WEISS & YOURMAN
KEVIN J. YOURMAN #147159
JORDAN L. LURIE #130013
JAMES E. TULLMAN #175008
10940 Wilshire Blvd, 24th Floor
Los Angeles, California 90024
Phone: (310) 208-2800

JOSEPH D. AMENT
MUCH SHELIST FREED DENENBERG
  AMENT BELL & RUBENSTEIN, P.C.
200 North LaSalle Street, Suite 2100
Chicago, Illinois 60601-1095
Phone: (312) 346-3100

Attorneys for Plaintiffs

Plaintiffs, by their attorneys, for his Class Action Complaint (the "Complaint") allege the following upon personal knowledge as to themselves and their own acts, and upon information and belief based upon the investigation of plaintiffs' attorneys as to all other matters. The investigation includes the thorough review and analysis of public statements, publicly-filed documents of Rational Software, Inc. ("Rational" or the "Company"), press releases, news articles and the review and analysis of accounting rules and related literature. Plaintiffs believe that further substantial evidentiary support will exist for the allegations set forth below after a reasonable opportunity for discovery.

1. This is a securities class action on behalf of public investors who purchased the common stock of Rational during the period of the commencement of trading of Rational Software Securities on the NASDAQ securities market on Wednesday, October 8, 1997 through the sudden announcement of a trading halt in Rational Software securities at 2:18 p.m. EDT on Wednesday, October 8, 1997 (the "Class Period"). Plaintiffs complain of Rational's material dissemination of material inside information regarding Rational's business prospects on a selective and discriminatory basis. Plaintiffs allege on information and belief that Rational provided material inside information to Cowen & Company during the course of the day of October 8, 1997, permitting Cowen to inform its clients to dump shares of Rational prior to full and proper disclosure of such information on a widespread basis to the investing public. Only at approximately 4:39 p.m. EDT did Rational Software disseminate to the investing public what it had already improperly provided to Cowen & Company earlier in the day: in a release via the PR newswire service, Rational stated that "based on the company's current operating plan and anticipated increases in competition, the company believes that revenue growth and EPS for FY99 will be lower than current analyst published estimates."

2. Plaintiffs seek damages from Rational Software and Cowen & Company, Inc. as a result of the conduct alleged herein. The Complaint will be amended to add as defendants the tippees who traded on the information provided by Rational Software to Cowen & Company before the uniform widespread release of the information to the market.

3. Rational, a corporation whose headquarters are in Cupertino, California, develops, markets and supports a comprehensive solution that automates the component-based development of software.

4. This Court has jurisdiction over this action pursuant to Section 27 of the Securities Exchange Act of 1934 (the "1934 Act"), 28 U.S.C. ßß 1331 and 1337. The claims asserted herein arise under, Sections 10(b) and 20(a) of the 1934 Act, 15 U.S.C. ßß78j(b), 78(n), and 78t(a), and Rule 10b-5, 17 C.F.R. ß240.10b-5, promulgated thereunder by the SEC.

5. Venue is proper in this District pursuant to Section 27 of the 1934 Act, 15 U.S.C. ß78aa, and 28 U.S.C. ß1391(b). Many of the defendants reside in this District. Many of the acts giving rise to the violations complained of, including the dissemination of false and misleading public statements and financial information, occurred in this District.

6. In connection with the wrongs alleged herein, defendants used the instrumentalities of interstate commerce, including the United States mails, interstate wire and telephone facilities, and the facilities of the national securities markets.

7. Plaintiffs Seymour Weiner and Shirley Weiner purchased shares of Rational common stock during the Class Period and were damaged thereby, as set forth in the Certification attached hereto.

8. Defendant Rational Software Corporation is a Delaware corporation with headquarters at 18880 Homestead Road, Cupertino, California 95014. Rational develops, markets and supports a comprehensive solution that automates the component-based development of software. These shares are listed and actively traded on the NASDAQ National Market, an efficient system.

9. Defendant Paul D. Levy ("Levy") is and was at all relevant times the Chief Executive Officer of Defendant Rational.

10. Defendant Robert T. Bond ("Bond") is and was at all relevant times the Chief Operating Officer and Chief Financial Officer of Defendant Rational.

11. Defendant Cowen & Company, Inc. ("Cowen") is and was at all relevant times a large institutional securities brokerage firm. Cowen proclaims that it is one of the ten largest institutional market makers in technology stocks.

12. By virtue of their positions as officers and/or directors of the Company, the defendants named in paragraphs 9-10 above (the "Individual Defendants") had the authority and ability to and, in fact, controlled the contents of the Company's annual and quarterly reports filed with the SEC, and press releases. Further, the actions of the Individual Defendants during the Class Period caused the material misstatement of the Company's financial condition and results as alleged herein. The Individual Defendants were aware of the contents of the Company's publicly disseminated reports and press releases alleged herein to be misleading prior to their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected, but failed to do so. Each of the Individual Defendants were signatories to the Registration Statement and some, if not all, of the other filings described herein.

13. Plaintiffs bring this action as a class action pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure, individually and on behalf of all other persons or entities who purchased or acquired Rational during the Class Period and were damaged thereby, excluding the defendants herein, their affiliates and any officers or directors of Rational or its affiliates, and any members of immediate families and their heirs, successors and assigns (the "Class").

14. The Class is so numerous that joinder of all the members of the Class is impracticable. Plaintiffs believe there are hundreds of record holders of the Company's common stock located throughout the United States.

15. Plaintiffs' claims are typical of the claims of absent Class members. Members of the Class have sustained damages arising out of defendants' wrongful conduct in violation of the federal securities laws in the same way as the plaintiffs sustained damages from the unlawful conduct.

16. Plaintiffs will fairly and adequately protect the interests of the Class. They have retained counsel competent and experienced in class and securities litigation.

17. A class action is superior to other available methods for the fair and efficient adjudication of the controversy. The Class is numerous and geographically dispersed. It would be impracticable for each member of the Class to bring a separate action. The individual damages of any member of the Class may be relatively small when measured against the potential costs of bringing this action, and thus make the expense and burden of this litigation unjustifiable for individual actions. In this class action, the Court can determine the rights of all members of the Class with judicial economy. Plaintiffs do not anticipate any difficulty in the management of this suit as a class action.

18. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. These questions include, but are not limited to, the following:

a. whether defendants' conduct as alleged herein violated the federal securities laws;

b. whether the SEC filings, press releases and statements disseminated to the investing public during the Class Period misrepresented Rational's financial condition and results;

c. whether defendants acted knowingly or recklessly in omitting and/or misrepresenting material facts;

d. whether the market price of Rational common stock during the Class Period was artificially inflated; and

e. whether the members of the Class have been damaged, and if so, what is the proper measure of damages.

f. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. To the extent that the Complaint alleges that any forward-looking statements were materially misleading, the defendants made no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements and in fact, defendants had no reasonable basis for their forward looking statements.

19. At approximately 9:28 a.m. EDT, Rational Software Inc. opened for trading on the NASDAQ market. Rational's trading on that day began uneventfully. The inside bid at 9:28 a.m. EDT was 15 1/16 and the inside ask at 9:28 a.m. EDT was 15 1/8. The inside ask on Rational as reflected by NASDAQ's records did not drop below 15 until 9:53 a.m. EDT. As of 10:09 a.m. EDT, the inside ask was still at 15. Between 10:09 a.m. and 10:45 a.m. EDT, the inside ask was lowered to 13 15/16. As of 11:00 a.m. EDT the inside ask had recovered to 14. Between 11:00 a.m. and 11:43 a.m. EDT, the inside ask on Rational declined to reach 12 15/16 at 11:43 a.m. By 11:50 a.m. EDT the inside ask on Rational had declined to 11 15/16.

20. During the foregoing period, there was no news pending on any wire service or Dow Jones or Reuters which gave any explanation for the sudden decline in Rational's securities price. At approximately 12:03 p.m. EDT, Dow Jones reported that Rational Software was down on heavy volume.

21. At 2:03 p.m. EDT Dow Jones reported the following headline:

RATIONAL OFF; COWEN SAYS CO. TELLS ANALYSTS TO LOWER VIEWS

22. Plaintiffs allege, based upon their investigation, that during the course of the day, October 8, 1997, but prior to its widespread public disclosure, Rational provided Cowen with material inside information, including that it had achieved lower than expected earnings.

23. Plaintiffs allege, based upon their investigation, that during the course of the day, October 8, 1997, but prior to Rational's widespread public disclosure of their announcement of lower than expected earnings, Cowen & Company told certain clients, who are not ascertainable at this time, to dump their positions or lighten their positions in Rational.

24. Between approximately 9:28 a.m. EDT and 10:03 a.m. EDT, there were no large block trades in an amount equal to or exceeding 10,000 shares per trade reported on the NASDAQ system. Between 10:03 a.m. EDT and throughout the course of the day, while there was no news pending available to the public market, a substantial number of large block trades were executed. For instance, at 10:22 a.m. EDT, three large block trades consisting of 35,000, 31,500 and 50,000 shares were reported to the NASDAQ system. At 11:06 a.m. EDT, a 100,000 share block was reported to the NASDAQ system. During the minute of 11:08 a.m. EDT, two large block trades were reported to the NASDAQ system. During the minute of 11:09 EDT, seven large block trades were reported to the NASDAQ system. At 11:10 a.m. EDT, a 115,000 share block trade was reported. At 11:13 a.m. EDT, a 76,900 share block trade was reported. At 11:15 a.m. EDT, a 75,000 share block trade was reported to the NASDAQ system. Plaintiffs allege, based on information and belief and reasonable inferences as to the workings of the NASDAQ securities market that certain of these trades were transacted by Cowen clients who were provided non-public inside information by Rational.

25. At 2:18 p.m. EDT, a trading halt was instituted by NASDAQ, presumably at the request of Rational.

26. At 2:42 p.m. EDT, Dow Jones released the following text:

NEW YORK (Dow Jones) -- 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 Rehand 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.

27. At 4:19 p.m. EDT, Dow Jones announced:

Rational is expected to hold a conference call at 4:30 p.m. EDT Wednesday, analysts said.

In addition to the competitive threat from Oracle, Rational faces another challenger in Mercury Interactive Corp. (MERQ) for load-testing software in client/server environments, Deutsche Morgan Grenfell Inc. analyst Wendell H. Laidley said.

In the near-term, Rational also needs to invest more heavily in products targeted for Microsoft Corp.'s (MSFT) Windows NT operating system, Laidley said. Rational has been transitioning its products from the UNIX to the NT platform.

28. During the course of the conference call, Paul D. Levy made the following statements:

Rational Strategy: To focus on software components, to focus on the enterprise customer is right on target. We are now far enough into detailed operational planning for fiscal 1999 that we have sufficient insight to warrant or create the need for providing an update to current published estimates. Now our intent had been to couple this update with the conference call scheduled next wednesday for reviewing September results, however, the Oracle announcement of several weeks ago has led us to accelerate our schedule and conclude that today's special call would present the appropriate forum for discussing revised estimates. The first point that it would like to make is that we have taken the decision inside the company based on a very detailed bottoms up planning process review of our business to make the investments necessary to execute rational strategy to capitalize on the broad market opportunity our components represent. Increasing investment levels in product development, in marketing, in our sales channel will result in a reduction in earnings estimates for the remainder of fiscal 1988 [sic] and fiscal 1999. (emphasis added).

29. Plaintiffs allege that the foregoing information was in substance revealed to Cowen & Company earlier in the day, leading to an insider trading based stock drop, rather than through the appropriate public disclosure. Defendant Rational, Paul D. Levy and Robert T. Bond, recklessly failed to disseminate the foregoing information on a widespread, non-discriminatory basis as required by law.

30. At 4:39 p.m. EDT, the following announcement appeared on the PR Newswire Service:

CUPERTINO, Calif. Oct 8/PR Newswire/ -- Rational Software Corporation (Nasdaq: RATL) will announce its 2Q98 earnings on Wednesday October 15, as scheduled. Revenue for 2Q98 will be in line with current published analysts estimates and the company will report a net loss, as previously announced, that is primarily associated with the acquisition of Pure Atria Corporation. Looking forward to the remainder of FY98, management believes that, while revenue will be generally in line with or slightly below published analysts' estimates, EPS will be somewhat lower due to increased expenses in R&D, sales, and marketing to address the increasingly competitive nature of the markets that the company serves. Based on the company's current operating plan and anticipate increases in competition, the company believes that revenue growth and EPS for FY99 will be lower than current analyst published estimates.

31. At 5:00 p.m. EDT, the Dow Jones Newswire Service announced:

CUPERTINO, Calif. (Dow Jones) -- Rational Software Corp. (RATL) will report a second-quarter loss due to its acquisition of Pure Atria Corp., and revenues for the quarter will match analysts' expectations.

In a press release Wednesday, the company said that for the rest of the fiscal year, revenue will be in line or slightly below analysts' estimates, while earnings will be "somewhat lower" due to increases expenses in research and development, sales and marketing.

Rational Software also expects revenue and earnings in 1999 to miss analysts' expectations.

A First Call consensus of 11 analysts estimated the company would earn 15¢ a share in the second quarter and 55 cents a share in fiscal 1998. For fiscal 1999, a consensus of 10 analysts estimated the company would earn 82 cents a share.

For the year ended March 31, 1997, Rational Software lost 98 cents a share, including charges, on revenues of $145.4 million. In the second quarter, the company earned 13 cents a share on revenues of $28.6 million.

32. According to the Wall Street Journal data, Rational Software Corporation traded 11,405,500 shares on October 8, 1997: the stock price of Rational declined 2 7/8, a decline of 19.4%. Subsequent to the conference call, numerous analysts downgraded Rational stock. On October 9, 1997, Rational Software, according to the Wall Street Journal, traded over 36 million shares and declined by $2, a stock loss of approximately 16%.

33. The market's reaction to the dissemination of Rational's release demonstrates the materiality of the foregoing information. The individual defendants knew or should have known of the anticipated reaction of the market and that the selective dissemination of such information to a market analyst constituted a violation of the federal securities laws. The failure to disclose such information on a timely, non-discriminatory basis constitutes a violation of Rule 10(b)-5 of the Securities laws.

Defendants' Knowing or Reckless Disregard of the False and Misleading Financial Statements

34. Defendants' false representations and material omissions were made with scienter in that: defendants knew or recklessly disregarded that the public documents and statements issued or disseminated by Rational were materially false and misleading as described above; knew or were reckless in not knowing that the false financial results would be issued or disseminated to the investing public; and knowingly and substantially participated in the preparation and/or issuance or dissemination of such statements or documents. The following factors indicate that defendants made the misrepresentations knowingly or with reckless disregard for the truth.

Inapplicability of Statutory Safe Harbor

35. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this complaint. Many of the statements pleaded herein were not specifically identified as "forward-looking statements" when made. To the extent there were any forward looking statements, there were no meaningful cautionary statements identifying the important then-present factors that could and did cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements was made, the particular speaker knew that the particular forward-looking statement was false or misleading, and/or the forward-looking statement was authorized and/or approved by an executive officer of Rational who knew that those statements were false when made.

36. Any warnings contained in the press releases and the financial statements quoted herein were generic statements of the kind of risks that affect any high-tech computer company and misleadingly contained no specific factual disclosure of any of the looming problems with Rational which placed Rational's profitability and growth at risk.

37. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 36 above as if fully set forth herein except for those allegations alleging fraud.

38. At all relevant times, the defendants, individually and in concert, directly and indirectly, by the use and means of instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct whereby they knowingly and/or recklessly made and/or failed to correct public representations which were or had become materially false and misleading regarding Rational's financial results and operations. This continuous course of conduct resulted in the defendants causing Rational to publish public statements which they knew, or were reckless in not knowing, were materially false and misleading, in order to artificially inflate the market price of Rational stock and which operated as a fraud and deceit upon the members of the Class.

39. Defendant Rational is a direct participant in the wrongs complained of herein. The Individual Defendants are liable as direct participants in and as controlling persons of the wrongs complained of herein. By virtue of their positions of control and authority as officers and directors of Rational, the Individual Defendants were able to and did, directly or indirectly, control the content of the aforesaid statements relating to the Company, and/or the failure to correct those statements in timely fashion once they knew or were reckless in not knowing that those statements were no longer true or accurate. The Individual Defendants caused or controlled the preparation and/or issuance of public statements and the failure to correct such public statements containing misstatements and omissions of material facts as alleged herein.

40. The Individual Defendants had actual knowledge of the facts making the material statements false and misleading, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though same were available to them.

41. In ignorance of the adverse facts concerning Rational's business operations and earnings, and in reliance on the integrity of the market, plaintiffs and the members of the Class acquired Rational common stock at artificially inflated prices and were damaged thereby.

42. Had plaintiffs and the members of the Class known of the materially adverse information not disclosed by the defendants, they would not have purchased Rational common stock at all or not at the inflated prices paid.

43. By virtue of the foregoing, defendants have violated Section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder.

44. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 43 above as if fully set forth herein except for those alleging fraud.

45. This count is asserted against the all defendants and is based upon Section 20A of the 1934 Act.

46. Defendant Rational, through its officers, and Defendant Cowen, through its analyst, disseminated material non-public information to individuals who sold shares in the possession of such information, and are liable, jointly and severally, for the losses avoided by the tippees who utilized such information.

47. By virtue of the conduct alleged herein, the Individual Defendants are liable for the aforesaid wrongful conduct and are liable to plaintiffs and the Class for damages suffered.

WHEREFORE, plaintiffs demand judgment:

1. Determining that the instant action is a proper class action maintainable under Rule 23 of the Federal Rules of Civil Procedure;

2. Awarding compensatory damages and/or rescission as appropriate against defendants, in favor of plaintiffs and all members of the Class for damages sustained as a result of defendants' wrongdoing;

3. Awarding plaintiffs and members of the Class the costs and disbursements of this suit, including reasonable attorneys', accountants' and experts' fees; and

4. Awarding such other and further relief as the Court may deem just and proper.

Plaintiffs hereby demand a trial by jury.

Source: File emailed from Weiss & Yourman