MILBERG WEISS BERSHAD
  HYNES & LERACH LLP
JOHN E. GRASBERGER (89774)
JOHN K. GRANT (169813)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
     - and -
WILLIAM S. LERACH (68581)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058

SCHIFFRIN & CRAIG, LTD.
RICHARD S. SCHIFFRIN
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
Telephone: 610/667-7706

Attorneys for Plaintiff

II. ARGUMENT

III. CONCLUSION

Plaintiff respectfully files this memorandum of points and authorities in opposition to Defendants' Motion to Strike the Declaration of John B. Torkelsen ("Motion to Strike"). 

I. INTRODUCTION

In response to defendants' Motion to Dismiss, plaintiff filed an opposition, accompanied by the Torkelsen Declaration.⁽⁴⁾ The Torkelsen Declaration directly addresses the materiality of the alleged misrepresentations, the very issue defendants raised by asserting a bespeaks caution defense. In contrast, however, with defendants' sketchy reliance on boilerplate disclosures, plaintiff's opposition to the Motion to Dismiss -- based in part on the Torkelsen Declaration -- provides the Court with strong support for the conclusion that defendants' misrepresentations were in fact material -- at least based on what is alleged in the Complaint.

In their Motion to Strike, however, defendants now reverse the position taken in their Motion to Dismiss and insist that "the motion to dismiss is not based on any argument that defendants['] statements were not material as a matter of law." Motion to Strike at 4 (emphasis added). Having made this assertion (and contradicted their own Motion to Dismiss), defendants insist that the Torkelsen Declaration is irrelevant, because materiality is not at issue. Defendants' present position -- that materiality is not relevant -- is a 180 degree reversal of their bespeaks caution defense which attempted to challenge materiality.⁽⁵⁾

Defendants' insistence, that the Torkelsen Declaration is irrelevant, is wrong, as is their assertion that materiality is not at issue. The Ninth Circuit has repeatedly recognized that the bespeaks caution doctrine is merely a reformulation of "two fundamental concepts . . . reliance and materiality." Worlds of Wonder, 35 F.3d at 1414. The Torkelsen Declaration is relevant and germane to the Motion to Dismiss because it: (a) demonstrates that defendants' misrepresentations were material and (b) shows how the market for Digital Link Corp. ("Digital Link") stock was impacted by defendants' misrepresentations (demonstrating materiality) and how the stock price subsequently collapsed upon the eventual disclosure of the truth concealed by defendants' misrepresentations. The Torkelsen Declaration also examines the individual defendants' insider sales of Digital Link stock, and demonstrates that such sales took advantage of the stock's price inflation. 

II. ARGUMENT

merely represents the pragmatic application of two fundamental concepts in the law of securities fraud: materiality and reliance. . . . "[T]he 'bespeaks caution' doctrine has developed to address situations in which optimistic projections are coupled with cautionary language - in particular, relevant specific facts or assumptions - affecting the reasonableness of reliance on and the materiality of those projections."

Worlds of Wonder, 35 F.3d at 1414 (emphasis added). In Worlds of Wonder, the court cited and relied on an earlier Ninth Circuit decision, In re Convergent Techs. Sec. Litig., 948 F.2d 507 (9th Cir. 1991), which similarly recognized that the existence of purported risk disclosures went to the materiality of the alleged misrepresentations. Worlds of Wonder, 35 F.3d at 1414.⁽⁶⁾ See also Provenz v. Miller, 102 F.3d 1478, 1493 (9th Cir. 1996) (bespeaks caution doctrine goes to materiality and reliance).

Worlds of Wonder, Convergent and Provenz, moreover, are consistent with numerous decisions which recognize the interplay between materiality and the bespeaks caution doctrine. See also In re Westinghouse Sec. Litig., 90 F.3d 696, 707-10 (3d Cir. 1996) (finding cautionary statements inadequate to render misrepresentations immaterial under bespeaks caution doctrine); Picard Chem. Inc. Profit Sharing Plan v. Perrigo Co., 940 F. Supp. 1101, 1122-23 (W.D. Mich. 1996) (bespeaks caution goes to materiality; court finds cautionary statements inadequately tailored to deprive misrepresentations of materiality).

By asserting a bespeaks caution defense in their Motion to Dismiss, defendants put the materiality of the misrepresentations alleged in the Complaint at issue. Defendants, however, now contradict themselves by insisting that "the motion to dismiss is not based on any argument that defendants['] statements were not material as a matter of law." Motion to Strike at 4. Defendants similarly contradict themselves by premising their Motion to Strike on the assertion that the Torkelsen Declaration, which addresses "the materiality of certain statements alleged [in the Complaint]," Motion to Strike at 1, is "irrelevant to the issues presented in defendants' motion to dismiss." Id. at 2.

In fact, the Torkelsen Declaration could not be more relevant to the issues raised by defendants' Motion to Dismiss. Defendants' bespeaks caution defense directly challenges the materiality of the misrepresentations alleged in the Complaint with respect to misrepresentations regarding the GateWay product and regarding international sales trends. Motion to Dismiss at 11, 14. The Torkelsen Declaration specifically examines the defendants' statements concerning the introduction of the GateWay product and defendants' statements concerning European/international sales levels. Torkelsen Declaration at 12-19. The Torkelsen Declaration also tracks and describes the movement of Digital Link's stock price resulting from defendants' misrepresentations and misleading statements. Id. While defendants do little more than speculate and hypothesize with respect to materiality,⁽⁷⁾ the Torkelsen Declaration shows how the movement of Digital Link stock's price was a result of defendants' false statements. The Torkelsen Declaration thus demonstrates the materiality of the alleged misrepresentations set out in the Complaint and disposes of defendants' bespeaks caution defense.

Nor is plaintiff's attachment of the Torkelsen Declaration to his opposition to the Motion to Dismiss procedurally improper. In Bakery Sales Drivers Local Union v. Wagshal, 333 U.S. 437 (1948), the Supreme Court permitted the use of affidavits that the plaintiff had attached to an opposition to a motion to dismiss, just as plaintiff has done in this case. The Supreme Court allowed the affidavits because they "serve[d] . . . as allegations, not proof." Id. at 444. The Court explained that the affidavits acted "merely [as] a gloss on the complaint." Id.

The Supreme Court's ruling in Bakery Sales is echoed by more recent circuit level decisions. Thus, the Third Circuit has held that a plaintiff is entitled to oppose a motion to dismiss with material that is "illustrative of those facts which [the plaintiff] could prove" to support the complaint's allegations. Swin Resource Sys., Inc. v. Lycoming County, 883 F.2d 245, 247 (3d Cir. 1989). Similarly, Judge Richard A. Posner explained for the Seventh Circuit in Orthmann v. Apple River Campground, Inc., 757 F.2d 909, 914-15 (7th Cir. 1985), such submissions "have no standing as evidence but are usable to show [what] might have happened," consistent with the complaint's allegations. (Emphasis added.)

"This rule is necessary to give plaintiffs the benefit of the broad standard for surviving a Rule 12(b)(6) motion as articulated in Hishon [v. King & Spaulding], 467 U.S. [69,] 73 [(1984)], and Conley v. Gibson, 35 U.S. 41, 45-46 [] (1957)." Dawson v. General Motors Corp., 977 F.2d 369, 372 (7th Cir. 1992); see Highsmith v. Chrysler Credit Corp., 18 F.3d 434, 440 (7th Cir. 1994). Hishon held that claims must survive dismissal if "relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon, 467 U.S. at 73 (emphasis added); see Strother v. Southern California Permanente Med. Group, 79 F.3d 859, 865 (9th Cir. 1996). Indeed, the "complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957)); accord Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Gilligan v. Jamco Dev. Corp., Case No. 95-56290, 1997 U.S. App. LEXIS 3787 (9th Cir. March 5, 1997).

Judge Frank Easterbrook explained in Hrubec v. National R.R. Passenger Corp., 981 F.2d 962, 963-64 (7th Cir. 1992):

A plaintiff need not put all of the essential facts in the complaint. He may add them by affidavit or brief -- even a brief on appeal.

Here similarly, the Torkelsen Declaration is not offered as "proof," but in order to demonstrate to this Court that a set of facts, as alleged in the Complaint, exists which will allow plaintiff to establish the materiality of the defendants' misrepresentations. 

III. CONCLUSION

DGTL-LNK\BM00127.BRF

1. The Motion to Dismiss and the Motion to Strike are jointly set for hearing on April 18, 1997.

2. "Complaint" refers to the Corrected Complaint for Violations of the Securities Exchange Act of 1934.

3. The bespeaks caution doctrine allows a defendant to challenge the materiality of a misleading projection in light of accompanying cautionary language; the doctrine only applies to projections and other forward-looking statements. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1414 (9th Cir. 1994), discussed below.

4. "Torkelsen Declaration" refers to the Declaration of John B. Torkelsen.

5. Defendants' confusion apparently stems from attempting to separate the "legal" issues from the "factual" issues of the "mixed question of law and fact" presented by materiality and demonstrates why such issues are generally left to the finder of fact.

6. In Worlds of Wonder, the Ninth Circuit also recognized that the bespeaks caution doctrine "applies only to precise cautionary language which directly addresses itself to further projections, estimates or forecasts." Id. Moreover, the bespeaks caution doctrine "applies only to cautionary statements made in the same context as the optimistic statements." Robbins v. Hometown Buffet, Case No. 94-1655-J(BTM), 1995 U.S. Dist. LEXIS 17870, at *27 (S.D. Ca. March 16, 1995) (bespeaks caution inapplicable because cautionary statements not made in same document as misrepresentations).

7. Indeed, much of the defendants' Motion to Strike is nothing more than posturing, rhetoric, and rude innuendo, which plaintiff is confident the Court will ignore.

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 27, 1997, declarant served the PLAINTIFF'S OPPOSITION TO DEFENDANTS' MOTION TO STRIKE THE DECLARATION OF JOHN B. TORKELSEN 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 27th day of March, 1997, at San Francisco, California.
 

______________________________ DEBORAH R. DASH

 

9 Oct 1997
Source: Milberg Weiss web file