BORIS FELDMAN, State Bar # 128838
JEROME F. BIRN, JR., State Bar # 128561
GIDON M. CAINE, State Bar # 188110
CHRISTINE A. KENDRICK, State Bar # 186002
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone: (650) 493-9300

Attorneys for Defendants
TCSI CORPORATION, ROGER A. STRAUCH,
DANIEL H. MILLER, JOHN C. BOLGER,
RAM A. BANIN, WILLIAM A. HASLER,
DAVID G. MESSERSCHMITT, and PAUL A. FARMER

INTRODUCTION

ARGUMENT

I. THE REFORM ACT'S SAFE HARBOR AND THE BESPEAKS CAUTION DOCTRINE PRECLUDE LIABILITY

A. The Reform Act's Safe Harbor Immunizes Forward-Looking Statements in Certain TCSI Press Releases and SEC Filings

B. TCSI's Other Forward-Looking Statements "Bespeak Caution

II. THE COMPLAINT FAILS TO PLEAD SPECIFIC FACTS SHOWING THAT TCSI'S STATEMENTS WERE FALSE WHEN MADE

A. The Reform Act's Requirements for Pleading Falsity Are More Rigorous than Prior Ninth Circuit Law

B. The Information and Belief Requirement Means What It Says

C. Plaintiffs' Conclusory Allegations of Accounting Fraud Are Inadequate

D. Plaintiffs Allege No Specific Facts Showing That TCSI's Forecasts Were False

III. THE COMPLAINT FAILS TO PLEAD SPECIFIC FACTS GIVING RISE TO A STRONG INFERENCE OF FRAUDULENT INTENT

A. The Complaint Does Not Allege Conscious Wrongdoing or Recklessness

B. Defendants' Stock Sales, Considered in Their Undisputed Context, Refute Any Inference of Fraud

IV. PLAINTIFFS PLEAD NO SPECIFIC FACTS SHOWING THAT DEFENDANTS ARE LIABLE FOR ANALYST REPORTS

V. MILLER, BOLGER, BANIN, HASLER, AND MESSERSCHMITT CANNOT BE LIABLE BECAUSE THEY DID NOT MAKE A FALSE STATEMENT

CONCLUSION

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

Brown v. E.F. Hutton Group, 735 F. Supp. 1196 (S.D.N.Y. 1990),
     aff'd, 991 F.2d 1020 (2d Cir. 1993)

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

Cherednichenko v. Quarterdeck Corp., No. CV 97-4320-GHK (CWx)
     (C.D. Cal. Nov. 26, 1997)

Chill v. General Elec. Corp., 101 F.3d 263 (2d Cir. 1996)

Cohen v. Koenig, 25 F.3d 1168 (2d Cir. 1994)

Cooper v. Pickett, No. 95-55657, 1997 U.S. App. LEXIS 39330
     (9th Cir. Jan. 30, 1998)

Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 1989)

Crystal v. Foy, 562 F. Supp. 422 (S.D.N.Y. 1983)

Decker v. Massey-Ferguson, Ltd., 534 F. Supp. 873 (S.D.N.Y. 1981),
     aff'd in part, rev'd in part on other grounds, 681 F.2d 111 (2d Cir. 1982)

Decker v. Massey-Ferguson, Ltd., 681 F.2d 111 (2d Cir. 1982)

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

Durning v. First Boston Corp., 815 F.2d 1265 (9th Cir. 1987)

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)

Fecht v. Price Co., 70 F.3d 1078 (9th Cir. 1995),
     cert. denied, 116 S. Ct. 1422 (1996)

Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42 (D. Mass. 1997)

Gray v. First Winthrop Corp., 82 F.3d 877 (9th Cir. 1996)

Grossman v. Novell, Inc., 120 F.3d 1112 (10th Cir. 1997)

Harvey M. Jasper Retirement Trust v. Ivax Corp., 920 F. Supp. 1260 (S.D. Fla. 1995)

Havenick v. Network Express, Inc., 981 F. Supp. 480 (E.D. Mich. 1997)

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

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

Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990)

In re AST Research Sec. Litig., 887 F. Supp. 231 (C.D. Cal. 1995)

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

In re Baesa Sec. Litig., 969 F. Supp. 238 (S.D.N.Y. 1997)

In re Bausch & Lomb, Inc. Sec. Litig., 941 F. Supp. 1352 (W.D.N.Y. 1996)

In re Comshare Sec. Litig., No. 96-73711, 1997 U.S. Dist. LEXIS 17262
     (E.D. Mich. Sept. 18, 1997)

In re Convergent Tech. Sec. Litig., 948 F.2d 507 (9th Cir. 1991)

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 Glenayre Technologies, Inc. Sec. Litig., 982 F. Supp. 294 (S.D.N.Y. 1997)

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

In re Health Management, Inc. Sec. Litig., 970 F. Supp. 192 (E.D.N.Y. 1997)

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

In re Interactive Network Sec. Litig., No. C-95-0026 DLJ (N.D. Cal. Apr. 4, 1997)

In re OPTi, Inc. Sec. Litig., No. C-95-3434 SBA (N.D. Cal. Mar. 31, 1997)

In re Oak Tech. Sec. Litig., No. 96-20552-SW, 1997 U.S. Dist. LEXIS 18503
     (N.D. Cal. Aug. 1, 1997)

In re Presstek, 1997 SEC LEXIS (Dec. 22, 1997)

In re SciClone Pharmaceuticals Sec. Litig., No. C-94-1485 SBA
     (N.D. Cal. Mar. 10, 1995)

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

In re Software Toolworks, Inc. Sec. Litig., 50 F.3d 615 (9th Cir. 1995)

In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996), cert. denied,
     117 S. Ct. 1105 (1997)

In re Synergen, Inc. Sec. Litig., 863 F. Supp. 1409 (D. Colo. 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 Wells Fargo Sec. Litig., 12 F.3d 922 (9th Cir. 1993)

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

Kaplan v. Rose, 49 F.3d 1363 (9th Cir. 1994)

Kershaw v. Nautica S.A. Ltd., 885 F. Supp. 617 (S.D.N.Y. 1995)

Laxalt v. McClatchy, 116 F.R.D. 438 (D. Nev. 1987), abrogated by
     Motenko v. MGM Dist., Inc., 921 P.2d 933 (Nev. 1996)

Lilley v. Charren, 936 F. Supp. 708 (N.D. Cal. 1996)

Marksman Partners, L.P. v. Chantal Pharmaceutical Corp., 927 F. Supp. 1297
     (C.D. Cal. 1996)

Michaels Building Co. v. Ameritrust Co., 848 F.2d 674 (6th Cir. 1988)

Nacht & Lewis Architects, Inc. v. Superior Court, 47 Cal. App. 4th 214 (1996)

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

Norwood Venture Corp. v Converse, Inc., 959 F. Supp. 205 (S.D.N.Y. 1997)

Novak v. Kasaks, No. 96 Civ. 3073 (AGS), 1998 U.S. Dist. LEXIS 2777
     (S.D.N.Y. Mar. 10, 1998)

Pache v. Wallace, [1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,643
     (E.D. Pa. Mar. 20, 1995), aff'd mem., 72 F.3d 123 (3d Cir. 1995)

Parnes v. Harris, No. C 95-2715 SBA (N.D. Cal. Mar. 31, 1997)

Powers v. Eichen, 977 F. Supp. 1031 (S.D. Cal. 1997)

Provenz v. Miller, 102 F.3d 1478 (9th Cir. 1996), cert denied, 118 S. Ct. 48 (1997)

Rasheedi v. Cree Research, Inc., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH)
     ¶ 99,566 (M.D.N.C. Oct. 17, 1997)

Rehm v. Eagle Fin. Corp., 954 F. Supp. 1246 (N.D. Ill. 1997)

SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996),
     cert. denied, 118 S. Ct. 57 (1997)

San Leandro Emerg. Med. Group Profit Sharing Plan v. Philip Morris Cos.,
     75 F.3d 801 (2d Cir. 1996)

Segan v. Dreyfus Corp., 513 F.2d 695 (2d Cir. 1975)

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

Shuster v. Symmetricon, Inc., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH)
     ¶ 99,437 (N.D. Cal. Feb. 25, 1997)

Smith v. Network Equip. Tech., Inc., [1990-1991 Transfer Binder] Fed. Sec. L. Rep.
     (CCH) ¶ 95,659 (N.D. Cal. Oct. 19, 1990)

Stack v. Lobo, 903 F. Supp. 1361 (N.D. Cal. 1995)

Voit v. Wonderware Corp., 977 F. Supp. 363 (E.D. Pa. 1997)

Warshaw v. XOMA Corp., 74 F.3d 955 (9th Cir. 1996)

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

15 U.S.C. § 78u-4(b)(1)(B)

15 U.S.C. § 78u-4(b)(2)

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

Fed. R. Civ. P. 26

141 Cong. Rec. S9150, S9156 (June 27, 1995)

141 Cong. Rec. S9150, S9161 (June 27, 1995)

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

H.R. Doc. No. 104-150, 104th Cong., 1st Sess. (1995)

Amend. 1485, S. 240, 104th Cong., 1st Sess. (1995)

William S. Lerach, Securities Class Action Litigation Under the Private Securities Litigation Reform Act, "A Brave New World," reprinted in 1015 PLI Corp. 9 (Sept. 1997)

Plaintiffs' Complaint can be summarized in a single sentence: because defendants' predictions about TCSI's prospects did not materialize, and the September 1996 quarter proved disappointing, there must have been fraud. The Private Securities Litigation Reform Act of 1995 (the "Reform Act") was intended to terminate Complaints such as this at the pleading stage.

The Reform Act's Safe Harbor immunizes certain challenged forward-looking statements. The bespeaks caution doctrine protects the others.

The Reform Act's strict new pleading requirements also mandate dismissal. The Reform Act requires plaintiffs to lay on the table the particular facts on which they base their allegations of fraud. But plaintiffs have alleged no particularized facts showing that any challenged statement was false when made. Plaintiffs do not even provide the Court with the factual basis for their conclusory allegations, hiding behind the assertion that all of their allegations are based on some novel form of pleading called "investigation of counsel" and, therefore, shielded from the Court's scrutiny.

Plaintiffs try to dress up this action as being about more than just the disappointing September 1996 quarter. Plaintiffs assert that, beginning in October 1995, TCSI improperly recognized license fee revenue and should have written off a contract with United Parcel Service ("UPS") a contract that UPS did not terminate until October 1996. Merely crying accounting fraud is not enough. There was no restatement; there are no SEC proceedings; the accountants did not pull their opinion and resign; not one analyst has ever questioned TCSI's accounting. Completely absent are any specific facts demonstrating that revenue from particular transactions with particular customers was improperly recognized; the problem in the third quarter was that TCSI did not sign licensing contracts with new customers. Also missing is a single fact showing that defendants knew early in the class period that UPS would terminate the contract on unfavorable terms in October 1995.

The Complaint also fails to plead particularized facts giving rise to a "strong inference" that defendants actually knew that their forward-looking statements were false when made. Although plaintiffs point to defendants' stock sales, they gloss over that more than 80 percent of those sales occurred in a secondary offering pursuant to a prospectus that contained extensive and specific risk disclosures, and that is not alleged to be misleading. Plaintiffs also try to inflate the percentages sold by each defendant by focusing only on options that were exercised and sold, ignoring options that could have been sold but were held.

I. THE REFORM ACT'S SAFE HARBOR AND THE BESPEAKS CAUTION DOCTRINE PRECLUDE LIABILITY

A. The Reform Act's Safe Harbor Immunizes Forward-Looking Statements in Certain TCSI Press Releases and SEC Filings.

In its April 17 and July 18 press releases, secondary offering prospectus, and SEC Form 10-Q for the second quarter of 1996, TCSI complied with the Reform Act's Safe Harbor for forward-looking statements. See Complaint ¶¶ 60, 65, 79. In these documents, TCSI warned investors about the issues that plaintiffs say were concealed: fluctuations in demand and license fee revenues; intense competition; reduced customer funding for research and development ("R&D"); and the risk of customer cancellations. Def. Mem. at 7-9.¹ Thus, TCSI's forward-looking statements are immune from liability.

Plaintiffs argue that the press releases do not comply with the Safe Harbor because they refer to "additional risks" in TCSI's SEC filings. Pl. Mem. at 2324. Plaintiffs ignore that the text included "meaningful cautionary statements" identifying "important factors" that could and did cause actual results to vary:

Statements contained in this press release which are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Such risks and uncertainties include fluctuations in customer demand and the timing and acceptance of new product introductions. Additional risks are detailed in the Company's filings with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K.

Kendrick Decl. Ex. F (Apr. 17, 1996 press release) and Ex. G (July 18, 1996 press release) (emphasis added).² Plaintiffs in effect are trying to penalize TCSI for doing more than the Safe Harbor required by also referring investors to the extensive risk disclosures in its SEC filings. Companies should be encouraged to refer investors to additional risks in its public filings, as TCSI did, not penalized by removing their Safe Harbor protection.

B. TCSI's Other Forward-Looking Statements "Bespeak Caution."

TCSI's extensive risk disclosures identified each of the issues that plaintiffs allege were concealed from investors: (1) that earnings were highly dependent on customer decisions to sign licensing agreements, which were difficult to predict; (2) that competition was intense; (3) that customers would no longer fund TCSI's R&D; and (4) that contract cancellations were a real possibility and could hurt TCSI's financial results. Def. Mem. at 8-11.

Plaintiffs first argue that, for the bespeaks caution doctrine to apply, "[t]rue cautionary language must truthfully address specific risks, and must exhaust the capacity of the positive statements to mislead investors." Pl. Mem. at 27. Plaintiffs interpret the bespeaks caution too onerously. The Ninth Circuit repeatedly has held that courts may rule "as a matter of law" that "defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud." In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413 (9th Cir. 1994) (rejecting claims where company disclosed problems with internal controls and warned of lower sales) (citation omitted). Applying the "bespeaks caution" doctrine at the pleading stage is particularly appropriate where, as here, the company disclosed the risks that plaintiffs allege were concealed.³ Courts in the Ninth Circuit consistently dismiss cases at the pleading stage where the challenged disclosure provided sufficient cautionary language.⁴ None of plaintiffs' authority supports their overly narrow view of the doctrine.⁵

Plaintiffs next argue that the bespeaks caution doctrine does not apply unless all risk disclosures appear in conjunction with each allegedly misleading statement. Pl. Mem. at 24-28. Again, plaintiffs interpret the doctrine too narrowly. This Court has held that once a company discloses the relevant risks of investing in its stock, it is not required to reiterate those risks every time it makes a public statement. In re OPTi, Inc. Sec. Litig., No. C-95-3434 SBA, slip op. at 24 (N.D. Cal. Mar. 31, 1997). In Grossman v. Novell, Inc., 120 F.3d 1112 (10th Cir. 1997), the Tenth Circuit agreed with this Court's interpretation of the bespeaks caution doctrine. The court in Grossman carefully analyzed and rejected the cases plaintiffs cite in their opposition memorandum. The Tenth Circuit determined that, notwithstanding dicta in various cases, "when actually faced with the issue, courts have not required cautionary language to be in the same document as the alleged misstatement or omission." 120 F.3d at 1122 (collecting authority).⁶ This holding is consistent with Congress' stated desire to encourage further development of the bespeaks caution doctrine to dismiss securities class actions at the pleading stage. See Conf. Rep. at 46.

Finally, plaintiffs assert that, because certain TCSI risk disclosures did not change "in any meaningful way" during the Class Period, those disclosures cannot bespeak caution. Pl. Mem. at 27 & App. B. No case, however, has applied such a hypertechnical interpretation of the doctrine, and required a public company to reach for a thesaurus and change a few words every quarter. Rather, the doctrine applies to cautionary language that addresses the risks at issue. See OPTi, slip op. at 24-25. If those risks do not change and the Complaint alleges that the risks were the same throughout the Class Period then the cautionary language should not change.⁷

II. THE COMPLAINT FAILS TO PLEAD SPECIFIC FACTS SHOWING THAT TCSI'S STATEMENTS WERE FALSE WHEN MADE

The Complaint fails to meet the Reform Act's tough, new pleading standards. Plaintiffs fail to plead each statement alleged to be misleading with particularity, and fail to set forth in detail "the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1)(B). Plaintiffs have also failed to "state with particularity all facts on which that belief is formed." Id. (emphasis added). Hockey v. Medhekar, [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,465, at 97,081 (N.D. Cal. Apr. 15, 1997) (Patel, J.); Silicon Graphics, 970 F. Supp. at 763-64 (Smith, J.). Because plaintiffs failed to meet these requirements, this action must be dismissed. See Def. Mem. at 11-16.

A. The Reform Act's Requirements for Pleading Falsity Are More Rigorous than Prior Ninth Circuit Law.

Plaintiffs do not plead any facts showing that defendants' statements were false when made. Plaintiffs do not even provide the Court with the facts in their possession supporting their conclusory beliefs that defendants' statements were false. Hoping to avoid the plain language of the Reform Act, plaintiffs argue that the Reform Act changed little, and "merely codifies Ninth Circuit decisional law" for pleading falsity under Fed. R. Civ. P. 9(b). Pl. Mem. at 18. Plaintiffs are incorrect for four reasons.

First, the statutory text is consistent with the view that the falsity requirement was based on Second Circuit law. Plaintiffs concede that, at a minimum, Second Circuit law applies to the Reform Act's scienter provision, which requires plaintiff to "state with particularity facts giving rise to a strong inference" of fraud. 15 U.S.C. § 78u-4(b)(2) (emphasis added). The falsity provision, § 78u-4(b)(1) contains the same language: "state with particularity." Congress could not have intended courts to apply their own Circuit's "particularity" standard in Section (b)(1), but then to apply the Second Circuit's "particularity" standard in Section (b)(2). Congress could not have used the same word in two consecutive sections and intended different things. Rather, as the Conference Report states, Congress was creating "uniform" and more stringent pleading standards to cure the inadequacies of Rule 9(b). Conf. Rep. at 41.

Second, the Reform Act's legislative history shows that the new pleading standards were based, "in part," on Second Circuit decisional law. Nothing in the statute or legislative history suggests that Congress was adopting Ninth Circuit law. Def. Mem. at 12.⁸ Prior to the Reform Act, courts in the Second Circuit required a plaintiff to detail the reasons why a statement was false. See San Leandro Emerg. Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 812-13 (2d Cir. 1996) (where plaintiff alleged internal inconsistent "confidential company sales reports," court held that plaintiff had to identify specifically alleged internal reports, including the authors, recipients, and contents); Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115-16 (2d Cir. 1982). In contrast, in the pre-Reform Act Ninth Circuit cases that plaintiff cites (Pl. Mem. at 7), the court never demanded such particularity in pleading falsity.⁹

Courts in other Circuits recognize that the Reform Act strengthened Rule 9(b). For example, plaintiffs cite Michaels Building Co. v. Ameritrust Co., 848 F.2d 674 (6th Cir. 1988) (Pl. Mem. at 12 n.9). In Havenick v. Network Express, Inc., 981 F. Supp. 480, 524 (E.D. Mich. 1997), however, a district court in the Sixth Circuit reexamined Michaels Building in light of the Reform Act and its legislative history. The district court concluded that the Reform Act "expand[s] existing Fed. R. Civ. P. 9(b) pleading requirements[,]" and heightens the pleading standards stated in Michaels Building:

In summary, the law now requires a plaintiff to draw a specific nexus between the allegedly fraudulent statements and the facts upon which the allegation of fraud is dependent, or, at least, a clear statement of why and how the plaintiff has reached the conclusion that a particular statement is fraudulent.

981 F. Supp. at 524, 526.

Third, the Reform Act's "information and belief" requirement goes beyond prior Ninth Circuit law.¹⁰ The information and belief provision requires plaintiffs to "state with particularity all facts on which [their] belief is formed." 15 U.S.C. § 78u-4(b)(1)(B) (emphasis added). Plaintiffs' contention that this is the same requirement adopted in Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th Cir. 1987) (Pl. Mem. at 18) is simply wrong. In Wool, the Ninth Circuit held that a complaint pleaded on information and belief satisfies Rule 9(b) if the "allegations are accompanied by a statement of the facts upon which the [plaintiffs'] belief is founded." Id. at 1439 (emphasis added). By contrast, the Reform Act requires plaintiffs to plead "all" facts upon which their beliefs are based, and those facts must be pleaded "with particularity," a further requirement absent from the Wool standard.

B. The Information and Belief Requirement Means What It Says.

Plaintiffs effectively concede that they have not complied with the information and belief requirement. On its face, this alone requires dismissal of the Complaint. Head v. Netmanage, Inc., No. C-97-4385 CRB, slip op. at 1 (N.D. Cal. Feb. 24, 1998) (Kendrick Supp. Decl. Ex. C). Plaintiffs argue that the information and belief provision cannot be interpreted to require them to plead the sources of their information. Pl. Mem. at 19. The source of plaintiff's information, however, was considered by courts in the Second Circuit to be perhaps the most important "fact" upon which a belief of fraud was based.¹¹

In Silicon Graphics, Judge Smith carefully analyzed the legislative history of the information and belief provision and concluded that Congress intended to require plaintiffs to plead "all facts" in their possession that supported their belief that a fraud had occurred. 970 F. Supp. at 763-64. Plaintiffs contend that Congress changed the original requirement of this section from "all facts" to "all information" because Congress did not intend to require the disclosure of sources. Pl. Mem. at 20. Plaintiffs misread the legislative history.

The Conference Committee changed the wording of the provision to "all facts." Nothing indicates that the Conference Committee was trying to soften the requirement. On the contrary, the Conference Committee's Report reenforces that this provision means what it literally says: a "plaintiff must state with particularity all facts in the plaintiff's possession on which his belief is formed." Conf. Rep. at 41 (emphasis added). Judge Smith thus correctly concluded that the information and belief provision requires "plaintiffs to plead all facts on which their allegations are based," including the sources of their beliefs. 970 F. Supp. at 767.

Plaintiffs argue that the Reform Act does not require them to disclose the sources of their information because this would require them to disclose attorney work product. Pl. Mem. at 18-21. The source of allegations in a complaint that is of public record is simply not work product. Under Fed. R. Civ. P. 26, parties are required to make initial disclosures of witnesses with relevant knowledge of their allegations. This is also consistent with the Second Circuit's view that the "sources" of a securities fraud complaint are not protected work product and must be pleaded with specificity. Segan v. Dreyfus Corp., 513 F.2d 695, 696 (2d Cir. 1975); see Decker, 534 F. Supp. at 878. Requiring plaintiffs to identify the sources of allegations in their complaint in no way infringes counsel's opinion work product. Plaintiffs are not being asked to divulge their entire investigation, only the sources of allegations they put at issue.¹²

C. Plaintiffs' Conclusory Allegations of Accounting Fraud Are Inadequate.

TCSI disclosed two pieces of bad news about the third quarter of 1996: that it would not close certain licensing deals it had hoped to sign, and that its contract with UPS would be terminated on unfavorable terms, requiring TCSI to write-off UPS-related assets. Complaint ¶¶ 88, 101. Although these events are the heart of this case, plaintiffs cannot provide a single fact showing that TCSI knew that either event would occur months before the end of the quarter, as they allege.

Rather, plaintiffs' opposition memorandum surprisingly focuses on conclusory allegations that TCSI improperly recognized revenue on licenses where "collectability" was not "probable." Complaint ¶¶ 94-97. These conclusory allegations obviously fail the Reform Act. Plaintiffs do not identify which contracts, with which customers, had to be written off because they were of questionable collectability, or even that uncollectible contracts had anything to do with the third quarter shortfall. Def. Mem. at 15 n.21.

More fundamentally, plaintiffs' accounting allegations make no sense. Although plaintiffs recite the names of eight customers with whom TCSI had license agreements, plaintiffs never explain how TCSI violated GAAP by recognizing revenue on those agreements. Plaintiffs allege only that "collectability was not assured with respect to much of this revenue." Complaint ¶ 95 (emphasis added). Yet, as plaintiffs allege, under GAAP collection need not be assured, but only probable. Id. at ¶ 94.

In addition, plaintiffs fail to quantify how the supposedly improper revenue recognition hurt the third quarter. Plaintiffs' discussion of "unbilled receivables" is off point. "Unbilled receivables" is money due for work performed but not yet billed. Plaintiffs allege that unbilled receivables increased between December 31, 1994 and June 30, 1996, and then declined by December 31, 1996. This proves nothing. The problem in the third quarter was that TCSI was unable to sign new licensing agreements, not that existing customers were refusing to pay.

Plaintiffs' allegations concerning UPS are no more than a recitation of disclosures about the contract. Plaintiffs fail to set forth specific facts showing that TCSI knew early in the class period that UPS would terminate their contract in October 1996. Plaintiffs cannot seem to make up their mind as to when TCSI knew this, offering no less than six alternatives: (1) "by mid-1995" (Pl. Mem. at 10, Complaint ¶¶ 91, 98); (2) "by the fall of 1995" (Complaint ¶ 3); (3) by October 1995 (id. ¶ 50); (4) in the fourth quarter of 1995 (Pl. Mem. at 1); (5) by "late 1995-early 1996" (id. at 4, Complaint ¶ 11)); and (6) "[b]y early 1996" (Pl. Mem. at 3). Nor do plaintiffs explain why TCSI should have written off a contract with a major customer at the same time that it was undisputably deploying more than $7 million of hardware to that same customer. See Kendrick Decl. Exs. F and G (April 17 and July 18 press releases reporting deployment of UPS system); Def. Mem. at 14-15.¹³

Plaintiffs try to distinguish Shuster v. Symmetricon, Inc., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,437 (N.D. Cal. Feb. 25, 1997) (Def. Mem. 13), by contending that Strauch "admitted" that he knew the UPS contract would be terminated. Strauch said no such thing. See Complaint ¶ 102. He explained that by the time that TCSI was deploying the project and recognizing revenue, the UPS work was no longer part of TCSI's core business: telecommunications. Strauch did not say anything about when TCSI realized that the UPS agreement would be terminated at a loss, requiring write offs. Because plaintiffs fail to identify a contemporaneous statement revealing a fraud, both Shuster, and certainly the Reform Act, compel dismissal.

D. Plaintiffs Allege No Specific Facts Showing That TCSI's Forecasts Were False.

Plaintiffs' allegations concerning TCSI's allegedly false forecasts are not actionable because the statutory Safe Harbor for forward-looking statements and the "bespeaks caution" doctrine render these statements inactionable as a matter of law. See supra. § I. Plaintiffs also fail to state a claim because they do not allege specific facts showing that TCSI knew when it made these forecasts of the events that caused the shortfall in September 1996. See Def. Mem. at 12-14 (citing In re Syntex Corp. Sec. Litig., 95 F. 3d 922, 929 (9th Cir. 1996); In re Stac Elecs. Sec. Litig., 89 F. 3d at 1404; Shuster, [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) at 96,865).

Plaintiffs ignore Stac and Syntex entirely, and make only passing reference to GlenFed, the main pre-Reform Act decision on pleading a false statement of fact. They argue instead that under Fecht and Cooper, the Complaint is sufficiently specific because it broadly identifies the problems that allegedly caused TCSI to miss its forecast. Pl. Mem. at 12-15. As discussed above, the Reform Act has straightforward requirements for pleading falsity that are more rigorous than prior Ninth Circuit law.

What facts are alleged showing that TCSI's forecasts for the third quarter of 1996 were false when made? Plaintiffs do not plead any. What facts and sources of information do plaintiffs have to support their belief that defendants knew that their forecasts for the third quarter were false when made? Plaintiffs do not identify any. Plaintiffs rely on mere speculation. They do not plead any specific facts that differentiate this case from one pleaded on hindsight. For example, plaintiffs allege that TCSI knew that licensing contracts with a Regional Bell Operating Company and other customers would not close as expected. Complaint ¶¶ 14(g); 84(g); 87(e). What facts support this conclusion, and what is the basis for plaintiffs' belief? The Reform Act requires that these facts be set forth in the Complaint with particularity, and plaintiffs have failed to do this.¹⁴

III. THE COMPLAINT FAILS TO PLEAD SPECIFIC FACTS GIVING RISE TO A STRONG INFERENCE OF FRAUDULENT INTENT

The Reform Act requires plaintiffs to allege with particularity facts giving rise to a "strong inference" that defendants acted with fraudulent intent. Plaintiffs contend that vague allegations concerning financial fraud and unspecified internal reports suffice. Plaintiffs also argue that, notwithstanding the Conference Report, mere allegations that defendants sold stock provide evidence of "motive and opportunity" that gives rise to a strong inference of fraud. Neither approach is acceptable under the Reform Act.

A. The Complaint Does Not Allege Conscious Wrongdoing or Recklessness.

Plaintiffs assert that their allegations of "financial fraud" give rise to a "strong inference" of fraud. Pl. Mem. at 31-33. As shown above, however, plaintiffs have not pleaded with particularity facts showing that TCSI's accounting was even incorrect indeed, the support for plaintiffs' allegations of improper revenue recognition, a decline in unbilled receivables between December 1995-1996, clearly is irrelevant to the allegation.

Even assuming that plaintiffs adequately alleged an accounting misstatement, plaintiffs still must allege particular facts showing that the accounting was not only wrong but fraudulent. As the Ninth Circuit has emphasized, "the mere publication of inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish scienter." In re Software Toolworks, Inc. Sec. Litig., 50 F.3d 615, 627 (9th Cir. 1995) (quoting Worlds of Wonder, 35 F.3d at 1426 and collecting authority). Plaintiffs have not alleged such facts. For example, because plaintiffs have not alleged any facts showing that UPS decided to terminate its contract before October 1996, plaintiffs obviously have failed to allege with particularity facts showing that defendants knew and fraudulently concealed this fact; likewise, because plaintiffs allege no facts showing that key licensing contracts would not close in September 1996, plaintiffs have failed to allege particular facts showing that TCSI actually knew and fraudulently concealed this fact.

Plaintiffs contend that defendants' mere positions within TCSI give rise to a strong inference of knowledge. Pl. Mem. at 31-33. The two Second Circuit opinions that plaintiffs cite do not support their contention. Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 1989), was decided before the Second Circuit had adopted the "strong inference" of scienter doctrine. In applying the strong inference test, the Second Circuit has rejected allegations based on a defendant's mere status.¹⁵ Such conclusory allegations clearly fail under the Reform Act, which requires "particular" facts showing a strong inference of fraud. If plaintiffs are contending that defendants' desire to enhance their corporate status gives rise to an inference of motive, the argument fails as well. Even under prior Second Circuit law, such allegations were summarily rejected.¹⁶ Under the Reform Act, allegations of motive and opportunity are no longer an independent basis to allege a strong inference of fraud. See infra. pp 15-17.

In plaintiffs' other case, Cohen v. Koenig, 25 F.3d 1168 (2d Cir. 1994), the owners of a closely held corporation allegedly misrepresented their balance sheet by specific amounts in face-to-face meetings for the purpose of financing an acquisition instead of paying cash. The Second Circuit contrasted this situation with the one in Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir. 1994), a shareholder class action, which involved "broad and conclusory allegations" of inadequate loan loss reserves that did not give rise to a strong inference of scienter. Id. at 1174.

Plaintiffs repeat their vague allegation that defendants' access to unspecified negative internal reports is sufficient to show a strong inference of scienter. Pl. Mem. at 33-34. As defendants have explained, many courts have held this to be insufficient. See Def. Mem. at 17.

B. Defendants' Stock Sales, Considered in Their Undisputed Context, Refute Any Inference of Fraud.

Defendants' stock sales do not support a "strong inference" of fraud because, when viewed in context, they are not "unusual or suspicious." Silicon Graphics, 970 F. Supp. at 767-68; see Def. Mem. at 17-19. Two facts about these sales are not genuinely disputed and are dispositive.

First, each Defendant retained significant holdings in TCSI throughout the Class Period. Thus, the fundamental assertion of the Complaint that defendants were scheming to inflate TCSI's stock so that they could dump their holdings during the class period is demonstrably false. Plaintiffs misleadingly calculated the percentage of shares sold by including options that were exercised and sold, and ignoring options that could have been exercised and sold but were held. Courts have held that, if stock sales are to be the evidence of scienter, all of a defendant's available holdings must be considered. Def. Mem. at 18.¹⁷

Second, over 80 percent of the shares sold during the Class Period were sold in a secondary offering that plaintiffs do not contend was in any way misleading. Rather, the prospectus for that offering overflowed with specific risk disclosures, many of which emphatically warn of the risks that plaintiffs say were concealed. Def. Mem. at 7-10. Stock sales cannot sustain a strong inference of fraud where defendants retained significant percentages of their stock holdings, and the only significant sales were made through a public offering subject to a prospectus that is not challenged as false and was loaded with risk disclosure.

Plaintiffs respond with the rote argument that stock sales show "motive and opportunity" to commit fraud and, therefore, create a "strong inference" of scienter. Pl. Mem. at 35-41. Plaintiffs are mistaken. A complaint may no longer base a strong inference of fraud on allegations of mere "motive and opportunity."

The Reform Act's "strong inference" requirement "is based in part on the pleading standard of the Second Circuit." Conf. Rep. at 41. (emphasis added). Under the Second Circuit's "strong inference" standard, a plaintiff was required to allege either (i) specific facts that "constitut[e] circumstantial evidence of reckless conscious misbehavior," or (ii) "motive and opportunity to commit fraud." Philip Morris, 75 F.3d at 812-13. Although the Second Circuit's pleading standard was "[r]egarded as the most stringent pleading standard," Congress intended to "strengthen" even that tough standard. Conf. Rep. at 41 (emphasis added). The Conference Report leaves no doubt about the issue:

Because the Conference Committee intends to strengthen existing pleading requirements, it does not intend to codify the Second Circuit's case law interpreting this pleading standard.[FN 23]

[FN23] For this reason, the Conference Report chose not to include in the pleading standard certain language relating to motive, opportunity, or recklessness.

Conf. Rep. at 41 & n.23.

Other legislative history further demonstrates that Congress did not intend to codify Second Circuit law interpreting the strong inference standard. The Senate version of the Reform Act included an amendment proposed by Senator Specter codifying the Second Circuit's standard.

Amend. 1485, S. 240, 104th Cong., 1st Sess. (1995) (Kendrick Supp. Decl. Ex. E). The Conference Committee eliminated the Specter Amendment from the final version of the bill. In vetoing the bill, President Clinton wrote that he could not agree with the deletion of the Specter amendment.¹⁸ Congress overrode the veto and passed the Conference Committee's bill.

In this District, Judge Smith has twice scrutinized the "strong inference" standard and concluded that Congress did not intend to codify Second Circuit law. She concluded that allegations of "motive and opportunity" are no longer an independent basis to plead fraud. Silicon Graphics, 970 F. Supp. at 757 (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197 (1976), and Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990)). Many courts including district courts in the Second Circuit itself have reviewed the Conference Report and this legislative history and come to the same conclusion.¹⁹

Plaintiffs rely heavily on Cooper in arguing that "motive and opportunity" is still a valid basis to allege a strong inference. The Court may quickly dispense with this argument. Cooper itself acknowledges that its discussion of scienter addresses only the pre-Reform Act standard, not the standard applicable under the Reform Act. 1997 U.S. App. LEXIS 39330, at *34 n.2.²⁰

Plaintiffs allegation that TCSI repriced certain defendants' options after the end of the class period misses the point. Plaintiffs do not contend that any defendant's option exercise price was above the market price during the class period. Quite the contrary, plaintiffs point to defendants' exercise of options and same-day sale of the resulting shares as evidence of the supposed fraud. Thus, the pertinent question as to each defendant is, what percentage of his available holdings did he sell during the class period while the stock was supposedly artificially inflated? Plaintiffs cannot myopically point to the options that were exercised and sold and contend that each defendant sold 100% of his stock holdings.

Plaintiffs also contend that plaintiffs routinely have used stock sales as evidence that defendants committed fraud. The Reform Act, in eliminating motive and opportunity as an independent basis to plead a strong inference, changed the old rules. Congress recognized that executives commonly exercise stock options as part of their compensation, and that such conduct should not give rise to "a presumption of guilt" if the stock later drops. Congress rejected a proposed amendment that would have excluded from the safe harbor companies selling $1 million of stock or officers selling $50,000 of stock. 141 Cong. Rec. S9150, S9156 (June 27, 1995) (introducing Amend. 1480) (Kendrick Supp. Decl. Ex. J). Senator Dodd explained why: "To assume there is inherently something illegal, that it is an assumption of an illegal act for someone to exercise an option, and that action becomes a presumption of guilt in this context, then stripping away safe harbor, I think, goes too far . . . . That, to me, is exactly what we are trying to avoid." Id. at S9161.

Finally, plaintiffs' attempt to distinguish Silicon Graphics are unavailing. Judge Smith held that individual defendants' sales of only 10 percent of their total holdings did not give rise to a strong inference of fraud. Silicon Graphics, 970 F. Supp. at 768 (individuals' sales of 2.6%, 7.7%, 4.1%, and 6.9%, and overall sales of 10% of total holdings, do not raise strong inference of fraudulent intent). Even before the Reform Act, courts around the country generally agreed that such levels of selling were not suspicious.²¹ As in these cases, defendants retained significant holdings through the end of the class period, which refutes any inference of fraudulent intent.

IV. PLAINTIFFS PLEAD NO SPECIFIC FACTS SHOWING THAT DEFENDANTS ARE LIABLE FOR ANALYST REPORTS

Defendants cannot be liable for the statements of stock analysts, because plaintiffs do not allege "with particularity" specific facts showing that defendants were involved with the reports and knew that the reports were false when made. See Def. Mem. at 20-21 (citing Syntex, 95 F.3d at 934; Stac, 89 F.3d at 1410). Plaintiffs argue that conclusory allegations of entanglement are sufficient under Cooper. Pl. Mem. at 45. That cannot be true in the post-Reform Act world. The Reform Act demands that plaintiffs plead "with particularity" both the details of a false statement here, the entanglement and defendants' actual knowledge of falsity.

Moreover, Cooper in no way overrules Stac and Syntex, as the Ninth Circuit acknowledges. 1997 U.S. App. LEXIS 39330, at *19-*20. Plaintiffs still must plead particularized facts showing that "defendants . . . put their imprimatur, express or implied, on the projections." Syntex, 95 F.3d at 934 (citations omitted). Cooper concerned an extreme situation where a company allegedly made specific false statements directly to an analyst with the knowledge and intent that its statements would be communicated to the market. 1997 U.S. App. LEXIS 39330, at *18-*20. Plaintiffs do not make such allegations here. See Def. Mem. at 20-21.²²

V. MILLER, BOLGER, BANIN, HASLER, AND MESSERSCHMITT CANNOT BE LIABLE BECAUSE THEY DID NOT MAKE A FALSE STATEMENT

Because Plaintiffs do not allege that defendants Miller, Bolger, Banin, Hasler, or Messerschmitt made any of the allegedly false statements, the claims against these defendants must be dismissed. Def. Mem. at 21-22; Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177 (1994); In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 592 (9th Cir. 1995). Hoping to avoid Central Bank and GlenFed, plaintiffs offer three unpersuasive arguments.

First, plaintiffs argue that defendants participated in a "fraudulent scheme." Pl. Mem. at 43-44. The "scheme," however, is no more than the alleged conspiracy to withhold material information. Complaint ¶ 27. Courts routinely reject this ploy as an evasion of Central Bank.²³

Second, plaintiffs rely upon the group-published information doctrine. Pl. Mem. at 41-43. Prior to the Reform Act, the doctrine allowed a plaintiff to meet the pleading requirements of Rule 9(b) by creating a presumption that certain officers of a company acted collectively to publish the company's allegedly false reports. GlenFed, 60 F.3d at 593. The Reform Act now requires particularized facts as to each Defendant; it is not sufficient to group defendants together and make undifferentiated allegations that they violated Section 10(b). 15 U.S.C. § 78u-4(b)(2). In any case, plaintiffs' conclusory allegations are insufficient to trigger the presumption. The doctrine "rests on the assumption that officers involved in the day-to-day management of a corporation must be aware of the internal operations of the corporation, including fraudulent internal operations." Smith v. Network Equip. Tech., Inc., [1990-1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,659, at 98,093 (N.D. Cal. Oct. 19, 1990) (emphasis added). Outside directors such as Miller, Bolger, Hasler, or Messerschmitt, are not involved in the "day-to-day management" of the company. E.g., In re Interactive Network, Inc. Sec. Litig., 948 F. Supp. 917, 920-21 (N.D. Cal. 1996); Lilley v. Charren, 936 F. Supp. 708, 717 (N.D. Cal. 1996).²⁴

Third, plaintiffs contend that defendants engaged in improper insider trading. Pl. Mem. at 44-45. But the Complaint does not plead a claim for insider trading under Section 10(b), which requires that plaintiffs trade contemporaneously with defendants. Neubronner v. Milken, 6 F.3d 666, 670 (9th Cir. 1993); In re AST Research Sec. Litig., 887 F. Supp. 231, 232-34 (C.D. Cal. 1995). In any case, such allegations are no substitute for particularized allegations that a defendant made a false statement. In re Oak Tech. Sec. Litig., 1997 U.S. Dist. LEXIS 18503, at *34.

For the foregoing reasons, defendants respectfully request that this Court dismiss the Complaint with prejudice.

¹ For some reason, plaintiffs argue that other statements in the Complaint, including the allegedly misleading financial statements, are not covered by the Safe Harbor. Pl. Mem. at 21-24. Although the Safe Harbor covers forward-looking statements no matter when they were made, In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 753-54 (N.D. Cal. 1997), defendants explain that the allegations of financial fraud, and other statements made before the Reform Act, are not actionable for other reasons, as stated in Sections II - IV, infra.

² See Rasheedi v. Cree Research, Inc., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,566, at 97,818 (M.D.N.C. Oct. 17, 1997) (applying Safe Harbor to dismiss claims based on forward-looking statements in press releases; "[d]efendants do not have to caution against every conceivable factor that may cause results to differ"); accord H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. 44 (1995) ("Conf. Rep.") (Kendrick Decl. Ex. D) ("[f]ailure to include the particular factor that ultimately causes the forward-looking statement not to come true will not mean that the statement is not protected by the safe harbor").

³ See In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1409 (9th Cir. 1996) (dismissing claim; complaint "must demonstrate that a particular statement, when read in light of all the information then available to the market. . . conveyed a false or misleading impression."), cert. denied, 117 S. Ct. 1105 (1997) (quoting In re Convergent Tech. Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991) (rejecting claims where company disclosed specific risks plaintiffs alleged were omitted)); In re Syntex Corp. Sec. Litig., 855 F. Supp. 1086 (N.D. Cal. 1994) (where company disclosed cautionary information, including allegedly omitted information, investing public could not have been misled), aff'd, 95 F.3d 922 (9th Cir. 1996).

⁴ See In re Interactive Network Sec. Litig., No. C-95-0026 DLJ, slip op. at 9-10 (N.D. Cal. Apr. 4, 1997) (Kendrick Supp. Decl. Ex. A) (dismissing claim; cautionary statements were "sufficient to put investors on notice"); In re OPTi, Inc. Sec. Litig., No. C-95-3434 SBA, slip op. at 25 (N.D. Cal. Mar. 31, 1997) (Kendrick Decl. Ex. N) (dismissing complaint; in light of defendants' specific warnings, no reasonable investor would have been misled); In re SciClone Pharmaceuticals Sec. Litig., No. C-94-1485 SBA, slip op. at 18 (N.D. Cal. Mar. 10, 1995) (Kendrick Decl. Ex. O) (dismissing complaint based upon "detailed cautionary language" in a prospectus).

⁵ See Provenz v. Miller, 102 F.3d 1478, 1487 (9th Cir. 1996) (bespeaks caution doctrine provides mechanism by which court can rule "as a matter of law . . . that defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud"), cert. denied, 118 S. Ct. 48 (1997) (citations omitted); Gray v. First Winthrop Corp., 82 F.3d 877, 883 (9th Cir. 1996) ("granting summary disposition under the bespeaks caution label represents a conclusion that, as a matter of law, a securities prospectus as a whole in not misleading due to the risks disclosed and the nature and extent of the other cautionary language employed"); Kaplan v. Rose, 49 F.3d 1363, 1373-74 (9th Cir. 1994) (bespeaks caution doctrine "holds that if 'precise cautionary language . . . directly addresses itself to future projections, estimates, or forecasts in a prospectus,' the projections will not give rise to a claim of securities fraud") (citations omitted).

⁶ See also Pache v. Wallace, [1995 Transfer Binder] Fed. Sec. L. Rep. (CCH)

⁷ Plaintiffs mistakenly assert that defendants are seeking to shield their statements from liability by relying on the "truth on the market" doctrine. Pl. Mem. at 27-28. The truth on the market doctrine applies where accurate information has entered the market independent of the company's statements. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1115-16 (9th Cir. 1989). Defendants contend that their own exhaustive risk disclosures "bespoke caution" and revealed the allegedly concealed risks facing their business.

⁸ None of plaintiffs' post-Reform Act authority discusses this legislative history and it is therefore inapposite. E.g., Cherednichenko v. Quarterdeck Corp., No. CV 97-4320-GHK (CWx), minute order (C.D. Cal. Nov. 26, 1997) (Lawrence Dec. Ex. A); Powers v. Eichen, 977 F. Supp. 1031, 1036-38 (S.D. Cal. 1997). Moreover, certain of plaintiffs' authority is irrelevant because it concerns the standard for pleading scienter under 15 U.S.C. § 78u-4(b)(2). E.g., Marksman Partners, L.P. v. Chantal Pharmaceutical Corp., 927 F. Supp. 1297, 1308-14 (C.D. Cal. 1996) (Pl. Mem. at 6 n.4); Rehm v. Eagle Fin. Corp., 954 F. Supp. 1246, 1251 n.1 (N.D. Ill. 1997) (Pl. Mem. at 6 n.4).

⁹ E.g., Cooper v. Pickett, No. 95-55657, 1997 U.S. App. LEXIS 39330, at *31 (9th Cir. Jan. 30, 1998) (Kendrick Supp. Decl. Ex. B) ("We decline to require that a complaint must allege specific shipments to specific customers at specific times with a specific dollar amount of improperly recognized revenue"); Warshaw v. XOMA Corp., 74 F.3d 955, 960 (9th Cir. 1996) ("[c]omplaint assert[ing] that the defendants knew that the facts contravened their 'optimistic' statements . . . easily . . . satisfied Rule 9(b)"); Fecht v. Price Co., 70 F.3d 1078, 1083 (9th Cir. 1995), cert. denied, 116 S. Ct. 1422 (1996) ("[t]he [c]omplaint alleges that the positive statements about the expansion program were false when made because, in truth, the new stores were losing money"); In re GlenFed. Inc. Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1994) (en banc) ("plaintiff must set forth facts explaining why the difference between the earlier and the later statements is not merely the difference between two permissible judgments, but rather the result of a falsehood").

¹⁰ Plaintiffs first try to avoid the information and belief requirement by conjuring up a new form of pleading, "investigation of counsel." Complaint ¶ 124. There is no such thing. There are only two types of pleading: knowledge or information and belief. Because plaintiffs do not purport to plead on knowledge, the "only alternative" is information and belief. See Silicon Graphics, 970 F. Supp. at 763-64; accord Havenick, 981 F. Supp. at 526.

¹¹ See Decker v. Massey-Ferguson, Ltd., 534 F. Supp. 873, 878 (S.D.N.Y. 1981), aff'd in part, rev'd in part on other grounds, 681 F.2d 111 (2d Cir. 1982); Kershaw v. Nautica S.A. Ltd., 885 F. Supp. 617, 621 (S.D.N.Y. 1995); Crystal v. Foy, 562 F. Supp. 422, 425 (S.D.N.Y. 1983).

¹² See Laxalt v. McClatchy, 116 F.R.D. 438, 442 (D. Nev. 1987) (ordering disclosure of persons having relevant knowledge but not all persons interviewed), abrogated by Motenko v. MGM Dist., Inc., 921 P.2d 933 (Nev. 1996); Nacht & Lewis Architects, Inc. v. Superior Court, 47 Cal. App. 4th 214, 215 (1996) (same).

¹³ This distinguishes this case from In re Wells Fargo Sec. Litig., 12 F.3d 922, 927 (9th Cir. 1993) (Pl. Mem. at 11), where the parties did not seriously dispute that Wells Fargo's loan loss reserves were inadequate, and In re Bausch & Lomb, Inc. Sec. Litig., 941 F. Supp. 1352, 1362 (W.D.N.Y. 1996) (Pl. Mem. at 12 n.9) where defendants conceded that sales figures and projections were inadequate.

¹⁴ Defendants explained that the remaining challenged statements were either historical facts or non-actionable expressions of vague optimism. Def. Mem. at 15-16. While plaintiffs argue that this doctrine conflicts with later Ninth Circuit authority, Pl. Mem. at 15-16, nothing in plaintiffs' authority directly addresses this issue; even the decisions of this Court that plaintiffs cite apply the doctrine to dismiss vaguely optimistic statements. Parnes v. Harris, No. C 95-2715 SBA, slip op. at 38 (N.D. Cal. Mar. 31, 1997) (Pl. Mem. at 16) (dismissing with prejudice allegations based on statements that were "so vague that no reasonable investor would rely upon them in making his or her investment decision"). Even if certain vague, forward-looking statements are material, Pl. Mem at 15-16 & nn.12, 13, these statements would be covered by the Safe Harbor and the "bespeaks caution" doctrine. See § I, supra.

¹⁵ Plaintiffs' own authority is in agreement. In re Health Management, Inc. Sec. Litig., 970 F. Supp. 192, 204-05 (E.D.N.Y. 1997) (status as Board member insufficient).

¹⁶ See Shields, 25 F.3d at 1130 (requiring allegations of particular facts showing "concrete benefit[] that could be realized by one or more of the false statements and wrongful disclosures alleged"); Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995) (alleged desire to maintain inflated stock price insufficient); Philip Morris, 75 F.3d at 813-14 (alleged desire to maintain credit rating insufficient); Chill v. General Elec. Corp., 101 F.3d 263, 268 (2d Cir. 1996) alleging any motive that "could be imputed to any publicly-owned, for profit endeavor" is insufficient).

¹⁷ Many of these defendants are subject to a state court derivative case arising out of the same events at issue here; in that case, the derivative plaintiff has readjusted his stock sale allegations to include vested options. Kendrick Supp. Decl. Ex. D.

¹⁸ President Clinton wrote: "The conferees deleted an amendment offered by Senator Specter and adopted by the Senate that specifically incorporated Second Circuit case law with respect to pleading a claim of fraud. Then they specifically indicated that they were not adopting Second Circuit case law but instead intended to 'strengthen' the existing pleading requirements of the Second Circuit. All this shows that the conferees meant to erect a higher barrier to bringing suit than any now existing. . . ." H.R. Doc. No. 104-150, 104th Cong., 1st Sess. (1995) (emphasis added) (Kendrick Supp. Decl. Ex. F).

¹⁹ See also Novak v. Kasaks, No. 96 Civ. 3073 (AGS), 1998 U.S. Dist. LEXIS 2777, at *15 (S.D.N.Y. Mar. 10, 1998) (Kendrick Supp. Decl. Ex. G) ("evidence of motive and opportunity no longer suffices to plead scienter"); In re Glenayre Technologies, Inc. Sec. Litig., 982 F. Supp. 294, 297 (S.D.N.Y. 1997) ("Congress sought to 'strengthen' existing pleading requirements . . . not . . . codify the Second Circuit's") (quoting Norwood Venture Corp. v Converse, Inc., 959 F. Supp. 205, 208 (S.D.N.Y. 1997)); Havenick, 981 F. Supp. at 524; In re Comshare Sec. Litig., No. 96-73711, 1997 U.S. Dist. LEXIS 17262, at *14-19 (E.D. Mich. Sept. 18, 1997) (Kendrick Supp. Decl. Ex. H) ("[T]he legislative history makes explicitly clear that it is not enough to allege . . . motive and opportunity, in order to establish a defendant's scienter"); Voit v. Wonderware Corp., 977 F. Supp. 363, 374 (E.D. Pa. 1997) ("[t]he Act's legislative history suggests that it was intended at least to surpass the Second Circuit's 'motive and opportunity' and 'recklessness' standards"); In re Baesa Sec. Litig., 969 F. Supp. 238, 242 & n.2 (S.D.N.Y. 1997); Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42, 49-50 & n.2 (D. Mass. 1997) (the Act requires "intent to defraud or knowledge of the falsity"); Powers, 977 F. Supp. at 1039 ("[t]his Court agrees with the reasoning cited in Silicon Graphics and adopts the stricter pleading standard for scienter"). While other courts have held that Congress merely codified the Second Circuit's strong inference standard, including its "motive and opportunity" prong, they have mistakenly ignored the Conference Report, Congress' rejection of the Specter Amendment, and the President's veto letter. Pl. Mem. at 29 (citing cases).

²⁰ Indeed, plaintiffs' counsel acknowledges that Cooper's analysis of scienter is inapplicable to Reform Act cases. See William S. Lerach, Securities Class Action Litigation Under the Private Securities Litigation Reform Act, "A Brave New World," reprinted in 1015 PLI Corp. 9, 30 (Sept. 1997) ("because Cooper is a pre-PSLRA case, in the 9th Cir. scienter only had to be alleged generally under GlenFed. Thus, the 9th Cir. did not reach the issue of whether the allegations in the Cooper complaint would have raised a strong inference of scienter. Cooper did not discuss this issue, merely noting in a footnote the passage of the PSLRA and its heightened pleading standard"); Plaintiffs-Appellants' Response to Petitions For Rehearing and Suggestions of Rehearing En Banc at 17, Cooper v. Pickett, 1997 U.S. App. LEXIS 39330 (conceding that the Reform Act "provides new statutory rules for alleging falsity and scienter") (Kendrick Supp. Decl. Ex. I).

²¹ See Acito, 47 F.3d at 54 (no fraud where defendant held 89 percent of his holdings); Duncan v. Pencer, [1995-1996 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,043, at 94,208 (S.D.N.Y. Jan. 18, 1996) (dismissing complaint; stock sales of $29 million not "unusual" based on defendants' "substantial holdings" after sales); Worlds of Wonder, 35 F.3d at 1425 (no inference of scienter where defendants retained bulk of their shares); Apple, 886 F.2d at 1117 (insider sales of $84 million representing only 8% of their holdings not suspicious).

²² Plaintiffs' other cases are inapposite. Pl. Mem. at 45-47. Warshaw, 74 F.3d at 959, involves the same issue and is likewise inapposite. In re Presstek, 1997 SEC LEXIS 2645 (Dec. 22, 1997), concerns a settled SEC administrative proceeding in which management provided an analyst with erroneous sales forecasts, edited the analyst's report without correcting the error, and then distributed it. Id. at *19-*27 (Lawrence Dec. Ex. K) . Fecht, 70 F.3d at 1080, did not discuss the standards for "entanglement." Durning v. First Boston Corp., 815 F.2d 1265 (9th Cir. 1987), concerns the liability of underwriters for misleading statements in an offering. Harvey M. Jasper Retirement Trust v. Ivax Corp., 920 F. Supp. 1260 (S.D. Fla. 1995), did not apply Stac or Syntex, and involved an officer who faxed a misleading analyst report to a third party. In re Synergen, Inc. Sec. Litig. 863 F. Supp. 1409, 1418 (D. Colo. 1994), considered whether the court should credit an analyst's opinion that omitted material facts.

²³ See In re Oak Tech. Sec. Litig., No. 96-20552-SW, 1997 U.S. Dist. LEXIS 18503, at *27-28 (N.D. Cal. Aug. 1, 1997) ("scheme to defraud" allegation is "no more than a thinly disguised attempt to avoid the impact of the Central Bank decision") (Kendrick Supp. Decl. Ex. K; Silicon Graphics, 970 F. Supp. at 761-62; In re Gupta Corp. Sec. Litig., 900 F. Supp. 1217, 1243-44 (N.D. Cal. 1994); Stack v. Lobo, 903 F. Supp. 1361, 1374 (N.D. Cal. 1995). In plaintiff's cases, "scheme" liability was premised on defendant's direct involvement in the alleged wrongdoing. E.g., Cooper, 1997 U.S. App. LEXIS 39330, at *20-*22 (Pl. Mem. at 43) (defendants "directly participated" in manipulative conduct); SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1458-1460, 1471 (2d Cir. 1996) (Pl. Mem. at 44) (owner of firm who "orchestrated every facet" of operations and was "intimately involved" in "all significant decisions" excessively marked up prices of securities), cert. denied, 118 S. Ct. 57 (1997); see also Parnes, slip op. at 45-50 (Pl. Mem. at 16) (accountants and others performed specific acts in furtherance of alleged "scheme").

²⁴ Although Banin was Executive Vice President and General Manager of the Object Software Group, Complaint ¶ 22(f), he cannot be held liable under the "group pleading" presumption because there is no basis to conclude that he was involved in detailed accounting decisions about UPS or revenue recognition.