MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
DARREN J. ROBBINS (168593)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058

BURT & PUCILLO
MICHAEL J. PUCILLO
WENDY H. ZOBERMAN
222 Lakeview Avenue
Suite 300 East
W. Palm Beach, FL 33401
Telephone: 561/835-9400
Attorneys for Plaintiff

Plaintiff, Pramod Kalapa, for his Class Action Complaint (the "Complaint") alleges as follows:

1. This Court has jurisdiction of this action under §27 of the Securities Exchange Act of 1934 (the "Exchange Act") and 28 U.S.C. §§1331 and 1337 by reason of the federal questions alleged herein. This is an action on behalf of investors who purchased the common stock of Rational Software Corporation ("Rational Software" or the "Company") on Wednesday, October 8, 1997, from persons in possession of material, non-public information in violation of §10(b) and §20A of the Exchange Act, as more fully alleged herein.

2. (a) Venue is proper in this judicial district. The acts, conduct and transactions complained of, including the dissemination of material non-public information by defendant Rational Software and defendant Cowen & Company, Inc. ("Cowen") during the course of the trading day on October 8, 1997 (which conduct gave rise to the sale of Rational Software common stock by those persons in possession of material, non-public information) occurred in substantial part in this judicial district.

(b) Assignment of this action to the San Jose Division is appropriate as a substantial part of the events or omissions identified herein occurred in Santa Clara County.

3. In connection with the acts and conduct alleged herein, the defendants directly or indirectly used the means and instrumentalities of interstate commerce, including the United States mails, interstate telephone communications, and the national business wire services.

4. Plaintiff Pramod Kalapa purchased 500 shares of Rational Software common stock on October 8, 1997, prior to the halt in trading at a price of $14.50 per share, and has been damaged thereby.

5. Defendant Rational Software is a Delaware corporation with headquarters at 2800 San Tomas Expressway, Santa Clara, California 95051. Rational Software designs, markets and supports software applications and provides software products and services. Rational Software is a growth oriented, high technology company, the stock price of which is significantly affected by the Company's projected growth in revenue and earnings. The stock of Rational Software has traded as high as $44.25 and as low as $9.37 within the last year, indicating its volatility and sensitivity to adverse adjustments in projected revenues and earnings.

6. Defendant Paul D. Levy ("Levy") was at all material times the Chairman and Chief Executive Officer of the Company. By reason of his position, defendant Levy had the authority and ultimate responsibility for the control of the Company's periodic releases of financial information, including its quarterly results of operations.

7. Defendant Robert T. Bond ("Bond") was at all material times Senior Vice President, Chief Operating Officer, Chief Financial Officer and Secretary to the Company. By reason of his positions, defendant Bond had authority over, and the ability to control, the Company's release of periodic financial information including the Company's quarterly results of operations.

8. Defendant Cowen is a national securities brokerage firm and is a registered broker/dealer, subject to the provisions of the Exchange Act regulating the conduct of registered broker/dealers. Cowen makes a market primarily in technology stocks and has a substantial institutional clientele in the stocks of high technology companies.

9. Rational Software reports its results of operation on a March 31 fiscal year. Thus, as of October 8, 1997, the Company had previously announced earnings of $0.16 per share for only the first quarter of the 1998 fiscal year.

10. Acknowledging its status as a growth oriented company in its first quarter Report on Form 10-Q for the quarter ending June 30, 1997, the Company acknowledged:

Rational has experienced rapid growth, particularly as a result of its acquisitions, and the Company is experiencing a period of aggressive product introductions that have placed, and may continue to place, a significant strain on its financial, operational, management, marketing and sales systems and resources, including its personnel.

11. As of the morning of October 8, 1997, the consensus estimates for third quarter revenue and earnings were approximately $84 million in revenue and $0.17 in projected earnings per share. Fourth quarter consensus estimates were for $90 million in revenue and $0.19 earnings per share. With respect to the 1999 fiscal year (commencing April 1, 1998), consensus estimates were that Rational Software would recognize revenue of approximately $400 million and report earnings per share of approximately $0.85 per share.

12. On the morning of Wednesday, October 8, 1997, Rational Software's common stock opened at $15-1/6 per share, up slightly from the previous day's close. The stock moved to a high of $15-3/8 early on that morning. The common stock price continued to trade at or above $15.00 per share through approximately 10:00 a.m.

13. At 10:22 a.m., two large blocks of 35,000 shares and 31,500 shares traded at $14.75, and a 50,000 share block traded at $14-13/16. At 11:06 a.m., a 100,000 share block traded at $13.50 followed by a 115,000 share block at 11:10 a.m. at a price of $13-3/8. In the next five minutes, blocks of 50,000, 76,900 and 75,000 shares traded at $13.50. At 11:33 a.m., another 50,000 share block traded at $13-3/8. By 11:53 a.m., the stock was in a freefall with heavy selling of large blocks. Between 11:53 a.m. and noon, five blocks of 50,000 shares traded between $12-1/8 and $11-15/16. The heavy selloff continued in the afternoon with 16 blocks of 25,000 shares or more trading, with the last large block of 250,000 shares trading at 2:11 p.m. at $11-7/8. Trading was halted at 2:18 p.m. Eastern Time.

14. Between its opening at approximately 9:30 a.m. Eastern Time and the halt of trading at 2:18 p.m., 11,450,500 shares traded on the NASDAQ exchange, more than five times Rational Software's three-month daily average trading. During this period, there was no news on the Dow Jones or other business news wire services to account for the heavy selloff.

15. At 2:03 p.m. Eastern Time, prior to the halt in trading of Rational Software stock the Dow Jones News Service reported:

Rational Off; Cowen Says Co. Tells Analysts To Lower Views.

16. At 2:42 p.m. Eastern Time, after the halt in trading, Dow Jones News Service released the following:

Rational Software Corp. tumbled 19% Wednesday as the company advised analysts to lower revenue growth expectations for fiscal year ending March 1998 and fiscal 1999, according to Cowen & Co. analyst Rehan Syed.

Syed said Rational management told him that the company is not expecting to see its revenue rise as fast as analysts had estimated on account of "additional competitive pressures."

The company didn't issue exact figures for what it expects revenue growth to be. Rational officials weren't immediately available for comment.

Rational management cited Oracle Corp.'s (ORCL) anticipated entry this year in the visual-modeling software market, one of Rational's core product areas as one of the additional competitive pressures, Syed said.

17. At approximately 3:37 p.m. Eastern Time, the Bloomberg News Service ran a report stating:

Rational Software Corp. fell as much as 19 percent after it warned investors and analysts it expects profit growth to slow in the fiscal year ending March 1999, amid competition from Oracle Corp.

The Bloomberg report did not indicate which analysts or investors had received this warning, but there was no previous warning on the Bloomberg News Service.

18. After the close of trading on October 8, the Company held a conference call with analysts in which defendants Levy and Bond participated. On the conference call, defendant Levy began by indicating that consensus estimates among the analysts' community for the second half of fiscal year 1998 and for fiscal year 1999 were "too aggressive." Levy indicated that for the third quarter ending December 31, 1997, revised revenue estimates would be $82 million to $84 million, and earnings per share for the third quarter would be $0.11 to $0.13 per share. For the fourth quarter ending March 31, 1998, Levy indicated the revised revenue range would be between $87 million and $90 million, and fourth quarter earnings per share would be $0.12 to $0.14, rather than the $0.19 currently projected.

19. Levy's downward adjustment of projected earnings for the 1999 fiscal year were even more significant. He indicated that the Company expected revenues in the $375 to $395 million range rather than the $400 million consensus projection, and earnings per share for 1999 would be adjusted to $0.52 to $0.63 per share, rather than the $0.85 currently projected.

20. The statements attributed to Cowen analyst Rehan Syed in the 2:42 p.m. Eastern Time release, together with the large blocks of stock trading at significantly lower prices demonstrate that management had advised Cowen of its downward adjustments for the second half of the 1998 fiscal year and for the 1999 fiscal year prior to any public release to the investing public at large. This enabled defendant Cowen to permit its customers to sell Rational Software common stock while in possession of material, non-public information regarding the downward adjustments in revenue and earnings, which information was not available to the investing public at large.

21. On October 9, 1997, the day following the downward adjustment in projected revenue and earnings, Rational Software's stock price fell as low as $9.37 per share with over 36 million shares trading. The volume and further price decline on October 9, 1997, confirmed the material nature of the Company's lowering its projected revenue and earnings for the second half of 1998 and the 1999 fiscal year.

22. Plaintiff brings this action, pursuant to Fed. R. Civ. P. 23(a) and (b)(3), on behalf of all similarly situated persons who purchased the common stock of Rational Software on October 8, 1997, prior to the halt of trading at 2:18 p.m. Eastern Time (the "Class"), excluding the defendants named herein, their affiliates and any officers, directors of Rational Software or Cowen.

23. The Class is so numerous that joinder of all members of the Class is impracticable. Over 11,400,000 shares traded on October 8, 1997 in 6,599 securities transactions. Joinder of all of the victims of the insider trading alleged herein would be impracticable.

24. The claims asserted by the plaintiff are typical of the claims of absent Class members. Each member of the Class sustained damages arising out of Rational Software and its senior management's wrongful dissemination of material, non-public information to Cowen prior to the dissemination of that information to the market as a whole, and Cowen's use of that information to benefit its customers. Each member of the Class who purchased the common stock of Rational Software on October 8, 1997, has sustained damages by reason of the wrongful conduct alleged herein.

25. Plaintiff will fairly and adequately protect the interests of the Class. Plaintiff has retained counsel competent and experienced in securities and class action litigation. Plaintiff has no interests which are antagonistic to, or in conflict with, the members of the Class. Indeed, plaintiff's interests are, for purposes of this litigation, coincident of the interests of other Class members.

26. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy. Because the Class is so numerous that joinder of all members is impracticable, and because the damages suffered by most of the individual members of the Class are too small to render prosecution of the claims asserted herein economically feasible on an individual basis, the expense and burden of individual litigation makes its impractical for members of the Class to adequately address the wrongs complained of herein. Plaintiff knows of no impediments to the effective management of this action as a class action.

27. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members. Among the common questions of law and fact in this action are:

(a) Whether Rational Software and defendants Levy and Bond wrongfully disseminated material, non-public information to one or more Cowen analyst prior to the release of that information to the investing public as a whole;

(b) Whether defendant Cowen wrongfully released material, non-public information regarding Rational Software's downward adjustments for the second half of fiscal year 1998 and the 1999 fiscal year to selected clients in order to enable them to profit from trading on material, non-public information that was unavailable to the investment community at large;

(c) Whether the defendants acted knowingly or recklessly in the dissemination of material, non-public information to Cowen and selected customers of Cowen; and

(d) Whether plaintiff and the members of the Class have been damaged by reason of the defendants' unlawful dissemination of material, non-public information to Cowen and selected customers of Cowen which dissemination resulted in transactions in violation of Section 10(b) and 20A of the Exchange Act.

28. Plaintiff realleges each prior allegation as though fully set forth herein.

29. Defendant Rational Software, a reporting company pursuant to §12(g) of the Exchange Act, was, at all times material to the allegations herein, under an obligation to timely release material information regarding its earnings and revenue, and to disseminate such information in an open and public forum to allow the investing public equal access to such material information.

30. Defendants Levy and Bond, by reason of their position as controlling persons of Rational Software, had the ability, and exercised such ability, to control the dissemination of material information regarding Rational Software's business, projected revenues and earnings.

31. Defendant Cowen, was a registered broker/dealer in possession of material, non-public information which it knew was not publicly available and was under a duty to either disclose such information or abstain from trading or further providing such material information to its clients on a selected basis.

32. Each of the defendants named herein engaged in acts, practices and courses of business in connection with the dissemination of material, non-public information regarding 1998 and 1999 revenues and earnings for Rational Software, which acts, practices and courses of business operated as a fraud and deceit upon plaintiff and the members of the Class in violation of SEC Rule 10b-5(3).

33. Defendant Cowen, by reason of its dissemination of material, non-public information to selected clients, employed a device scheme or artifice to defraud the members of the Class who purchased Rational Software stock from Cowen clients while said clients were in possession of material, non-public information regarding Rational Software's 1998 and 1999 revenues and earnings, in violation of SEC Rule 10b-5(1).

34. Defendants Levy and Bond, by reason of their position as controlling persons of a publicly-held company, for themselves and on behalf of Rational Software, acted knowingly and/or recklessly in the dissemination of material, non-public information to Cowen.

35. Defendant Cowen, by reason of its status as a registered broker/dealer pursuant to §15 of the Exchange Act, acted knowingly and/or recklessly in disseminating material, non-public information regarding the 1998 and 1999 projected revenue and earnings for Rational Software to its clients, so as to enable them to sell Rational Software common stock prior to the release of such information to the investing public at large.

36. Plaintiff and the members of the Class have been damaged by reason of the violations of law alleged herein.

37. Plaintiff realleges each prior allegation as though fully set forth herein.

38. This claim is asserted by plaintiff on behalf of the Class pursuant to §20A of the Exchange Act, for the trading on and dissemination of material, non-public information.

39. Plaintiff and the members of the Class purchased Rational Software common stock on national securities exchanges contemporaneous with the sale of Rational Software common stock by clients of Cowen while such clients were in possession of material, non-public information regarding the 1998 and 1999 projected revenue and earnings of Rational Software. Plaintiff and the members of the Class have been damaged by reason of the violations of §20A alleged herein.

40. Defendant Cowen, having obtained material, non-public information from defendant Rational Software, communicated such information to its clients in violation of §20A(c) of the Exchange Act. Further, in its capacity as a broker/dealer, defendant Cowen sold, on behalf of its clients, Rational Software common stock while in possession of material, non-public information regarding 1998 and 1999 projected revenue and earnings of Rational Software, in violation of §20A(a) of the Exchange Act.

41. Defendant Rational Software, acting through its officers and agents, is liable under §20A(c) of the Exchange Act for communicating material, non-public information to defendant Cowen, which in turn communicated to its clients such information, thereby enabling them to trade on such information and damage plaintiff and the Class.

42. Defendants Levy and Bond, by reason of their status as controlling persons pursuant to §20(a) of the Exchange Act, are liable pursuant to §20A(b)(3) of the Exchange Act for Rational Software's violations of the Exchange Act as more fully alleged herein. Further, defendants Levy and Bond are liable pursuant to §20A(c) of the Exchange Act by reason of their communication of material, non-public information to defendant Cowen regarding the 1998 and 1999 projected revenue and earnings of Rational Software.

43. By reason of the violations of §20A of the Exchange Act alleged herein, each defendant herein is jointly and severally liable to plaintiff and the members of the Class for the communication and resulting transactions based on material, non-public information regarding the 1998 and 1999 projected revenue and earnings of Rational Software.

44. This Complaint is pleaded in accordance with the Federal Rules of Civil Procedure under Rule 11. Because the PSLRA, §21D(c) of the Exchange Act [15 U.S.C. §78u-4(c)], requires complaints to be pleaded in conformance with Federal Rule of Civil Procedure 11, plaintiff has alleged the foregoing based upon the investigation of his counsel, which included a review of public filings concerning Rational Software, securities analysts reports and advisories about the Company, pursuant to Rule 11(b)(3), believes that, after reasonable opportunity for discovery, substantial evidentiary support will exist for the allegations set forth in ¶¶2, 12, 20, 24, 32-35, 39-43.

WHEREFORE, plaintiff, on his own behalf and on behalf of the Class, prays for judgment as follows:

1. Declaring this action to be a class action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;

2. Awarding plaintiff and the members of the Class rescissory or compensatory damages in an amount which may be proven at trial, together with interest thereon;

3. Awarding plaintiff and the members of the Class pre-judgment and post-judgment interest, as well as their reasonable attorneys' and experts' witness fees and other costs; and

4. Awarding such other and further relief as this Court may deem just and proper including any extraordinary equitable and/or injunctive relief as permitted by law or equity to attach, impound or otherwise restrict the defendants' assets to assure plaintiff has an effective remedy.

Plaintiff demands a trial by jury.

COMPLNTS\RATIONA2.CPT

Source: Milberg Weiss web site