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

At issue are two proxy statements. Under either the incorporation by reference or judicial notice doctrines, defendants request that the Court consider their stock and vested option holdings, as reported in TCSI's 1996 and 1997 proxy statements filed with the Securities and Exchange Commission ("SEC"). Plaintiffs' complaint contains lengthy allegations about the percentage of total holdings that each defendant sold, alleging that each defendant dumped virtually all of his holdings. The only sources for these allegations are the publicly available documents that defendants are required by law to file with the SEC. These documents demonstrate beyond any doubt that plaintiffs have misleadingly ignored the vested options held by each defendant, thereby drastically inflating the percentages allegedly sold by each defendant.¹ Having put defendants' stock trading and holdings at issue, plaintiffs should not be heard to complain when defendants provide the Court with publicly available documents that summarize the stock trading, the accuracy of which plaintiffs cannot legitimately contest.

On a motion to dismiss, the Court may consider documents raised by the allegations in the complaint or subject to judicial notice. "Documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss." Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994) (court considered deposition transcript and defendant's affidavit on motion to dismiss); In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 757-59 (N.D. Cal. 1997) (in ruling on motion to dismiss, court considered SEC documents, including proxy statements, under judicial notice and incorporation by reference doctrines). Because plaintiffs' complaint relies on the stock holdings reflected in TCSI's 1996 and 1997 proxy statements, the Court can properly consider the vested option holdings reflected therein as well. Silicon Graphics, 970 F. Supp. at 758-59.

The Court may also take judicial notice of a fact that is "not subject to reasonable dispute in that it is . . . capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b)(2). The 1996 and 1997 proxy statements, which TCSI is required by law to file with the SEC, contain such facts; thus, they are properly the subject of judicial notice on a motion to dismiss. Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991) (on motion to dismiss, court took judicial notice of a joint proxy statement on which complaint was based). Since this Court can consider the proxy statements, either under the incorporation by reference doctrine or by judicial notice, plaintiffs' counter-motion to strike these documents should be denied.

I. THE COURT MAY CONSIDER DEFENDANTS' TOTAL STOCK AND VESTED OPTION HOLDINGS AS REPORTED IN THE 1996 AND 1997 PROXY STATEMENTS BECAUSE PLAINTIFFS RAISED THAT ISSUE IN THEIR COMPLAINT.

Plaintiffs contend that this Court cannot consider the 1996 and 1997 proxy statements because they are in effect "matters outside the pleading." Plaintiffs' Objection to Consideration of Defendants' 1996 & 1997 Proxy Statement and Counter-Motion to Strike (hereafter "Pltfs.' Obj.") at 4. But plaintiffs have put defendants' stock trading at issue. Their central theory of fraud is that defendants inflated the stock price so that they could sell large percentages of their total holdings during the class period. Complaint ¶¶ 15-16, 106-107. Plaintiffs' only sources for these allegations are the documents defendants are required by law to file with the SEC.

Plaintiffs are trying to survive a motion to dismiss by presenting half-truths in their complaint, and objecting to the Court's full consideration of publicly-filed documents that refute their scienter argument. Ironically, although plaintiffs rely on the contents of these documents, plaintiffs contend that "[t]he Complaint does not mention defendants' Proxy Statements at all." Pltfs.' Obj. at 4. Plaintiffs' argument exalts form over substance. Plaintiffs seek to preclude this Court's proper consideration of the full contents of these documents by simply omitting any express reference to the proxy statements. While inviting the Court to consider portions of these documents by presenting defendants' stock sales in their complaint, plaintiffs cannot at the same time protest when defendants ask the Court to consider the entire document.

Under the incorporation by reference doctrine, federal courts routinely consider the full content of documents on which a complaint relies. Branch, 14 F.3d at 453-54; In re VeriFone Sec. Litig., 11 F.3d 865, 868 n.2 (9th Cir. 1993) (court considered registration statement, prospectus and 10-Qs filed with the SEC on motion to dismiss); Amfac Mortgage Corp. v. Arizona Mall of Tempe, Inc., 583 F.2d 426, 429-30 (9th Cir. 1978); Silicon Graphics, 970 F. Supp. at 757-59.² The rationale underlying these decisions is that a complaint should not survive the pleading stage by selectively including facts from a document the contents of which are uncontestable. As the Second Circuit observed, "[w]ere courts to refrain from considering such documents, complaints that quoted only selected and misleading portions of such documents could not be dismissed under Rule 12(b)(6) even though they would be doomed to failure. Foreclosing resort to such documents might lead to complaints filed solely to extract nuisance settlements." Kramer, 937 F.2d at 774.

In Silicon Graphics, the Court rejected the identical objections that plaintiffs have raised here. 970 F. Supp. at 758. In that case, Judge Smith considered defendants' total stock and vested option holdings, based on documents filed with the SEC, including the company's proxy statement. Judge Smith noted that the Court could consider the contents of documents that the corporation was required by law to file with the SEC and on which the plaintiff's complaint relied either through incorporation by reference or judicial notice. Id. The Court rejected plaintiffs' objections as "disingenuous because plaintiffs rely on the information contained in these filings in pleading their allegations." Id. Finding that plaintiffs had put the alleged percentages sold by each defendant at issue, but had ignored defendants' vested options, the court considered defendants' total available shares for sale. Judge Smith explained:

[D]efendants' SEC Forms 3 and 4, and [company's] 1995 proxy statement, show that defendants sold only a fraction of their total [company] holdings. Defendants collectively had available millions of options that could have been exercised and sold during the class period. Considered in that context, defendants' actual sales were relatively small.

Id. at 768.

The holding of Silicon Graphics should be applied here. In calculating the percentage of holdings that each defendant sold, plaintiffs omitted each defendants' vested and exercisable options. In so doing, plaintiffs' contention that the stock sales support a strong inference of scienter rests on their conspicuous overstatement of the percentage sold by each defendant during the class period. Judge Smith rejected such attempts to concoct a strong inference of scienter through selective use of publicly-available information about defendants' stock sales and holdings. Judge Smith explained: "It is important to consider available options in evaluating stock sales. Exercisable options, not actual stock holdings, represent the owner's trading potential; by limiting their allegations to stock shares, plaintiffs artificially inflate defendants' activities." Id. at 768, n.13. Just as in Silicon Graphics, the proxy statements here set forth the total shares and vested options held by each defendant as of January 15, 1996 and 1997 (and within 60 days thereafter).

Plaintiffs erroneously contend that federal courts that have taken judicial notice of SEC documents "have done so only because the documents noticed were the very documents alleged to contain the misrepresentations at issue." Pltfs.' Obj. at 6 (emphasis in the original) (citing Kramer, 937 F.2d at 774). In fact, the Kramer decision states that courts may take judicial notice not only of the documents alleged to contain the inadequate or misleading statements but documents that bear on those issues as well. Id. Here, plaintiffs selectively cited portions of TCSI's publicly-filed documents; defendants properly introduced the full contents of those documents for the Court's consideration so that the Court could see the actual percentage of holdings that each defendant sold.

II. JUDICIAL NOTICE OF THE 1996 AND 1997 PROXY STATEMENTS IS PROPER BECAUSE THESE DOCUMENTS ARE PUBLIC RECORDS WHOSE ACCURACY CANNOT BE QUESTIONED.

This Court may take judicial notice of TCSI's proxy statements because they contain facts "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b)(2); Kramer, 937 F.2d at 774; Silicon Graphics, 970 F. Supp. at 757-59; Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 49 (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.").³ TCSI is required by law to file these proxy statements with the SEC. Thus, "no serious question as to their authenticity can exist." Kramer, 937 F.2d at 774; Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018, n.1 (5th Cir. 1996) (court may take judicial notice of public disclosure documents filed with SEC on motion to dismiss). These documents are public records. "Securities and Exchange Commission ("SEC") filings fall within this category of public records that can be judicially noticed." Diceon Electronics, Inc. v. Calvary Partners, L.P., 772 F. Supp. 859, 861-62, n.1 (D. Del. 1991) (citing Kramer, 937 F.2d 767) (on motion to dismiss, court noted that it could have taken judicial notice of defendants' public disclosure documents filed with SEC to determine defendants' compliance with securities laws but did not do so because defendants did not introduce them). Moreover, TCSI's proxy statements were audited by Ernst & Young. Thus, their accuracy, particularly as to the total stock and option holdings of each defendant, cannot be -- and is not -- challenged.⁴

Plaintiffs erroneously contend that Cooper v. Pickett, No. 95-55657, 1997 U.S. App. LEXIS 39330 (9th Cir. Jan. 30, 1998) (Kendrick Supp. Decl. Ex. B), precludes this Court from taking judicial notice of TCSI's proxy statements. Cooper is inapposite to the specific issue raised here. In Cooper, the Court declined to take judicial notice of transcripts of conference calls with analysts and a declaration. Id. at *11. The transcripts at issue did not even exist when plaintiffs filed their compliant. While the complaint in Cooper discussed analyst calls, it did not quote or specifically refer to the substance of those calls. In this case, plaintiffs' complaint clearly lists the alleged holdings and sales of each defendant during the class period. Complaint ¶ 106. The only sources of such information are the publicly-available documents, such as these proxy statements, that TCSI is required by law to file with the SEC. Thus, unlike Cooper, plaintiffs here have relied on the specific contents of documents filed with the SEC to support their central theory of fraud. In addition, the proxy statements have a greater degree of authenticity and accuracy than transcripts made from taped conference calls. The Cooper decision is not on point and does not preclude this Court from considering each defendant's total holdings, including vested options, as reported in TCSI's documents publicly filed with the SEC.

Plaintiffs' attempt to question the accuracy of these documents is self-serving and disingenuous. Pltfs.' Obj. at 4. Plaintiffs contend that the contents of these documents "are not free from dispute as to their accuracy" because they are statements of an adverse party to this dispute. Pltfs.' Obj. at 4. What, exactly, do plaintiffs believe is inaccurate? Plaintiffs never say. Therefore, there is no genuine dispute about the accuracy of the stock and vested option holdings contained in these proxy statements. Silicon Graphics, 970 F. Supp. at 758 (rejecting a similar claim given plaintiffs' own reliance); see 1 Weinstein's Evidence ¶ 201[03] at 201-24 (1996) (purpose of judicial notice is to avoid unnecessary costs associated with establishing fact that "is not really disputable.").

Plaintiffs' contention that the proxy statements are inadmissible hearsay is equally misguided. Pltfs.' Obj. at 4-5. The Court need not consider this hearsay objection. Plaintiffs opened the door by putting each defendants' stock sales (and percentages of holdings) at issue. The ultimate source of this information is defendants' SEC filings. Silicon Graphics, 970 F. Supp. at 759 (citing United States v. Anderson, 532 F.2d 1218, 1229 (9th Cir. 1976) (defendant who introduced hearsay statement waived objection)); see 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).

Furthermore, hearsay is not at issue because the proxy statements may be considered to show defendants' states of mind or under three exceptions to the hearsay rule. The Court could consider the proxy statements to evaluate whether plaintiffs' allegations give rise to a strong inference of scienter, without considering the "truth" of the matter contained in the proxy statements. Plaintiffs allege that defendants acted with the fraudulent intent of inflating the stock price so that they could unload their stock holdings on the market. The total holdings in the proxy statements refute this by demonstrating that defendants believed they were selling only a fraction of their TCSI holdings. If considered for this purpose, there is no hearsay issue. Fed. R. Evid. 801 (statement not hearsay if not "offered to prove truth of the matter stated"); Silicon Graphics, 970 F. Supp. at 759, n.6 (citing Gray v. First Winthrop Corp., 82 F.3d 877, 885, n.10 (9th Cir. 1996)).

Even if hearsay, the facts concerning defendants' total holdings would be admissible under the state of mind, business records, or government records exceptions. Silicon Graphics, 970 F. Supp. at 759, n.6. Each defendants' contemporaneous reporting of his stock and option holdings would be admissible to show that defendant's "then existing state of mind." Fed. R. Evid. 803(3).

The proxy statements are also admissible as business records. Defendants are required by law to file annual proxy statements with the SEC and to reflect an accurate accounting of stock and option holdings, subject to criminal penalties for any intentional misstatements or omissions. See 15 U.S.C. § 78n(a), (c). Records maintained pursuant to federal government requirements are admissible business records. Fed. R. Evid. 803(6) (hearsay exception for records of regularly conducted activity); see Silicon Graphics, 970 F. Supp. at 759 n.6 (citing United States v. Bland, 961 F.2d 123, 127 (9th Cir. 1992) and United States v. Central Gulf Lines, Inc., 747 F.2d 315, 319 (5th Cir. 1984)). Plaintiffs have not identified a single fact that calls into question the trustworthiness of the figures in the proxy statements.

Finally, documents filed with a government agency under these circumstances qualify as government records. Fed. R. Evid. 803(8) (hearsay exception for public records and reports); see Central Gulf Lines, Inc., 747 F.2d at 319.

III. BECAUSE VESTED OPTIONS ARE AS SALEABLE AS COMMON STOCK, AN ACCURATE ASSESSMENT OF EACH DEFENDANT'S SALES RELATIVE TO HIS TOTAL AVAILABLE HOLDINGS REFUTES ANY INFERENCE OF SCIENTER.

Plaintiffs contend that if this Court takes judicial notice of the proxy statements and considers exercisable options, they still have shown a strong inference of fraud. Pltfs.' Obj. at 6-7. This argument belongs in plaintiffs' opposition to the motion to dismiss; defendants respond to it in detail in their reply memorandum.

In brief, as Judge Smith held, common sense dictates that a court should consider exercisable options. Silicon Graphics, 970 F. Supp. at 768, n.13. Vested options that can be exercised for stock, which can be sold the same day, have the same trading potential as shares of common stock. There is no need to develop an elaborate factual record. Defendants' total holdings, including vested options, can be calculated from the proxy statements and other SEC filings. Fair consideration of defendants' actual holdings -- common stock and vested options -- demonstrates that defendants did not "bail out"of TCSI stock, as plaintiffs allege. Rather, each defendant retained a significant portion of his pre-class period holdings and, in some cases, increased his holdings through the end of the class period. Defs.' Mot. to Dismiss at 18. Thus, plaintiffs' argument that the stock sales are unusual and suspicious, and therefore evidence of scienter, fails as a matter of law.⁵

For the foregoing reasons, defendants respectfully request that this Court consider defendants' stock and vested option holdings, as reported in TCSI's 1996 and 1997 proxy statements, either through incorporation by reference or judicial notice, and deny plaintiffs' counter-motion to strike.

¹ Plaintiffs in the state court derivative action (Tinkler v. Hasler, Alameda County Superior Court Case No. 776206-4) acknowledged this error and, in their amended complaint, corrected the alleged percentages sold by defendants.

² See also In re Sun Microsystems, Inc. Sec. Litig., No. C 89 20351, 1990 U.S. Dist. LEXIS 18740, at *6 (N.D. Cal. Aug. 20, 1990) (Kendrick Supp. Decl. Ex. L); and Newport Components, Inc. v. NEC Home Electronics, 671 F. Supp. 1525, 1539 n.16 (C.D. Cal. 1987).

³ See 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); see also United States v. Chapel, 41 F.3d 1338, 1342 (9th Cir. 1994).

⁴ The Ninth Circuit 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) (holding that the district court properly took judicial notice of widespread layoffs at Hughes Aircraft based on a newspaper article because the fact was generally known in the area and was "capable of sufficiently accurate and ready determination."

⁵ See Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995) (no fraud where defendant held 89 percent of his holdings); 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); Duncan v. Pencer, [1995-1996 Tr. 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); see also In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1425 (9th Cir. 1994) (no inference of scienter where defendants retained bulk of their shares).