This Rule 10b securities fraud class action is brought on behalf of purchasers of NetManage, Inc. software company stock between April 18, 1996 and July 18, 1996. By Order dated February 23, 1998, the Court dismissed the First Amended Complaint in related action Head v. NetManage, 97-4385, with leave to amend. In particular, the Court held that these actions are governed by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), and that the complaint is pled upon information and belief, and that as a result, plaintiffs must state with particularity all facts on which their allegations of fraud are based. See 15 U.S.C. § 78u-4(b)(1)(B). In light of the Court's order in Head v. NetManage, plaintiffs amended their complaint in this action for a second time.

Now before the Court is defendants' motion to dismiss the Second Amended Complaint ("SAC"). After carefully considering the papers submitted by the parties, including the supplemental pleadings, and having had the benefit of oral argument on December 23, 1998, the motion to dismiss is GRANTED without leave to amend.

NetManage develops and markets transmission control protocol/Internet ("TCP/IP") software products. NetManage's core products -- brand-named Chameleon and accounting for 90% of NetManage's revenue -- are TCP/IP based applications designed to facilitate network connections. TCP/IP is an open, non-proprietary system which cannot be protected by patent. The SAC alleges that in July 1995, when defendants became aware of competition from Microsoft and Netscape, and lacking any available new products, defendants initiated a fraudulent scheme to artificially inflate NetManage's stock price. The scheme included flooding the market with positive statements about NetManage and improperly recognizing millions of dollars of revenue on incomplete or contingent sales. During the period of this alleged fraudulent scheme, in October and November 1995, NetManage acquired two companies, Syzygy Communications, Inc. ("Syzygy") and AGE Logic, Inc. ("AGE") by merger. The Syzygy and AGE shareholders exchanged their shares for NetManage shares, but could not trade their NetManage shares on the open market until NetManage registered the shares with the Securities and Exchange Commission. The gravamen of the SAC is that in order to avoid a lawsuit by the two companies with which NetManage merged, defendants made false statements to inflate the value of NetManage's stock. After the value of the stock had been improperly inflated, defendants registered the merger allowing the Syzygy and AGE shareholders to sell their NetManage shares at an inflated price.

Plaintiffs allege that defendants' statements were false for the same reasons alleged in Head v. NetManage, and plaintiffs' claims fail for the reasons discussed in the Court's order of December 30, 1998 dismissing the Head complaint without leave to amend. Plaintiffs have failed to allege the facts upon which their belief as to defendants' fraud is based and have, in any event, failed to allege facts that give rise to a strong inference of scienter.

The alleged "avoiding a lawsuit" motive of defendants does not give rise to the requisite inference of scienter, especially since the complaint itself alleges that NetManage had six months to register the mergers and that it did so toward the end of the sixth month period. In other words, the fact that NetManage registered the mergers during a period when NetManage was selling at a higher price than in the previous few months does not support an inference of scienter, and certainly not a strong inference, in light of the circumstances.

The insider trading allegations here are even less compelling than in Head v. NetManage and thus for the reasons stated in the Court's December 30, 1998 Head order, these allegations do not give rise to a strong inference of the required state of mind, including an inference of recklessness.

For the foregoing reasons, defendants' motion to dismiss is GRANTED. As plaintiffs have already twice amended their complaint, and have not demonstrated that a further amendment would rectify the deficiencies in their complaint, the SAC is dismissed without leave to amend.