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Stanford University Law School - Securities Class Action Clearinghouse
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MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
MARK SOLOMON (151949)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
ALISON M. TATTERSALL (149607)
DAVID R. STICKNEY (188574)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
KAPLAN, KILSHEIMER & FOX, LLP
FREDERIC S. FOX
JONATHAN K. LEVINE
ADRIENNE L. VALENCIA
685 Third Avenue, 26th Floor
New York, NY 10017
Telephone: 212/687-1980
Co-Lead Counsel for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
CITY NOMINEES LTD., et al.,
Plaintiffs,
vs.
MACROMEDIA, INC., et al.,
Defendants.
__________________________________________
Lead No. C-97-3521-SC
(Consolidated with
C-97-3546-SC
C-97-4047-SC
C-97-4230-SC)
CLASS ACTION
DATE: April 24, 1998
TIME: 10:00 a.m.
CTRM: The Honorable
Samuel Conti
PLAINTIFFS' NOTICE OF COUNTER-MOTION AND
COUNTER-MOTION TO STRIKE EXHIBITS SUBMITTED IN SUPPORT
OF DEFENDANTS' MOTION TO DISMISS AND IN OPPOSITION
TO DEFENDANTS' REQUEST FOR JUDICIAL NOTICE
I. INTRODUCTION
II. BACKGROUND
III. ON A MOTION TO DISMISS, ALL MATTERS OUTSIDE THE COMPLAINT MUST BE EXCLUDED
A. Defendants' Submission Of Documents To Disprove Scienter Is Improper
B. The SEC Filings Not Alleged In The Complaint And Outside The Class Period Are Not Proper Subjects For Judicial Notice Because Their Accuracy Is In Dispute
C. The Stock Price Histories Are Not Proper Subjects For Judicial Notice And May Not Be Considered
IV. CONCLUSION
TO: ALL PARTIES AND THEIR ATTORNEYS OF RECORD
PLEASE TAKE NOTICE that on Friday, April 24, 1998, at 10:00 a.m., or as soon thereafter as the matter may be heard, in the Courtroom of the Honorable Samuel Conti, United States District Court, Northern District of California, 450 Golden Gate Avenue, San Francisco, plaintiffs will, and hereby do, move the Court to strike Exhibits 1-2, 9-13, 15-17 and 19 to the Declaration of Michael L. Zigler ("Zigler Decl.") and Appendices A, B and C attached to Macromedia's Notice of Motion and Motion to Dismiss and Supporting Memorandum of Points and Authorities ("Macromedia's Motion to Dismiss"), submitted in support thereof and all references thereto. This counter-motion, filed pursuant to Civil L.R. 7-3(c), is based on the accompanying memorandum, the pleadings and papers on file in this action, and such other argument as may be presented at the hearing on the motion.
1. May the Court consider documents outside the Complaint(1) on motions to dismiss?
2. May the Court consider, on motions to dismiss, Securities and Exchange Commission ("SEC") filings offered as evidence to support the truth of the matters asserted in the SEC filings?
Contrary to Ninth Circuit law, defendants ask the Court to take judicial notice of certain documents whose contents are not referenced in the Complaint. Defendants not only ask this Court to review documents that fall outside the Complaint, but to rely on the documents for the truth of the matters asserted therein. These documents and the assertions therein are not proper subjects for judicial notice. As the Ninth Circuit recently recognized in Cooper v. Pickett, No. 95-55657, 1997 U.S. App. LEXIS 39330, at **13-16 (9th Cir. Jan. 30, 1998), defendants' attempt to interpose this extraneous "evidence" to resolve factual disputes is plainly improper. This is especially true where, as here, plaintiffs are stayed from obtaining any discovery.(2) As the consideration of matters outside the Complaint must be excluded on a motion to dismiss, all references to these documents should be stricken.
On February 27, 1998, defendants filed motions to dismiss the Complaint. As "evidentiary" support for their Rule 12(b)(6) motions, defendants filed a Request for Judicial Notice ("Defs' Request") and submitted 19 documents as Exhibits to the Zigler Decl.
Exhibits 1-2, 9-13, 15-17 and 19 to the Zigler Decl. are documents that are not referenced in the Complaint. Several of the documents contain information from outside the Class Period, which runs from April 18, 1996 through January 9, 1997. These documents, as described in Defs' Request, are:
a) Exhibit 1: NASDAQ daily prices for Macromedia, Inc. ("Macromedia") stock for the period December 13, 1993 to August 4, 1997;
b) Exhibit 2: NASDAQ daily prices for Apple Computer Corporation ("Apple") stock for the period December 1, 1995 to August 27, 1997;
c) Exhibit 9: Schedule 14A Information, dated May 3, 1996, with information as of May 2, 1996;
d) Exhibit 10: Schedule 14A Information, dated January 30, 1997, with information as of January 22, 1997;
e) Exhibit 11: Form 4's, Statement of Changes in Beneficial Ownership, filed with the SEC on various dates on behalf of the individual defendants;
f) Exhibit 12: LEXIS' DIALOG INSIDER TRADING MONITOR for the individual defendants as of January 9, 1997;
g) Exhibit 13: Summary of Shares Sold by Macromedia Defendants 2Q95 through 3Q97;
h) Exhibit 15: Purported excerpts from Macromedia's initial public offering Prospectus dated December 13, 1993;
i) Exhibit 16: Purported excerpts from Macromedia's Notice of Special Meeting of Stockholders, dated December 15, 1994;
j) Exhibit 17: Macromedia's Annual Report on Form 10-K for the fiscal year ended March 31, 1997; and
k) Exhibit 19: Macromedia's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1995.(3)
Defendants seek to use these challenged Exhibits for three purposes: (1) to rebut plaintiffs' scienter allegations; (2) to establish that the "truth" about Macromedia's financial fraud was sufficiently disclosed to the market to commence the statute of limitations; and (3) to establish that Macromedia's stock price decline from its Class Period high of $45 per share to just over $9 per share was caused, not by defendants' fraud, but by extrinsic evidence occurring at non-party Apple.(4) Each of these uses is improper. Plaintiffs move to strike these Exhibits and all arguments relying on the Exhibits in defendants' motions to dismiss and supporting papers.
The Ninth Circuit has consistently held that a court may not consider materials beyond the Complaint in deciding a motion to dismiss. Cooper, 1997 U.S. App. LEXIS 39330, at *14; see also Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994); Fecht v. Price Co., 70 F.3d 1078, 1080 n.1 (9th Cir. 1995).(5) A document is outside the complaint if its contents are not alleged in the complaint, or if its authenticity is questioned. See Branch, 14 F.3d at 453-54. Even if judicial notice of matters outside the complaint is appropriate, they may not be considered for the truth of the matter asserted therein. Fecht, 70 F.3d at 1080.
In Cooper, the defendants had submitted "documentary evidence" in the form of transcripts, declarations and internal corporate documents. Cooper, 1997 U.S. App. LEXIS 39330, at *13. The Ninth Circuit noted that the transcripts not only were not cited in the complaint, but that they apparently did not even exist when the complaint was filed. Id. at *15. Nor were the other submitted documents referenced in the complaint. Id. at *16. The Ninth Circuit rejected the submissions and "decline[d] to consider any of the documentary evidence filed with the motion to dismiss." Id. Here, Exhibits 1-2, 9-13, 15-17 and 19 were not cited in the Complaint, and therefore their consideration by this Court on defendants' motions to dismiss is inappropriate.
Defendants submit eight Exhibits in an attempt to rebut plaintiffs' allegations of scienter: (1) excerpts of Macromedia's Proxy Statement, dated May 3, 1996 (Zigler Decl., Ex. 9); (2) excerpts of Macromedia's Proxy Statement, dated January 30, 1997 (Zigler Decl., Ex. 10); (3) Statements of Changes in Beneficial Ownership filed on behalf of the individual defendants (Zigler Decl., Ex. 11); (4) LEXIS' DIALOG INSIDER TRADING MONITOR (Zigler Decl., Ex. 12); (5) Summary of Shares Sold By Macromedia Defendants (Zigler Decl., Ex. 13); and (6) Appendices A-C to Macromedia's Motion to Dismiss. Defendants seek to use these documents to rebut the Complaint's allegations of insider trading. These submissions are improper attempts to dispute factual matters alleged in the Complaint and are not subject to judicial notice.
A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.
Federal Rule of Evidence 201(b).(6) In other words, for a fact to be judicially noticed, "indisputability is a prerequisite." Hennessy v. Penril Datacomm Networks, 69 F.3d 1344, 1354 (7th Cir. 1995). Clearly, that is not the case with defendants' statements offered to prove a fact (lack of scienter) in support of their case. SEC documents may be considered on a motion to dismiss only if not used to prove the truth of their contents but to establish that they were filed. Id.; see Lovelace v. Software Spectrum, 78 F.3d 1015, 1018 (5th Cir. 1996).(7) Thus, while the fact that the forms were filed may be subject to judicial notice, the contents of the forms do not establish their truth. Here, however, defendants seek only to prove the truth of the contents of the forms -- a purpose clearly not permitted on a motion to dismiss.
Decisions that have allowed judicial notice of SEC filings have done so only because the documents noticed were the very documents alleged to contain the misrepresentations at issue, and even then "not to prove the truth of their contents but only to determine what the documents stated." Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991). In Diceon Elecs., Inc. v. Calvary Partners, L.P., 772 F. Supp. 859 (D. Del. 1991), the court noticed the filings only because they were not submitted for their truth.
"The Court should not use judicial notice to generate an evidentiary record and then weigh evidence . . . to dismiss [a] complaint." In re Network Equip. Techs., Inc. Litig., 762 F. Supp. 1359, 1363 (N.D. Cal. 1991). See also In re Sun Microsystems, Inc. Sec. Litig., No. C-89-20351-RPA, 1990 U.S. Dist. LEXIS 18740, at **5-6 (N.D. Cal. Aug. 20, 1990) (court refused to take judicial notice of defendants' SEC filings because to do so would convert motion to dismiss into one for summary judgment); In re Wickes Cos. Sec. Litig., [1982-1983 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,055, at 95,002 (S.D. Cal. 1983) (refusing to take judicial notice of SEC filings in a motion to dismiss).
Here the Court is being asked to use the forms for the "truth" of the matter asserted regarding factual assertions and defendants' ownership and sales of stock. Such a use of materials from without the pleadings is clearly beyond the acceptable parameters of judicial notice.
The SEC filings which are attached as Exhibits 15, 16, 17 and 19 are not pleaded in the Complaint and were created either before or after the Class Period. Therefore, they cannot be considered by this Court because they are not the proper subjects of judicial notice.(8)
Moreover, regardless of whether the Court may judicially notice the SEC filings, they are indisputably hearsay, as they are offered for the truth of the matters asserted in them.(9)
Defendants seek to use the contents of Macromedia's SEC filings to establish that Macromedia's accounts receivable and revenues had increased by same amount during Macromedia's fourth quarter of fiscal year 1996, and that defendants James R. Von Ehr II and Kevin Crowder received their Macromedia stock in January 1995, as a result of the acquisition of their company, Altsys, by Macromedia. The SEC filings are thus offered for the truth of their contents, which plaintiffs have not had the opportunity to verify. If this Court were to use these filings to decide as a matter of law that the defendants lacked scienter, then the Court would be allowing disputed SEC filings to be used as evidence of key issues, including knowledge and intent, thereby accepting defendants' facts when it must be accepting, on a motion to dismiss, the facts as pleaded by plaintiffs.(10)
The price histories proffered by defendants regarding the daily prices for the common stock of Macromedia and Apple, are neither referenced in the Complaint, nor form the basis of the Complaint's allegations. Zigler Decl., Exs. 1-2. These charts are the most egregious example of the defendants' insistence that the Court improperly consider extrinsic evidentiary materials. If the Court takes judicial notice of these documents and their evidentiary material, the Court effectively converts the motions to dismiss into a motion for summary judgment. See, e.g., Cooper, 1997 U.S. App. LEXIS, at **14-16; Sun Microsystems, 1990 U.S. Dist. LEXIS 18740, at **5-6. Moreover, if the Court wishes to consider the additional material and treat the motion as one for summary judgment, then it must give the party opposing the motion -- the plaintiffs -- an opportunity to conduct necessary discovery and to submit responsive evidentiary materials of their own. Bonilla v. Oakland Scavenger Co., 697 F.2d 1297, 1301 (9th Cir. 1982); Portland Retail Druggists Ass'n v. Kaiser Foundation Health Plan, 662 F.2d 641, 645 (9th Cir. 1981). Defendants' cases agree. See, e.g., Kramer, 937 F.2d at 773.
For the foregoing reasons, plaintiffs respectfully request that this Court grant plaintiffs' motion to strike Zigler Decl., Exs. 1-2, 9-13, 15-17 and 19 and Appendices A-C and all references thereto, as well as defendants' arguments relying on these documents in their motions to dismiss and supporting papers.
DATED: March 24, 1998
Respectfully submitted,
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
MARK SOLOMON
______________________________
MARK SOLOMON
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
ALISON M. TATTERSALL
DAVID R. STICKNEY
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
KAPLAN, KILSHEIMER & FOX, LLP
FREDERIC S. FOX
JONATHAN K. LEVINE
ADRIENNE L. VALENCIA
685 Third Avenue, 26th Floor
New York, NY 10017
Telephone: 212/687-1980
Co-Lead Counsel for Plaintiffs
MACROMED\LLS01604.BRF
DECLARATION OF SERVICE
PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2)
I, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Francisco, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 222 Kearny Street, 10th Floor, San Francisco, California 94108.
2. That on March 24, 1998, declarant served the PLAINTIFFS' NOTICE OF COUNTER-MOTION AND COUNTER-MOTION TO STRIKE EXHIBITS SUBMITTED IN SUPPORT OF DEFENDANTS' MOTION TO DISMISS AND IN OPPOSITION TO DEFENDANTS' REQUEST FOR JUDICIAL NOTICE by depositing a true copy thereof in a United States mailbox at San Francisco, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at:
http://securities.milberg.com
3. Declarant also caused a true copy of the above to be served via facsimile on the party denoted on the attached Service List.
4. That there is a regular communication by mail between the place of mailing and the places so addressed.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 24th day of March, 1998, at San Francisco, California.
______________________________
LISA NEWELL
1. The term "Complaint" refers herein to plaintiffs' Consolidated Complaint for Violations of the Federal Securities Laws, filed on February 13, 1998.
2. See §21D(b)(3)(B) of the Securities Exchange Act of 1934 ("Exchange Act") (as added by the Private Securities Litigation Reform Act ("PSLRA") (15 U.S.C. §78u-4(b)(3)(B)) ("[A]ll discovery and other proceedings shall be stayed during the pendency of any motion to dismiss.").
3. Defendants also attached five Appendices to Macromedia's Motion to Dismiss. Three of those Appendices (A-C) relate to the individual defendants' sales of Macromedia stock. The argument for exclusion made with respect to these Appendices is identical to the argument made with respect to Zigler Decl., Exs. 9-13 herein. In fact, Appendix C and Zigler Decl., Ex. 13 are identical. Therefore, plaintiffs will not make a separate argument with respect to the three Appendices but respectfully incorporate by reference their arguments as to the Zigler Decl., Exs. 9-13.
4. Defendants briefly claim that these documents "are referenced in the Complaint and/or . . . form the basis of plaintiffs' allegations," in reference to Zigler Decl., Exs. 7-11, 15-16 and 19, or are "documents relating to plaintiffs' allegations from sources whose accuracy cannot reasonably be questioned." Defs' Request at 1 (in reference to Zigler Decl., Exs. 1-2 and 12). Defendants are wrong. The Court will search the Complaint in vain for any reference to a daily stock price chart for Apple, Zigler Decl., Ex. 2, an unrelated entity, or for Macromedia itself, for that matter. Zigler Decl., Ex. 1. Nor are the two Schedule 14A's referenced in any way in the Complaint. Zigler Decl., Exs. 9-10. Nor is the Form 10-K for the fiscal year ending March 31, 1997, Zigler Decl., Ex. 17, referenced in the Complaint.
5. The PSLRA does not alter the necessary exclusion of any matters outside the pleadings under Rule 12(b)(6). Like the Ninth Circuit precedents on motions to dismiss, under the PSLRA, a district court may "consider any statement cited in the complaint and any cautionary statement accompanying the forward-looking statement, which are not subject to material dispute." 15 U.S.C. §78u-5(e). This language does not authorize consideration of extraneous documents submitted by defendants.
6. Emphasis has been added and citations have been omitted throughout unless otherwise indicated.
7. Liberty Mutual Ins. Co. v. Rotches Pork Packers, Inc., 969 F.2d 1384, 1388-89 (2d Cir. 1992) (district court improperly took judicial notice of filed documents because it used them "to establish facts asserted therein"). State Farm Fire & Casualty Co. v. Westchester Inv. Co., 721 F. Supp. 1165, 1166 (C.D. Cal. 1989) (truth of argument contained in documents not judicially noticeable); United States v. Jones, 29 F.3d 1549, 1553 (11th Cir. 1994) (court may take judicial notice of another court's order only for the limited purpose of "recognizing" either the subject matter of the litigation or the judicial act that the order represents).
8. Plaintiffs presume that by providing documents from outside the Class Period, defendants will not later object to providing discovery from these periods.
9. Hearsay is an out-of-court statement offered to prove the truth of the matter asserted. Fed. R. Evid. 801(c). Unless otherwise excepted, hearsay is not admissible. Fed. R. Evid. 802.
10. See Lovelace, 78 F.3d at 1018 (SEC documents may be considered on a motion to dismiss only if not used to prove the truth of their contents); Liberty Mutual, 969 F.2d at 1388-89 (district court improperly took judicial notice of filed documents because it used them "to establish facts asserted therein"); State Farm, 721 F. Supp. at 1166 (truth of argument contained in documents not judicially noticeable).