BRUCE G. VANYO, State Bar # 060134
JEROME F. BIRN, JR., State Bar # 128561
IGNACIO E. SALCEDA, State Bar # 164017
REBECCA A. MITCHELLS, State Bar # 151683
TRACY TOSH LANE, State Bar #184666
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone: (650) 493-9300

Attorneys for Defendants
NETMANAGE, INC., ZVI ALON, WALTER
AMARAL, UZIA GALIL, JOHN BOSCH,
ROBERT WILLIAMS and RICHARD KORETZ

NOTICE OF MOTION TO DISMISS

MEMORANDUM OF POINTS AND AUTHORITIES

INTRODUCTION AND SUMMARY OF ARGUMENT

ALLEGATIONS OF THE SECOND AMENDED COMPLAINT

ARGUMENT

I. PLAINTIFFS HAVE FAILED TO SATISFY THE REFORM ACT'S RIGOROUS PLEADING REQUIREMENTS

A. Plaintiffs Have Not Pled with Particularity All Information Supporting Their Belief that the Defendants Committed Fraud

1. The Reform Act Requires Plaintiffs to Disclose All Information in their Possession

2. Plaintiffs Do Not Plead With Particularity the Facts on Which Their Conclusions of Fraud are Based

B. Plaintiffs Fail to Plead Specific Facts Showing That NetManage's Accounting Was Incorrect and, Consequently, Also Fail to Plead Facts Giving Rise to a Strong Inference of Fraud

C. Plaintiffs Do Not Plead Any Factual Basis to Believe That Defendants Made False Forecasts

D. Plaintiffs' Other Allegations Do Not Give Rise to A Strong Inference of Fraud

1. The Individual Defendants' Stock Sales Refute Any Inference of Fraud

2. The Syzygy and AGE Acquisitions Do Not Raise a "Strong Inference" of Fraud

II. DEFENDANTS GALIL, BOSCH, WILLIAMS, AND KORETZ CANNOT BE LIABLE BECAUSE THEY ARE NOT ALLEGED TO HAVE MADE A FALSE STATEMENT

CONCLUSION

Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir. 1995)

Allison v. Brooktree Corp., No. 97-0852-JM-POR, 1998 WL 151787
     (S.D. Cal. Mar. 10, 1998)

Blum v. Semiconductor Packaging Materials Co., No. 97-7078, 1998 U.S. Dist.
     LEXIS 6868 (E.D. Pa. May 5, 1998)

Central Bank of Denver, N.A. v. First Interstate Bank of Denver , N.A.,
     511 U.S. 164 (1994)

Cooper v. Pickett, 137 F.2d 616 (9th Cir. 1997)

Duncan v. Pencer, [1995-1996 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,043
     (S.D.N.Y. Jan. 18, 1996)

Head v. NetManage, Inc., No. 07763295 (Santa Clara Super. Ct., filed Jan. 9, 1997)

Head v. NetManage, Inc., No. 97-4385-CRB (N.D. Cal. Feb. 24, 1998)

Hockey v. Medhekar, [1997 Tr. Binder] Fed. Sec. L. Rep.
     (CCH) ¶ 99,465, (N.D. Cal. Apr. 15, 1997)

In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir. 1989)

In re Boston Tech. Inc. Sec. Litig., [Current Binder] Fed. Sec. L. Rep.
     (CCH) ¶ 90,174 (D. Mass. Feb. 5, 1998)

In re Crystal Brands Sec. Litig., 862 F. Supp. 745 (D. Conn. 1994)

In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994)

In re GlenFed, Inc. Sec. Litig., 60 F.3d 591 (9th Cir. 1995)

In re Gupta Corp. Sec. Litig., 900 F. Supp. 1217 (N.D. Cal. 1994)

In re Health Management Sys., Inc. Sec. Litig., No. 97 Civ. 1865-HB,
     1998 U.S. Dist. LEXIS 8061 (S.D.N.Y. June 1, 1998)

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

In re Oak Tech. Sec. Litig., No. 96-20552

In re Ross Sys. Sec. Litig., [1994-1995 Tr. Binder] Fed. Sec. L. Rep.
     (CCH) ¶ 98,363, (N.D. Cal. July 21, 1994) (Jensen, J.)

In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746 (N.D. Cal. 1997);

In re Silicon Graphics, Inc. Sec. Litig., [1996-1997 Tr. Binder] Fed. Sec. L. Rep.
     (CCH) ¶ 99,325 (N.D. Cal. Sept. 25, 1996)

In re Software Publ'g Sec. Litig., [1993-1994 Tr. Binder] Fed. Sec. L. Rep.
     (CCH) ¶ 98,094 (N.D. Cal. Feb. 2, 1994)

In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086 (N.D. Cal. 1994),
     aff'd, 95 F.3d 922 (9th Cir. 1996)

In re Syntex Corp. Sec. Litig. 95 F.3d 922 (9th Cir. 1996)

In re Valence Tech. Sec. Litig., No. C-95-20459 JW,
     1996 WL 67326 (N.D. Cal. Feb. 13, 1996)

In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994);

In re YES! Entertainment Sec. Litig., No. C-97-01388-CRB
     (N.D. Cal. May 15, 1998)

Leonard v. NetFRAME Sys., Inc., [1995-1996 Tr. Binder] Fed. Sec. L. Rep.
     (CCH) ¶ 98,982, (N.D. Cal. Aug. 8, 1995)

Medhekar v. United States District Court, 99 F.3d 325 (9th Cir. 1996)

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

Novak v. Kasaks, 997 F. Supp. 425 (S.D.N.Y. 1998)

Polk v. Fritz, No. C-96-2712 MHP(N.D. Cal. Mar. 5, 1998)

Ronconi v. Larkin, [Current Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,212
     (N.D. Cal. May 1, 1998)

Salinger v. Projectavision, Inc., 972 F. Supp. 222 (S.D.N.Y. 1997)

San Leandro Emergency Med. Plan v. Philip Morris, 75 F. 3d 801, (2d Cir. 1996)

Shields v. Citytrust Bancorp, 25 F.3d 1124 (2d Cir. 1994)

Spiegler v. Wills, 60 F.R.D. 681 (S.D.N.Y. 1973)

Stack v. Lobo, [1995-1996 Tr. Binder] Fed. Sec. L. Rep.
     (CCH) ¶ 99,027 (N.D. Cal. Sept. 15, 1995)

Siegel v. Lyons, [1996-97 Tr. Binder] Fed. Sec. L. Rep.
     (CCH) ¶ 99,227 (N.D. Cal. Apr. 16, 1996)

Thornton v. Micrografx, Inc., 878 F. Supp. 931 (N. D. Tex 1995)

Wenger v. Lumisys, Inc., No. C-97-20609 RMW, 1998 WL 199082
     (N.D. Cal. Mar. 31, 1998)

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

Zeid v. Kimberley, 973 F. Supp. 910 (N.D. Cal. 1997)

15 U.S.C. § 78u-4(b)(1)(B)

15 U.S.C. § 78u-4(b)(2)

15 U.S.C. § 78u-4(b)(3)(B)

15 U.S.C. § 78u-5(c)(1)(B)(i)

Fed. R. Civ. P. 9(b)

Securities and Exchange Commission
     Rule 10b-5, 17 C.F.R. 240.10b-5

H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. at 41 (1995)

On October 9, 1998, at 10:00 a.m., Defendants NetManage, Inc., Zvi Alon, Walter Amaral, Uzia Galil, John Bosch, Robert Williams, and Richard Koretz ("Defendants") will move this Court, located at 450 Golden Gate Avenue, San Francisco, California, Courtroom 8, to dismiss with prejudice all claims in plaintiffs' Second Amended Complaint, pursuant to Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act of 1995 ("Reform Act"), which added Section 21D to the Securities Exchange Act of 1934 ("Exchange Act"). Defendants Ben-Artzi and Geisler, who have not been served, do not appear or join this motion.

The issues presented in this motion are: (1) whether the Complaint, which is pleaded on information and belief, satisfies the Reform Act's requirements for such pleadings; (2) whether plaintiffs allege with particularity facts showing that defendants' statements were false when made, as required by Section 21D(b)(1) of the Reform Act; (3) whether plaintiffs allege with particularity facts giving rise to a "strong inference" that defendants acted with fraudulent intent, as required by Section 21D(b)(2) of the Reform Act; (4) whether plaintiffs allege specific facts showing that defendants may be held liable for statements made in stock analyst reports; (5) whether defendants Galil, Bosch, Williams, and Koretz may be liable under Section 10(b) of the Exchange Act where they are not alleged to have made a single false statement.

Plaintiffs voluntarily withdrew their initial complaint when faced with defendants' first motion to dismiss. On February 24, 1998, the Court dismissed plaintiffs' First Amended Complaint in its entirety, with leave to amend. Head v. NetManage, Inc., No. 97-4385-CRB (N.D. Cal. Feb. 24, 1998) (the "Order") (attached as Exhibit A to the Declaration of Ignacio E. Salceda ("Salceda Decl.")). This is plaintiffs' third try to state a viable claim under the Reform Act. While plaintiffs have bulked up the Second Amended Complaint (the "Complaint" or "SAC"), plaintiffs have not added particularized factual allegations as required by the Reform Act and this Court's Order. In its Order, the Court warned plaintiffs to state with particularity all facts supporting their belief that defendants had committed a fraud; to allege with particularity facts showing that defendants' statements were false when made; and, to allege with particularity each defendant's involvement in making statements or participation in the daily control of NetManage. Plaintiffs have merely added boilerplate, not particularized facts as the Court required. The Complaint should be dismissed without leave to amend for four reasons.

First, because the Complaint is pleaded on plaintiffs' information and belief, plaintiffs must "state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1); Order at 1. Plaintiffs ignore this obligation. Instead, plaintiffs have repeated essentially the same boilerplate "Basis of Allegations" paragraph that they pleaded last time. Compare SAC ¶ 127 with First Am'd Cmpt. ¶ 160. Indeed, plaintiffs again state that they "believe that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth herein." SAC ¶ 127 (emphasis added). This and other courts have rejected this allegation as insufficient under the Reform Act. This Court made clear that the Reform Act requires a complaint to contain particularized factual allegations; merely alleging a hope that discovery will "likely" provide factual support is insufficient. The Second Amended Complaint, like the First Amended Complaint, remains silent about the facts upon which plaintiffs base their belief of fraud.

Second, plaintiff is required to plead with particularity each allegedly false statement and the reason why the statement was false. 15 U.S.C. § 78u-4(b)(1); cf. Order at 1. The Complaint again fails to satisfy this standard. Plaintiffs do not plead particular contemporaneous facts showing that NetManage published false financial statements, or that NetManage's forward-looking statements were false when made. As in the First Amended Complaint, the Second Amended Complaint just provides a long list of NetManage's customers and makes a conclusory allegation that unspecified amounts of revenue were recognized improperly on unidentified shipments to these customers. SAC ¶ 99. Not one detail of any supposedly phony transaction is alleged. And while plaintiffs allege that defendants made false financial forecasts to and through financial analysts, plaintiffs never plead specific facts showing that these supposed forecasts differed from NetManage's own internal expectations. Even before the Reform Act, this was insufficient.

Third, the Reform Act requires plaintiff to "state with particularity facts giving rise to a strong inference that the defendant acted" with fraudulent intent. 15 U.S.C. § 78u-4(b)(2). The Complaint alleges no more than the type of boilerplate allegations of motive that other courts have found insufficient under the Reform Act. Hoping to avoid the indisputable fact that NetManage's executives retained 96.4 percent of their available holdings, plaintiffs ask the Court to shut its eyes to the options that defendants could have sold but did not. Fine. Even under plaintiffs' myopic approach, the defendants retained 95.6 percent of their stock. See SAC ¶ 111. Sales of such minuscule percentages refute any inference of fraud.

Finally, plaintiffs again invoke the group published information doctrine against persons who did not make any statements. To do so, the Court has held that plaintiffs must plead with particularity each defendants' participation in the day-to-day control of NetManage and preparation of the allegedly false statements made by others. Order at 2. Plaintiffs ignore this holding. Instead, plaintiffs merely expound upon the general duties of defendants Galil, Bosch, Williams and Koretz. Plaintiffs do not allege that these defendants actually did anything in preparing the alleged false statements.

Plaintiffs have amended twice. In dismissing the previous complaint, the Court made clear the defects plaintiffs had to cure. Plaintiffs have not done so. This failure is remarkable because these same plaintiffs and their counsel obtained extensive document discovery and the state law equivalent of a Rule 30(b)(6) deposition in the parallel, factually-identical state court case, and have repeatedly stated their intent to use that discovery to bolster their federal allegations. See Letters between plaintiffs' and defense counsel (Salceda Decl. Ex. P). Nonetheless, the Complaint cannot allege particular facts supporting plaintiffs' allegations that defendants committed fraud. Three chances to amend, combined with extensive document discovery through the state courts, is surely more than Congress had in mind when it passed the Reform Act. The Complaint should be dismissed with prejudice. See Neubronner v. Milken, 6 F.3d 666, 671 (9th Cir. 1993) (affirming dismissal with prejudice where plaintiff had opportunity to conduct discovery).

NetManage develops connectivity software for Windows-based computers. From revenue of less than $1 million in 1991, NetManage grew spectacularly to revenue of $71.5 million in 1994.

The class period begins on July 25, 1995, when NetManage announced its results for the second quarter of 1995: revenue of $30.2 million -- 150 percent growth compared to the prior-year quarter -- and net income of $6.8 million. SAC ¶ 53. The class period ends with NetManage's announcement on January 12, 1996 that results for the fourth quarter of 1995 would be below market expectations. SAC ¶ 96. Nevertheless, NetManage still reported a profitable fourth quarter, with revenue of $31.2 million and net income of $3.3 million. SAC ¶ 97. More significantly, NetManage reported stellar results for 1995: revenue of $125.4 million, a 75 percent increase over 1994. Id.

Like the First Amended Complaint, the SAC alleges that defendants published false financial statements about NetManage's second and third quarters, on July 25 and October 24, 1995, respectively. SAC ¶¶ 53,70. Plaintiffs allege NetManage improperly recoined revenue on sales where distributors and other customers had a right of return or there were other contingencies. SAC ¶¶ 10, 99-109. Plaintiffs allege that defendants made falsely optimistic forecasts about NetManage's prospects; plaintiffs also say that defendants' are liable for the opinions expressed by stock analysts who published reports about NetManage during the class period, as if defendants had published those opinions themselves. SAC ¶¶ 54-57, 65-68, 71-74, 79-80, 86-89, 94.

I. PLAINTIFFS HAVE FAILED TO SATISFY THE REFORM ACT'S RIGOROUS PLEADING REQUIREMENTS

A. Plaintiffs Have Not Pled with Particularity All Information Supporting Their Belief that the Defendants Committed Fraud.

1. The Reform Act Requires Plaintiffs to Disclose All Information in their Possession.

In dismissing the last complaint, the Court noted that "[a] complaint made 'upon investigation of counsel' is the same as a complaint made 'upon information and belief.'" Order at 1. Once again, however, plaintiffs simply state that their "allegations [are] based on the investigation of counsel." SAC ¶ 127. This Court, and many others, have held that such a complaint is an information and belief pleading subject to the Reform Act's strict new requirements.¹

Plaintiffs must "state with particularity all facts" upon which plaintiffs base their beliefs that a fraud occurred. 15 U.S.C. § 78u-4(b)(1)(B). In the Conference Report, Congress emphasized that a plaintiff must plead "all facts in the plaintiff's possession" that support plaintiff's belief that a fraud occurred. H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. at 41 (1995) (Salceda Decl. Ex. B). A plaintiff may not plead some facts and withhold others: plaintiff must plead "all" facts, and plead them "with particularity." Id. On its face, this requirement is far more stringent than the "relaxed" standard previously applied by the Ninth Circuit, which merely required a plaintiff to provide "a statement of the facts upon which the [plaintiff's] belief is founded." Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987).

Indeed, Judge Smith held in Silicon Graphics that the Reform Act "strengthened" the Ninth Circuit requirement for information and belief pleading "[i]n an effort to minimize discovery abuse . . . and unwarranted fraud claims . . . ." In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 763 (N.D. Cal. 1997) (Silicon Graphics II). Judge Smith noted that this heightened information and belief pleading requirement was derived from the Second Circuit's "strong inference" standard. See id. at 756; In re Silicon Graphics, Inc. Sec. Litig., [1996-1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,325 at 95,961 (N.D. Cal. Sept. 25, 1996) (Silicon Graphics I). As Judge Smith observed, strict scrutiny of information and belief pleadings was "an integral part" of the Second Circuit's strong inference standard and was strictly applied in securities cases. Silicon Graphics II, 970 F. Supp. at 766.

2. Plaintiffs Do Not Plead With Particularity The Facts On Which Their Conclusions of Fraud Are Based.

As before, the Complaint falls short of the heightened pleading standards. Plaintiffs' allegations of fraud are not based on their personal knowledge. As paragraph 127 states, plaintiffs' allegations are "based upon the investigation of [plaintiffs'] counsel," which included counsel's review of public documents (SEC filings, analyst reports, etc.) and discussions with unidentified "former NetManage employees and consultants." This deliberately murky allegation fails.

First, contrary to this Court's Order and the Reform Act, plaintiffs do not plead with particularity the information upon which their beliefs are based. Plaintiffs do not even try to identify the information that supposedly supports any particular beliefs pled in their complaint. Paragraph 127 merely lumps together all of the purported sources of plaintiffs' allegations without specifying which allegations were derived from which sources. This tactic precludes the Court from determining whether any factual basis exists for any specific allegation.

Plaintiffs' failure to satisfy the Reform Act's requirements is notable here because these same plaintiffs, represented by the same counsel, have had extensive document discovery (and one deposition) in the parallel, factually-identical state case. Head v. NetManage, Inc., No. 07763295 (Santa Clara Supr. Ct., filed Jan. 9, 1997). Despite the Reform Act's mandatory stay, plaintiffs sought discovery in the state case with the admitted purpose of bolstering their federal complaint. Defendants protested that this tactic would undermine one of the central goals of the Reform Act, that complaints in "securities actions should stand or fall based on the actual knowledge of the plaintiffs rather than information produced by the defendants after the action has been filed," Medhekar v. United States District Court, 99 F.3d 325, 328 (9th Cir. 1996) (emphasis added). The state court declined to prohibit plaintiffs from using state court discovery in this action;² Judge Ware denied a similar motion without prejudice. Believing that nothing in these documents would support any claim of wrongdoing, defendants did not renew their motion before this Court.

The Complaint proves the point. Although plaintiffs successfully made an end run around the Reform Act's mandatory discovery stay, and obtained tens of thousands of pages from defendants and from NetManage's accountants, Arthur Andersen LLP, the Complaint does not point to one specific internal document from NetManage or Arthur Andersen that supports plaintiffs' allegations. This omission is particularly glaring because the key allegation is that NetManage wrongfully recognized revenue on distributor sales during the third and fourth quarters of 1995, and were forced to change its accounting policy by Arthur Andersen. SAC ¶¶ 10, 99-109. Plaintiffs allege that Arthur Andersen "discovered serious irregularities " in NetManage's financial statements and "refused to permit . . . improper revenue recognition." SAC ¶ 106. If there were any truth to these allegations, plaintiffs could certainly point to something in NetManage's documents or Arthur Anderson's workpapers to support their claim. But the Complaint does not allege anything specific -- no specific transactions, no dates, no amounts; as before, plaintiffs merely list more than three dozen NetManage customers (SAC ¶ 99) and conclude that sales to all of these customers were improper. That style of pleading would have failed before the Reform Act.

Similarly, plaintiffs allege that defendants repeatedly issued false financial forecasts through analysts. If there were any truth to this allegation, plaintiffs should be able to point to a specific internal forecast that differed from a public forecast. But again, there is nothing. The best plaintiffs can do is conclude that defendants received unspecified negative internal reports. SAC ¶¶ 21-22, 26-28. As the Court found in dismissing the Complaint, this is insufficient.

Where plaintiffs have already put a company and its auditors to the expense and trouble of producing thousands of pages internal documents, the Reform Act's information and belief pleading requirement should be applied with special rigor. If there were any factual basis to support plaintiffs' sweeping claims of fraud, plaintiffs would have pleaded it in the Complaint.

B. Plaintiffs Fail to Plead Specific Facts Showing That NetManage's Accounting Was Incorrect and, Consequently, Fail to Plead Facts Giving Rise to a Strong Inference of Fraud.

NetManage has never restated its financial results for 1995 or any prior fiscal period. Moreover, in the last three years, plaintiffs do not point to anyone who has publicly questioned the propriety of NetManage's accounting. Despite these facts, plaintiffs' core allegation is again that NetManage fraudulently recognized revenue on certain sales during the third and fourth quarters of 1995. SAC ¶¶ 10, 99-109. This allegation of accounting fraud is still hollow.

Plaintiffs do not identify a single fraudulent transaction -- despite discovery. As before, plaintiffs just intone the names of over three dozen NetManage customers and make the conclusory allegation that unspecified revenue was recognized improperly. SAC ¶ 99. As Judge Williams stated in applying the Reform Act to dismiss similar allegations, "[s]imply listing customers and providing general, unsupported estimates of 'improper' sales does not meet the particularity requirements of Rule 9(b) and the Reform Act. Rather, plaintiffs must allege facts regarding the underlying transactions with particularity." Zeid v. Kimberley, 973 F. Supp. 910, 923 (N.D. Cal. 1997) (emphasis added); see In re Oak Tech. Sec. Litig., No. 96-20552 SW, 1997 WL 448168, at *8 (N.D. Cal. July. 1, 1997) (Salceda Decl. Ex. F) (plaintiffs must allege "particular transactions where revenues were improperly recorded, including the names of the customers, the terms of specific transactions, when the transactions occurred, and the approximate amount of the fraudulent transactions. Merely providing the names of 'chief customers' . . . does not suffice.") (emphasis added).

Because plaintiffs have not pleaded any specific facts, they have failed to establish that any supposed accounting irregularity was material. If there were phony transactions, as plaintiffs allege, one would expect to see lots of returned product and an eventual increase in sales return reserves. But plaintiffs do not allege that NetManage's sales return reserves proved inadequate; indeed, they do not allege that any customer ever returned any product. See Siegel v. Lyons, [1996-97 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,227, at 95,223 (N.D. Cal. Apr. 16, 1996) ("Given the lack of allegations of either direct or circumstantial evidence of falsity at the time the reserves were set and the lack of evidence that the reserves were actually inadequate, there is no reason to suspect that the changes in these reserves were based on anything other than a permissible business judgment.")

Plaintiffs do not allege any specific facts supporting their speculation that, at the end of 1995, Arthur Anderson forced NetManage to change its policy for recognizing revenue on distributor sales. SAC ¶ 106-08. As explained in the last motion, the fact that NetManage changed from one acceptable policy in 1994 to another acceptable policy in 1995 cannot demonstrate fraud.³ See Spiegler v. Wills, 60 F.R.D. 681, 682-83 (S.D.N.Y. 1973) ("the mere allegation of a change in accounting procedure -- from one accepted practice to another -- is not sufficient in itself to state a claim upon which relief may be granted, no matter how characterized. . . . [I]t will not suffice to merely compare present accounting practices with past accounting practices and paste rote [fraud] allegations or action-seeking characterizations thereto.") (citation omitted). Indeed, plaintiffs still do not allege that either the 1994 or 1995 policy was improper. Nevertheless, plaintiffs continue to allege, without factual support, that this change was spurred by Arthur Andersen's discovery of wrongdoing.

Arthur Andersen's audit of the 1995 financial statements necessarily included a review of the fourth quarter and all prior quarters. Arthur Andersen opined that NetManage's financial statements complied with generally accepted accounting principles. If Arthur Andersen had found material problems with prior quarters, as plaintiffs allege, it would have required NetManage to restate its financial results. Yet Arthur Andersen issued an unqualified endorsement of NetManage's financial statements for all of 1995. See 1995 Annual Report at 35 (Salceda Decl. Ex. G).

Plaintiffs are left with nothing but the generalized allegation that NetManage did not follow its accounting policies. Which sales to which customers were fraudulent? What alleged "contingencies" precluded proper revenue recognition? What were the amounts of the challenged sales? That plaintiffs cannot identify a single improper transaction, let alone plead facts showing that such transactions were material and fraudulent, is dispositive. Even before the Reform Act, courts routinely dismissed such generalized allegations of accounting fraud. E.g., In re Ross Sys. Sec. Litig., [1994-1995 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,363, at 90,498-99 (N.D. Cal. July 21, 1994).⁴ Where plaintiffs have already had discovery, as here, dismissal is appropriate.E.g., Zeid, 973 F. Supp. at 923.

Moreover, the allegation that "delivery did not occur until after the end of the quarter" (SAC ¶ 105) does not, on its face, state a violation of NetManage's publicly-disclosed accounting policies. NetManage disclosed in both its 1994 and 1995 Annual Reports that it recognized revenue after "the software has been shipped," pursuant to AICPA Statement of Position 91-1. 1994 Annual Report at 22; 1995 Annual Report at 26. Thus, plaintiffs' allegation does not support a claim of incorrect accounting, much less fraud.

Finally, this new allegation suffers the same fundamental problem as all of the others: plaintiffs do not identify any particular factual basis supporting their belief that NetManage did what plaintiffs allege. Defendants can only surmise that plaintiffs learned the names of Japanese customers from Arthur Andersen workpapers where the auditors verified that the revenue was properly recognized. If plaintiffs have a different source, indeed, any source which supports their allegation, let them come forward, as the Reform Act requires, and state it.

C. Plaintiffs' Do Not Plead Any Factual Basis to Believe That Defendants Made False Forecasts.

Plaintiffs say that defendants made false forecasts about NetManage's prospects in conference calls with financial analysts. Plaintiffs also say that defendants endorsed analyst reports containing forecasts that defendants knew were false. See SAC ¶¶ 54-57, 65-68, 71-74, 79-80, 86-89, 94. To state a claim for fraudulent forecasts, however, the Reform Act requires plaintiffs to show that a forward-looking statement was made with "actual knowledge . . that the statement was false or misleading." 15 U.S.C. § 78u-5(c)(1)(B)(i). Plaintiffs do not plead any particular facts showing that any forecast was false when made.

Plaintiffs allege that all of defendants' forward-looking statements were false because they omitted to disclose three principal problems: that sales for some NetManage products were below internal expectations; that NetManage was having internal difficulties with its Telesales group and its Japanese sales office; and that demand for NetManage products was declining due to competition in the marketplace. SAC ¶¶ 58, 75, 91. These allegations are pure conclusions. The Complaint does not identify any supporting factual basis.

First, although plaintiffs allege that sales were below internal expectations, plaintiffs do not say what internal expectations or actual sales were when defendants made their forecasts. Although plaintiffs repeatedly claim that Alon and Amaral made fraudulent forecasts, plaintiffs never allege with particularity that NetManage's internal forecasts differed from Alon and Amaral's alleged statements. It bears repeating that, despite extensive document discovery, plaintiffs do not allege that any particular, contemporaneous NetManage's internal forecast was materially worse than Alon or Amaral's supposed public forecasts.

Second, although plaintiffs allege problems with the Telesales group and the Japanese sales office, plaintiffs do not allege either what these "problems" were, or what impact NetManage believed they would have on its forecasts. Even before the Reform Act, plaintiffs could not merely assert that optimistic statements were false because there were undisclosed problems. E.g. Leonard, [1995-1996 Tr. Binder] Fed. Sec. L. Rep. (CCH) at 93,780 ("Plaintiff's conclusory attempt to plead as 'facts' the converse of the positive statements made by defendants does not satisfy Glenfed's requirement that a plaintiff identify particular facts indicating the falsity of defendants' statements.") (citing In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1552 (9th Cir. 1994) (en banc)). It goes without saying that plaintiffs, uncorroborated speculation cannot show that defendants actually knew that these supposed problems would have a material adverse impact on NetManage's fourth quarter forecast. Zeid, 973 F. Supp. at 920 (list of undisclosed "adverse facts" not supported by "references to inconsistent contemporaneous statements or information made by or available to [d]efendants").⁵

Finally, plaintiffs allege that defendants' forecasts were undermined by competitive developments -- including Microsoft's planned inclusion of comparable technology in Windows '95. Plaintiffs do not allege anything specific about NetManage's contemporaneous knowledge of competive developments. And plaintiffs provide no factual basis for their belief that Microsoft's intentions for Windows '95 were hidden from the market or something within NetManage's special knowledge. Moreover, plaintiffs do not allege facts showing that NetManage's internal forecasts were materially worse than defendants' public statements, thereby demonstrating defendants' knowledge that Microsoft's plans would hurt NetManage in 1995. In Oak Technology, Judge Williams examined nearly identical allegations, to the effect that certain of Oak's customers were beginning to make the type of computer chip produced by Oak. Judge Williams dismissed, noting that such "conclusory allegations do not satisfy the requirements of Rule 9(b) and the Reform Act." 1997 WL 448168, at *5. Rather, plaintiffs had to provide specific details of how this information was passed to defendants, and the timing and amount of decreased orders. Id. No such information is in the Complaint.

Plaintiffs' allegation that Alon and Amaral are responsible for all of the forecasts and opinions expressed in analyst reports fails for the independent reason that plaintiffs allege no basis to believe that these defendants endorsed the analyst reports. The reports themselves do not state that they were endorsed by any of the defendants. Hoping to avoid the Ninth Circuit's strict requirements for pleading analyst entanglement, In re Syntex Corp. Sec. Litig., 95 F.3d 922 (9th Cir. 1996), plaintiffs have crafted their allegations to fit within the Ninth Circuit's narrow holding in Cooper v. Pickett, 137 F.2d 616 (9th Cir. 1997). Yet, as Chief Judge Patel has recently observed, Cooper's pre-Reform Act analysis is generally inapposite:

Cooper, although recently decided, did not deal with the pleading requirements under the SRA as the complaint at issue was filed on August 15, 1994. Thus, it did not consider the heightened pleading standards incorporated into the SRA, such as the requirement that a complaint pleaded on information and belief disclose all facts underlying the beliefs. In addition, the court respectfully notes that Cooper, while not purporting to overrule existing law, appears to conflict with earlier Ninth Circuit securities cases that required greater particularity in the pleading of fraud claims. See, e.g. Glenfed, 42 F.3d at 1549; In re Stac, 89 F.3d at 1405; Wool, 818 F.2d at 1439. The court will not parse these conflicts, however, since they arise in pre-SRA cases.

Polk v. Fritz, No. C-96-2712 MHP Slip op. at 12 (N.D. Cal. Mar. 5, 1998) (Salceda Decl. Ex. O). In any case, Cooper is irrelevant here. Cooper would apply only to supposed statements made by defendants to analysts, not to the analyst reports themselves. As to defendants' own statements, that plaintiffs have failed to plead particular facts showing that these statements were known to be false when made. Accordingly, defendants cannot be held liable for the analyst's opinions and forecasts.⁶

D. Plaintiffs' Other Allegations Do Not Give Rise to a Strong Inference of Fraud.

The Reform Act requires a complaint to "state with particularity facts giving rise to a strong inference" of scienter. 15 U.S.C. § 78u-4(b)(2). In enacting this standard, Congress repudiated prior Ninth Circuit law. Congress found that even the Second Circuit's "strong inference" standard -- the most rigorous in the nation -- was not strong enough. Congress therefore expressly rejected the "motive and opportunity" portion of the Second Circuit standard. Judge Smith has extensively analyzed the Reform Act's legislative history in reaching this conclusion. Silicon Graphics II, 970 F. Supp. at 757. Numerous other courts, including courts in the Second Circuit have agreed.⁷

1. The Individual Defendants' Stock Sales Refute Any Inference of Fraud.

Because plaintiffs have not alleged facts showing a basis for their belief that NetManage's financial statements were false, or that defendants knew that their forecasts were false when made, plaintiffs cannot show that the facts alleged give rise to a "strong inference" of fraud. Nevertheless, the individual defendants' stock sales actually refute any inference of fraud.

Because plaintiffs frequently rely on stock sales to allege fraudulent intent, courts applying the Reform Act have taken a hard look at such allegations. In Silicon Graphics, Judge Smith held that stock sale allegations did not support a strong inference of scienter. Although the defendants collectively sold almost $14 million of stock, Judge Smith held the sales were not suspicious because defendants sold only a fraction of their millions of available shares and options, and the trades were generally consistent with prior patterns. Silicon Graphics II, 970 F. Supp. at 767. Judges Whyte and Patel have issued similar rulings.⁸

Under the Reform Act, stock sales by defendants "will not support a strong inference of fraud unless the sales are unusual or suspicious." Silicon Graphics II, 970 F. Supp. at 767 (citing Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995)). Plaintiffs contend that the individual defendants' stock sales are suspicious because they supposedly sold a significant percentage of their NetManage stock holdings during the class period. But by ignoring the individuals' available options, plaintiffs have understated their total holdings and thereby overstated the percentage each defendant allegedly sold.

The options that the individual defendants held were as liquid as shares of stock, and could have been exercised and sold immediately; in fact, some of the stock sales plaintiffs put at issue were same-day option exercises and sales. In applying the Reform Act, Judge Smith has recognized that, if plaintiffs point to stock sales as evidence of scienter, the court must consider all of defendants' available holdings, including vested options. Silicon Graphics II, 970 F. Supp. at 767-78; Silicon Graphics I, at 95,966-67 (citing Duncan v. Pencer, [1995-1996 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,043, at 94,208 (S.D.N.Y. Jan. 18, 1996)).⁹

The chart below summarizes defendants' actual sales and total holdings of NetManage stock:

Thus, on the public record, the allegation that the individuals "bailed out" of NetManage stock is demonstrably false. The individuals collectively sold only 3.6 percent of their available holdings. The individuals retained 10,622,924 shares and vested options through the end of the class period. In Silicon Graphics, Judge Smith held that sales of only 10 percent of defendants' total holdings was insufficient as a matter of law to give rise to a strong inference of fraud. Silicon Graphics II, 970 F. Supp. at 768.¹²

The amounts of stock sold by NetManage's key executives is strikingly inconsistent with a strong inference of fraud. Although the core allegation is accounting fraud, Mr. Amaral, NetManage's CFO, did not sell a single share of stock. SAC ¶ 18(b). Indeed, the only reason plaintiffs provide for Amaral to commit fraud is the cursory allegation that all of the defendants sought to "protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby." SAC ¶ 36. This boilerplate contention would have been rejected under the more permissive standards of prior law. As the Second Circuit put it, "a plaintiff must do more than merely charge that executives aim to prolong the benefits of the positions they hold. . . . If motive could be pleaded by alleging the defendant's desire for continued employment, and opportunity by alleging the defendant's authority to speak for the company, the required showing of motive and opportunity would be no realistic check on aspersions of fraud, and mere misguided optimism would become actionable under the securities laws." Shields v. Citytrust Bancorp, 25 F.3d 1124, 1130 (2d Cir. 1994).¹³

Likewise, the leader of any supposed conspiracy, NetManage's Chairman and Chief Executive Officer, Zvi Alon, had no apparent reason to commit fraud. Mr. Alon sold a mere 2.6 percent of his total holdings, retaining more than 8,800,000 shares of stock and options through the end of the class period. Sales of such minuscule percentages refute any inference of scienter. Plaintiffs try to avoid the dispositive impact of these facts by claiming Alon was motivated to commit fraud to reduce the extent his substantial holdings would be diluted by several stock-for-stock acquisitions made by NetManage. SAC ¶ 39. This speculative theory is unsupported by any basis in fact. Plaintiffs also say that NetManage's two biggest shareholders, Alon and Galil, retained the vast bulk of their shares "to avoid undermining the very scheme they were pursuing." SAC ¶ 112. In other words, under plaintiffs' fanciful theory, Alon and Galil didn't want to undermine the scheme they were pursuing . . . even though their scheme would not benefit them. Courts have always rejected this Alice-in-Wonderland argument: holding large percentages of stock is inconsistent with an alleged intent to fraudulently inflate the stock price. As the court in Thornton v. Micrografx, Inc., 878 F. Supp. 931, 938 (N. D. Tex 1995), aptly stated, "The Court refuses to leave its common sense at the courthouse steps, and concludes that the Plaintiffs have failed to make the requisite showing of scienter to support their securities fraud claims."

Nor is the timing or pattern of the other individuals' sales suspicious. Plaintiffs allege that Koretz resigned from NetManage during the first month of the class period, before the successful third quarter had concluded, and long before he could have known of the modest fourth quarter miss. SAC ¶ 18(g). Accordingly, Mr. Koretz's stock sales cannot be suspicious. Acito, 47 F.3d at 54 (stock sales by defendant who retired before the adverse event fail to raise any inference of scienter).

Williams and Galil both sold more stock during the first half of 1995 than they did during the second half of 1995 (the class period). Williams sold 37,400 shares during the class period, but 45,800 shares during the first half of 1995; Galil sold 92,500 shares during the class period, but 119,000 shares during the first half of 1995. Where defendants sold more stock before the class period than during the class period, their class period sales obviously cannot give rise to a strong inference of fraud. Silicon Graphics II, 970 F. Supp. at 768; Hockey, [1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) at 97,083 (dismissing complaint; "defendants sold more shares before the class period than they did during the class period and sold only a small percentage of their collective holdings").

2. The Syzygy and AGE Acquisitions Do Not Raise a "Strong Inference" of Fraud.

Plaintiffs say that defendants were motivated to commit fraud so they could use NetManage's inflated stock to complete mergers with AGE Logic and Syzygy, two private companies. SAC ¶ 37-38. These conclusory allegations are insufficient for two reasons.

First, plaintiffs' allegations are refuted by the Complaint itself. Plaintiffs say that defendants had to artificially inflate the price of NetManage stock because the two acquisitions "were larger for a company of NetManage's size" and "could have been very dilative." SAC ¶ 38. The Complaint alleges that Syzygy's shareholders received 444,000 shares of NetManage stock, and AGE shareholders received 1,000,000 shares. SAC ¶ 38. Yet, as of the beginning of 1995, NetManage had 40.9 million shares outstanding. SAC ¶ 18(a). In other words, these acquisitions required NetManage to issue less than 3 percent of its already outstanding shares.

Second, even under prior Second Circuit law, conclusory allegations of motive based on a desire to conclude acquisitions were insufficient. Courts in the Second Circuit routinely hold that a "[d]esire to consummate [a] corporate transaction does not constitute a motive for securities fraud." Health Management, 1998 U.S. Dist. LEXIS 8061, at *16 (citing San Leandro Emergency Med. Plan v. Philip Morris, 75 F. 3d 801, 814 (2d Cir. 1996)). Otherwise, any company that engaged in any acquisition could be sued for securities fraud any time their stock price subsequently dropped. Accord Philip Morris, 75 F.3d at 814.

II. DEFENDANTS GALIL, BOSCH, WILLIAMS, AND KORETZ CANNOT BE LIABLE BECAUSE THEY ARE NOT ALLEGED TO HAVE MADE A FALSE STATEMENT

Plaintiffs do not allege that defendants Galil, Bosch, Williams, or Koretz made a single false statement. Section 10(b) prohibits only "the making of a material misstatement (or omission) or the commission of a manipulative act," and does not impose liability on persons who merely "giv[e] aid to a person who commits a manipulative or deceptive act." Central Bank of Denver, N.A. v. First Interstate Bank of Denver , N.A., 511 U.S. 164, 177 (1994) (emphasis added). The Ninth Circuit has held that Central Bank eliminated all non-statutory theories of secondary liability under Section 10(b). In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 592 (9th Cir. 1995). Thus, a defendant may be sued for securities fraud only where the allegations meet "all of the requirements for primary liability under Rule 10b-5." Central Bank, 511 U.S. at 191; Silicon Graphics II, 970 F. Supp. at 759 (only primary participants in a Section 10(b) violation may be held liable).

The Court previously held that Galil, Bosch, Williams, and Koretz cannot be liable under a "scheme to defraud" theory. Order at 2. The Court held that if plaintiffs seek to invoke the group published information doctrine, plaintiffs must plead with particularity defendants' "participation in the day-to-day control of the corporation and their participation in the preparation of the allegedly false statements. See Oak Technology, 1997 WL 44168, at *10-11. The conclusory allegations of the First Amended Complaint are insufficient." Order at 5.

Plaintiffs have not remedied these deficiencies.¹⁴ Plaintiffs continue to rely upon conclusory allegations. Plaintiffs say that all of the defendants were involved in preparing NetManage's statements because of "the small size of NetManage's Board and the small, tight-knit nature of NetManage's management team," and that all of the defendants received copies of the reports and releases and could correct them before they were made public. SAC ¶ 20. Such conclusory allegations are insufficient. Plaintiffs have ignored their obligation to allege each defendant's specific role in the creation of a specific statement. Order at 5. The conclusory adjectives that NetManage's board of directors was "small," or that its management team was "tight-knit" add nothing; they are not particularized facts showing each defendants actual involvement, as the Court required.

Plaintiffs face a high burden in imposing the group published presumption these four defendants. Williams and Koretz were vice presidents. "Plaintiffs must plead that these vice presidents were directly involved 'not only in the day-to-day affairs of [NetManage] in general but also in [the preparation of its] financial statements in particular." Oak Tech., 1997 WL 448168, at *11 (quoting Wool, 818 F.2d at 1440). The allegations against Mr. Koretz are particularly strained: plaintiffs concede that Mr. Koretz resigned from NetManage in August 1995, only a few weeks into the class period, long before he could have known how the fourth quarter would turn out. SAC ¶ 18(g). Mr. Koretz cannot be responsible for "group" actions after he concededly was no longer part of the group. Defendants Galil and Bosch were outside directors and served on the audit committee. Even before the Reform Act, courts routinely rejected allegations that outside directors were "privy to inside information" by their service of the board or its committees. In re Interactive Network Inc. Sec. Litig., 948 F. Supp. 917, 921 (N.D. Cal. 1996) (Jensen, J.); Oak Tech., 1997 WL 448168, at *11.¹⁵

Despite this overwhelming wave of authority, plaintiffs suggest that Bosch and Galil "were much more intimately and actively involved in the day-to-day management of NetManage than would ordinarily have been the case with outside directors." SAC ¶ 22. The only basis for this conclusory allegation is that "NetManage had a very small Board of Directors which consisted only of five persons" and "NetManage's business was small." Id. This exercise in circular reasoning does not amount to particularized facts showing that these defendants were involved in the daily control of NetManage or the preparation of the allegedly false statements.

In any case, plaintiffs have failed to satisfy the requirements of the group pleading presumption because they have not alleged facts showing that Galil, Bosch, Williams, or Koretz were involved in the day-to-day operations of NetManage at issue here, revenue recognition and communications to the market. Oak Tech., 1997 WL 448168, at *11 (citing cases).

For these reasons, the Second Amended Complaint should be dismissed with prejudice.

¹ See In re YES! Entertainment Sec. Litig., No. C-97-01388-CRB (N.D. Cal. May 15, 1998) (Salceda Decl. Ex. C); In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 763 (N.D. Cal. 1997); In re Health Management Sys., Inc. Sec. Litig., No. 97 Civ. 1865-HB, 1998 U.S. Dist. LEXIS 8061, at*8 (S.D.N.Y. June 1, 1998) (Salceda Decl. Ex. D) (allegations based on unspecified articles, SEC filings and matters of public record fail to satisfy information and belief standard).

² Subsequently, the courts in Santa Clara County, beginning with Judge Fogel's order in Howard Gunty, Inc. Profit Sharing Plan v. Quantum Corp., No. CV760370 (Order Granting Defendants' Motion for Creation of Ethical Wall Oct. 29, 1997) (Salceda Decl. Ex. E), have consistently required plaintiffs to erect an ethical wall between counsel for plaintiffs in state court and counsel for plaintiffs in parallel federal cases brought pursuant to the Reform Act.

³ In brief, NetManage changed its revenue recognition policy for distributor sales, from booking revenue upon shipment, then estimating the likely returns and setting up a sales return reserve, to simply deferring recognizing any revenue on distributor sales until the product was by the distributor. 1994 Annual Report at 22 (Salceda Decl. Ex. H); 1995 Annual Report at 26.

⁴ E.g., Siegel, [1996-1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) at 95,222; Leonard v. NetFRAME Sys., Inc., [1995-1996 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,982, at 93,779-80 (N.D. Cal. Aug. 8, 1995) ("To survive a motion to dismiss, plaintiffs cannot simply allege that specific accounting practices were violated without also providing specific underlying facts to support the allegations."); Stack v. Lobo, [1995-1996 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,027, at 94,043 (N.D. Cal. Sept. 15, 1995) In re Software Publ'g Sec. Litig., [1993-1994 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,094, at 98,761-62 (N.D. Cal. Feb. 2, 1994).

⁵ See Ronconi v. Larkin, [Current Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,212, at 90,890 (N.D. Cal. May 1, 1998) (dismissing complaint for failure to allege specific facts showing company had "troubled operations"); Novak v. Kasaks, 997 F. Supp. 425, 431 (S.D.N.Y. 1998) (dismissing with prejudice where "the complaint fails to allege with sufficient specificity that at the time [defendants] made favorable statements to securities analysts, they were aware that much of their inventory was worthless or seriously overvalued, or were reckless as to whether that was the case").

⁶ Plaintiffs also challenge several vague optimistic statements contained in NetManage press releases. Such vaguely optimistic statements are routinely dismissed. Statements such as "we are pleased" with results (¶¶ 53, 70); "NetManage revolutionizes the corporate internet" (¶ 61), "is the leader in TCP/IP software" (¶¶ 59, 62, 64, 76-78, 81, 83-85), and is "the fastest growing software company" (id.), are not actionable as a matter of law because no reasonable investor would rely upon such obvious "puffery." E.g., Siegel, [1996-1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) at 95,223; Leonard, [1995-1996 Tr. Binder] Fed. Sec. L. Rep. (CCH) at 93,780.

⁷ See, e.g., Novak, 997 F. Supp. at 430 ("The growing trend in the courts, and particularly in this district, is to find that Congress intended to strengthen the Second Circuit standard. The two leading Southern District [of New York] cases . . . both held that the pleading of motive and opportunity no longer suffices to raise a strong inference of scienter.") (citing cases); Friedberg v. Discreet Logic, 959 F. Supp. 42, 49-50 & n.2 (D. Mass. 1997) (following Silicon Graphics); Havenick v. Network Express, Inc., 981 F. Supp. 480, 527 (E.D. Mich. 1997) (same).

⁸ Wenger v. Lumisys, Inc., No. C-97-20609 RMW, 1998 WL 199082, at *17 (N.D. Cal. Mar. 31, 1998) (Salceda Decl. Ex. I) (corporate officers "retained the vast majority of their holdings and none of the sales occurred at suspicious times, such as immediately before a negative earnings announcement"); Hockey v. Medhekar, [1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,465, at 97,083 (N.D. Cal. Apr. 15, 1997) (no inference of fraud where "amounts [not] dramatically out of line with prior trading practices") (citation omitted); In re Boston Tech. Inc. Sec. Litig., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,174, at 90,573 (D. Mass. Feb. 5, 1998) (sale of over 300,000 shares insufficient where no allegation sales were out of ordinary); Blum v. Semiconductor Packaging Materials Co., No. 97-7078, 1998 U.S. Dist. LEXIS 6868, at *12 n.3 (E.D. Pa. May 5, 1998) (sale of 20,000 shares representing 3 percent of holdings insufficient) (Salceda Decl. Ex. H).

⁹ Because plaintiffs' allegations are based on "NetManage's SEC filings," SAC ¶ 127, and discuss defendants' option holdings, SAC ¶ 112-17, the Court may consider defendants' SEC filings under the incorporation by reference doctrine. Silicon Graphics II, 970 F. Supp. at 758-59. Alternatively, the Court may take judicial notice of these publicly-filed documents. Id.; Allison v. Brooktree Corp., No. 97-0852-JM-POR, 1998 WL 151787, at *13 n. 3 (S.D. Cal. Mar. 10, 1998) (Salceda Decl. Ex. K) (taking judicial notice of CEO's Form 4 filing with the SEC reporting that he had purchased stock during the class period). See also Defendant. Order at 3 ("The parties need not rebrief the motion to strike.").

¹⁰ Defendant Koretz, former vice president of sales, resigned from NetManage effective August 31, 1995, see SAC ¶ 18(g); First Amended Complaint ¶ 23(g), before the end of the successful third quarter, and long before he conceivably could have known of the modest fourth quarter forecasting miss; Koretz is not alleged to have made a single false statement, or to have had any role in NetManage's accounting. Therefore, his sales are not included in the chart.

¹¹ "Total Retained Holdings" are the number of shares and vested options held by each defendant at the end of the class period, which are derived from the public record, specifically, NetManage's 1995 and 1996 Proxy Statements, filed with the SEC on April 6, 1995 and April 12, 1996, respectively (Salceda Decl. Ex. L at 10-11, Ex. M at 10-11), and Form 4s filed by each defendant with the SEC. For the reasons stated above, the Court may judicially notice documents filed with the SEC where their authenticity is not questioned. Defendants do not attach all of the Form 4s because they are voluminous and defendants do not believe that the numbers are subject to dispute. If plaintiffs' counsel or the Court so requests, defendants will provide copies of the Form 4s.

¹² See Acito, 47 F.3d at 54 (no fraud where defendant held 89 percent of his holdings); Duncan v. Pencer, [1995-1996 Tr. Binder] Fed. Sec. L. Rep. (CCH) at 94,208 (dismissing complaint; stock sales of $29 million not "unusual" based on defendants' "substantial holdings" after sales); see also In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 125 (9th Cir. 1994) (no inference of scienter where defendants retained bulk of their shares); In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir. 1989) (insider sales of $84 million representing only 8% of their holdings not suspicious).

¹³ Accord e.g., Salinger v. Projectavision, Inc., 972 F. Supp. 222, 234 (S.D.N.Y. 1997) ("[A]n unsubstantiated allegation that an executive was motivated to commit fraud in order to maintain the perquisites of corporate rank does not support a strong inference of fraud."); In re Crystal Brands Sec. Litig., 862 F. Supp. 745, 749 (D. Conn. 1994) ("Equally unexceptional is the allegation that the individual defendants wanted to protect their executive positions.").

¹⁴ Whether the "group published information doctrine" survives the Reform Act is doubtful. Plaintiffs are now required, "with respect to each act or omission" alleged to violate the securities laws, to "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) (emphasis added). Indeed, the court in Allison v. Brooktree Corp., 1998 WL 151787, at *7, recently cited these provisions in noting that "the continued vitality of the judicially created group-published doctrine is suspect."

¹⁵ See In re Valence Tech. Sec. Litig., No. C-95-20459 JW, 1996 WL 67326, at *6 (N.D. Cal. Feb. 13, 1996) (Salceda Decl. Ex. N) (committee memberships "fail to establish involvement in the day-to-day operations"); In re Gupta Corp. Sec. Litig., 900 F. Supp. 1217, 1241 (N.D. Cal. 1994) (rejecting application of doctrine to director who was a member of company's "audit and compensation committees"); In re Ross Sys., [1994-95 Tr. Binder] Fed. Sec. L. Rep. (CCH) at 90,496 ("[I]t is generally not enough to base allegations on general job descriptions of corporate positions and allege knowledge or actions flowing primarily from an interpretation of those positions"); In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086, 1100 (N.D. Cal. 1994) (refusing to apply doctrine to director allegedly having "access to the company's internal business plans, budgets and forecasts"), aff'd, 95 F.3d 922 (9th Cir. 1996).