MILBERG WEISS BERSHAD
  HYNES & LERACH LLP
ALAN SCHULMAN (128661)
MARK SOLOMON (151949)
SALLIE A. BLACKMAN (141830)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
     - and -
JOHN K. GRANT (169813)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545

ABBEY, GARDY & SQUITIERI, LLP
JILL S. ABRAMS
JAMES J. SEIRMARCO
212 East 39th Street
New York, NY 10016
Telephone: 212/889-3700

BERNSTEIN LITOWITZ BERGER &
  GROSSMANN LLP
DANIEL L. BERGER
JEFFREY N. LEIBELL
1285 Avenue of the Americas
33rd Floor
New York, NY 10019
Telephone: 212/554-1400

Attorneys for Lead Plaintiffs and the Class
 
 

II. RECENT AUTHORITIES

III. CONCLUSION

I. INTRODUCTION

The sufficiency of plaintiffs' allegations is determined by application of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. The following recent authorities each contain some discussion of those standards. 

II. RECENT AUTHORITIES

In Gross v. Medaphis Corp., Case No. 1:96-CV-2088 FMH (N.D. Ga. May 27, 1997), ("Grant Decl., Ex. B) the court sustained the complaint at issue which alleged that defendants violated §10b of the Exchange Act by (1) engaging in improper financial accounting, (2) concealing and misrepresenting the status of Medaphis' projects and (3) concealing the severe operational problems being experienced by the Company. Id., slip op. at 3. In upholding the complaint, the court, while clearly leaning toward adopting Second Circuit pleading standards (id., slip op at 14 n.4), found that the allegations in any event provided "a strong inference of conscious deceit" by defendants. In reaching its decision, the court pointed to plaintiffs' allegations that defendants knowingly made false and misleading statements about the progress of Medaphis' major projects. Id. at 16. The Medaphis court also held sufficient plaintiffs' allegations that "to meet certain earnings projections, Defendants improperly recognized income that Defendants knew should not have been recognized under GAAP principles." Id.

In this case, plaintiffs specifically allege defendants made false statements concerning particular products that were Diamond's lifeblood. Complaint, ¶¶45, 49.¹ These allegations of particularized problems plaguing specifically identified products are concrete and demand an answer, not dismissal. Plaintiffs have specified particular customers of Diamond who were granted secret credits and/or return rights so liberal as to preclude the recognition of revenues (¶81), as well as the particular products that accumulated in inventory, the amounts of over-accumulation and the amount of the consequent improper under-reserving, as well as defendants' express admission that they were cognizant of the rapid obsolescence of their products. ¶¶73-76. Plaintiffs have also made particularized allegations that defendants' representations of current or historical facts (note not current or historical "assumptions") were false and misleading when made. Plaintiffs specifically detail the assurances made by defendants that serious inventory control problems had been resolved and sufficient controls put in place. ¶59. Plaintiffs also specifically allege both the lack of internal controls and the huge inventory write-down that ultimately and inevitably caused the collapse of Diamond's stock. ¶¶49, 52, 64.

It is clear that plaintiffs' Complaint must be upheld under the standards articulated in Fugman and in Medaphis. See also In re Wells Fargo Sec. Litig., 12 F.3d 922, 927 (9th Cir. 1993); In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1551 (9th Cir. 1994).

The most recent decision in In re Silicon Graphics, Inc. Sec. Litig., No. C 96-0393 FMS (N.D. Cal. May 23, 1997) (Grant Decl., Ex. C) supports the sustaining of the complaint in this action. The court now holds that "[k]nowing or intentional misconduct includes deliberate recklessness . . . ." Id., slip op. at 21. As Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 1989) makes clear, under established Second Circuit pleading standards directors are deemed to have knowledge of the fundamental aspects of the company's business and, to be "unaware" of the particularized, fundamental problems alleged in this case while selling $12 million of their Diamond stock and making repeated positive representations, provides a strong inference that defendants at least were "deliberately reckless." In addition, the Silicon Graphics court also found actionable defendants' descriptions similar to descriptions alleged in this case, that the company's European business was "strong," that "its sales force reorganization was successful" and that a key product was "selling well." Silicon Graphics, slip op. at 42.²

In In re Trimble Navigation Sec. Litig., No. C-95-4353 MME (N.D. Cal. April 28, 1997) (Grant Decl., Ex. F) the court acknowledged what has been lost in some other decisions -- that "[a] complaint is not a summary judgment motion, and plaintiffs are not required to set forth a detailed exegesis of precisely how defendants knew the information that rendered their public statements misleading."³ Id., slip op. at 23. The court upheld the accounting allegations (pled with the benefit of discovery), the allegations concerning shift of product mix, and the allegations concerning falling sales, parts shortages and cost containment problems. Id. at 43, 44.

Although the Trimble decision dismisses the claims against an "outside" director, it can hardly assist defendant Lee. In Trimble, the court found that plaintiffs had not alleged day-to-day management, drafting participation, or "any other 'special relationship' with [the Company] . . . ." Id., slip op. at 43. Here, plaintiffs have alleged the numerous ingredients of Lee's "special relationship" with Diamond in spades. Accordingly, plaintiffs are entitled to the benefit of the group pleading presumption as to Lee. In In re U.S. Bioscience Sec. Litig., 80 F. Supp. 1197 (E.D. Pa. 1992) the court applied the group publication presumption to so-called "outside directors" who, although not officers of the corporation, were experts in the corporation's business and were board members in order to provide their expertise and insider status and also to monitor the Company's dealings in order to safeguard their investments. The court distinguished such directors from true outside directors as follows:

Outside directors can be of two very different kinds. The paradigmatic outside director is, say, a college president who sits on the Board of a large corporation, owns 100 shares of its stock, and attends a Board meeting four times a year. When the outside director is of this type, the Xoma rationale makes a good deal of sense because such directors cannot be expected to engage in the day to day management of the company and must necessarily rely exclusively on officers' reports in Board decision making. Such a director's role on the Board is not intended or expected to be of a hands-on variety.

It is unthinkable that defendant Lee, or any other of Diamond's most senior officers and directors were unaware of the pervasive accounting weaknesses and failures and product problems that are depicted vividly in the Complaint. Likewise, it is unthinkable that they were unaware of the dramatically out-of-control inventory problem that they claimed was "resolved" when, as no one can now dispute, it was not. ¶¶45, 49, 52, 55, 57-60, 61, 65-85. Group pleading here serves a righteous purpose. Plaintiffs are entitled to discovery to reveal the precise involvement of the most senior and well-rewarded stewards of Diamond. Moreover, as the Silicon Graphics court acknowledged, the group publication presumption is for defendants to rebut on summary judgment or at trial, not on a motion to dismiss. Silicon Graphics, at 27. 

III. CONCLUSION

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 June 6, 1997, declarant served the SUBMISSION ADDRESSING RECENT AUTHORITIES IN FURTHER SUPPORT OF PLAINTIFFS' OPPOSITIONS TO DEFENDANTS' MOTIONS TO DISMISS 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.

3. 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 6th day of June, 1997, at San Francisco, California.
 

______________________________ LISA NEWELL

1. Amended Consolidated Class Action Complaint For Violation of the Securities Exchange Act of 1934 (hereinafter "Complaint" or "¶").

2. Defendants may contend that Silicon Graphics requires plaintiffs to identify any specific individuals who may be the sources of the detailed allegations. That cannot be the law. The letter of the law (which the Silicon Graphics court finds plaintiffs have complied with) does not obligate plaintiffs, when faced with the most sophisticated and pernicious of corporate fraudulent conduct, to lay their most confidential work product out on the table at the very beginning of the case before receiving any discovery from defendants! Nothing could be more calculated to cause undue prejudice to plaintiffs and be further from the spirit of a law which is supposed to nourish well-founded cases and reject the frivolous. Zeid v. Kimberley, Civil No. 96-20136 (N.D. Cal. May 6, 1997) and Hockey v. Medhekar, No. C-96-0815 MHP (N.D. Cal. April 18, 1997) (Grant Decl., Exs. D and E) are two other recent decisions of courts within this district with which plaintiffs, in large part, strenuously disagree. In Zeid (where, unlike here, no insider selling was alleged), the court held that unqualified recklessness is sufficient scienter; that the Second Circuit "motive and opportunity" and "circumstantial evidence of reckless conduct" tests apply, but then the court demanded excruciating, minute details of identified transactions way beyond that necessary or even desirable and that should be the subject of permissible discovery to prevent undue prejudice. Apparently, solely because plaintiffs alleged that their complaint was based on the investigation of counsel (in compliance with Rule 11), the court declined to relax the pleading detail required which is the other recognized means of ensuring that plaintiffs do not suffer undue prejudice in cases of sophisticated corporate fraud. Zied, slip op. at 8-9. Hockey, again, misses the mark in critical aspects. The court confuses disclosed "assumptions" with "facts" and, inviting the exception to swallow the rule, portrayed many of the defendants' statements of "hard facts" as mere "assumptions" within the Exchange Act's "forward looking" safe harbor provisions. And again, the court demanded the pleading of excruciating detail knowable only to corporate insiders without reference to the "undue prejudice" that denial of discovery to meet such stringent demands would wreak, and without heed, in any event, to the fact that much of the wrongdoing had to be known to all but the most reckless of corporate executives. See Cosmas.

3. In fact, in Friedberg v. Discreet Logic, No. 96-11232-EFH, 1997 U.S. Dist. LEXIS 2893 (D. Mass. March 7, 1997) (Grant Decl., Ex. G) the court held that allegations to show that the defendants were aware of the misrepresentations were unnecessary to show a strong inference of scienter where false statements were alleged accompanied by sales of 12% of the individuals' aggregate stockholdings.