Diamond Multimedia Systems, Inc. - CASE #: 96-CV-2644 - MEMORANDUM IN SUPPORT OF DEFENDANT CHONG-MOON LEE'S MOTION TO DISMISS

Stanford University Law School - Securities Class Action Clearinghouse

PILLSBURY MADISON & SUTRO LLP
WALTER J. ROBINSON III #40632
MORGAN R. SMOCK #148212
225 Bush Street
Post Office Box 7880
San Francisco, CA 94120-7880
Telephone: (415) 983-1000

Attorneys for Defendant
CHONG-MOON LEE

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

OAKLAND DIVISION

_________________________________________
In re DIAMOND MULTIMEDIA SYSTEMS,
INC. SECURITIES LITIGATION
_________________________________________
This Document Relates to:
ALL ACTIONS.
_________________________________________

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No. C 96-2644-SBA

Date: May 6, 1997
Time: 2:00 p.m.
Before The Honorable Saundra
Brown Armstrong

REPLY MEMORANDUM IN SUPPORT OF DEFENDANT CHONG-MOON LEE'S MOTION TO DISMISS THE AMENDED CONSOLIDATED CLASS ACTION COMPLAINT

INTRODUCTION AND SUMMARY OF ARGUMENT
THE COMPLAINT DOES NOT PLEAD MR. LEE'S PARTICIPATION IN THE ALLEGED FRAUD WITH ADEQUATE PARTICULARITY

Plaintiffs new and unpled "disclose or abstain" claim fails under controlling Ninth Circuit law
Plaintiffs completely ignore the numerous cases rejecting their boilerplate allegation of Mr. Lee's "knowledge of adverse information"
Plaintiffs make no allegations showing a "special relationship" between Mr. Lee and the allegedly false statements
Plaintiffs fail to discuss the numerous Northern District decisions rejecting an inference of participation in fraud based on a director signing an SEC filing

PLAINTIFFS CITE NO CASE HOLDING OR SUGGESTING THAT A SALE OF ONLY 5% OF A DEFENDANT'S STOCK RAISES A "STRONG INFERENCE" OF SCIENTER
PLAINTIFFS CITE NO PRECEDENT FOR DEEMING A DEFENDANT SUCH AS MR. LEE A "CONTROLLING PERSON," AND FAIL TO DISCUSS MR. LEE'S ON-POINT AUTHORITIES
CONCLUSION

TABLE OF AUTHORITIES

Cases

Anderson v. Clow (In re Stac Electronics

Securities Litigation), Fed. Sec. L. Rep.
(CCH) [1994-95 Transfer Binder] ¶ 98,367
(N.D. Cal. 1994)

Blake v. Dierdorff, 865 F.2d 1365 (9th Cir. 1988)

Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 1989)

Fecht v. Price Co., 70 F.3d 1078 (9th Cir. 1995)

Haltman v. Aura Systems, Inc.,
844 F. Supp. 544 (C.D. Cal. 1993)

In re Glenfed, Inc. Securities Litigation,
60 F.3d 591 (9th Cir. 1995)

In re Gupta Corp. Securities Litigation,
Fed. Sec. L. Rep. (CCH) [1995 Transfer Binder]
¶ 98,612 (N.D. Cal. 1995)

In re Gupta Corp. Securities Litigation,
Fed. Sec. L. Rep. (CCH) [1995 Transfer Binder]
¶ 98,689 (N.D. Cal. 1995)

In re Interactive Network, Inc. Securities Litigation,
948 F. Supp. 917 (N.D. Cal. 1996)

In re Rasterops Corp. Securities Litigation,
Fed. Sec. L. Rep. (CCH) [1994-95 Transfer Binder]
¶ 98,467 (N.D. Cal. 1994)

In re Ross Systems Securities Litigation,
Fed. Sec. L. Rep. (CCH) [1994-95 Transfer Binder]
¶ 98,363 (N.D. Cal. 1994)

In re Silicon Graphics Securities Litigation,
Fed. Sec. L. Rep. (CCH) [1996-97 Transfer
Binder] ¶ 99,325 (N.D. Cal. Sept. 25, 1996)

In re Stac Electronics Securities Litigation,
89 F.3d 1399 (9th Cir. 1996)

In re Syntex Corp. Securities Litigation,
855 F. Supp. 1086 (N.D. Cal. 1994)

In re Valence Technology Securities Litigation,
1996 WL 225010 (N.D. Cal. Apr. 30, 1996)

In re Worlds of Wonder Securities Litigation,
35 F.3d 1407 (9th Cir. 1994)

In re Xoma Corp. Securities Litigation,
Fed. Sec. L. Rep. (CCH) [1991-92 Transfer Binder]
¶ 96,491 (N.D. Cal. 1991)

Kaplan v. Rose, 49 F.3d 1363 (9th Cir. 1994)

Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir. 1973)

Lilley v. Charren,
936 F. Supp. 708 (N.D. Cal. 1996)

Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993)

O'Sullivan v. Trident Microsystems, Inc.,
Fed. Sec. L. Rep. (CCH) [1993-94 Transfer Binder]
¶ 98,116, at p. 98,913 (N.D. Cal. 1994)

Picard Chemical Inc. Profit Sharing Plan v. Perrigo Co.,
940 F. Supp. 1101 (W.D. Mich. 1996)

Provenz v. Miller, 102 F.3d 1478 (9th Cir. 1996)

Robbins v. Hometown Buffet, Inc.,
1995 WL 908194 (S.D.Cal. 1995)

Stack v. Lobo,
903 F. Supp. 1361 (N.D. Cal. 1995)

Strasssman v. Fresh Choice, Inc.,
1995 WL 743728 (N.D. Cal. 1995)

Travelers Ins. Co. v. Lewis,
756 F.Supp. 172 (S.D.N.Y. 1991)

Wool v. Tandem Computers Inc.,
818 F.2d 1433 (9th Cir. 1987)

Constitutions

Statutes and Codes

Corporations Code

Section 309(b)

Delaware Journal of Corporation Law
Section 141(e)

United States Code
Title 15 section 78t-1
Title 15 section 78u-4(b)(2)

Rules and Regulations

Other Authorities

Defendant CHONG-MOON LEE hereby replies to plaintiffs' Opposition to Mr. Lee's motion to dismiss ("Opp.").¹

I. INTRODUCTION AND SUMMARY OF ARGUMENT.

Plaintiffs' Opposition shares the failings that permeate their Complaint; it fails to treat Mr. Lee as an individual. Plaintiffs begin by promising to "avoid duplication" of their arguments against other defendants (Opp. 1 n.1), then proceed to fill half their twenty-five page Opposition with a duplicate of their Diamond Opposition's narration of the floor debates surrounding the Reform Act's "strong inference" standard for pleading scienter. How this saves their claim against Mr. Lee is unexplained. Whether pre-Act or post-Act, the best "scienter" cases plaintiffs could find involved officer defendants selling large percentages of their personal holdings at suspicious times of their own making and choosing. Part III, infra. Here, the sales attributed to Mr. Lee were only 5% of the shares held by himself and the Lee charitable trusts, were made by the trusts, and were made at the outset of the class period in a secondary offering (and thus at a time determined by Diamond). Plaintiffs simply ignore the pertinent cases discussed by Mr. Lee, and even their own cases show they fail to allege facts raising a "strong inference" of Mr. Lee's scienter.

Indeed, on virtually all issues plaintiffs' Opposition in wholesale fashion ignores the pertinent authorities from this Circuit. Plaintiffs argue that Mr. Lee is liable to them and to the purported class under a "disclose or abstain theory" which the Ninth Circuit definitively rejected in 1993. Part II.A, infra. Mr. Lee's opening brief showed that this District has repeatedly deemed inadequate plaintiff's boilerplate allegation that he "knew" material adverse information "by virtue of" his boardroom titles; plaintiffs simply refuse to discuss these cases and continue to cite this allegation as gospel. Part II.B, infra. Mr. Lee showed that the Ninth Circuit has now clarified that his board status at Diamond raises no inference of his "operational involvement," approving a specific line of cases from this District; plaintiffs ignore this development and attempt to revert to the older state of the law. Part II.C, infra. Plaintiffs' argument that Mr. Lee had a "special relationship" with Diamond is clearly wrong once one proceeds beyond the catchphrase and examines the actual "special relationship" cases. "Special relationship" means a non-officer relationship involving drafting of the particular statements at issue. Id. Mr. Lee cited the repeated decisions from this District that his signature as director on an SEC filing raises no inference that he drafted it or had knowledge of any alleged misstatements therein; again, plaintiffs refuse to even address this law, and cite nothing from this Circuit to the contrary. Part II.D, infra.

Finally, plaintiffs simply assert that a 10% shareholder and director is a "controlling person" even when their Complaint shows he lost his former management positions and became a "consultant" after outside venture capitalists acquired a 45% stake. Once again, plaintiffs choose to not even discuss the on-point authorities cited by Mr. Lee. Part IV, infra.

II. THE COMPLAINT DOES NOT PLEAD MR. LEE'S PARTICIPATION IN THE ALLEGED FRAUD WITH ADEQUATE PARTICULARITY.

A. Plaintiffs new and unpled "disclose or abstain" claim fails under controlling Ninth Circuit law.

Much of plaintiffs' brief against Mr. Lee consists of a claim nowhere pled in their Complaint: "Lee is liable for violating § 10(b) under the disclose-or-abstain doctrine, whereby corporate insiders who know material adverse non-public information about the corporation's business may not sell their stock without disclosing that information." Opp. 1:9-11 (plaintiffs' emphasis). Plaintiff argues that Mr. Lee is liable to them for his "failure to speak" because he sold stock allegedly while possessing material nonpublic information. Opp. 5:3-6:2, 8:19-9:5 (plaintiffs' emphasis).

Plaintiffs' belated claim cannot rescue their Complaint. First, they plead not a single fact to establish that Mr. Lee possessed any nonpublic material information at the time of the sales attributed to him (November 27, 1995 and December 5, 1995). See Part II.B, infra. Second, even if plaintiffs did plead such facts, they ignore the Ninth Circuit's decision in Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993). "[We] hold that the scope of liability for insider trading claims under section 10(b) and Rule 10b-5 is confined to persons who traded contemporaneously with the insider." Id. at 670; see also 15 U.S.C. § 78t-1 (1988) (creating private civil remedy based on "contemporaneous" insider trading). "Contemporaneously" means within "a few days" Neubronner at 670 (emphasis added); see also In re Silicon Graphics Securities Litigation, Fed. Sec. L. Rep. (CCH) [1996-97 Transfer Binder] ¶ 99,325, at p. 95,964 (N.D.Cal. 1996) (only trades within three business days are "contemporaneous").

Thus, even assuming arguendo that plaintiffs could adequately allege knowledge of inside information and scienter when Mr. Lee allegedly sold, the notion that he could thereby be liable to the purported months-long class of plaintiffs is simply wrong. Furthermore, not one of the representative plaintiffs can even state an individual insider-trading claim against Mr. Lee; all of these plaintiffs traded later, and the closest purchase is thirteen days after Mr. Lee. Compl. ¶¶ 25, 26(b). As another court held in rejecting a similar argument:

[P]laintiff argues that the complaint alleges that the defendants sold stock while failing to disclose material information, and that this adequately alleges their direct participation. This is known as the "abstain or disclose" doctrine. . . . However, this doctrine is applicable only to a claim of insider trading which is not alleged in this case.
Claims of insider trading require, among other things, that the complaint specifically allege exact dates of contemporaneous trading as-to [sic] defendants and plaintiffs. [Neubronner.] There are no such allegations of contemporaneous trading in the complaint. This action obviously does not proceed under an insider trading theory. Plaintiffs may not invoke a doctrine to establish the defendants participation in the fraud when that doctrine is inapplicable to the claims asserted in this case.

Robbins v. Hometown Buffet, Inc., 1995 WL 908194 (S.D.Cal. 1995). ²

B. Plaintiffs completely ignore the numerous cases rejecting their boilerplate allegation of Mr. Lee's "knowledge of adverse information".

Whether plaintiff claims Mr. Lee violated Section 10(b) through silence under their new theory ("disclose or abstain") or under the Complaint's theory that Mr. Lee is liable for the actual statements allegedly made, plaintiffs must adequately allege that Mr. Lee knew the alleged material, adverse, undisclosed insider information allegedly known to Diamond's officers. Plaintiffs' Opposition erroneously states that their Complaint alleges that "Lee and other defendants disseminated . . . positive statements to the market" with knowledge of their falsity. Opp. 1:24-2:2. But the Complaint contains not a single such factual allegation.

Instead, paragraph 26(b) of the Complaint simply asserts Mr. Lee had such knowledge "by virtue of" his boardroom titles. As Mr. Lee showed in his opening brief, Glenfed II together with the cases from this District that it expressly approved, as well as the later cases following Glenfed II, deem this plaintiffs' shibboleth inadequate. Mem. 5:14-27 (discussing In re Glenfed, Inc. Securities Litigation, 60 F.3d 591 (9th Cir. 1995); In re Interactive Network, Inc. Securities Litigation, 948 F. Supp. 917, 920-21 (N.D. Cal. 1996); In re Syntex Corp. Securities Litigation, 855 F. Supp. 1086, 1100 (N.D. Cal. 1994); In re Ross Systems Securities Litigation, Fed. Sec. L. Rep. (CCH) [1994-95 Transfer Binder] ¶ 98,363, at p. 90,496 (N.D. Cal. 1994); In re Rasterops Corp. Securities Litigation, Fed. Sec. L. Rep. (CCH) [1994-95 Transfer Binder] ¶ 98,467, at p. 91,194 (N.D. Cal. 1994).) Plaintiffs' Opposition discusses none of these holdings. They simply continue to cite paragraph 26(b) as the allegation showing that Mr. Lee "knew" adverse information, ³ as if Interactive Network, Syntex, Ross and Rasterops had never been decided. Opp. 4:8-12. ⁴

C. Plaintiffs make no allegations showing a "special relationship" between Mr. Lee and the allegedly false statements.

Likewise, plaintiffs simply ignore the several holdings, approved by Glenfed II, that their generic allegations of participation in drafting all statements are inadequate to place director Lee within the "group-published information" doctrine. Mem. 4:23-5:13 (discussing Glenfed II; In re Gupta Corp. Securities Litigation, Fed. Sec. L. Rep. (CCH) [1995 Transfer Binder] ¶ 98,689, at p. 92,227 (N.D. Cal. 1995); Ross at p. 90,496; O'Sullivan v. Trident Microsystems, Inc., Fed. Sec. L. Rep. (CCH) [1993-94 Transfer Binder] ¶ 98,116, at p. 98,913 (N.D. Cal. 1994); Haltman v. Aura Systems, Inc., 844 F. Supp. 544, 549 (C.D. Cal. 1993)). Once again, plaintiffs simply fail to address these adverse holdings.

Instead, plaintiffs rely on pre-Glenfed II authority--Blake v. Dierdorff, 865 F.2d 1365 (9th Cir. 1988)--for the proposition that all "directors" automatically fall within the group-publishing doctrine. Opp. 10:14-18. Glenfed II has now clarified that Blake involved "a small board of directors" and does not apply to "outside directors" absent additional factual allegations showing each such director's "operational involvement." Other recent holdings cited by Mr. Lee and ignored by plaintiffs reinforce the Glenfed II rule that plaintiffs' Complaint must be dismissed if it does not allege facts showing Mr. Lee's "operational involvement." Mem. 4:6-22 (discussing Stac Electronics, 89 F.3d at 1411; Lilley v. Charren, 936 F. Supp. 708, 716 (N.D. Cal. 1996)).

Plaintiffs try to salvage their "group-published information" theory against Mr. Lee by repeatedly asserting that Mr. Lee's positions as director and "consultant," combined with his former leadership positions show a present "special relationship" of the type mentioned by Glenfed II. Opp. 11:11-12:11; see Glenfed II at 593. This "special relationship" concept recognizes that "day-to-day involvement" was the standard underlying the seminal "group-published information" decision of Wool v. Tandem Computers Inc., 818 F.2d 1433, 1435 (9th Cir. 1987). As the cases explain, a "special relationship" means a non-officer relationship which by its nature suggests the defendant actually had "operational involvement" in drafting the particular statements at issue. See, e.g., Strassman v. Fresh Choice, Inc., 1995 WL 743728, at *13-*14 (N.D. Cal. 1995) (no "special relationship" absent such involvement); Rasterops, at p. 91,194 ("special relationship" exception satisfied only by allegations showing participation in drafting); Syntex at 1100 (allegations showing "boardroom titles, not operational involvement" were insufficient to show "special relationship").

Thus Glenfed II refers to "a special relationship, such as participation in preparing or communicating group information at particular times," citing to Syntex and Rasterops on this point, and sums up its holding as requiring a showing of "operational involvement." Glenfed II at 593. Subsequent cases following Glenfed II apply the "special relationship" concept as part of the "operational involvement" standard, not as an alternative standard. Lilley at 716; see also Picard Chemical Inc. Profit Sharing Plan v. Perrigo Co., 940 F. Supp. 1101, 1127 (W.D. Mich. 1996) (applying Glenfed II; dismissing director where complaint did not show "a special relationship with [the company] involving the group published documents"). Contrary to plaintiffs' brief, the "special relationship" doctrine is not an empty catchphrase that frees plaintiffs from pleading facts showing "operational involvement"; it simply recognizes that some non-officers can undertake operational involvement as to particular statements. Plaintiffs cite cases dismissing outside directors which note a "special relationship" was not adequately alleged (Opp. 11:15-12:1); what they fail to supply is any case establishing that their Complaint does allege facts showing a "special relationship" with operational involvement.

The relationship which the Complaint shows between Mr. Lee and Diamond is that of a former CEO who, long before the class period, retired from his management position and took "consultant" status following the Venture Capital Investors' acquisition of a 45% stake. As founder, Mr. Lee was permitted to retain his boardroom title of "chairman." Compl. ¶¶ 2-3, 26(b). As Mr. Lee has shown, this changing-of-the-guard scenario is familiar to the corporate case law and is only suggestive of Mr. Lee's loss of involvement in day-to-day management. Mem. 6:1-14, 9:20-10:2. Plaintiffs seem enthralled by the fact that Mr. Lee is Diamond's "founder," but nowhere cite authority explaining why the fact that Mr. Lee founded Diamond in 1973 means he had operational involvement in the multimillion dollar, public company that was Diamond during late 1995 and 1996. Compl. ¶¶ 2-3. Apart from simply repeating "special relationship" as a catchphrase, plaintiffs offer only their speculation that Mr. Lee's alleged position on the board's Compensation Committee "must have involved frequent consideration of Diamond's stock as a form of compensation." Opp. 11:21-12:1. Yet no misstatements about the company's compensation programs are alleged, and in any case alleging a director's "various committee assignments" raises no inference that the director was involved in the alleged fraudulent scheme, as a matter of law. Glenfed II at 593.

D. Plaintiffs fail to discuss the numerous Northern District decisions rejecting an inference of participation in fraud based on a director signing an SEC filing.

Plaintiffs allege that Mr. Lee signed two SEC filings. Plaintiffs then erroneously argue that a director's signature raises an inference that he drafted or researched the document's allegedly misleading statements, as opposed to relying on the assurances of the managers preparing them, as he was entitled to do. ⁵ As Mr. Lee explained in his opening brief, decisions in this District repeatedly reject plaintiffs' argument as a matter of law. Mem. 6:15-25 (discussing In re Valence Technology Securities Litigation, 1996 WL 225010, at *3, n.4 (N.D. Cal. Apr. 30, 1996); Stack v. Lobo, 903 F. Supp. 1361, 1376 (N.D. Cal. 1995); In re Gupta Corp. Securities Litigation, Fed. Sec. L. Rep. (CCH) [1995 Transfer Binder] ¶ 98,612, at p. 91,782 (N.D. Cal. 1995); Ross at p. 90,496; In re Xoma Corp. Securities Litigation, Fed. Sec. L. Rep. (CCH) [1991-92 Transfer Binder] ¶ 96,491, at p. 92,160-61 (N.D. Cal. 1991)). When plaintiffs assert that Mr. Lee's signature is "circumstantial evidence of intentional and/or reckless conduct" (Opp. 9:17-10:3) or suggests knowledge of participation in fraud (Opp. 6:21-7:5), they simply ignore the established law of this District. ⁶

Plaintiffs' plaint that "his signature must mean something" presents a false dilemma. Opp. 9:17 (plaintiffs' emphasis). The precedents of this District do not say a director's signature means nothing; they merely hold that it cannot be used, as plaintiffs here attempt, to bootstrap an inference that the director was personally familiar with the details of all matters discussed in the document, or to bypass the requirement of adequately pleading fraudulent scienter as to that statement. A director's signature on a company document means he represents that he signed it in good-faith reliance on the management and without fraudulent scienter.

III. PLAINTIFFS CITE NO CASE HOLDING OR SUGGESTING THAT A SALE OF ONLY 5% OF A DEFENDANT'S STOCK RAISES A "STRONG INFERENCE" OF SCIENTER

As Mr. Lee showed in his opening brief, in addition to passing the 9(b) threshold of pleading with particularity the circumstances constituting fraud by Mr. Lee, under the Reform Act the complaint additionally must "with respect to each act or omission alleged to violate [Section 10(b)], state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Plaintiffs and the Diamond Defendants debate whether the Reform Act increased the "required state of mind" and whether a "strong inference" may be raised through "motive and opportunity" pleading, and half of plaintiffs' Opposition against Mr. Lee duplicates their Diamond Opposition's blow-by-blow narrative of the Congressional floor debates surrounding the Reform Act. Opp. 14-25. But plaintiffs fail to explain how this issue can salvage their allegations against Mr. Lee. Under any standard of scienter the allegations are inadequate. Indeed, even the best pre-Act cases that plaintiffs can come up with against Mr. Lee all involved officer defendants selling large percentages of their stock, and confirm that the Complaint against Mr. Lee is inadequate.

Putting aside the Opposition's multi-page narration of the Reform Act's journey through Congress, plaintiffs make only one attempt to explain why their allegation that Mr. Lee sold an unspecified percentage of his "beneficially owned" stock in 1995 is adequate to plead scienter: "The patterns of insider stock sales held sufficient to prove fraud in Provenz, Kaplan and Fecht are similar to Lee's insider sales in this case." Opp. 6:17-19 (referring to Provenz v. Miller, 102 F.3d 1478 (9th Cir. 1996); Fecht v. Price Co., 70 F.3d 1078 (9th Cir. 1995); Kaplan v. Rose, 49 F.3d 1363 (9th Cir. 1994)).

The only thing "similar" between Mr. Lee and the Provenz, Kaplan and Fecht defendants is that each allegedly sold stock. Otherwise, it is difficult to see how Mr. Lee is "similar" to:

A CEO selling two-thirds of his stock. Kaplan at 1379 (defendant Payne).
A president selling all of his stock during the class period. Kaplan at 1379 (defendant Penfil).
A COO selling "all of the Company stock he had acquired by option," representing a "significant retrenchment[]" of his position. Fecht at 1084.
Another COO who "halved his total holdings in the Company." Fecht at 1084.
A CEO and president who sold unusually large amounts of their stock and personally "withheld material information from [the company's accountants" to mislead them and sold before the accountants figured out the ruse. Provenz at 1491.

There is no "similarity" to Mr. Lee's case. Mr. Lee, an outside director, and the Lee charitable trusts retained 95% of their total holdings during the class period. The timing of the sale of 5% of those shares was at the outset of the class period, months before the alleged bad news disclosures, and occurred through participation in a company-determined secondary offering. Mem. 8. This is not a case, as in Provenz, Fecht and Kaplan, where an officer involved in management massively retrenches his position, selling at times determined by the officer's own discretion. Plaintiffs argue that it is somehow damning that Lee had "previously sold no stock whatsoever in the preceding seven months" before the Secondary Offering. Opp. 6:19-20. They fail to allege any similar opportunities for selling occurred in the preceding seven months. Indeed, a public market in Diamond shares existed only since Diamond's initial public offering in February 1995. Compl. ¶ 4.

Even if a factual similarity could somehow be gleaned, plaintiffs overlook one inconvenient point: none of these cases applied a "strong inference" standard of any variety. As Mr. Lee has already shown, the cases from this Circuit that do apply a "strong inference" standard establish that the Complaint's bare allegation that Mr. Lee sold some stock is insufficient because it does not provide the critical context of how much stock Mr. Lee retained along with plaintiffs; if the Court chooses to judicially notice that information, it shows Mr. Lee sold none of his direct holdings and retained 95% of his direct and "beneficial" holdings. Mem. 7:13-8:28 (discussing In re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1424-25 (9th Cir. 1994); Anderson v. Clow (In re Stac Electronics Securities Litigation), Fed. Sec. L. Rep. (CCH) [1994-95 Transfer Binder] ¶ 98,367 (N.D. Cal. 1994); Trident Microsystems). Plaintiffs' Opposition simply avoids any discussion of these directly relevant cases.

IV. PLAINTIFFS CITE NO PRECEDENT FOR DEEMING A DEFENDANT SUCH AS MR. LEE A "CONTROLLING PERSON," AND FAIL TO DISCUSS MR. LEE'S ON-POINT AUTHORITIES.

Plaintiffs also claim Mr. Lee is a "controlling person" of Diamond and thus liable under Section 20(a) if any other defendants are primarily liable under Section 10(b). Predictably, plaintiffs fail to discuss any of the on-point authorities cited by Mr. Lee, opting instead for the abstract assertion that "Whether a defendant is a control person is a complex factual question that cannot properly be resolved on a motion to dismiss." Opp. 13:13-14. The case law is contrary and clear: as a matter of law, on a 12(b)(6) motion, an 8-10% stockholder⁷ who sits on a board is not thereby a "controlling person" particularly where, as here, a unified, 45% block of shares exists. Mem. 9-10 (discussing Trident Microsystems at p. at 98,913; Travelers Ins. Co. v. Lewis, 756 F. Supp. 172, 177 (S.D.N.Y. 1991)).

V. CONCLUSION

For the foregoing reasons, and for the reasons stated in the motion brought by Diamond Defendants, Mr. Lee requests the Court to grant his motion to dismiss with prejudice.

Dated: April 15, 1997.

PILLSBURY MADISON & SUTRO LLP
WALTER J. ROBINSON III
MORGAN R. SMOCK
225 Bush Street
Post Office Box 7880
San Francisco, CA 94120-7880

/s/
By _________________________________

Attorneys for Defetatement" to support a "scheme" theory. In re Stac Electronics Securities Litigation, 89 F.3d 1399, 1410 (9th Cir. 1996).

3 They also exaggerate even their own boilerplate, stating directly that Mr. Lee "regularly received and reviewed internal management reports." Opp. 2:7-8. This is not alleged.

4 To defend paragraph 26(b), plaintiff appears to rely solely on Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989). Opp. 6:21-22. That case does not apply here. Instead, Glenfed II and its progeny establish that such boilerplate allegations are inadequate.

5 See, e.g., Cal. Corp. Code § 309(b); Del. Stat., tit. 8, § 141(e); American Law Institute, Principles of Corporate Governance § 4.02 (1992); Lanza v. Drexel & Co., 479 F.2d 1277, 1307 (2d Cir. 1973).

6 Plaintiffs' opposition fails to cite any holding from the courts of this Circuit except Xoma, which it mistakenly cites in support. Opp. 9:9. Xoma directly held that signing an SEC document raises no inference of participation in fraud for persons falling outside the group-published information doctrine. Xoma at 92,160-61.

7 Plaintiffs quibble over whether to apply Mr. Lee's percentage ownership at the beginning of the class period (10%) or at the end (8%). Opp. 13:24-25. The distinction is immaterial.

                  Docket No. C 96-2644 SBA

                 PROOF OF SERVICE BY MAIL

     I, Frances M. Ceccacci, hereby declare:

     1.   I am over the age of 18 years and am not a party

to the within cause.  I am employed by Pillsbury Madison &

Sutro LLP in San Francisco, California.

     2.   My business address is 225 Bush Street, San

Francisco, California.  My mailing address is P.O. Box 7880,

San Francisco, CA 94120.

     3.   I am readily familiar with Pillsbury Madison &

Sutro LLP's practice for collection and processing of

correspondence for mailing with the United States Postal

Service; in the ordinary course of business, correspondence

placed in interoffice mail is deposited with the United

States Postal Service with first class postage thereon fully

prepaid on the same day it is placed for collection and

mailing.

     4.   On April 15, 1997, at 225 Bush Street, San

Francisco, California, I served true copies of the attached

document titled exactly REPLY MEMORANDUM IN SUPPORT OF

DEFENDANT CHONG-MOON LEE'S MOTION TO DISMISS THE AMENDED

CONSOLIDATED CLASS ACTION COMPLAINT by placing them in

envelopes clearly labeled to identify the persons being

served at the addresses shown below, which envelopes were

then sealed and placed in interoffice mail for collection

and deposit in the United States Postal Service on that date

following ordinary business practices:

               [See Attached Service List]

                                      -1-




     I declare under penalty of perjury that the foregoing

is true and correct.

     Executed this 15th day of April, 1997, at San

Francisco, California.



                                             /s/
                              ________________________________
                                   Frances M. Ceccacci





                                      -2-

23 July 1997