BRUCE G. VANYO, State Bar # 060134
JEROME F. BIRN, JR., State Bar # 128561
IGNACIO E. SALCEDA, State Bar # 164017
TRACY L. TOSH, 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, ROBERT WILLIAMS AND
DARRELL MILLER.

Defendants NetManage, Inc., Zvi Alon, Walter Amaral, Uzia Galil, Robert Williams, and Darrell Miller respectfully submit this memorandum of points and authorities: (1) concerning plaintiff Joseph Molinari's motion for appointment as Lead Plaintiff and for the appointment of Lead Plaintiff's Counsel, pursuant to Section 21D(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u-4(a); and (2) opposing the motion of putative plaintiffs Leo Malcomson, Jonathan P. Bloom, Donald D. Jabro and Michael T. Lattanzi for appointment as Lead Plaintiffs.

Since Congress passed the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, (the "Reform Act"), securities plaintiffs have adopted the tactic of filing parallel, duplicative class actions in the California federal and state courts. Defendants have identified at least 33 such cases in California, including 20 cases in the Northern District alone. See Chart attached as Exhibit A to the accompanying Declaration of Tracy L. Tosh ("Tosh Decl."). This tactic is not accidental. It is a purposeful attempt to circumvent the mandatory discovery stay imposed by the Reform Act.

Plaintiff Joseph Molinari filed this action on June 19, 1997. In his memorandum in support of appointment as Lead Plaintiff, he states that he "filed the only complaint in this action," and otherwise complied with Section 21D of the Reform Act. Pl. Mem. at 8-9. Mr. Molinari does not disclose that on March 21, 1997, he and the same counsel filed a virtually identical securities class action against the same defendants in Santa Clara County Superior Court. Interactive Data Systems, Inc. et al. v. NetManage, Inc. et al., Case No. CV764945 (Santa Clara Co. Sup. Ct.) (Tosh Decl. Ex. B).¹ Both actions are brought on behalf of the same putative class: persons who purchased NetManage stock between April 18, 1996 and July 18, 1996. Compare State Complaint ¶ 1 with Federal Complaint ¶ 1. Both complaints contained identical factual allegations based on the same alleged statements and omissions.

The only difference is that the state complaint alleged causes of action under California law Cal. Corp. Code §§ 25400 and 25500; Cal. Civ. Code §§ 1709 and 1710; Cal. Bus. & Prof. Code §§ 17200 and 17500 and the federal complaint alleges claims arising under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, which are subject to the Reform Act. Although Mr. Molinari could not have filed his federal claims in state court, because federal courts have exclusive jurisdiction over claims arising under the Securities Exchange Act, he could have efficiently brought all of his claims (including the state law claims) in this Court, pursuant to federal supplemental jurisdiction. He chose not to do so because he hopes to circumvent the Reform Act's discovery stay.

Mr. Molinari's tactic is a familiar one. In another securities class action filed against NetManage by the same plaintiffs' counsel and pending before Your Honor, plaintiffs also filed identical federal and state complaints against the same defendants on behalf of the same putative class. See Head et al. v. NetManage, Inc. et al., Case No. CV763295 (Santa Clara Co. Supr. Ct.) and Head et al. v. NetManage, Inc. et al., Case No. C-97-20061-JW (N.D. Cal.) (collectively "NetManage I"). At the lead plaintiff hearing in NetManage I, defendants expressed concern that plaintiffs might attempt to use the state case to obtain discovery they are barred from obtaining in the federal action. Defendants proposed that plaintiffs erect an ethical wall between counsel working on the federal and state cases until discovery is permitted in the federal action or it is dismissed. Precisely what defendants feared has happened.

In NetManage I, plaintiffs have refused to erect an ethical wall, have stated their intent to use state court discovery to circumvent the federal discovery stay, and have moved to compel state discovery without limitations on their use of such discovery. Defendants moved the state court to stay discovery until such time as discovery is permitted in federal court. As yet, defendants have not persuaded the state courts to impose limits on state discovery to prevent plaintiffs from circumventing the Reform Act. Defendants were forced to file a motion before this Court to enforce the federal discovery stay, which originally was set to be heard on September 15, 1997, but, to accommodate plaintiffs' counsel, has been reset for November 3, 1997.

Given the experience in NetManage I, there is no mystery about what will happen here. Plaintiffs will try to use the parallel state case to obtain discovery that is otherwise barred by the Reform Act. If the state court rulings in NetManage I are any guide, the state court will decline to apply principles of comity for federal law and limit plaintiffs' use of the fruits of state discovery. Because plaintiff Molinari and his counsel are obviously attempting to undermine the Reform Act, defendants do not believe that they should be certified to serve as Lead Plaintiff and Lead Plaintiff's Counsel.

The motion of plaintiffs Leo Malcomson, Jonathan P. Bloom, Donald D. Jabro and Michael T. Lattanzi suffers from the fatal problem that their purported class claims are time barred. None of these plaintiffs filed a complaint within the applicable one-year statute of limitations for claims under Section 10(b) and Rule 10b-5. The class period ended on July 18, 1996. Malcomson, Bloom, Jabro, and Lattanzi did not file any complaints in this action before July 18, 1997, when the statute ran out, and did not move for appointment as Lead Plaintiffs until August 15, 1997. While these plaintiffs could maintain individual actions, they may not bring class claims, and so cannot be appointed as lead plaintiffs under the Reform Act.²

I. MR. MOLINARI'S TACTIC OF FILING DUPLICATIVE, PARALLEL CLASS ACTIONS TO EVADE THE REFORM ACT'S DISCOVERY STAY RAISES SERIOUS QUESTIONS ABOUT HIS ADEQUACY TO SERVE AS LEAD PLAINTIFF

A. Defendants Have Standing to Raise Defects in Plaintiff's Motion and to Ensure That Their Rights under the Reform Act Are Not Undermined.

Plaintiffs will undoubtedly argue that defendants do not have any standing to challenge or even comment upon the appointment of Lead Plaintiff or Lead Plaintiffs' Counsel. As Judge Williams has noted, however, "it is appropriate for defendants to bring to the attention of the court a flaw in the papers of a party moving for appointment as lead plaintiff." Howard Gunty Profit Sharing v. Quantum Corp., No. 96-20711 SW, slip op. at 6 (N.D. Cal. Feb. 6, 1997) (Tosh Decl. Ex. C). See also In re Read-Rite Corp. Sec. Litig., No. C-97-20059 RMW, slip op. at 3 (N.D. Cal. May 28, 1997) ("defendants are not prohibited from challenging whether the most adequate plaintiff presumption should be adopted initially by the court") (Gronberg Decl. Ex. B). Moreover, the lead plaintiff certification is not merely a rubber stamp. The Court may use its equitable power to deny plaintiff's motion or to grant it with conditions. This is especially appropriate here, where the federal discovery stay provides defendants with a potent protection against unwarranted suits that would be undermined if the putative lead plaintiff can evade the stay merely by filing a parallel class action in state court.

The Supreme Court has long recognized that securities class actions "'present[] a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general'. . . . Litigation under 10b-5 thus requires secondary actors to expend large sums even for pretrial defense and the negotiation of settlements." Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 189 (1994) (quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739 (1975)); see also Blue Chip Stamps, 421 U.S. at 740-41 ("[I]n the field of federal securities laws governing disclosure of information even a complaint which by objective standards may have very little chance of success at trial has a settlement value to the plaintiff out of any proportion to its prospect of success at trial."). Congress passed the Reform Act to end "abuse in private securities lawsuits". . . and to protect defendants from baseless fraud accusations. H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Session (1995) ("Conf. Rep.") at 31 (Tosh Decl. Ex. D).

The discovery stay is one of the centerpieces of the Reform Act. Congress was especially concerned about the "the abuse of the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle[.]" Id. at 31. Congress therefore intended to preclude "the routine filing of lawsuits . . . without regard to any underlying culpability of the issuer, and with only faint hope that the discovery process might lead eventually to some plausible cause of action[.]" Conf. Rep. at 31 (emphasis added). The automatic discovery stay is one of the most important protections that Congress created. Id. It provides:

In any private action arising under this title, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.

Section 21D(b)(2)(3)(B) (emphasis added.) As the Conference Report explains, "courts must stay all discovery pending a ruling on a motion to dismiss." Conf. Rep. at 37. By so doing, Congress intended to put "[l]imits on abusive discovery to prevent fishing expedition lawsuits." Id.

The Ninth Circuit has held that Congress intended that complaints should be dismissed if they do not have a factual basis before plaintiffs obtain any discovery: "Congress clearly intended that complaints in these 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 Dist. Court, 99 F.3d 325, 328 (9th Cir. 1996) (emphasis added). District courts have uniformly interpreted the discovery stay as precluding plaintiffs from conducting discovery before their complaint has survived a motion to dismiss.³

If securities plaintiffs were permitted to use discovery obtained in parallel state cases to circumvent the discovery stay, they would be able to thwart Congressional intent to prevent the "routine filing of lawsuits . . . with only faint hope that the discovery process might lead eventually to some plausible cause of action." Conf. Rep. at 31. As Judge Smith has held in the leading case interpreting the Reform Act's other procedural changes, "courts should be mindful of such policy considerations in construing federal securities law." In re Silicon Graphics, Inc. Sec. Litig., [1996-1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,325, at 95,963 (N.D. Cal. Sept. 25, 1996).

Defendants' fears are not merely hypothetical. The plaintiffs in NetManage I have stated their intent to use the fruits of state discovery to circumvent the Reform Act. The same counsel has taken this position in response to a motion to dismiss in another case in this District, In re IMP, Inc. Securities Litigation, No. C-96-20826-SW(PVT) (N.D. Cal.). There, plaintiffs have urged Judge Williams not to dismiss their federal complaint because of information obtained through discovery in a parallel state court action. See Plaintiffs' Memorandum in Opposition to Defendants' Motion to Dismiss Plaintiffs' Second Amended Consolidated Complaint in In re IMP, Inc. Sec. Litig., No. C-96-20826-SW(PVT) (N.D. Cal.), at 21 (Tosh Decl. Ex. F).

This case will head down the same road as NetManage I and IMP. The Court can prevent this purposeful undermining of Congressional intent by certifying Mr. Molinari as lead plaintiff only on the condition that his counsel erect an ethical wall to prevent state discovery from being used in this action until discovery is permitted in this case or it is dismissed.

B. Plaintiff Molinari's Failure to Mention His Parallel State Class Action Raises Serious Questions About His Adequacy To Serve As Lead Plaintiff.

Why did plaintiff Molinari try to hide from the Court the fact that, three months before filing this case, he had filed an identical class action in Santa Clara County Superior Court asserting California state law claims? The reason is because he hoped to obtain discovery in state court that he could use to skirt the Reform Act's mandatory discovery stay; indeed, after filing this action, plaintiffs in the state case served Requests for Production of Documents on all Defendants, and subpoenaed documents from three financial analysts who reported on NetManage during the class period.⁴

Mr. Molinari's tactic of filing federal claims in federal court, and state claims in state court, is more than just a needless multiplication of expense and a waste of judicial resources that creates a significant danger of conflicting results. It is a purposeful attempt to evade the Reform Act's mandatory discovery stay. Defendants believe the Court may question whether a person seeking to evade this crucial provision of the Reform Act should be appointed as lead plaintiff under that statute.

The Court may also question Mr. Molinari's fitness to serve as lead plaintiff because he is subjecting class members to wasteful, duplicative litigation. Even in the unlikely event that plaintiffs obtain a settlement or judgment, class members still would be required to pay for the additional costs incurred by the duplicative litigation brought by Mr. Molinari and his counsel. If Mr. Molinari and his counsel want to maintain this federal action, they should be required to put forward all of their claims against defendants in this action; defendants will waive all objections to the amendment of the federal complaint to include the state law claims. Not only would this avoid unnecessary duplication of litigation and the possibility of inconsistent decisions, absent class members would receive the greatest protection. This federal case is covered by the Reform Act's special protections for the class, including the lead plaintiff procedure, specific settlement notice requirements, and a greater review of attorneys' fees. It is difficult to articulate any legitimate reason why the lead plaintiff and his counsel should prosecute two actions in courts located only a few blocks apart when they could as easily prosecute all of their claims in this federal action.

At a minimum, the Court could ensure that the Reform Act's mandatory discovery stay is not circumvented by the very person who has moved to be certified under the Act as lead plaintiff. The Court could enter an order prohibiting the lead plaintiff and lead counsel (and any other counsel working on the federal case) from having any access to the fruits of state court discovery, unless and until discovery is authorized in federal court or this case is dismissed. This solution would accommodate plaintiffs' desire to maintain parallel duplicative actions in state and federal court, while enforcing Congress' intent that "these 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, 99 F.3d at 328.

C. The Motion for Appointment Submitted by the Other Proposed Lead Plaintiffs Should be Denied Because Their Claims Are Time Barred.

Plaintiffs assert that each of the Proposed Lead Plaintiffs is "willing to serve as a representative on the Class's behalf and has signed and filed a certification attesting thereto." Pl. Mem. at 8. There are two fatal problems with the motion of plaintiffs Leo Malcomson, Jonathan P. Bloom, Donald D. Jabro and Michael T. Lattanzi.

First, the class claims asserted by these plaintiffs are time barred. Under the Supreme Court's holding in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364 (1991), a plaintiff must bring an action under Section 10(b) and Rule 10b-5 within one year after the discovery of the facts constituting the alleged violation. Plaintiff Molinari filed his complaint on June 19, 1997, within the one-year statute of limitations. The class period ended on July 18, 1996. Malcomson, Bloom, Jabro, and Lattanzi did not file any complaints in this action before July 18, 1997, and did not move for appointment as Lead Plaintiffs until August 15, 1997. Under Ninth Circuit law, the filing of a class action complaint by Mr. Molinari tolled the statute of limitations only for the individual claims of Malcomson, Bloom, Jabro, and Lattanzi; it did not toll the statute of limitations for any class claims. Robbin v. Fluor Corp., 835 F.2d 213, 214 (9th Cir. 1987). Thus, the applicable one year statute of limitations has run, and these plaintiffs have no right to bring class claims. Accordingly, their motion for appointment as Lead Plaintiffs should be denied.

Second, the motion papers filed by plaintiffs Malcomson, Bloom, Jabro or Lattanzi fail to include the certifications required by the Reform Act. See Section 21D(a)(2)(A) ("Each plaintiff seeking to serve as a representative party on behalf of a class shall provide a sworn certification, which shall be personally signed by such plaintiff and filed with the complaint . . ."). For example, these plaintiffs have not certified that they did not purchase NetManage stock at the direction of counsel or for the purpose of bringing a lawsuit, that they will not accept any bounty for serving as a class representative, or that they are not "professional plaintiffs" as prohibited by Section 21D(a)(3)(B)(vi). Accordingly, these plaintiffs have not provided the Court with the required factual basis to conclude that they meet the Reform Act's requirements.

For these reasons, defendants respectfully request that the motion of plaintiff Molinari be granted only on the condition that he and his lead counsel not have access to the fruits of any discovery obtained in the parallel state action until discovery is permitted in this case or it is dismissed; defendants further respectfully request that the motion of plaintiffs Malcomson, Bloom, Jabro and Lattanzi be denied on the ground that their putative class claims are time-barred, and they have not filed the certificates required by the Reform Act.

¹ On July 31, 1997, the Superior Court sustained defendants' demurrer as to all causes of action. On September 9, 1997, plaintiffs filed an amended complaint alleging claims only under the Corporations Code. Defendants will demur again.

² Moreover, none of these plaintiffs has filed the certifications required by Section 21D(a)(2) of the Reform Act attesting to his capacity to serve as a lead plaintiff. Because these plaintiffs have failed to make the required showing, the Court cannot certify them.

³ See Kane v. Madge Networks, No. C-96-20652 (N.D. Cal. Jan 13, 1997) (no discovery prior to assessment of viability of pleadings) (Tosh Decl. Ex. E); Novak v. Kasaks, [1996-1997 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,307 (S.D.N.Y. Aug. 16, 1996) (no discovery prior to assessment of viability of pleadings); Medical Imaging Centers of America, Inc. v. Lichtenstein, 917 F. Supp. 717, 721-22 (S.D. Cal. 1996) (no discovery before resolution of motion to dismiss; delay resulting from Reform Act's discovery stay not "undue prejudice" in hostile takeover case even though corporate action to be enjoined would occur less than three weeks after hearing).

⁴ See Plaintiffs' First Set of Requests For Production Of Documents To Defendants and Deposition Subpoenas for Production of Business Records issued to Robertson, Stephens & Co., Smith Barney, Inc., and Oppenheimer & Co. Inc. (Tosh Decl., Exs. G-J).