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STEVEN M. SCHATZ, State Bar # 118356 TIMOTHY T. SCOTT, State Bar # 126971 THOMAS J. MARTIN, State Bar # 150039 DANIEL W. TURBOW, State Bar # 175015 WILSON, SONSINI, GOODRICH & ROSATI Professional Corporation 650 Page Mill Road .Palo Alto, California 94304-1050 Telephone: (415) 493-9300 Attorneys for Defendants VINITA GUPTA, DANIEL L. PALMER, TIMOTHY K. MONTGOMERY, STANLEY E. KAZMIERCZAK, TONI BELLIN, BENJAMIN W. BERRY, MOREY R. SCHAPIRA, GREGORY M. AVIS, CHARLES R. MOORE and DIGITAL LINK CORPORATION UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION GEORGE GENNA, On Behalf of Himself ) CASE NO.: C-96-20867-RMW (EAI) and All Others Similarly Situated, ) ) CLASS ACTION Plaintiff, ) ) REPLY MEMORANDUM OF POINTS v. ) AND AUTHORITIES IN SUPPORT ) OF DEFENDANTS' MOTION TO DIGITAL LINK CORPORATION, VINITA ) DISMISS GUPTA, DANIEL L. PALMER, TIMOTHY ) K. MONTGOMERY, STANLEY E. ) KAZMIERCZAK, TONI BELLIN, ) Date: April 18, 1997 BENJAMIN W. BERRY, MOREY R. ) Time: 9:00 a.m. SCHAPIRA, GREGORY M. AVIS and ) Judge: The Honorable CHARLES R. MOORE, ) Ronald M. Whyte ) Defendants. ) ) ___________________________________) REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI)
TABLE OF CONTENTS Page INTRODUCTION .................................................... 1 ARGUMENT ........................................................ 1 I. DEFENDANTS ARE NOT LIABLE FOR STATEMENTS MADE BY OR TO ANALYSTS ................................................ 1 A. Plaintiff's Have Made No Showing Of Entanglement With Analysts ......................................... 1 B. Plaintiff Has Not Alleged How The Paraphrased Statements Allegedly Made By Defendants to Analysts Entered The Market ........................... 2 II. THE CLAIMS AGAINST DEFENDANTS WHO DID NOT MAKE ANY STATEMENTS MUST BE DISMISSED ............................... 2 A. The Reform Act Abolished Group Pleading For Claims Under Section 10(b) ............................ 2 B. Plaintiff Cannot Rely On The Disclose-Or-Abstain Doctrine .............................................. 3 C. Plaintiff Has Not Established the Existence Of a "Scheme" to Defraud ................................... 3 III. THE BESPEAKS CAUTION DOCTRINE DICTATES DISMISSAL ........... 4 A. Defendants' Disclosures And Cautionary Statements Were Not Boilerplate .................................. 4 B. The Bespeaks Caution Doctrine Applies Even If Defendants' Cautionary Statements Did Not Accompany Every Alleged Misleading Statement .......... 6 IV. PLAINTIFF HAS FAILED TO PLEAD FACTS ESTABLISHING A "STRONG INFERENCE" OF SCIENTER ............................. 7 A. The Reform Act Applies To This Action ................. 8 B. The Act Substantially Strengthened The Pleading and Scienter Requirements ............................ 10 1. Allegations of Motive and Opportunity Cannot Create a Strong Inference of Scienter ........... 11 2. Actual Knowledge Is The Standard For Forward-Looking Statements ...................... 12 C. Plaintiff's Allegations Cannot Satisfy The Reform Act ........................................... 13 1. Plaintiff Alleges No Facts To Show That Defendants Actually Knew Their Statements Were False When Made ............................ 13 2. Defendants' Stock Trading Negates An Inference of Fraud .............................. 13 V. PLAINTIFF'S CLAIMS RELATING TO GATEWAY ARE TIME-BARRED AS A MATTER OF LAW ........................................ 15 CONCLUSION ..................................................... 15 REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -i-
TABLE OF AUTHORITIES Page(s) CASES ABF Capital Management v. Askin Capital Management, No. 96 Civ. 2978, 1997 U.S. Dist. LEXIS 621 (S.D.N.Y. Jan 24, 1997) .................................. 8,9 Acito v. Imcera, 47 F.3d 47 (2d Cir. 1995) ................................. 14 Adam v. Silicon Valley Bancshares, 884 F. Supp. 1398 (N.D. Cal. 1995) ......................... 4 Central Bank of Denver v. First Interstate Bank, 511 U.S. 164 (1994) .................................... 2,3,4 Conerly v. Westinghouse Elec. Corp., 623 F.2d 117 (9th Cir. 1980) .............................. 15 District 65 v. Prudential Secs., Inc., 925 F. Supp. 1551 (N.D. Ga. 1996) .......................... 9 Duncan v. Pencer, [1995-96 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,043 (S.D.N.Y. Jan. 18, 1996) ................... 14 Employers Ins. v. Musick, Peeler & Garrett, 871 F. Supp. 381 (S.D. Cal. 1994) .......................... 4 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1985) ....................................... 10 Fecht v. Price Co., 70 F.3d 1078 (9th Cir. 1995), cert. denied, 116 S. Ct. 1422 (1996) .................................. 7,10 Fleckler v. Hollywood Entertainment Corp., No. 95-1926-MA (D. Or. Feb. 12, 1997) ...................... 4 Gray v. First Winthrop Corp., 82 F.3d 877 (9th Cir. 1996) ................................ 7 Grossman v. Novell, Inc., 909 F. Supp. 845 (D. Utah 1995) ............................ 7 Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186 (1974) ....................................... 11 In re AST Research Sec. Litig., 887 F. Supp. 231 (C.D. Cal. 1995) .......................... 3 In re Caere Corp. Sec. Litig., 837 F. Supp. 1054 (N.D. Cal. 1993) ......................... 3 In re Cirrus Logic Sec. Litig., 946 F. Supp. 1446 (N.D. Cal. Nov. 1, 1996) ................. 2 In re Gupta Sec. Litig., 900 F. Supp. 1217 (N.D. Cal. 1994) ......................... 3 In re Opti, Inc. Sec. Litig., No. C 95-3434 (N.D. Cal. Mar. 31, 1997) .................. 6,7 In re Prudential Sec. Ltd. Partnerships Litig., 930 F. Supp. 68 (S.D.N.Y. 1996) ............................ 9 In re Silicon Graphics Inc. Sec. Litig., [1996-97 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,325 (N.D. Cal. Sept. 25, 1996) ....................... 3 In re Software Toolworks Sec. Litig., 50 F.3d 615 (9th Cir. 1984), cert. denied, 116 S. Ct. 274 (1995) ...................................... 4 In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996), cert. denied, 117 S. Ct. 1105 (1997) ............................ 1, 5, 6, 7 REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -ii-
TABLE OF AUTHORITIES Page(s) CASES In re Syntex Corp. Sec. Litig., 95 F.3d 922 (9th Cir. 1996) ................................ 2 In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994), cert. denied, 116 S. Ct. 185 (1995) ................................... 6,14 In re ZZZ Best Sec. Litig., 864 F. Supp. 960 (C.D. Cal. 1994) .......................... 4 Landgraf v. USI Film Products, 511 U.S. 244 (1994) ...................................... 8,9 Ledesma v. Jack Stewart Produce, Inc., 816 F.2d 482 (9th Cir. 1987) .............................. 15 Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297 (C.D. Cal. 1996) ........................ 11 Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993) ................................. 3 Pache v. Wallace, [1995 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,643 (E.D. Pa. 1995), aff'd, 72 F.3d 123 (3d Cir. 1995) .......................... 7 People for Environmental Progress v. Leisz, 373 F. Supp. 589 (C.D. Cal. 1974) ......................... 11 Provenz v. Miller, 102 F.3d 1478 (9th Cir. 1996) .............................. 7 Roots Partnership v. Lands' End, Inc., 965 F.2d 1411 (7th Cir. 1992) .............................. 7 S.E.C. v. Fehn, 97 F.3d 1276 (9th Cir. 1996) ............................... 9 S.E.C. v. First Jersey Securities, Inc., 101 F.3d 1450 (2d Cir. 1996) ............................... 4 Santa Fe Industries v. Green, 430 U.S. 462 (1977) ........................................ 4 Shuster v. Symmetricom, Inc., No. C 94-20024 (N.D. Cal. Feb. 25, 1997) ................. 5,6 Stack v. Lobo, 903 F. Supp. 1361 (N.D. Cal. 1995) ..................... 3, 15 United States ex rel. Anderson v. Northern Telecom, Inc., 52 F.3d 810 (9th Cir. 1995) ................................ 9 United States ex rel. Newsham v. Lockheed Missiles & Space Co., 907 F. Supp. 1349 (N.D. Cal. 1995) ......................... 9 United States v. $814,254.76 in U.S. Currency, 51 F.3d 207 (9th Cir. 1995) ................................ 9 United States v. Bacon, 82 F.3d 822 (9th Cir. 1996) ................................ 9 Warshaw v. Xoma Corp., 74 F.3d 955 (9th Cir. 1996) ................................ 7 Zeid v. Kimberly, 930 F. Supp. 431 (N.D. Cal. 1996) ......................... 11 REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -iii-
TABLE OF AUTHORITIES Page(s) STATUTES 15 U.S.C. § 78u-4(b)(2) ........................................ 14 15 U.S.C. § 78u-5(c)(1)(b)(i) .................................. 12 15 U.S.C. § 78u-5(i)(1)(D) ..................................... 12 Reform Act § 108, 15 U.S.C. § 77l ............................... 8 REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -iv-
INTRODUCTION This Complaint should be dismissed because it is precisely the kind of boilerplate, cookie-cutter complaint Congress intended to discourage when it enacted the Reform Act. Plaintiff has not gotten the message. Plaintiff's brief ("Opp.") manifests his unease about the Act, as much of it is spent analyzing pre-Reform Act cases that are now largely irrelevant, or arguing that the Act did not really change the pleading and scienter requirements, or arguing irrelevant points not even addressed by defendants in their opening brief ("Def. Mem."). ARGUMENT I. DEFENDANTS ARE NOT LIABLE FOR STATEMENTS MADE BY OR TO ANALYSTS There is no dispute about the legal standards governing statements made to and by securities analysts. With respect to statements by analysts, plaintiff concedes that liability only attaches if the defendant was "entangled" with the analysts. See Opp. 11. With respect to statements made to analysts, defendants may be held liable for misrepresentations but, in a fraud-on-the- market case such as this, plaintiff must allege and prove that such statements entered the market. See Def. Mem. at 8. Despite the agreement regarding these legal standards, plaintiff has still failed to adequately plead his claims. A. Plaintiff's Have Made No Showing Of Entanglement With Analysts With respect to statements by analysts, plaintiff has not adequately alleged that defendants were entangled with any analysts or otherwise adopted their reports as defendants' own. Plaintiff's only analysis on this issue is contained in a footnote that merely recites the allegations in the Complaint and concludes those allegations are adequate. See Opp. 12 n.16. As defendants noted in their opening brief (see Def. Mem. 5-6), plaintiff's allegations have been routinely rejected by courts because they "provide[] no specific facts -- no names, no meetings, no internal memoranda or documents, no specific conduct or statement -- in support of its theory." In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1410 (9th Cir. 1996), cert. denied, 117 S. Ct. 1105 (1997). Plaintiff also ignores the Complaint's failure to plead specific facts showing a REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -1-
two-way flow of information between analysts and the company. See In re Syntex Corp. Sec. Litig., 95 F.3d 922, 934 (9th Cir. 1996). For these reasons, the allegations of ¶¶ 46, 50-53, 62 and 63 must be dismissed. B. Plaintiff Has Not Alleged How The Paraphrased Statements Allegedly Made By Defendants to Analysts Entered The Market With respect to the other statements allegedly made by defendants to securities analysts, plaintiff has again avoided the chief arguments raised in defendants' opening brief. See Def. Mem. at 7-8. Basing a securities fraud complaint on paraphrased statements is inadequate. Plaintiff has also failed to allege how the paraphrased statements entered the market and affected Digital Link's stock price. See In re Cirrus Logic Sec. Litig., 946 F. Supp. 1446, 1468 (N.D. Cal. Nov. 1, 1996). Plaintiff has failed to identify any reports or other public statements where defendants' alleged statements entered the market. Therefore, the allegations in ¶¶ 49, 57-58, 60, 67, and 73 should be dismissed. II. THE CLAIMS AGAINST DEFENDANTS WHO DID NOT MAKE ANY STATEMENTS MUST BE DISMISSED A. The Reform Act Abolished Group Pleading For Claims Under Section 10(b) In Central Bank of Denver v. First Interstate Bank, 511 U.S. 164 (1994), the Supreme Court eliminated aiding and abetting liability for Section 10(b) claims. A defendant can be liable for a statement only if the defendant spoke. Since neither Montgomery, Avis, Bellin, Berry, Schapira, nor Moore spoke, plaintiff asserts they are liable under the group pleading doctrine. See Opp. 21. Plaintiff simply ignores, however, that the group pleading doctrine did not survive the Reform Act's requirement that particularized facts must be alleged with respect to each defendant to state a claim against that defendant. See Def. Mem. 9-10. Because the Reform Act requires that plaintiff plead particular facts creating a strong inference that each defendant had the requisite state of mind for each act or omission, "group pleading" cannot survive. See §21D(b)(2). These defendants are not alleged to have made any statements, and thus they cannot be liable under Section 10(b).1 ____________________ 1 Even if the group pleading doctrine does survive the Reform Act, plaintiff has not alleged facts showing that the doctrine applies to outside directors Avis and Moore. REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -2-
B. Plaintiff Cannot Rely On The Disclose-Or-Abstain Doctrine Plaintiff argues that these defendants are liable under the "disclose or abstain" doctrine because they sold stock while in possession of material non-public information. Opp. 21-22. This doctrine has only been applied to insider trading claims. At most, only "contemporaneous" traders could state a claim for disgorgement. See In re Silicon Graphics Inc. Sec. Litig., [1996- 97 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,325, at 95,964 (N.D. Cal. Sept. 25, 1996) ("plaintiff must plead with specificity that she traded contemporaneously with defendants"; interpreting "contemporaneous" as "purchases within six days of insider sales") (citing Neubronner v. Milken, 6 F.3d 666, 669 & n.5 (9th Cir. 1993)) ("SGI"). No claim can be stated by a class; a defendant may only be held liable to those people with whom he traded stock. See, e.g., Neubronner, 6 F.3d at 669 n.5; In re AST Research Sec. Litig., 887 F. Supp. 231, 233-34 (C.D. Cal. 1995); In re Caere Corp. Sec. Litig., 837 F. Supp. 1054, 1061-62 (N.D. Cal. 1993); Opp. 22 n.39 (citing cases). Plaintiff has not plead any facts that enable him to apply the disclose-or-abstain doctrine. There is no allegation of contemporaneous trading here -- the Complaint is bereft of any explanation of how or why the plaintiff's stock transactions are contemporaneous with defendants' sales. See SGI, Fed. Sec. L. Rep. (CCH) at 95,964 ("Simply pleading the dates of the parties' sales is not sufficient. Plaintiff must compare the dates, and explain why the transactions are contemporaneous.") Therefore, the disclose-or-abstain doctrine does not apply to plaintiff's allegations, and his claims based on alleged insider trading must be dismissed. C. Plaintiff Has Not Established the Existence Of a "Scheme" to Defraud Plaintiff attempts to circumvent the holding of Central Bank by arguing that the defendants are liable because they participated in a "scheme to defraud." Opp. 22-24. Courts in this District have consistently rejected plaintiff's attempt to circumvent Central Bank by characterizing their conspiracy allegations as an alleged "scheme" to defraud.2 Gupta, Stack, and Valence all preclude plaintiff's transparent attempt to disguise his impermissible conspiracy allegations as a "scheme." ____________________ 2 E.g., In re Gupta Sec. Litig., 900 F.Supp. 1217, 1243-44 (N.D. Cal. 1994); Stack v. Lobo, 903 F. Supp. 1361, 1374 (N.D. Cal. 1995) (citing Gupta); In re Valence Tech. Sec. Litig., No. C 95-20459 JW, 1996 WL 37788 (N.D. Cal. Jan. 23, 1996) (Turbow Decl. Ex. 6). REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -3-
In addition, plaintiff has not alleged any facts, specific or otherwise, to create an inference that the individual defendants participated in any scheme to defraud. See SGI, Fed. Sec. L. Rep. (CCH) at 95,964 ("merely alleging that all the defendants had access to negative information and that all sold stock does not create an inference that they were employed in a scheme to devise and disseminate false statements to the public"). The Supreme Court has made clear that the word "manipulative" in Section 10(b) should be narrowly construed as a "term of art" referring to practices designed to mislead investors by artificially affecting market activity, such as wash sales, matched orders or rigged prices. Santa Fe Industries v. Green, 430 U.S. 462, 476 (1977) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976)). The Complaint does not allege that these defendants engaged in any manipulative behavior of this nature.3 III. THE BESPEAKS CAUTION DOCTRINE DICTATES DISMISSAL Defendants demonstrated that the bespeaks caution doctrine precludes liability for the challenged statements because defendants warned of the risks facing the Company and, in warning of such risks, adequately disclosed the facts plaintiff contends were omitted. See Def. Mem. 11-15. With virtually no analysis, plaintiff argues in one paragraph that the bespeaks caution doctrine does not apply. se and ____________________ 3 The post-Central Bank cases that sustained a claim involved defendants who directly participated in the making of a false statement or engaged in other manipulative conduct. See S.E.C. v. First Jersey Securities, Inc., 101 F.3d 1450, 1458, 1460, 1471 (2d Cir. 1996) (sole owner "orchestrated every facet" of operations); In re Software Toolworks Sec. Litig., 50 F.3d 615, 628 n.3 (9th Cir. 1984) (significant and extensive involvement in drafting of letters to SEC), cert. denied, 116 S. Ct. 274 (1995); Adam v. Silicon Valley Bancshares, 884 F. Supp. 1398, 1399, 1401-1402 (N.D. Cal. 1995) (representations about company's financial statements and involvement with press releases); Employers Ins. v. Musick, Peeler & Garrett, 871 F. Supp. 381, 388-89 (S.D. Cal. 1994) (drafting prospectus containing false information); In re ZZZ Best Sec. Litig., 864 F. Supp. 960, 964-65, 966, 968, 970 (C.D. Cal. 1994) (actively participating in preparation of 13 public statements); Fleckler v. Hollywood Entertainment Corp., No. 95- 1926-MA, slip op. at 19 (D. Or. Feb. 12, 1997) (participation in drafting and decision-making). 4 See Def. Mem. at 10-11 & n.6; Reform Act § 21E; Conf. Rep. at 46. REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -4-
misleading. See Opp. 20 & n.33. Plaintiff's argument fails because, as defendants demonstrated in their opening brief, defendants' disclosures were "meaningful and specific" and did in fact change over time. Shuster v. Symmetricom, Inc., No. C. 94- 20024 RMW(PVT), slip. op. at 8 (N.D. Cal. Feb. 25, 1997) (Turbow Supp. Decl. Ex. A); see Def. Mem. 11-15.5 In addition to the repeated warnings about the risks associated with the development of a market for and acceptance of the product (see JNO Exhs. B at 5; C at 12; D at 11; E at 12), Digital Link's cautionary statements related to GateWay were precise and contained specific descriptions of the very "problems" that plaintiff alleges were concealed. See Def. Mem. 11-13. For example, Digital Link's Form 10-Q for the quarter ended September 1994 stated: "T]he Company does not anticipate making revenue shipments of its W/ATM GateWay product in 1994, although the Company anticipates shipping trial units at the end of 1994. The W/ATM product is a complex development with many critical milestones yet to be achieved. The next major milestone is fully loaded capacity testing, which is expected to be done during the fourth quarter of 1994. JNO Exh. A at 11-12 (emphasis added). On March 31, 1995, the Company announced that it had "forged ahead with development of the W/ATM GateWay," that it was scheduled for revenue shipments "this year," and that the Company planned on "continued development." Complaint ¶ 55 (emphasis added). At that time, the Company stated that "evaluation units were shipped to AT&T" and that it was "continuing to develop the product." Id. ¶¶ 55-56 (original emphasis). As the project progressed, Digital Link announced in its Form 10-Q for the quarter ended June 1995 that: The W/ATM GateWay product has not been deployed to end user customers, and the Company has experienced delays in the development of this product. Given its complexity, there can be no assurance that this product will not encounter further technical or other difficulties which could significantly delay its deployment or acceptance. JNO Exh. D at 11 (emphasis added). A short time thereafter, Digital Link disclosed its decision to re-design certain elements of GateWay which were not performing satisfactorily. Complaint ¶ 73. These statements demonstrate that Digital Link provided specific disclosures regarding the status of GateWay and revealed the very facts alleged to have been concealed. See Stac, 89 F.3d at 1409. ____________________ 5 Plaintiff also claims that the application of the bespeaks caution doctrine is a factual issue that presumably cannot be decided on a motion to dismiss. See Opp. 2. This argument has been rejected. See e.g., Stac, 89 F.3d at 1408-9; Shuster, slip. op. at 8. REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -5-
Similarly, defendants demonstrated in their opening brief that Digital Link provided warnings throughout the class period with respect to its international sales and accurately disclosed the percent of its net sales attributable to them. See Def. Mem. 13- 15; JNO Exhs. A at 9; B at 13; C at 8; D at 9; E at 9. In addition to these warnings, when Digital Link reported its third quarter results on October 17, 1995, the Company expressly and specifically warned that the decline in international revenues experienced during the prior quarter would continue into the next quarter and beyond. Gupta and Kazmierczak specifically told the market that "[t]he Company had seen a slowdown in sales to the UK which negatively impacted revenues" and that "[t]he weakness in the UK market was expected to continue into the fourth quarter." Complaint ¶ 73 (emphasis added). Plaintiff's only argument to the contrary apparently is that Digital Link's SEC filings did not contain "disclosure of the adverse factors which were actually negatively impacting Digital's business." Opp. 20. Having disclosed the basic facts and having projected the slowdown to continue, defendants had no duty to speculate as to the causes of the slowdown. See In re Opti, Inc. Sec. Litig., No. C 95-3434 SBA, Slip. Op. at 13 (N.D. Cal. Mar. 31, 1997) (once company discloses decline in demand, no duty to disclose precise extent of anticipated revenue drop) (Turbow Supp. Decl. B). B. The Bespeaks Caution Doctrine Applies Even If Defendants' Cautionary Statements Did Not Accompany Every Alleged Misleading Statement As the Ninth Circuit has repeatedly stated, the bespeaks caution doctrine "reflects the unremarkable proposition that statements must be analyzed in context." Stac, 89 F.3d at 1408 (citing In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1414 (9th Cir. 1994), cert. denied, 116 S. Ct. 185 (1995) ("WOW")(citation omitted)). In other words, for an omission to be actionable, "'there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.'" Id., (citing WOW, 35 F.3d at 1413 n.2, quoting Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988)). Bespeaks caution applies "where meaningful and specific cautionary disclosures are made regarding the subject mater of the alleged misrepresentation." Shuster, Slip. Op. at 8. Plaintiff's half-hearted argument that the bespeaks caution doctrine only applies if a defendant's statements are directly REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -6-
accompanied by cautionary language (see Opp. 20 n.34) is plainly wrong and was recently rejected by this Court. See Opti, Slip. Op. at 24-25. Once risks have been disclosed, they are part of the "total mix of information" in the market and qualify a defendant's later statements -- defendants need not repeat the warnings or disclosures every time the company makes a statement.6 The "total mix of information" would not be significantly altered if Digital Link were forced to repeat what it had already disclosed. This "leads to the inexorable conclusion that investors were specifically and adequately cautioned" about the relevant risks. Stac, 89 F.3d at 1409. Therefore, bespeaks caution applies even if defendants' cautionary statements were not issued exactly when every alleged misleading statement was made.7 IV. PLAINTIFF HAS FAILED TO PLEAD FACTS ESTABLISHING A "STRONG INFERENCE" OF SCIENTER In passing the Reform Act, Congress specifically targeted the abuses of "lawyer-driven" lawsuits and expressed its acute concern with the filing of thousands of "cookie-cutter complaints" by plaintiffs' law firms.8 The original Complaint in this action contained blanks in addition to rote allegations which have been held to be boilerplate and identical to those in multitudes of other complaints. If this is not the kind of frivolous litigation ____________________ 6 E.g., Pache v. Wallace, [1995 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,643, at 91,967 (E.D. Pa. 1995), aff'd, 72 F.3d 123 (3d Cir. 1995) (holding that disclosures in a 1991 annual report applied to predictions made by a company in 1992; optimistic forecasts in one document are not actionable if market was sufficiently warned in prior or simultaneous document about those forecasts); In re 3DO Sec. Litig., No. C-94-1820 CAL, Transcript of Hrg. at 37 (N.D. Cal. July 19, 1995) (holding that risk disclosure in prospectus applied to post-offering statements) ( Supp. Decl. Ex. C); Roots Partnership v. Lands' End, Inc., 965 F.2d 1411, 1419- 1420 (7th Cir. 1992); Grossman v. Novell, Inc., 909 F. Supp. 845, 849 (D. Utah 1995). 7 The pre-Reform Act cases on which plaintiff relies are distinguishable: see Fecht v. Price Co., 70 F.3d 1078, 1081 (9th Cir. 1995) (defendants' "disclosures" were optimistic, not cautionary, and contributed to misleading impression created by other statements), cert. denied, 116 S. Ct. 1422 (1996); Gray v. First Winthrop Corp., 82 F.3d 877, 884 (9th Cir. 1996) (cautionary statements contained false information); Warshaw v. Xoma Corp., 74 F.3d 955, 958-59 (9th Cir. 1996) (defendant's mild cautionary statements that FDA approval could be denied did not offset numerous false statements about progress of FDA approval); Provenz v. Miller, 102 F.3d at 1493-94 (defendants' disclosures were too general to protect them as a matter of law). 8 141 Cong. Rec. S 1075, *1075 (Attached as Exhibit 1 to the Declaration of Daniel Turbow in Support of Defendants' Motion to Strike). REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -7-
Congress intended to halt, one wonders what is.9 Thus, it is not surprising that plaintiff argues the Reform Act does not apply to this lawsuit, or that if it does, Congress really did not change that much. These arguments lack merit. A. The Reform Act Applies To This Action Plaintiff has already admitted that "the [Reform] Act applies to actions filed after [December 25, 1995]. Thus, this litigation [filed Jan. 29, 1996] is governed by it." Plaintiff's Motion to be Appointed Lead Plaintiff at 3-4. Plaintiff nevertheless argues that because Digital Link's challenged statements were made before the Reform Act's date of enactment, recklessness rather than actual knowledge remains the standard of liability for those statements. Plaintiff's argument is foreclosed by the Supreme Court's retroactivity analysis in Landgraf v. USI Film Products, 511 U.S. 244, 280 (1994). The Court found that Congressional intent as to the temporal scope of a statute was decisive, thereby "allocat[ing] to Congress responsibility for fundamental policy judgments concerning the proper temporal reach of statutes." If the intended temporal scope of a new law is clear from the statute's text, a court need go no further. Id. at 280. The text of the Reform Act is crystal clear concerning its applicability. Congress specifically wrote a section of the Reform Act titled "Applicability," which states that: The amendments made by this title shall not affect or apply to any private action arising under title I of the Securities Exchange Act of 1934 or title I of the Securities Act of 1933, commenced before and pending on the date of enactment of this Act. Reform Act § 108, 15 U.S.C. § 77l note. The only limitation Congress put on the Reform Act's "Applicability" was to exempt cases already on file when it was enacted. Comparable provisions of other statutes using identical language was found by the Supreme Court to manifest Congress' intent that the statute apply to conduct predating enactment. Landsgraf, 511 U.S. 256-57 (citing with approval language that turned on filing date of action as clear statement of legislative intent). In ABF Capital Management v. Askin Capital Management, No. 96 Civ. 2978, 1997 U.S. Dist. LEXIS 621 (S.D.N.Y. Jan 24, 1997), Judge Sweet concluded that the Reform Act applied to a lawsuit filed in ____________________ 9 Congress was also concerned with the filing of complaints without investigating whether the allegations have sufficient factual support. See Turbow Decl. Ex. 1 at 31. Plaintiff's "belie[f] that substantial evidentiary support will exist" for the Complaint's allegations "after a reasonable opportunity for discovery" (Complaint ¶ 90) is exactly the sort of "file complaint now, get factual support later" speculation which Congress strove to prohibit as the basis for filing a lawsuit. REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -8-
April 1996 that involved conduct occurring before the Act's date of enactment, regardless of when the conduct occurred. The court found the language of Section 108 decisive: The text of the Reform Act does not, on its face, evince any Congressional intent to withhold application of the law from cases where the allegedly fraudulent conduct took place prior to enactment, but the suit is brought after enactment. . . .[FN1] [Section 108] support[s] the conclusion that Congress intended [the Act's] reforms to apply to all actions brought after passage of the Act[.] 1997 U.S. Dist. LEXIS 621, at *24 & n.1 (Turbow Supp. Decl. Ex. D). Plaintiff cannot cite one case declaring invalid a provision making a statute applicable to all cases filed after its date of enactment, even if based on pre-enactment conduct. The retroactivity cases plaintiff cites all involved statutes that did not discuss their applicability to pending cases or prior conduct.10 Moreover, while plaintiff cites three cases that discuss the Reform Act, all of the cases were filed before the enactment of the Reform Act.11 Even if Section 108 did not clearly reflect Congressional intent -- which it does -- the Reform would still apply to cases filed after the passage of the Act based on pre-enactment conduct. As the Supreme Court explained in Landgraf, a statute has an impermissible retroactive effect only if it (i) impairs rights a party possessed when he acted, (ii) increases a party's liability for past conduct, or (iii) imposes new duties with respect to transactions already completed. Id. at 1505.12 Plaintiff makes no showing under any of these factors. The only conceivable argument he could make is that applying the Reform Act's actual knowledge requirement liability for forward-looking statements would impair his right to file a recklessness claim under pre-existing law. In ABF Capital Management, the court rejected this exact argument, ____________________ 10 See United States v. Bacon, 82 F.3d 822, 823-24 (9th Cir. 1996) (no discussion of any explicit retroactivity provision in statute); United States v. $814,254.76 in U.S. Currency, 51 F.3d 207, 209 (9th Cir. 1995) (statute "did not discuss retroactivity"); United States ex rel. Newsham v. Lockheed Missiles & Space Co., 907 F. Supp. 1349, 1354 (N.D. Cal. 1995) ("Congress did not expressly prescribe the reach of the" statute at issue). 11 See S.E.C. v. Fehn, 97 F.3d 1276 (9th Cir. 1996) (involved an SEC enforcement action filed in 1989; Reform Act applies to private actions filed after Dec. 22, 1995); In re Prudential Sec. Ltd. Partnerships Litig., 930 F. Supp. 68 (S.D.N.Y. 1996) (involved action arising under RICO that was pending when Congress passed Reform Act; issue was whether Act intended to apply to already pending cases); District 65 v. Prudential Secs., Inc., 925 F. Supp. 1551 (N.D. Ga. 1996) (same). 12 Cf., United States ex rel. Anderson v. Northern Telecom, Inc., 52 F.3d 810 (9th Cir. 1995) (holding that defendants' conduct governed by law in effect when such conduct occurred and plaintiffs' claims governed by the procedures in effect at time claims were first asserted). REPLY MEMO OF POINTS & AUTHORITIES ISO DEFENDANTS' MOTION TO DISMISS Case No. C-96-20867-RMW (EAI) -9-
explaining that it has long been recognized that "no person has a vested right in any general rule of law or policy of legislation entitling him to insist that it remain unchanged for his benefit. . . . A cause of action that has not been reduced to a final judgment is not a vested right.'" 1997 U.S. Dist. LEXIS 621, at *26-27 (emphasis added). This is especially true with respect to plaintiff's "vested right" to sue defendants for reckless conduct under Section 10(b). In Ernst & E