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

Defendants NetManage, Inc., Zvi Alon, Walter Amaral, Uzia Galil, John Bosch, Robert Williams and Richard Koretz respectfully submit this Supplemental Opposition to Plaintiffs' Motion to Strike.¹

I. The Court Can And Should Consider NetManage's SEC Filings

The Reform Act requires plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant[s] acted with" scienter. 15 U.S.C. § 78u-4(b)(2). Plaintiff's supposed "facts" to show scienter include allegations that defendants had the a motive to make false statements in order to engage in improper insider trading. SAC ¶¶ 36, 111-112.²

A defendant's stock trades show a motive to engage in securities fraud if the amount of stock traded and the timing of the sales is unusual or suspicious in light of that defendant's total holdings or pattern of previous sales. See Def. Mem. at 13-14; Def. Reply Mem. at 12. Total holdings include stock that the defendant owned and controlled, as well as vested options that the defendant could exercise and sell as stock. Id.

Although plaintiffs allege the dates of the defendants' supposed trades and the number of shares sold, plaintiffs deceptively omit information about the defendants' total holdings. See SAC ¶ 111. Plaintiffs do not ignore the issue of total holdings. Indeed, plaintiffs allege at length why ownership of stock options should not be considered as part of a defendant's total holdings. Id. ¶¶ 113-20. Therefore, the issue of options as part of total holdings, and hence each defendant's total holdings is referenced in the Second Amended Complaint. The only information not alleged is the amount of each defendant's total holdings.

Plaintiffs' decision to exclude this vital information is obvious: comparison of the alleged sales by the individual defendants with their total holdings shows that, as a matter of law, none of these defendant's sales were unusual. Def. Mem. at 15; Reply Mem. at 12. Therefore, plaintiffs' allegations fail to give rise to a strong inference of scienter. Id.³

The amount of each defendant's total holdings is derived from information in NetManage's 1995 and 1996 Proxy Statements and the individual defendants' Form 4 filings with the Securities and Exchange Commission. See Def. Mem. at 15 & n. 11. A public company, like NetManage, is required to file with the SEC its annual proxy statement to shareholders. 15 U.S.C. § 78n; 17 C.F.R. § 240.14a-6. Likewise, each insider of a public company must file a Form 3 or 4 with the SEC showing the insider's purchases and sales of the company's stock. 15 U.S.C. § 78p(a); 17 C.F.R. § 240.16a-2, 16a-3. Defendants requested the Court to take judicial notice of these SEC filings to determine each defendant's total holdings in considering the motion to dismiss.

1. Defendants' SEC Filings Are Reliable Indications of Defendants' Holdings..

Plaintiffs argue that the Court should ignore the SEC filings because they question the accuracy of the information in the SEC filings and the SEC filings constitute hearsay. Pl. Supp. Mem. at 3. Plaintiffs objections are not well-taken.

Plaintiffs do not seriously challenge the accuracy of the SEC filings in question. In their Second Amended Complaint and their Supplemental Memorandum, plaintiffs claim that a number of stock sales by defendants Amatzia Ben-Artzi and Dan Geisler were not reflected in filings by these individuals with the SEC. See SAC ¶ 111. Accordingly, plaintiffs suggest that the filings of all of the individual defendants should be ignored. Plaintiffs' argument is unavailing.

First, Mr. Ben-Artzi and Mr. Geisler are not movants before this Court and do not join in defendants' motion to dismiss.⁴ Thus, their SEC filings, as opposed to those of the other moving individual defendants, are irrelevant.

Notably, however, according to the Complaint, none of the moving defendants' stock sales are allegedly omitted from the Form 4s they filed with the SEC. Thus, by plaintiffs' admission, all of the moving defendants' stock sales are reflected in such public filings and such filing accurately reflect the moving defendants' stock sales and holdings.

When faced with a more significant problem with Form 4 filings in In re Silicon Graphics, Inc. Securities Litigation, 970 F. Supp. 746 (N.D. Cal. 1997), Judge Smith had no difficulty finding that the Forms were of sufficient reliability to be considered by the Court. Specifically, plaintiffs noted that nine of Silicon Graphics' officers and directors, three of whom were defendants in the case, had previously been required to make corrections to their SEC forms filed in 1992. The court noted that there was no evidence that these were continuing problems, or "that they were serious enough to cast doubt on the filings now before the Court." Id. at 758. Plaintiffs here have not cast any doubt as to the accuracy of the filings made by the individuals before this Court.

Moreover, it is well-established that a "district court may take judicial notice of the contents of relevant public disclosure documents required to be filed with the SEC as facts 'capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.'" Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991); see also Cortec Indus., Inc. v. Sum Holding, L.P., 949 F.2d 42, 47 (2d Cir. 1991) (court "may review and consider public disclosure documents required by law to be [filed] and which actually have been filed with the SEC, particularly where plaintiff has been put on notice by defendant's proffer of these public documents").⁵ As noted above, defendants were under a legal duty to file the documents in question with the SEC in a timely and accurate manner. See 15 U.S.C. § 78n and 17 C.F.R. § 240.14a-6 (proxy statements); 15 U.S.C. § 78p(a) and 17 C.F.R. § 240.16a-2, 16a-3 (Forms 3 and 4).

In addition, the Ninth Court has held that judicial notice may be taken of matters less trustworthy than defendants' SEC filings, where the matter is "capable of sufficiently accurate and ready determination." Ritter v. Hughes Aircraft Co., 58 F.3d 454, 458-59 (9th Cir. 1995). Thus, for example, in Ritter the Ninth Court held that the district court properly took judicial notice of widespread layoffs at Hughes Aircraft based on a newspaper article: "judicial notice of layoffs at Hughes was not an abuse of discretion [because] [t]his is a fact which would be generally known in Southern California and which would be capable of sufficiently accurate and ready determination." Id. By plaintiffs' own admission, the SEC filings of the moving defendants are an accurate reflection of these defendants transactions and holdings in NetManage stock and options.

Cases cited by plaintiffs are not helpful to their position. In Hennessy v. Penril Datacomm Networks, Inc., 69 F.3d 1344 (7th Cir. 1995), for example, an employee sued her former employer for gender and pregnancy discrimination. The plaintiff requested the court to take judicial notice of the defendant company's Form 10-K to determine the number of employees at a specific unit in the company in order to calculate punitive damages. Id. at 1354. The Seventh Circuit found that the district court's decision to exclude the Form 10-K was reasonable because the "fact in question here was not capable of accurate and ready determination by resort to the 10-K." Id. at 1355. That was because the Form 10-K reported on the entire company, which included the unit in question and two other unrelated units. Thus, the Form 10-K's reliability about the number of employees in the unit at issue was too questionable for purposes of judicial notice. Id.

Unlike Hennessy, plaintiffs offer no reason to doubt the accuracy of those numbers as reported in the SEC filings of the moving defendants. Here, plaintiffs do not dispute that the moving defendants' stock sales and holdings are accurately reflected in these filings. Accordingly, the Court may properly take notice of these filings.

2. Courts Take Judicial Notice of SEC Filings Where They are Integral to the Allegations of the Complaint.

Plaintiffs' Complaint makes repeated reference to defendants' stock sales, (SAC ¶¶ 13, 18, 111-12), and defendants' filing of Forms 4 with the SEC. SAC ¶¶ 111-12. It is highly likely that plaintiffs' allegations of the amount and date of each defendant's trades were taken from information in these filings, and, thus, these filings are incorporated by reference into the Complaint.

Indeed, plaintiffs allege that their allegations are based, inter alia, on "NetManage's SEC filings." SAC ¶ 127. In addition, plaintiffs allege that the defendants' insider trading "was publicly reported as soon as it occurred on the First Call network and other services that track stock sales by corporate insiders because for each of these sales these individuals were required to file notice of their sales on Form 4 with the SEC." Id. ¶ 112.

Interestingly, and clearly in anticipation of this problem of incorporation by reference, the Complaint states that the allegations of stock sales are "based on non-public information." See SAC ¶ 18(a)-(h). Nevertheless, in contravention of the Reform Act's requirement that plaintiffs provide all facts which support their belief that a fraud has been committed, 15 U.S.C. 78u-4(b)(1)(B), plaintiffs do not identify the "non-public" sources of their allegations of stock sales.

The reasonable inference is that plaintiffs' source of the insider trading allegations was either the SEC filings, or a service such as the First Call network which obtained its information about the defendants' stock trades from the SEC filings. Certainly plaintiffs have not identified any other source. Plaintiffs' own allegations therefore are derived from the Form 4s. The SEC filings thus are incorporated by reference under Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994).

Plaintiffs' position that their allegations are based on unidentified "non-public" sources was squarely rejected by Judge Smith in Silicon Graphics. In that case, plaintiffs alleged that they had relied on "other sources" for their information concerning defendants' stock sales. Judge Smith rejected this attempt to avoid incorporation by reference by noting that these "other sources" must have relied on the SEC filings as well. 970 F. Supp. at 758. Thus, Judge Smith found that the plaintiffs' motion to strike the SEC filings was "disingenuous because plaintiffs rely on the information contained in these filings in pleading their allegations." Id. at 759. Judge Smith found that even though the plaintiffs had not alleged the sources of their insider trading allegations, "the allegations can be derived only from [the SEC filings]. Plaintiffs cannot preclude consideration of defendants' SEC forms by artful pleading." Id. Thus, in addition to taking judicial notice of the SEC filings, Judge Smith ruled that the court could consider the documents under the incorporation by reference doctrine. Id. at 758-59.

Likewise, in Plevy v. Haggerty, No. CV-97-9200-SVW, slip op. (C.D. Cal. Aug. 21, 1998),⁶ the court took judicial notice of the defendants' SEC filings, including the defendants' Form 4s, even though the filings were not cited or quoted in the complaint. Id. at 5. Judge Wilson pointed out that the complaint was based on "'a review of the public filings'" of Western Digital, the defendant company. Therefore, the complaint "does reference those filings." Id. at 6. Furthermore, Judge Wilson held that "as these documents are public records required by the SEC to be filed, the Court may take judicial notice of them." Id.

Plaintiffs' suggestion that the SEC filings are inadmissible hearsay is also unavailing. In Silicon Graphics, Judge Smith also considered and rejected the same hearsay objection raised here. Judge Smith recognized that "[h]aving raised questions about defendants' stock sales, based their allegations on defendants' SEC filings, and submitted expert declarations that rely on the SEC forms at issue, plaintiffs can hardly complain when defendants refer to the same information in their defense." Silicon Graphics, 970 F. Supp. at 759. Judge Smith found that having "opened the door" by placing defendants' stock sales and SEC filings at issue, plaintiffs may not legitimately complain after defendants walked through. See also United States v. Anderson, 532 F.2d 1218, 1229 (9th Cir. 1976) (defendant who introduced hearsay statement waived objection); cf. United States v. Kerr, 981 F.2d 1050, 1052 (9th Cir. 1992); E.E.O.C. v. General Telephone Co. of Northwest, Inc., 885 F.2d 575, 578 (9th Cir. 1989).

Moreover, Judge Smith also held that the defendants' SEC filings were admissible as a business or government record. Silicon Graphics, 970 F. Supp. at 759 n.6; see also Plevy v. Haggerty, slip op. at 5. Defendants are required by law to file these documents when they sell NetManage stock, and are subject to criminal penalties for intentional misstatements or omissions. 18 U.S.C. § 1001; 15 U.S.C. § 78ff(a). Documents filed with a government agency under these circumstances qualify as government records. See United States v. Central Gulf Lines, Inc., 747 F.2d 315, 319 (5th Cir. 1984). Defendants' SEC filings also qualify as business records. See United States v. Bland, 961 F.2d 123, 127 (9th Cir. 1992). Alternatively, these documents may be admissible not to show the truth of the information but to show the lack of scienter. See Gray v. First Winthrop Corp., 82 F.3d 877, 885 n.10 (9th Cir. 1996). Thus, the SEC filings should be considered under this exception to the hearsay rule.

For the foregoing reasons, plaintiffs' motion to strike should be denied.

¹ In its Order of February 24, 1998, the Court dismissed plaintiffs' First Amended Complaint. The Court further instructed the parties that they need not rebrief the issues concerning plaintiffs' motion to strike defendants' SEC filings and plaintiffs' opposition to the Court taking judicial notice of such filings.

² As discussed in defendants' opening and reply briefs in support of the motion to dismiss, the "motive and opportunity" test to show scienter is no longer valid under the Securities Reform Act. Def. Mem. at 13; Reply Mem. at 11. Nonetheless, defendants showed that the stock sales are insufficient to give rise to a strong inference that the defendants acted with scienter. Id.

³ As noted in defendants' briefs in support of the motion to dismiss, even if the Court were to consider only the amounts of stock owned outright by the individual defendants and ignore vested options, the defendants retained 95.6 percent of their NetManage holdings. See SAC ¶ 111; Def. Mem. 13-14.

⁴ It appears that plaintiffs have never served Mr. Ben-Artzi and Mr. Geisler, who are believed to live outside of the United States.

⁵ See also In re AES Corp. Sec. Litig., 825 F. Supp. 578, 584 n.6 (S.D.N.Y. 1993); Diceon Electronics, Inc. v. Calvary Partners, L.P., 772 F. Supp. 859, 861 (D. Del. 1991); In re Delmarva Sec. Litig., 794 F. Supp. 1293, 1299 (D. Del. 1992); Southmark Prime Plus, L.P. v. Falzone, 776 F. Supp. 888, 892-93 (D. Del. 1991); Newport Components, Inc. v. NEC Home Electronics, 671 F. Supp. 1525, 1539 n.16 (C.D. Cal. 1987).

⁶ A copy of Plevy v. Haggerty is attached as Exhibit C to the Supplemental Declaration of Ignacio E. Salceda, filed concurrently.