MILBERG WEISS BERSHAD

HYNES & LERACH LLP

ALAN SCHULMAN (128661)

JAMES A. CAPUTO (120485)

TRAVIS E. DOWNS, III (148274)

TOR GRONBORG (179109)

600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058

Attorneys for Plaintiffs

[Additional counsel appear on signature page.]

WALTER W. HEAD, III, et al., On Behalf of Themselves

and All Others Similarly Situated,

Plaintiffs,

vs.

NETMANAGE, INC., et al.,

Defendants.

___________________________________

No. C-97-4385-CRB

CLASS ACTION

DATE: February 24, 1998

TIME: 10:00 a.m.

COURTROOM: Hon. Charles R.

Breyer

I. INTRODUCTION

Defendants' oppose plaintiffs' motion to strike and objections to judicial notice primarily on the ground that plaintiffs have somehow waived their right to object to the use of SEC Form 4 Reports and Proxy Statements simply by alleging that defendants' Class Period sales exceeded $14 million. Plainly, however, plaintiffs did not even reference either the individual defendants' Form 4 Reports or NetManage, Inc.'s ("NetManage" or the "Company") Proxy Statement in the Second Amended Complaint ("Complaint"). Defendants' attempt to read between the lines assumes that insider trading information can only come from the Form 4 Reports and Proxy Statements, and plaintiffs therefore, have put these documents at issue. This assumption is incorrect.

Ultimately, when defendants finally attempt to address the merits of plaintiffs' objection to the Form 4 Report's use, they virtually ignore controlling Ninth Circuit authority which dictates that matters outside the pleadings are not to be considered on a motion to dismiss. Cooper v. Pickett, No. 95-55657, 1997 U.S. App. LEXIS 39330, at *16 (9th Cir. Jan. 30, 1998).⁽¹⁾ Because defendants' SEC Form 4 Reports and Proxy Statements are not pleaded in the Complaint, are not the proper subject of judicial notice, and are inadmissible hearsay, they should not be considered on defendants' Motion to Dismiss. All references to such documents in defendants' Motion and Reply should be stricken.⁽²⁾

II. NINTH CIRCUIT LAW PROHIBITS THE USE OF EXTRINSIC DOCUMENTS ON A MOTION TO DISMISS

The Ninth Circuit recently and emphatically confirmed that matters not specifically pleaded in a complaint cannot be considered on a Rule 12(b)(6) motion. In Cooper, the Ninth Circuit refused to consider conference call transcripts on a motion to dismiss even though plaintiffs had alleged these calls, because the complaint did not specifically plead about the transcripts or their existence. Plaintiffs also disputed the transcripts' authenticity and objected to their use. Accordingly, the Ninth Circuit ruled that such transcripts were "'beyond the pleadings'" and could not be considered on defendants' motion to dismiss. 1997 U.S. App. LEXIS 39330, at *14 (quoting Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994)).

The present facts are, for all relevant purposes, identical to those in Cooper. Here, while the Complaint alleges that "several officers and directors of NetManage reported to the SEC that they had sold substantial amounts of NetManage shares" (¶89), no reference whatsoever is made to defendants' Form 4 Reports, or Proxy Statements.⁽³⁾ Moreover, plaintiffs dispute the accuracy of such documents and have objected to their use. See Memorandum of Points and Authorities Supporting Plaintiffs' Motion to (1) Strike Defendants' References to the Contents of Their Public Records or, in the Alternative; (2) Plaintiffs' Objection to the Court's Taking Judicial Notice of Same ("Pltfs' Motion") at 8.

Defendants' further argument that the Complaint necessarily incorporates the Form 4 Reports because plaintiffs' pre-filing investigation included a review of "SEC filings" fails to amount to the specific pleading Cooper requires. 1997 U.S. App. LEXIS 39330, at *14-15.⁽⁴⁾

III. DEFENDANTS' FORM 4 REPORTS AND PROXY STATEMENTS ARE INADMISSIBLE HEARSAY

Defendants argue that their Form 4 Reports and Proxy Statements are not being offered for their truth. Defs' Mem. at 7. If, however, Form 4 Reports and Proxy Statements are relevant at all, they are so only as they relate to the question of when and how much NetManage stock defendants sold. If the Form 4 Reports are not being offered to prove the fact of defendants' alleged stock sales, such documents have no relevance. Assuming the truth of such documents is thus a prerequisite to making any use of them.

Defendants' reliance on Gray v. First Winthrop Corp., 82 F.3d 877, 885 n.10 (9th Cir. 1996), is entirely misplaced. In Gray, the court considered the use of a memorandum sent to defendants which expressed concern that certain statements in the prospectus were inaccurate. Id. The court held that the memorandum was not being used to prove the truth of the matters contained in the memorandum, but to prove defendants' scienter as to these potential inaccuracies. Id. The situation in Gray is thus different from the instant case in that the fact that the Gray memorandum alerted defendants to potential misrepresentations evidenced defendants' knowledge. Whether the specific problems cited in the memorandum were actually true was irrelevant to defendants' knowledge of their existence. Thus, to infer scienter in Gray, the truth of the matters asserted did not need to be proven. Delivery of the memorandum to defendant established plaintiffs' point.

Conversely here, to establish relevance, defendants must prove that the stock sales actually occurred. The documents they rely on must therefore be established as true and accurate representations of their stock sales before they have any bearing on scienter. The Form 4 Reports and Proxy Statements must thus be taken as true before defendants can use them to negate scienter. The documents offered, as they are only for the truth of the matters asserted, are inadmissible.

Moreover, defendants' Form 4 Reports do not fit within the government or business records exceptions to the hearsay rule. Fed. R. Evid. 802. As detailed in plaintiffs' motion to strike, the Form 4 Reports are records simply stored by the SEC. They are prepared by non-government officials (i.e., the defendants), and the accuracy of these records are not verified by the SEC. In short, they are not government records. Similarly, the Form 4 Reports are not expected business records as their preparation by defendants is not a "regularly conducted business activity." Insider stock sales and the reporting thereof has nothing to do with NetManage's business activity. It is akin to the filing requirement for personal income tax returns, which are clearly not the filers' business records. In fact, the obligation to provide Form 4 Reports is imposed on non-employees as well as directors and officers, making the obligation clearly unrelated to NetManage's regularly conducted business activities. Thus, the Form 4 Reports are improper hearsay and should be excluded.

IV. THE COURT MAY NOT TAKE JUDICIAL NOTICE OF THE FORM 4 REPORTS OR PROXY STATEMENTS

Defendants' own brief admits that only facts which can be obtained from indisputably accurate sources are proper for judicial notice. See Opposition at 4. In light of numerous reporting indiscretions repeatedly evidenced in SEC Form 4 filings and given plaintiffs' objection, the Form 4 Reports cannot reasonably be said to be an indisputably accurate source. See Pltfs' Motion at 2-3, 4-5. Finally, defendants' suggestion that plaintiffs have opened the door to admissibility because their counsel generally review SEC filings fails to rise to the level of specific incorporation of such documents. Cooper, 1997 U.S. App. LEXIS 39330, at *15-16.

V. CONCLUSION

For the reasons set forth above, Plaintiffs' Motion to (1) Strike Defendants' References to the Contents of Their "Public Records" or, in the Alternative; (2) Plaintiffs' Objection to the Court's Taking Judicial Notice of Same should be granted.

DATED: February 13, 1998

Respectfully submitted,

MILBERG WEISS BERSHAD

HYNES & LERACH LLP

ALAN SCHULMAN

JAMES A. CAPUTO

TRAVIS E. DOWNS, III

TOR GRONBORG

______________________________

TOR GRONBORG

600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058

LAW OFFICES OF ALFRED G.

YATES, JR.

ALFRED G. YATES, JR.

519 Allegheny Building

429 Forbes Avenue

Pittsburgh, PA 15219

Telephone: 412/391-5164

SCHIFFRIN CRAIG &

BARROWAY, LLP

RICHARD S. SCHIFFRIN

ANDREW L. BARROWAY

Three Bala Plaza East

Suite 400

Bala Cynwyd, PA 19004

Telephone: 610/667-7706

FARUQI & FARUQI, LLP

NADEEM FARUQI

415 Madison Avenue

21st Floor

New York, NY 10017

Telephone: 212/986-1074

Attorneys for Plaintiffs

NETMANAG\MJ016543.brf

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 Diego, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 600 West Broadway, Suite 1800, San Diego, California 92101.

2. That on February 13, 1998 declarant served the PLAINTIFFS' REPLY TO DEFENDANTS' OPPOSITION TO MOTION TO STRIKE AND OBJECTIONS TO JUDICIAL NOTICE by depositing a true copy thereof in a United States mailbox at San Diego, 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. 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 13th day of February, 1998, at San Diego, California.

______________________________

Lori L. Starmer

1. Defendants do not successfully distinguish Cooper. Their argument turns on the type of document at issue, rather than focusing on the Court's holding that documents neither referred to nor referenced in a complaint may not be considered in reviewing a motion to dismiss.

2. See Memorandum of Points and Authorities in Support of Defendants' Motion to Dismiss the Amended Complaint at 19-22.

3. Defendants' assertion that information concerning insider sales could only come from the Form 4 Reports or Proxy Statements is incorrect. (Defs' Mem. at 3-4.) Insider sales, including those detailed in the Complaint, are reported in a number of periodicals and electronic databases.

4. In re Wells Fargo Sec. Litig., 12 F.3d 922, 931 (9th Cir. 1993) (while allegations of unusual insider trading may be typical of securities fraud, they "are not required" to show motive and opportunity).