which
                                                 ________

            sets forth claims under Sections 11 and 12(2) of the Securities

            Act, contains any "averments of fraud."

                   Fraud is not an element of a claim under either  Section

            11  or 12(2), and a  plaintiff asserting such  claims may avoid

            altogether  any  allegations  of  scienter or  reliance.    See
                                                                        ___

            Shapiro, 964 F.2d  at 288;  Lucia v. Prospect  St. High  Income
            _______                     _____    __________________________

            Portfolio,  Inc., 769 F. Supp. 410, 416 (D. Mass. 1991), aff'd,
            ________________                                         _____

            36  F.3d 170  (1st Cir.  1994).   However, despite  the minimal

            requirements of  Sections 11  and 12(2), a  complaint asserting

            violations  of those statutes may yet "sound[] in fraud."  Haft
                                                                       ____

            v. Eastland  Financial Corp., 755  F. Supp. 1123,  1126 (D.R.I.
               _________________________

            1991).   For  example,  if  a  plaintiff  were  to  attempt  to

            establish  violations of Sections 11  and 12(2) as  well as the

                                          -67-

            anti-fraud provisions  of the Exchange Act  through allegations

            in  a  single  complaint  of a  unified  course  of  fraudulent

            conduct, fraud  might  be said  to "lie[]  at the  core of  the

            action."  Hayduk v.  Lanna, 775 F.2d 441, 443  (1st Cir. 1985).
                      ______     _____

            In  such a case,  the particularity  requirements of  Rule 9(b)

            would  probably apply to the Sections 11, 12(2), and Rule 10b-5

            claims alike.   "It is the allegation of fraud, not the 'title'

            of the claim  that brings the policy concerns  [underlying Rule

            9(b)] . . . to  the forefront."   Haft, 755 F.  Supp. at  1133;
                                              ____

            accord  Shapiro,  964 F.2d  at  287-88 (applying  Rule  9(b) to
            ______  _______

            Section 11 and 12(2) claims "grounded in fraud"); Lucia, 769 F.
                                                              _____

            Supp. at 416-17 (same).

                   As  the  district  court noted,  the  Wilensky complaint
                                                         ________

            avoids  grounding  its  Section  11  and  12(2) claims  on  any

            allegations of  fraud.  Although the complaint does assert that

            defendants actually possessed the  information that they failed

            to disclose, those allegations  cannot be thought to constitute

            "averments  of  fraud,"  absent   any  claim  of  scienter  and

            reliance.    Otherwise,  any  allegation  of  nondisclosure  of

            material information would be transformed into a claim of fraud

            for purposes of  Rule 9(b).  In the circumstances, we hold that

            the  Wilensky  complaint  was   not  subject  to  the  pleading
                 ________

            requirements of Rule 9(b).

            B.  Whether the Shaw Complaint Satisfies Rule 9(b)
            __  ___________      _____________________________

                   The defendants' primary challenge to  the sufficiency of

            the Shaw complaint under  Rule 9(b) is that it  fails to allege
                ____

                                          -68-

            specific facts  that would  permit a reasonable  inference that

            defendants   had  knowledge  of   information  foretelling  the

            financial results  for the third  quarter of  fiscal year  1994

            prior to  the quarter's end.   We limit  our analysis to  those

            allegations in the Shaw complaint that state a cognizable claim
                               ____

            for securities fraud.  The issue is thus whether the plaintiffs

            have  sufficiently pleaded  that  defendants knew  facts as  of

            March  21, 1994 that indicated  the third quarter  was going to

            turn out as it did, and that the company would  soon thereafter

            announce   further   restructuring  actions   necessitating  an

            additional restructuring charge for  the fiscal year.  Although

            the question  is close, we  think that  the complaint  survives

            Rule 9(b) scrutiny.

                   This court  has been  "especially rigorous" in  applying

            Rule 9(b) in securities  fraud actions "to minimize the  chance

            'that  a plaintiff with a largely groundless claim will bring a

            suit  and conduct extensive discovery in the hopes of obtaining

            an  increased settlement,  rather than  in the  hopes that  the

            process will  reveal relevant evidence.'"  Romani,  929 F.2d at
                                                       ______

            878  (quoting New England Data Servs., Inc. v. Becher, 829 F.2d
                          _____________________________    ______

            286,  288  (1st  Cir. 1987)).    We  have  emphasized that  the

            particularity requirement  cannot be avoided "simply  through a

            general  averment that  defendants  'knew'  earlier what  later

            turned out badly."  Greenstone v. Cambex Corp., 975 F.2d 22, 25
                                __________    ____________

            (1st Cir. 1992).   A securities plaintiff cannot  plead "'fraud

            by  hindsight.'"  Id. (quoting  Denny v. Barber,  576 F.2d 465,
                              ___           _____    ______

                                          -69-

            470  (2d Cir.  1978)).   This  means that  a plaintiff  may not

            simply contrast a defendant's past optimism with less favorable

            actual results, and then "contend[] that the difference must be

            attributable  to fraud."  DiLeo v. Ernst & Young, 901 F.2d 624,
                                      _____    _____________

            627 (7th Cir.),  cert. denied,  498 U.S. 941  (1990).   Rather,
                             _____ ______

            Rule  9(b) requires  that the  complaint "set[]  forth specific

            facts that make  it reasonable to  believe that defendant  knew

            that  a   statement  was   materially  false   or  misleading."

            Greenstone,  975  F.2d  at  25  (collecting  cases);  see  also
            __________                                            _________

            Serabian, 24 F.3d at 361 (quoting Greenstone).
            ________                          __________

                   Here,  the complaint cannot  fairly be  characterized as

            resting on conclusory allegations of the defendants' knowledge.

            The plaintiffs provide a series of factual allegations relating

            to  a combination of  developments known to  the company (e.g.,
                                                                      ____

            failing product  pricing strategies,  market resistance  to new

            products, wayward compensation  policies, failure to  implement

            downsizing  plans) that could have provided a basis for advance

            knowledge  of the  information disclosed  on April  15, 1994.38
                                
            ____________________

            38.  In asserting that defendants had direct knowledge of DEC's
            third quarter operating  results as they  developed, plaintiffs
            allege that "[m]ore so  than the management of  most companies,
            DEC's  management,  including  the Individual  Defendants,  was
            virtually   immediately  cognizant   of  the   Company's  sales
            information"  by  virtue of  the  company's use  of  "a highly-
            efficient reporting system which  allows the Company to forward
            sales and  cost information  to senior management  virtually as
            sales are  made."  The defendants argue  that these allegations
            should  be viewed with skepticism and as the product of nothing
            more than  "pure speculation."   Speculation  or not,  we think
            that  the  plaintiffs'   allegations  of  a   "highly-efficient
            reporting  system" may speak to the  question of how defendants
                                                             ___
            might  have known  what they  allegedly  knew, but  absent some
            indication of the specific factual content of any single report
                                               _______

                                          -70-

            These factual  allegations, together with other  aspects of the

            complaint  discussed below,  provide a  basis for  a reasonable

            inference  that defendants  knew facts  by March  21 indicating

            that the  third fiscal  quarter would  be disastrous, and  that

            accelerated   restructuring   efforts   requiring   a   further

            restructuring charge  were likely  to follow.39   Cf. Serabian,
                                                              ___ ________

            24 F.3d at 365; In re Wells Fargo, 12 F.3d at 931.
                            _________________

                   In  additional   support   of   their   allegations   of

            defendants' knowledge,  plaintiffs assert that two  insiders of

            the  company, neither  of whom  is a  defendant here,  sold DEC

            stockholdings  during  the  third  fiscal quarter.    One,  the

            company's treasurer,  sold 1,625  shares (68% of  the officer's

            total holdings) on February  11, 1994.  The other,  the general

            manager and  vice president of the  company's personal computer

            business,  sold 2,000 shares (20% of his position) on March 22,

            1994.

                                
            ____________________

            generated by the alleged reporting system, do not independently
            provide a factual basis  for inferring any such knowledge.   On
            balance, we do not think that generalized allegations regarding
            the existence of  an internal "reporting system"  substantially
            assist a securities fraud complaint in overcoming the hurdle of
            Rule 9(b).   See  Pitten v.  Jacobs, 903  F. Supp.  937, 949-50
                         ___  ______     ______
            (D.S.C.  1995); cf. Arazie v.  Mullane, 2 F.3d  1456, 1467 (7th
                            ___ ______     _______
            Cir. 1993) (refusing to credit "scanty" allegations  concerning
            internal  documents, absent  indication  of  "who prepared  the
            projected  figures,  when  they  were prepared,  how  firm  the
            numbers were, or which . . . officers reviewed them").

            39.  We  reject defendants' argument  that the  complaint fails
            adequately  to  particularize  the   roles  of  the  individual
            defendants  in the purported fraud.   Cf. Serabian,  24 F.3d at
                                                  ___ ________
            367-68.

                                          -71-

                   Of  course,  the  mere  fact  that insider  stock  sales

            occurred does not  suffice to establish scienter.   See Tapogna
                                                                ___ _______

            v.  Egan,  141  F.R.D. 370,  373  (D.  Mass.  1992).   However,
                ____

            allegations  of "insider  trading in  suspicious amounts  or at

            suspicious  times" may permit  an inference that  the trader --

            and  by further  inference, the  company --  possessed material

            nonpublic information at the time.  See Greenstone, 975 F.2d at
                                                ___ __________

            26 (citing  In re Apple Computer,  886 F.2d at 1117);  see also
                        ____________________                       ________

            Rubinstein,  20  F.3d  at 169-70  (characterizing  sufficiently
            __________

            suspicious trading as "presumptively probative of bad faith and

            scienter").   Here,  the level  of suspicion  warranted by  the

            alleged  insider  stock  sales  is  marginal:  the  first  sale

            occurred more than a  month prior to the  date of concern  here

            (March  21, 1994);  and the  second sale,  though made  at what

            might  be  considered a  "suspicious"  time,  involved a  small

            (albeit not  insignificant) percentage  of the  insider's total

            holdings  of  DEC  stock.    Nonetheless,  we  think  that  the

            plaintiffs'  allegations of insider  trading, inasmuch  as they

            are  at least  consistent with their  theory of  fraud, provide

            some support  against the  defendants' motion to  dismiss under

            Rule 9(b).

                   Finally,  in testing  the allegations  of  the complaint

            against Rule 9(b), we need not turn a blind eye to the obvious:

            the  proximity   of  the  date  of   the  allegedly  fraudulent

            statements and omissions to both the end of the quarter then in

            progress  and the date on which disclosure was eventually made.

                                          -72-

            While  the short  time  frame between  an allegedly  fraudulent

            statement or  omission and  a later disclosure  of inconsistent

            information  does  not, standing  alone,  provide  a sufficient

            factual grounding to satisfy  Rule 9(b), see Arazie, 2  F.3d at
                                                     ___ ______

            1467-68,  there   is  nothing  in  Rule   9(b)  that  precludes

            consideration  of  such temporal  proximity  as a  circumstance

            potentially bolstering  the complaint's  claims of fraud.   See
                                                                        ___

            Fecht,  70 F.3d at  1083-84.  On  the facts as  alleged in this
            _____

            case, we think that the proximity of the date of  the allegedly

            misleading statements  and omissions to the end  of the ongoing

            quarter  (and the  date of  eventual disclosure)  provides some

            circumstantial  factual support  to  be taken  into account  in

            determining whether the complaint  pleads an adequate basis for

            inferring defendants' culpable knowledge.

                   We  have no  intention  here of  diluting  the stringent

            mandate of  Rule 9(b).   But in  determining the adequacy  of a

            complaint under  that  rule, we  cannot  hold plaintiffs  to  a

            standard that would effectively require them, pre-discovery, to

            plead evidence.  Rule 9(b) proscribes the pleading of "fraud by

            hindsight," Denny, 576 F.2d at  470, but neither can plaintiffs
                        _____

            be  expected to plead fraud with complete insight.  We conclude

            that  the  portions of  the  Shaw complaint  that  survive Rule
                                         ____

            12(b)(6)  scrutiny also satisfy  the particularity requirements

            of Rule 9(b).

                                          VI.

                                       Conclusion
                                       __________

                                          -73-

                   The district court erred  in dismissing the Wilensky and
                                                               ________

            Shaw complaints in their entirety.  Portions of both complaints
            ____

            survive Rule 12(b)(6), but only to the extent that they allege:
                                       ____

            (i) that  the registration  statement filed in  connection with

            the public  offering  of March  21,  1994, failed  to  disclose

            material information in DEC's  possession as of that date  that

            would have alerted the  market to the likelihood  of disastrous

            quarterly  results;   and  (ii)  that  the   statement  in  the

            prospectus supplement as to the "adequacy" of the restructuring

            reserve  remaining as of March 21, 1994 was materially false or

            misleading.40   We hold,  however, that the  Wilensky complaint
                                                         ________

            fails  to state a claim  under Section 12(2)  of the Securities

            Act as to DEC  and the individual defendants.   Furthermore, in

            light of the limited basis  on which we permit the Shaw  action
                                                               ____

            to  go forward, only the  claims of the  single named plaintiff

            who  purchased  DEC  shares   after  March  21,  1994   may  be

            reinstated,  and  the   allegations  in   the  Shaw   complaint
                                                           ____

            pertaining to the scope of the putative plaintiff class must be

            modified  accordingly.   Finally, the  requirements of  Fed. R.

            Civ.  P. 9(b)  do  not  apply  to  the  Wilensky  complaint  as
                                                    ________

            currently  pleaded,  and  the  surviving portion  of  the  Shaw
                                                                       ____

            complaint  does satisfy  Rule 9(b).   On  remand,  the district
                                
            ____________________

            40.  The district  court did not state  any independent reasons
            for dismissing the Wilensky plaintiffs' derivative claims under
                               ________
            Section 15 of the Securities Act or the Shaw plaintiffs' claims
                                                    ____
            under  Section 20(a)  of the  Exchange Act  and for  common law
            negligent misrepresentation.   Those claims  should, therefore,
            be reinstated and permitted to proceed to the extent consistent
            with this opinion.

                                          -74-

            court  may  choose to  require  the plaintiffs  to  amend their

            complaints in accordance with these conclusions.

                   In  closing,  we  note   that  although  the  issues  of

            materiality and knowledge raised by the two complaints preclude

            terminating this  litigation on  the pleadings, nothing  we say

            here is  intended to foreclose  the possibility that  those and

            other issues,  after discovery  and an opportunity  for factual

            development, might be susceptible  to resolution on motions for

            summary judgment.   To borrow wise words  from one of our prior

            decisions:  "Despite  our conclusion  that  certain allegations

            survive threshold consideration, we note that plaintiffs remain

            a  great distance from actually proving"  any violations of the

            federal securities laws.  Serabian, 24 F.3d at 365-66.
                                      ________

                   Affirmed in  part, reversed in part,  and remanded.   No
                   ________________________________________________________
            costs are awarded.
            __________________

                                          -75-