Glassman v. Computervision Corp., No. 95-2240

• Court: U.S. Court of Appeals — First Circuit
• Writing for the Court: Before LYNCH, Circuit Judge, COFFIN, Senior Circuit Judge, and CUMMINGS; LYNCH
• Citation: 90 F.3d 617
• Parties: Fed. Sec. L. Rep. P 99,278, 35 Fed.R.Serv.3d 1494 Morris I. GLASSMAN, et al., Plaintiffs, Appellants, v. COMPUTERVISION CORPORATION, et al., Defendants, Appellees.
• Decision Date: 31 July 1996
• Docket Number: No. 95-2240

Page 617

90 F.3d 617 Fed. Sec. L. Rep. P 99,278, 35 Fed.R.Serv.3d 1494 Morris I. GLASSMAN, et al., Plaintiffs, Appellants,
v.
COMPUTERVISION CORPORATION, et al., Defendants, Appellees. No. 95-2240. United States Court of Appeals,
First Circuit. July 31, 1996.

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Peter J. Macdonald, Boston, MA, with whom Jeffrey B. Rudman, David E. Marder, S. Tara Miller, Hale and Dorr, Bruce D. Angiolillo, Nicholas Even, Elisabeth Bassin, Simpson Thacher & Bartlett, New York City, Thomas J. Dougherty, Dennis M. Kelleher, and Skadden, Arps, Slate, Meagher & Flom, Boston, MA, were on brief, for defendants-appellees.

Thomas G. Shapiro, Boston, MA, with whom Michelle Blauner, Shapiro Grace Haber & Urmy, Glen DeValerio, Norman Berman, Michael Lange, Berman DeValerio & Pease, Boston, MA, Daniel W. Krasner, Peter C. Harrar, Wolf Haldenstein Adler Freeman & Herz, L.L.P., New York City, I. Stephen Rabin, Joseph P. Garland, and Rabin & Garland, New York City, were on brief, for plaintiffs-appellants.

Before LYNCH, Circuit Judge, COFFIN, Senior Circuit Judge, and CUMMINGS, Circuit Judge. ^*

LYNCH, Circuit Judge.

Computervision Corporation, a Massachusetts high technology company, made an initial public offering ("IPO") of securities on August 14, 1992. Six weeks later, on September 29, 1992, Computervision announced that its revenues and operating results for the third quarter of 1992 would be lower than expected. The prices of Computervision's stock and notes fell sharply. On the day after this announcement, the first investor suit was filed. Computervision and the IPO underwriters were sued under Sections 11 and 12(2) of the Securities Act of 1933 (the "Securities Act"). The investors also sued Computervision's principal officers and directors, alleging controlling person liability under Section 15 of the Securities Act. Plaintiffs asserted that they represented the class of investors who purchased common stock or notes between August 14, 1992 and September 29, 1992. The district court, after lengthy pre-trial proceedings and full discovery, both dismissed the case for failure to state a claim and denied as futile plaintiffs' motion for leave to file a second amended complaint. See In re Computervision Corp. Secs. Litig. ("Computervision II "), 914 F.Supp. 717, 719 (D.Mass.1996).

The investors appeal from the denial of their motion for leave to amend, arguing that their proposed second amended complaint (the "Proposed Complaint") passed the Rule 12(b)(6) threshold. They say the Proposed Complaint adequately alleged violations of the securities laws in that the Prospectus ¹ for the IPO contained actionable misrepresentations, "half-truths" or omissions regarding: (1) the factors considered in determining the prices for the offerings; (2) certain mid-quarter information for the third quarter of 1992; (3) the importance of Computervision's low backlog; (4) the latest release of Computervision's key new software product, CADDS 5, which Computervision said it was

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commercially shipping when (plaintiffs say) it was not; and (5) the development and commercial prospects of CADDS 5.

We affirm, although our reasoning as to the first claim differs from that of the district court.

I.

Background

Computervision is a leading supplier of work station-based computer aided design and computer aided manufacturing ("CAD/CAM") software and related services to the mechanical design automation market. Its software products are utilized in the design of complex parts and assemblies for the automotive, aerospace, and other mechanical industries. Its products enable users to reduce the time required for designing, engineering and manufacturing a product before market introduction. This "time-to-market" is a key factor in ensuring profitability and competitiveness. ²

The company was organized in 1972 under the name Prime Computer, Inc. ³ Until 1988, Prime was in the business of making and selling computer systems. In 1988, Prime acquired Computervision Corporation, a leading supplier of CAD/CAM hardware and software products. In 1989, the company was acquired by DR Holdings, and shifted its focus from computer systems to the CAD/CAM market. A principal shareholder of DR Holdings, Shearson Holdings, ⁴ provided the company with a $500 million bridge loan in connection with the acquisition. That bridge loan was intended to be repaid with the proceeds from a high-yield bond offering. However, that offering never occurred and Computervision instead refinanced the bridge loan with $500 million in notes. In December 1991, interest on the notes was itself converted from cash payments to payments "in kind," i.e., additional notes.

The proceeds from the IPO were intended to repay half the principal amount, of the notes held by Shearson Holdings, with the rest of the debt to Shearson Holdings to be converted to Computervision common stock or written off by Shearson. Both Shearson Holdings and DR Holdings signed "lock-up" agreements, promising not to sell their equity positions in Computervision until a year after the IPO. Plaintiffs posit that Computervision's worsening financial condition ⁵ placed Shearson Holdings' investment in jeopardy by increasing the likelihood that Computervision would default on its debt to Shearson Holdings. Allegedly, the solution was to take the company public and use the proceeds to repay a substantial portion of the debt. Plaintiffs say that defendants believed that if Computervision was not taken public during the summer of 1992, the opportunity for Shearson Holdings to recoup its investment would be lost.

On August 14, 1992, Computervision sold $600 million of securities in a registered IPO. The offering was composed of 25 million shares of common stock at $12 a share (for a total of $300 million); $125 million of 10-7/8% Senior Notes due 1997; and $175 million of 11-3/8% Senior Subordinated Notes due 1999. The Computervision IPO was a firm-commitment underwriting, in which the underwriters purchased the securities from the company and assumed the risk that the market

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would not accept the securities at the price set. See Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1200 n. 1 (1st Cir.1996). Shearson Lehman Brothers, Inc., Donaldson, Lufkin & Jenrette Securities Corp., The First Boston Corp., and Hambrecht & Quist, Inc., were the co-lead underwriters for the domestic offering, representing a syndicate of over forty firms.

On September 29, 1992, six weeks after the offering, Computervision announced that its revenue and operating results for the third quarter of 1992 would be below expectations. Within a day, the stock price fell 30%, to $6.25, and the notes were trading at approximately 8% below face value.

On October 22, 1992, Computervision quantified its results for the third quarter, which ended on September 27, 1992. Computervision had suffered a net loss of roughly $88 million, including a $25 million non-recurring charge occasioned by its decision to lay off more than 11% of its work force.

II.

Description of Actions and Procedural History

On September 30, 1992, one day after Computervision announced that its operating results for the third quarter of 1992 would be lower than expected, plaintiffs filed the first of eighteen separate complaints. In addition to claims under Sections 11, 12(2) and 15 of the Securities Act, plaintiffs asserted a violation of Section 10(b) of the Securities Exchange Act of 1934 and negligent misrepresentation.

The eighteen actions were consolidated into one class action and on June 11, 1993, plaintiffs filed a Corrected Supplemental Consolidated Amended Class Action Complaint (the "1993 Amended Complaint"). ⁶ Among other things, the 1993 Amended Complaint alleged that the Prospectus: (i) distorted Computervision's earning trends; (ii) omitted disclosure of known uncertainties impacting upon Computervision's operating results; (iii) omitted disclosure of the increasing likelihood that Computervision would not meet its internally projected results for 1992; (iv) omitted disclosure of known declines in the demand for Computervision's services and products; and (v) omitted disclosure of software development problems.

On November 23, 1993, the district court heard argument on defendants' motion to dismiss. While the motion was under advisement, discovery commenced. Discovery was extensive. Plaintiffs reviewed more than 130,000 documents and deposed over twenty witnesses. Plaintiffs have represented that, should the case be reinstated, it does not require the reopening of discovery.

On November 22, 1994, the district court issued its decision, dismissing all but a sliver of the claims, primarily on the grounds that they failed to satisfy the requirements of Fed.R.Civ.P. 12(b)(6) and 9(b). See Computervision I, 869 F.Supp. at 64. The district court noted that the Prospectus warned investors of the risks involved and that, with one exception, the alleged misrepresentations were made in a context that adequately "bespoke caution." Id. at 60-61. As to the omissions, the court noted that these, in large part, referred either to information that was effectively disclosed, or to information for which there was no duty to disclose. Id. at 62-63.

On January 20, 1995, plaintiffs served a motion for leave to file a second amended complaint. Defendants served their opposition to that motion on February 24, 1995 and moved for summary judgment on the sole allegation surviving the district court's 1994 decision. ⁷ The parties then entered into a Stipulation of Dismissal, dismissing, with

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prejudice, the surviving claim. The stipulation was to be effective the day after the district court ruled on the motion for leave to amend.

On May 1, 1995, plaintiffs moved for leave to file the Proposed Complaint at issue here. The court heard argument on September 13, 1995, and a week later, on September 20, denied the motion for leave to amend. The basis for the denial...