BORIS FELDMAN, State Bar # 128838
JEROME F. BIRN, JR., State Bar # 128561
GIDON M. CAINE, State Bar # 188110
CHRISTINE A. KENDRICK, State Bar # 186002
TRACY A. DONSKY, State Bar # 197114
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

Pursuant to Local Rule 7-3(e), 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 (collectively, "Defendants") submit the following supplemental statement of recent decisions in support of their motion to dismiss the plaintiffs' class action Complaint, which has been taken under submission by this Court. Defendants also object to plaintiffs' submission of supplemental authority related to the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78u-4 (1998) ("Uniform Standards Act") because: (a) the Uniform Standards Act's legislative history is entirely irrelevant to this Court's interpretation of the Reform Act, a statute passed three years before the Uniform Standards Act; (b) the text and the legislative history of the Uniform Standards Act do not support plaintiffs' position; and (c) this Court should not take judicial notice of the brief filed by the Securities and Exchange Commission ("SEC") as amicus curiae in In re Silicon Graphics Securities Litigation, appeal docketed, No. 96-16240 (9th Cir. argued June 11, 1998) ("Silicon Graphics") because it is improperly submitted and entitled to no deference.

I. BACKGROUND

On September 24, 1997, plaintiffs commenced this class action against Defendants and others for alleged violations of the federal securities laws. On January 15, 1998, Defendants moved to dismiss the Complaint. On February 19, 1998, plaintiffs filed their opposition to Defendants' motion. On March 20, 1998, Defendants filed their reply.

On April 17, 1998, this Court deferred consideration of Defendants' motion until after a plaintiff class was certified. By Orders dated April 17, June 13, and June 29, 1998, this Court provisionally certified the plaintiff class and ordered that notice be sent to the class members. Pursuant to this Court's Orders, notice has been sent to the potential class members, and pursuant to the June 13, 1998 Order, the time for potential class members to opt out of the class expired on or about August 28, 1998. Therefore, this Court's ruling on Defendants' motion to dismiss will bind the class members.

On September 28, 1998, Defendants filed a statement of recent decisions pursuant to Local Rule 7-3(e). Since that time, numerous decisions interpreting the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, have been issued, published, or disseminated. These new decisions are relevant to Defendants' motion to dismiss. On October 14, 1998, plaintiffs filed a statement of recent decisions in opposition to the motion to dismiss. On November 18, 1998, plaintiffs filed a second statement of recent decisions, which focused primarily on the Uniform Standards Act, enacted on November 3, 1998. On November 24, 1998, plaintiffs filed a corrected submission, which included a brief filed by the SEC in Silicon Graphics. This statement of recent decisions updates Defendants' September 28, 1998 submission, and responds and objects to plaintiffs' November 24 arguments concerning the Uniform Standard Act.

II. RECENT DECISIONS SUPPORTING DEFENDANTS' MOTION TO DISMISS

Defendants respectfully submit true and correct copies of the following 9 decisions that directly support the grounds for Defendants' pending motion to dismiss the Complaint. Defendants also submit true and correct copies of other materials supporting their response and objections to plaintiffs' November 24 arguments concerning the Uniform Standards Act:

III. EXCERPTS SUPPORTING DEFENDANTS' ARGUMENTS

In accordance with the Local Rules, Defendants excerpt, without argument, relevant portions of the 9 decisions annexed hereto as Exhibits A-I. For this Court's convenience, these excerpts are organized in the same manner as Defendants' briefs.

A. Additional Authority Supporting The Argument That The Complaint's Allegations Do Not Comply With The Reform Act's "Information and Belief" Provision.

The following cases support the argument made at pages 11-12 of Defendants' motion to dismiss and pages 7-9 of Defendants' reply brief that the Complaint's allegations do not comply with the Reform Act's "information and belief" provision.

In Berger v. Ludwick, No. C-97-0728-CAL, slip op. at 4-5 (N.D. Cal. Sept. 15, 1998) (Ex. A), Judge Legge held that:

Both of the SACs in Berger and in Florida are expressly alleged upon information and belief. When allegations are made on information and belief, the [Reform Act] requires that plaintiffs allege with particularity all facts upon which their belief is based. 15 U.S.C. § 78u-4(b)(1). The SACs do not meet that standard. The complaints do allege the general sources of plaintiffs' information; see ¶ 10 of the Berger SAC and several references throughout the complaints to "unnamed former employees." Silicon Graphics held that plaintiffs "must literally . . . include the names of confidential informants, employees, competitors, Government employees, members of the media, and other who have provided information leading to the filing of the case." [In re Silicon Graphics, Inc. Sec. Litig., ("Silicon Graphics") 970 F. Supp. 746,] 763 [(N.D. Cal. 1997)] (quoting 141 Cong. Rec. H2848 (March 8, 1995) and 141 Cong. Rec. H2849 (March 8, 1995))[, appeal docketed, No. 96-16240 (9th Cir. argued June 11, 1998)]. And if plaintiffs' information is obtained from records, including internal documents of defendants, those sources must be cited. 970 F.Supp. at 767. Accord, Novak v. Kasaks, 96 Civ. 3073, 1998 WL 10733 at *7 (S.D. N.Y. 1998); Queen Uno Ltd. Partnership v. Coeur d'Alene Mines Corp., 97 WY 1431, 1998 U.S. Dist. Lexis 5698 (D.C. Col. 1998).

In Lirette v. Shiva Corp., No. Civ. A. 97-11159-WGY, 1998 WL 812696, at *5 (D. Mass. Nov. 19, 1998) (Ex. B), the United States District Court for the District of Massachusetts held that:

As to the statements in paragraphs 59, 61, 76, and 86, Lirette's theories as to why these statements are fraudulent rest solely on information and belief. . . . Both the [Reform Act] and this Circuit's pre-[Reform Act] cases require Lirette to set forth with particularity the facts on which that belief is formed. See 15 U.S.C. 78u-4(b)(1). . . . While few courts have addressed section 78u-4(b)(1) in any significant depth, "clearly Congress intended courts to take seriously the requirement that a plaintiff plead with particularity all facts upon which the plaintiff is basing the information and beliefs contained in the plaintiff's allegations." Malin v. IVAX, 17 F. Supp. 2d 1345, 1998 WL 519595, at *13 (S.D. Fla. Aug.18, 1998). Surely plaintiffs cannot simply predicate their beliefs on other allegations that themselves are based solely on information and belief.

(footnote omitted)(citations omitted).

In Novak v. Kasaks, No. 96 Civ. 3073(AGS), 1998 WL 790610, at *1-2 (S.D.N.Y. Nov. 12, 1998) (Ex. C), the United States District Court for the Southern District of New York rejected a "basis of allegations" paragraph nearly identical to the "basis of allegations" paragraph here. The Court held:

We turn first to the basis for the amended complaint. In our earlier Opinion, we found that the complaint was "woefully devoid" of particularity in stating the basis for plaintiffs' allegations. Plaintiffs had stated only that they relied upon "investigation of their counsel, which included a review of AnnTaylor's SEC filings, securities analyst reports and advisories about the Company, press releases issued by the Company, media reports about the Company and discussions with consultants." Novak [v. Kasaks], 997 F. Supp. [425,] 431[(S.D.N.Y. 1998)].

The amended complaint states: ["]Plaintiffs' investigation has included, among other things, a review of (i) the public filings of AnnTaylor Stores Corporation with the Securities and Exchange Commission (the "SEC"); (ii) press releases and other public statements issued by defendants; (iii) published reports and news articles regarding the Company; (iv) internal AnnTaylor documents obtained through plaintiffs' investigation; and (v) documents produced by various non-parties in this litigation, as well as confidential communications with certain former AnnTaylor employees and independent consultants.["] (Am. Compl. at 1).

Items (i), (ii), and (iii) reiterate sources of information referenced in the original complaint. Item (iv) appears to refer to weekly reports used at Ann Taylor management meetings. . . . Item (v) refers to other documents; the Court, however, is unable to ascertain from the body of the amended complaint what these documents might be, what information they might contain, or who provided them to plaintiffs. This lack of particularity in pleading is exactly what led the Court to dismiss the original complaint.

In Coates v. Heartland Wireless Communications, Inc., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,331, at 91,578 (N.D. Tex. Nov. 2, 1998) (Ex. D), the Court held:

Defendants contend that plaintiffs have failed to set forth with requisite particularity the basis for their information and belief allegations.

As the court has already noted, the [Reform Act] mandates that if an allegation regarding a statement or omission is made on information and belief, the complaint must state with particularity all facts on which that belief is formed. 15 U.S.C. § 78u-4(b)(1). The complaint must also specify each statement alleged to have been misleading and the reason why it is misleading. Id.

Plaintiffs' complaint is sufficient in part and inadequate in part. The complaint states in the opening paragraph that plaintiffs' allegations are based on information and belief gained through the investigation conducted by counsel, a review of Heartland's public filings, news articles, press releases, and other publicly available representations. Other courts have held that this general statement is insufficient under the [Reform Act]. See, e.g., Novak v. Kasaks, 997 F. Supp. 425, 431 (S.D.N.Y. 1998) (holding that single paragraph that asserted that plaintiffs based their information and belief on investigation of SEC filings, analysts' reports, press releases, and discussions with consultants neither provided required facts underlying complaint's allegations, nor directed court to where facts could be found; Silicon Graphics, 970 F. Supp. at 763 (indicating that complaint might have to provide names of "confidential informants, employees, competitors, Government employees, members of the media, and others who have provided information leading to the filing of the case" (citation omitted)). The court agrees that such general statements fail to satisfy the [Reform Act].

(footnote omitted).

In Head v. NetManage, No. C 97-4385 CRB, slip op. at 3-4 (N.D. Cal. Dec. 30, 1998) (Ex. G), Judge Breyer held that:

Plaintiffs' SAC identifies numerous allegedly false forecasts made by defendants to the public and to analysts, or by analysts in reports which defendants allegedly endorsed. Plaintiffs allege that the statements were false and misleading for the reasons set forth in paragraphs 8-9, 21, 29-30, 37, 58-59, 75-76, 91-92. For example, plaintiffs allege that the optimistic statements were false, in part, because of the following:

(a) Sales of NetManage's Chameleon and ECCO products were below NetManage's internal expectations, derived from the 96 plan/budget, because of weaker than anticipated demand and lower than expected price levels, due to intensive price competition which was adversely impacting NetManage's profitability;

(b) NetManage's direct Telesales group was inadequately trained in TCP/IP interconnectivity technology and was not able to successfully sell NetManage's Chameleon products in the increasing competitive environment that emerged in mid-95;

(c) Several of NetManage's VARs were downplaying NetManage's Chameleon products in favor of competing products -- or even refusing to sell Chameleon at all -- in retaliation again [sic] NetManage's practice of having its Telesales group directly compete with the VARs by targeting Fortune 1000 companies that NetManage knew had already been approached by or solicited by VARs;

(d) NetManage had learned from internal management discussions and discussions with its corporate account managers that the introduction of Win95 with its own embedded TCP/IP protocol and the rapid acceptance and popularity of Netscape's browser and software applications would adversely impact market demand for and acceptance of NetManage's products, thereby reducing NetManage's future EPS growth.

SAC ¶ 58. The SAC, however, is silent as to the facts upon which plaintiffs' belief as to the above allegations is formed. For example, the SAC does not identify the facts upon which plaintiffs base their allegations that NetManage sales were below internal projections. Nor does it identify what facts they base their allegations that the direct Telesis group was inadequately trained, or that VARs were downplaying Chameleon in favor of competitor's products. The boilerplate allegations of paragraph 127 are plainly insufficient. See In re Health Management Sys., Inc. Sec. Litig., No. 97CV1865-HB, 1998 WL 283286 [, at]*3 (S.D.N.Y. June 1, 1998).

Plaintiffs' reliance on Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987), for the proposition that plaintiffs need only set forth each misrepresentation, what was said, when, and by whom, and why the statement was false, to survive a motion to dismiss is misplaced. Wool did not apply the [Reform Act]. The [Reform Act], by its plain and unambiguous language, requires a plaintiff to plead all facts upon which his allegations made upon information and belief are based, and the Court so held, when it dismissed the First Amended Complaint.

Plaintiffs' claim that they do not have to plead their confidential sources, or that they do not have to plead each and every fact upon which their allegations are based, is unpersuasive. Assuming, without deciding, that plaintiffs do not have to plead the confidential sources of the facts upon which their allegations are based, or that they do not have to allege each and every fact upon which their allegations are based, their complaint still fails because they have not alleged any of the facts, with or without identifying their sources. For example, if plaintiffs' allegations as to the value added resellers' ("VARs") treatment of Chameleon were based upon conversations plaintiffs or their attorneys had with certain of the VARs, plaintiffs' could set forth the substance of those conversations without identifying with which particular VARs plaintiffs spoke. Plaintiffs, however, have not made any similar allegation. Their complaint is silent as to the basis for their allegations. For this reason alone the false forecast claims must be dismissed.

B. Additional Authority Supporting The Argument That The Reform Act Heightened the Standard for Pleading Scienter.

The following cases support the argument made at page 16 of Defendants' motion to dismiss and pages 12, and 15-16 of Defendants' reply brief that the Reform Act heightened the standard for pleading scienter.

In Head v. NetManage, No. C 97-4385 CRB, slip op. at 9 (N.D. Cal. Dec. 30, 1998) (Ex. G), Judge Breyer held that:

Plaintiffs' reliance on Cooper v. Pickett, 137 F.3d 616 (9th Cir. 1998) is as misplaced as its reliance on Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th Cir. 1997). Cooper, like Wool, did not apply the [Reform Act], and, in particular, did not apply the requirement that plaintiffs plead facts that give rise to a strong inference of the required state of mind.

In In re Glenayre Technologies Inc. Securities Litigation, 1998 U.S. Dist. LEXIS 20344, at *6-7 (S.D.N.Y. Dec. 30, 1998) (Ex. I), the Court held that:

In order to state a § 10(b) claim for securities fraud that satisfies the heightened pleading requirements of the [Reform Act], a plaintiff must allege facts that give rise to a strong inference of either reckless behavior or conscious misconduct. See Novak v. Kasaks, 997 F. Supp. 425, 430 (S.D.N.Y. 1998) ("joining the emerging consensus in this district that either conscious recklessness or actual intent [to misrepresent] satisfy the [Reform Act]'s scienter requirement"); In re Baesa Sec. Litig., 969 F. Supp. 238, 241-42 (S.D.N.Y. 1997) (plaintiff must allege facts supporting strong inference of conscious or reckless behavior by the defendants in order to satisfy the reform act). n3 Again, the plaintiffs' allegations fail to establish the requisite scienter. n4

Fn.3/ The plaintiffs also contend that statements made during the enactment of the Securities Litigation Uniform Standards Act of 1998 conclusively establish that motive and opportunity are sufficient to establish scienter. This contention is without merit since post-enactment legislative history plays no role in statutory interpretation. See Regional Rail Reorganization Act Cases v. Connecticut Gen. Ins. Corp., 419 U.S. 102, 132, 42 L. Ed. 2d 320, 95 S. Ct. 335 (1974) ("post-passage remarks of legislators, however explicit, cannot serve to change the legislative intent of Congress"); see also Petry v. Block, 225 U.S. App. D.C. 279, 697 F.2d 1169, 1171 (D.C. Cir. 1983) (district court reversed where it "relied improperly on the post-enactment statements of legislators involved in the enactment process").

Fn.4/ Since the plaintiffs fail to adequately plead scienter, I need not address the other grounds for dismissal articulated by the defendants.

C. Additional Authority Supporting The Argument That The Complaint Does Not Plead Specific Facts Supporting Plaintiffs' Conclusory Beliefs That Defendants Committed Accounting Fraud.

The following cases support the arguments made at pages 14-15 of Defendants' motion to dismiss and pages 9-12 of Defendants' reply brief that the Complaint does not plead specific facts supporting plaintiffs' conclusory beliefs that Defendants committed accounting fraud.

In Lirette v. Shiva Corp., No. Civ. A. 97-11159-WGY, 1998 WL 812696, at *7 (Ex. B), the Court held that:

To adequately plead financial fraud based on improper revenue recognition, Plaintiffs must allege, at a minimum, some particular transactions where revenues were improperly recorded, including the names of the customers, the terms of specific transactions, when the transactions occurred, and the approximate amount of the fraudulent transactions. . . .

According to the Complaint, Shiva told one of its resellers, SoluNet Inc., that it could return Shiva products at any time for any reason. See Comp. ¶ 51(b)(1). The Complaint also alleges that another reseller, Asyne Technologies, could return any unsold product. See Comp. ¶ 51(b)(2). The Complaint further alleges that Shiva accepted the return of, "or agreed to accept the return of," approximately $130,000 worth of product that had been shipped to Omnitech Corporate Solutions in the fourth quarter of 1996. Comp. ¶ 51(d)(2).

Despite these details, Lirette fails to allege with requisite particularity that defendants committed financial statement fraud. First, he never alleges who at Shiva offered to accept unconditional returns from SoluNet and Async, and never alleges that anyone at Shiva extended this offer to Omnitech. Second, the Complaint is vague as to when these promises were made, using the terms "at all relevant times" with respect to SoluNet, "in or about the third or fourth quarter of 1996" with respect to Async, and no temporal designation with respect to Omnitech. Finally, Lirette never alleges that any Shiva customer actually returned any products. At best, the Complaint alleges that "Shiva has since [the fourth quarter of 1996] accepted the return of, or agreed to accept the return of, approximately $130,000 worth of product" from Omnitech. Comp. ¶ 51(d)(2) (emphasis added). Not only does this statement fail to allege that Omnitech actually returned the product, but it refers to a period of time that goes beyond the scope of the class period. Thus, even if Omnitech actually did return $130,000 worth of product--a fact not specifically alleged in the Complaint--the Complaint does not allege adequately that the return occurred during the class period. For these reasons, the Complaint fails sufficiently to allege financial statement fraud as required by the pleading standards of Rule 9(b), see Gross [v. Summa Four, Inc.], 93 F.3d [987,] 996 [(1st Cir. 1996)], and the [Reform Act], see Zeid [v. Kimberley], 973 F.Supp.[910,] 923 [(N.D. Cal. 1997)]; In re Oak Tech. Sec. Litig., 1997 WL 448168, at *8 [(N.D. Cal. July 1, 1997)].

In Coates v. Heartland Wireless Communications, Inc., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,331, at 91,581-82 (N.D.Tex., Nov. 2, 1998) (Ex. D), the Court held:

Plaintiffs allege throughout their complaint that defendants "knew or should have known" of the need to write down the subscriber base and related accounts receivable. They offer no specific facts, however, demonstrating why defendants knew they would have to write off a substantial portion of the subscriber base and receivables. Plaintiffs merely couple neutral statements of fact with conclusory allegations that defendants "knew or should have known" of such facts. See, e.g., Compl. at PP 34, 36, 39 & 40. It is insufficient to advance general, conclusory allegations, paired with a recitation of neutral facts. Zeid v. Kimberley, 930 F. Supp. 431, 434 (N.D. Cal. 1996).

Plaintiffs allege on information and belief that defendants knew or should have known that approximately $ 5.2 million of $ 7.5 million in accounts receivable was doubtful and past due. Compl. at P 34. They maintain that "[Heartland's] internal accounts receivable aging reports revealed, or would have revealed, such to defendants and defendants were well aware that industry practice and experience with respect to past due accounts receivable was that there was little or no chance of recovery of a substantial portion of the Company's receivables." Id. Both assertions are inadequate.

As to the "internal accounts receivable aging reports," an unsupported general claim of the existence of confidential company reports is insufficient to survive a motion to dismiss. San Leandro [Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos.], 75 F.3d [801, 812 [(2d Cir. 1996)]; see Silicon Graphics, 970 F. Supp. at 766-67 (concluding allegations that defendants received "flash reports" and "stop ship" reports were too generic to create strong inference of fraud under [the Reform Act]). Most well-managed corporations generate a variety of reports at regular intervals. Silicon Graphics, 970 F. Supp. at 767. Consequently, any company that announces low earnings would be vulnerable to ipse dixit claims that the reports exist and that they reflect poor results. Id. To establish a strong inference of fraud, plaintiffs must provide more details about the alleged negative internal reports, such as report titles, when they were prepared, who prepared them, to whom they were directed, their content, and the sources from which plaintiffs obtained this information. Id. at 767; Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 365 (1st Cir. 1994) (holding allegations sufficiently particular to satisfy Rule 9(b) where plaintiffs specifically identified internal reports and public statements underlying their claims, providing names and dates). This requirement is consistent with the [Reform Act]'s information and belief standard, which requires that plaintiffs plead all facts on which their allegations are based. Silicon Graphics, 970 F. Supp. at 767. The court holds that this allegation is insufficient to satisfy the [Reform Act] because of a lack of specificity in identifying the reports.

. . . .

Without sufficiently pleading scienter, plaintiffs' complaint essentially alleges fraud by hindsight. That is, plaintiffs allege that because Heartland announced on March 20, 1997 that it had taken a $5.2 million charge from writing off its subscriber base, defendants must have known earlier that such a charge and write-down would be required. Plaintiffs may not plead fraud by hindsight. Acito [v. IMCERA Group, Inc.], 74 F.3d [47,] 53 [(2d Cir. 1995)] ("Mere allegations that statements in one report should have been made in earlier reports do not make out a claim of securities fraud."); Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1129 (2d Cir. 1994) (affirming dismissal of § 10(b) claim that defendants should have disclosed at earlier time need to take charge and to increase loan loss reserves); Tuchman [v. DSC Communications Corp.], 14 F.3d [1061,]1069 n.6 [(5th Cir. 1994)] (stating that contrasting two statements made by defendant is insufficient to plead securities fraud). A decision to write off subscribers and related accounts receivable does not make fraudulent management's prior belief that past due customers might return to active status. So long as management held this belief, any alleged omissions regarding the write-off were not material omissions in violation of § 10(b). Novak, 997 F. Supp. at 432 ("Plaintiffs . . . apparently fault the timing of the markdowns that were made. But disagreement with a company's business judgment does not state a claim under federal securities laws." (footnote omitted)).

In Head v. NetManage, No. C 97-4385 CRB, slip op. at 8-9 (N.D. Cal. Dec. 30, 1998) (Ex. G), Judge Breyer held that:

Plaintiffs' accounting fraud allegations also fail. Even assuming that defendants have satisfied the [Reform Act]'s requirement that they set forth all facts upon which their accounting fraud allegations are based, plaintiffs' allegations do not give rise to a strong inference of scienter. The gravamen of the accounting allegations is that unresolved contingencies on sales throughout 2Q95 and 3Q95, such as sales with a right of return, were improperly accounted thereby falsely inflating NetManage's 2Q95 and 3Q95 financials by two million dollars. See ¶¶ 99-109. Plaintiffs allege that NetManage's accounting policy was fraudulent because (1) it violated GAAP, (2) NetManage, at the insistence of its auditors, changed its policy in 1995 to defer revenue recognition where the right of return had not expired, (3) as a result of the change in policy, the 4Q95 results were less than expected, and (4) in the past NetManage had represented that returns were insignificant, but no such representation was made in the 95 report. See SAC ¶ 108.

These allegations do not give rise to a strong inference of scienter. As plaintiffs themselves allege, the annual reports disclosed the rights of return and that NetManage was accounting for revenue from such sales even though the rights of return existed. The facts that this policy may have violated GAAP and may have been subsequently changed do not support an inference of scienter, including recklessness. This is especially true given that the second and third quarter statements have never been restated even though NetManage continued to employ the accounting company that allegedly uncovered the fraud in the first place, and given that plaintiffs do not allege that any of the revenue which was prematurely accounted for was never actually realized by NetManage. Moreover, the allegation that NetManage did not include in its 1995 annual statement the representation that the returns were insignificant is false. The 1995 annual report, which the Court may consider since the SAC discusses it, includes the precise statement that plaintiffs allege was omitted.

Plaintiffs' reliance on Cooper v. Pickett, 137 F.3d 616 (9th Cir. 1998) is as misplaced as its reliance on Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th Cir. 1997). Cooper, like Wool, did not apply the [Reform Act], and, in particular, did not apply the requirement that plaintiffs plead facts that give rise to a strong inference of the required state of mind.

In sum, the mere fact that NetManage changed its publicly-disclosed accounting policy that may have violated GAAP, and that the change led to lower reported revenues in the following quarter, does not support any inference of scienter, let alone the required strong inference. The insider trading and merger allegations do not supply the missing inference for the reasons discussed above.

D. Additional Authority Supporting The Argument That The Complaint Does Not Adequately Allege Conscious Wrongdoing or Recklessness, Either By Allegations of Unspecified Internal Corporate Reports or Otherwise.

The following cases support the arguments made at pages 16-17 of Defendants' motion to dismiss and pages 12-14 of Defendants' reply brief that the Complaint does not adequately allege conscious wrongdoing or recklessness, either by allegations of unspecified internal corporate reports or otherwise.

In Head v. NetManage, No. C 97-4385 CRB, slip op. at 4-5 (N.D. Cal. Dec. 30, 1998) (Ex. G), Judge Breyer held that:

Since the SAC is devoid of specific particularized facts, it does not give rise to a strong inference of scienter, even if scienter includes recklessness as defined by plaintiffs. In other words, the complaint lacks the specific allegations necessary to raise an inference of fraud. For example, the SAC alleges that defendants were publicly making optimistic forecasts about NetManage at the same time NetManage's sales were not meeting internal forecasts. At oral argument plaintiffs explained that this allegation is based upon the facts set forth in paragraphs 26 and 27. Those paragraphs, however, allege nothing more than a description of NetManage's internal financial reporting system. If such allegations were sufficient to give rise to a strong inference of scienter, a plaintiff could state a fraud claim anytime a corporation does not meet its publicly-stated projections since any corporation with a modicum of sophistication has an internal financial reporting system. See In re Silicon Graphics, Inc. Sec. Lit., ("Silicon Graphics []") 970 F. Supp. 746, 766 (N.D. Cal. 1997)[, appeal docketed, No. 96-16240 (9th Cir. argued June 11, 1998)]. Without any alleged facts as to how NetManage was actually performing compared to the projections made by certain defendants, the SAC does not give rise to an inference, let alone a strong inference, of fraud.

Plaintiffs also allege that defendants knew their forecasts were false because they learned from internal management discussions that the introduction of Windows 95 would adversely impact demand for NetManage's products. See, e.g., SAC ¶ 58(d). They do not allege, however, what specifically defendants learned that was not already in the public domain. Without such facts, the allegation that Windows 95 was going to hurt NetManage's business does not give rise to a strong inference of fraud. The above examples are illustrative of the SAC's lack of specificity. That lack of specificity is fatal to plaintiffs' claims since their conclusory allegations simply do not give rise to a strong inference of the required state of mind.

In Molinari v. Netmanage, No. C 98-0202 CRB, slip op. at 2-3 (N.D. Cal. Dec. 30, 1998) (Ex. H), Judge Breyer held that:

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.

In In re Glenayre Technologies Inc. Securities Litigation, 1998 U.S. Dist. LEXIS 20344, at *8-11 (S.D.N.Y. Dec. 30, 1998) (Ex. I), the Court held that:

The plaintiffs contend that the defendants actual knowledge of the impending FCC freeze and the insider sales by seven defendants during the class period are sufficient. According to the plaintiffs, the defendants engaged in fraudulent conduct by inflating 1995 financial figures through the BUBBA program, when it was known that the impending FCC Freeze would adversely impact Glenayre's business given the contingent nature of the BUBBA orders. I disagree.

In San Leandro, the plaintiffs advanced a general claim that the defendants withheld unspecified confidential company reports that revealed a larger decline in sales than previously reported. See San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Companies, Inc., 75 F.3d 801, 812 (2d Cir. 1996). The Second Circuit affirmed the district court dismissal with respect to the non-disclosure, since the plaintiffs failed to allege "circumstances [that] show [ ] the defendants lacked a reasonable basis for their optimistic, but qualified, predictions as to the company's future performance." Id. at 813, 815. Likewise, the plaintiffs in the instant case fail to provide a factual basis upon which to conclude that the defendants did not reasonably expect the BUBBA orders to be shipped. Indeed, there is no allegation that the defendants falsely claimed that the $102 million in purchase orders were irrevocable. Consequently, the plaintiffs have failed to adequately allege scienter. See San Leandro, 75 F.3d at 812-813; Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d Cir. 1994) (no inference of fraud where company's disclosures were not inconsistent with current reports since "misguided optimism is not a cause of action"); see also Raab v. General Physics Corp., 4 F.3d 286, 289 (4th Cir. 1993) (where company accurately reported past financial results no obligation existed to speculate on the impact of future events).

In addition, the plaintiffs allegations are insufficiently conclusory. The plaintiffs advance the conclusory allegation that one of the defendants, Ramon D. Ardizzone, learned of the impending freeze in late 1995 given his "extensive political and FCC contacts." Without more, this allegation is insufficient. What is needed and missing here is some specificity with respect to either the individuals from whom Ardizzone allegedly received information about the impending FCC freeze or the nature of the relationship with these individuals and the positions of authority they held.

Moreover, the allegation that several defendants, including Ardizzone, Smith and Ciepcielinski, "informed their sales force of the impending freeze" in December 1995 or January 1996 is unavailing. Again, the plaintiffs provide no specificity in terms of date, location or method by which the defendants allegedly communicated this information. The plaintiffs also make no reference to any office memorandum, e-mail or telephone conversation on this subject. Further, the plaintiffs neglected to provide in their allegations even one staff member to whom the defendants mentioned the FCC freeze. Given the conclusory nature of the plaintiffs contentions, the alleged facts do not give rise to the requisite strong inference of actual knowledge. See 15 U.S.C. § 78u-4(b)(2) ([The Reform Act] requires plaintiffs to "state with particularity facts giving rise to a strong inference" of scienter); San Leandro, 75 F.3d at 813 (no "license to base" § 10(b) claims "on speculation and conclusory allegations") (citation and internal quotations omitted).

E. Additional Authority Supporting The Argument That Defendants' Stock Sales Do Not Support a Strong Inference of Scienter.

The following cases support the argument made at pages 17-19 of Defendants' motion to dismiss and pages 14-18 of Defendants' reply brief that Defendants' stock sales do not support a strong inference of scienter.

In In re Informix Corp. Sec. Litig., No. C-97-1289-CRB, slip op. at 3 (N.D. Cal. Nov. 6, 1998) (Ex. E), this Court held that:

The trading allegations as to the individual defendants are insufficient in and of themselves to create a strong inference of scienter in light of defendants' evidence of each defendant's trading pattern and the vested options which each defendant did not exercise.

In Berger v. Ludwick, No. C-97-0728-CAL, slip op. at 7 (Ex. A), Judge Legge held that:

Plaintiffs' allegations of the defendants' stock sales are also not sufficient evidence of scienter, because plaintiffs do not allege that the sales were unusual in timing or volume. Plaintiffs allege in detail each of defendants' stock transactions during the class period. But no information is alleged regarding how much stock defendants sold before or after. There is no showing whether the sales in the class period were average or aberrations. Sales of stock must be "unusual" and occur in suspicious amounts and at suspicious times to indicate scienter. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir. 1989). Plaintiffs make no such allegations.

In Lirette v. Shiva Corp., No. Civ. A. 97-11159-WGY, 1998 WL 812696, at *12 (Ex. B), the Court held that:

The only allegations supported by some document or statement on personal knowledge, rather than by information and belief, relate to defendant Cole's sale of 50,000 shares of Shiva stock during the class period. See Comp. ¶ 123. Allegations of unusual insider trading by a defendant during the class period can support a strong inference of scienter. See Serabian, at 368 (1st Cir.1994). Lirette, however, bears the burden of showing that sales by insiders were in fact unusual or suspicious in amount or timing. See In re Glenayre Tech., Inc. Sec. Litig., 982 F.Supp. 294, 298-99 (S.D.N.Y. 1997). One fact necessary to a showing of unusualness is the amount of trading that the insider conducted before or after the class period. See Greebel v. FTP Software, Inc., 182 F.R.D. 370 (D. Mass. 1998) (holding that evidence of insider trading, without reference to the amount of insider trading normally conducted, fails to imply scienter); In re Chipcom Corp. Sec. Litig., No. 95-11114, 1996 WL 1057531, slip. op. at 36 (D. Mass. Apr. 29, 1996) (Woodlock, J.) (same). Lirette's Complaint fails to set forth the amount of trading Cole conducted before or after the class period, or, for that matter, any other fact that might support a finding of unusualness. Thus, Lirette's allegations about Cole's trades do not support a strong inference of scienter. See Greebel, 182 F.R.D. 370, ---, 1998 WL 685165, at *4; Chipcom, No. 95-11114, 1996 WL 1057531, slip. op. at 36.

In Head v. NetManage, No. C 97-4385 CRB, slip op. at 5-8 (N.D. Cal. Dec. 30, 1998) (Ex. G), Judge Breyer held that:

The insider trading allegations do not give rise to the inference required to survive defendants' motion to dismiss. Stock sales "will not support a strong inference of fraud unless the sales are unusual or suspicious." Silicon Graphics [], 970 F. Supp. at 767 (citing Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995)); see also Wenger v. Lumisys. Inc., 2 F. Supp. 2d 1231, 1251 (N.D. Cal. 1998) ("stock sales alone cannot create a strong inference of scienter"). Plaintiff's SAC does not allege any facts that would make defendants' stock sales unusual or suspicious enough to support a strong inference of scienter.

As a preliminary matter, the Court notes that it will consider the allegations as set forth in plaintiffs' SAC without taking into account the options held and not sold by defendants, even though the Court believes judicial notice of such facts is appropriate. Judicial notice is unnecessary here because the facts as alleged by plaintiffs do not give rise to the requisite scienter.

Based solely on plaintiffs' allegations, the defendants as a group sold only five percent of their stock holdings. Such a percentage does not support a strong inference that defendants were engaged in a fraudulent scheme to inflate the price of NetManage stock so as to make more money from their own stock holdings, at least in the absence of any factual allegations which support an inference that the collective sale of five percent of their holdings was unusual or suspicious. Plaintiffs argue that the Court should take into account the dollar amount and number of shares sold collectively by the defendants. Such numbers are relevant, however, only when considered in conjunction with the percentage of shares held by the defendants. As stated above, the complaint does not allege any facts that suggest the percentage of shares sold was unusual or suspicious.

The insider trading allegations similarly do not give rise to an inference of scienter even when each defendant's sales are considered individually. As to defendants Alon and Amaral, the CEO and CFO respectively of NetManage, and the alleged masterminds of the fraudulent scheme, the SAC alleges that during the class period Alon sold only three percent of his holdings (and thus retained 97% of his holdings), and that Amaral did not sell any stock. Such allegations do not support an inference of fraud. Plaintiffs contend that these defendants could not sell more of their stock because to do so would alert the public to a "bail out" and would cause the stock price to fall. Such an argument is essentially a concession that these defendants' stock sales do not support an inference of scienter; plaintiffs do not seriously contend that a lack of such sales support an inference of fraud, at least in the absence of any allegation that the lack or small amount of such sales was unusual or suspicious for some reason.

Defendant Galil, an outside director and the second largest shareholder (and defendant Alon's farther-in-law) is alleged to have sold just 14% of his holdings. The SAC does not allege any facts that make Galil's sales unusual or suspicious enough to give rise to a strong inference of scienter. The amount of the sales themselves do not give rise to the required inference in light of the fact that he retained over 80% of his stock holdings. Nor does the timing of the sales. Plaintiffs claim the sales were made right after the false second and third quarter financial statements were made, on July 25 and October 24, respectively. The allegations, however, show that Galil did not sell until three weeks after the July 25 statement was issued. Moreover, if defendants were engaged in a fraudulent scheme to inflate the price of stock, common sense dictates that they would sell when they learned that their scheme would be discovered, that is, when they announced their disappointing fourth quarter results on January 12, 1996 and were forced (according to plaintiffs) to announce that they could no longer recognize revenue on contingencies. According to the allegations of the SAC, Galil did not make any trades after November 13, 1995. Indeed, no defendant traded after mid-November for the remainder of the class period. See [Wenger], 2 F.Supp. 2d at 1251 (holding that stock sales did not raise an inference of scienter where officers retained the vast majority of their shares and "none of the sales occurred at suspicious times, such as immediately before a negative announcement").

The insider trading allegations as to defendants Bosch, Koretz and Williams are insufficient for similar reasons. While defendant Bosch sold all of his approximately 9,600 shares on August 15, 1995, plaintiffs have not alleged any facts that make this sale suspicious, especially in light of the fact that he is not alleged to have personally made any of the false statements and was an outside director. Plaintiffs' contention that the timing is suspicious because Windows 95 was released in August is unpersuasive. As stated above, plaintiffs have failed to identify what specific information defendants, and Bosch in particular, knew about Windows 95 that was not publicly available.

Defendants Koretz and Williams sold 76% and 94% of their shares respectively during the class period. As with the other defendants, however, there is nothing suspicious or unusual about the timing of these sales. Moreover, the Court takes judicial notice of the fact that these defendants actually sold more shares during the six months preceding the class period. Accordingly, the stock sales of these defendants do not create a strong inference of scienter as the sales were consistent with their selling pattern during the period when they are not alleged to have engaged in the fraudulent scheme. See Silicon Graphics [], 970 F.Supp. at 768; Hockey v. Medhekar, 1997 WL 203704 [, at] *11 (N.D. Cal. April 15, 1997). In any event, even if their sales were somehow suspicious or unusual, they are insufficient to create the requisite strong inference of scienter in light of the lack of any specific allegations as to their fraudulent conduct, including the lack of any allegation that they personally made any of the allegedly fraudulent statements.

Plaintiffs' merger allegations similarly do not alone, or taken together with the other allegations of the SAC, give rise to a strong inference of scienter in light of the small percentage of stock at issue.

In In re Glenayre Technologies Inc. Securities Litigation, 1998 U.S. Dist. LEXIS 20344, at *11-15 (S.D.N.Y. Dec. 30, 1998) (Ex. I), the Court held that:

The plaintiffs allegations with respect to the insider sales by seven defendants during the class period presents a closer question. Between February 12, 1996 and February 29, 1996 these defendants sold approximately $36 million of their Glenayre stock holdings. To bolster the assertion that this trading gives rise to a strong inference of fraudulent intent, the plaintiffs newly allege that the sales were subsequently labeled suspicious by an investment analyst and gave rise to an investigation by the Securities and Exchange Commission.

It is beyond peradventure that "unusual insider trading activity during the class period may permit an inference of bad faith and scienter." Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995). Insider stock sales are unusual where "the trading was in amounts dramatically out of line with prior trading practices [and] at times calculated to maximize personal benefit from undisclosed inside information." Marksman Partners, L.P. v. Chantal Pharmaceutical Corp., 927 F. Supp. 1297, 1312 (C.D. Cal. 1996) (citation and internal quotations omitted). Here, the sales do not give rise to an inference of scienter.

To begin with, the individual defendants engaged in comparable cumulative sales in 1994, and in fact sold more stock in 1995. See In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 768 (N.D. Cal. 1997) (no inference of scienter where individual sales by defendants were consistent with those made in previous quarters) [hereinafter Silicon Graphics]. Second, the February sales totaled only five percent of the defendants cumulative stock holdings. This low percentage militates against an inference of scienter. See Acito, 47 F.3d at 54 (sale that represented approximately 11% of defendant's holdings suggests that trading was not unusual); see also Silicon Graphics, 970 F. Supp. at 768 (no inference of scienter where sales represented 2.6%, 4.1%, 6.9% and 7.1% of stock holdings); In re Comshare Inc. Sec. Litig., 1997 U.S. Dist. LEXIS 17262, at *28 (E.D. Mich. Sept. 18, 1997) (no strong inference of scienter where some executives retained significant portions of their stock) [hereinafter Comshare].

Third, and perhaps most importantly, the inference of scienter is undermined by the fact that Glenayre's Chief Executive Officer ("CEO") and Chairman, Vice Chairman, Chief Financial Officer ("CFO") and Comptroller did not sell any stock before the Company publically disclosed the impact of the FCC freeze. Certainly, one can assume that these high-ranking corporate officers, arguably the most knowledgeable of all Board members, would be part of any fraudulent scheme to benefit from insider information through pre-emptive stock sales. The absence of sales from these individuals, then, suggests that the February trading by the seven defendants does not give rise to a strong inference of scienter. See Acito, 47 F.3d at 54 ("The fact that the other defendants did not sell their shares during the relevant class period undermines plaintiffs' claim that defendants delayed notifying the public so that they could sell their stock at a huge profit.") (citation and internal quotations omitted); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1423 (3d Cir. 1997) (strong inference of fraudulent intent absent where no allegation that the CEO or general merchandise manager traded stock); Comshare, 1997 U.S. Dist. LEXIS 17262, at *28-29 (suggestion of knowledge undermined where plaintiffs did not allege that CEO or CFO, who the court deemed probable "essential participants," sold any stock during the class period).

Lastly, the additional allegations advanced by the plaintiffs that the February trading was labeled suspicious by an investment analyst and gave rise to an investigation by the Securities and Exchange Commission are unhelpful. At best, these allegations simply confirm my observation in Glenayre I that the plaintiffs "articulated a troubling factual scenario." Glenayre I, 982 F. Supp. at 299. Nonetheless, as I concluded there, the plaintiffs have not demonstrated that the sales undergirding this factual scenario are unusual -- given the consistent past trading history of the defendants, low percentage of stocks traded relative to the amount owned and absence of participation in the alleged trading scheme by high-ranking corporate officers. Accordingly, at least for now the [Reform Act] must be read so as to find that the plaintiffs have failed to establish the requisite scienter. Understanding such, the motions to dismiss claim one are granted. See 15 U.S.C. § 78u-4(b)(3)(A) ([Reform Act] mandates dismissal of the complaint where the scienter requirement is not satisfied).

F. Additional Authority Supporting The Argument That The Complaint Does Not Plead Specific Facts Showing that Defendants Are Liable for Analyst Reports.

The following cases support the argument made at pages 20-21 of Defendants' motion to dismiss and page 18 of Defendants' reply brief that the Complaint does not plead specific facts showing that Defendants are liable for analyst reports.

In Allison v. Brooktree Corp., No. 97-CV-0852-TW(POR), slip op. at 11 (S.D. Cal. Nov. 27, 1998) (Ex. F), the United States District Court for the Southern District of California held that:

Nearly all of the analyst statements in that complaint were the result of a "one-way" flow of information from Brooktree representatives to analysts and from the analysts to the market. See In re Stratosphere Corp. Sec. Litig., 1 F.Supp.2d 1096, 1115 (D.Nev. 1998) ("[a] one way flow of information[. . . ]is insufficient to impose liability based on the analysts' statements"); [In re] Syntex [Corp. Sec. Litig.], 95 F.3d [922,] 934 [(9th Cir. 1996)]. This court finds that the analyst statements in the amended complaint fail for the same reason.

The analyst statements in the amended complaint were based on allegedly false and misleading information provided by Brooktree executives to analysts during conference calls and meetings. FAC ¶¶ 58, 64, 65, 70, 75. Attempting to remedy the lack of adoption or entanglement in the initial complaint, the amended complaint now alleges that unspecified "follow-up conversations" took place between the analysts and Brooktree. . . . However, the complaint does not specify the date, time, number, or content of any of these follow-up conversations and provides no additional facts which could raise an inference that the defendants endorsed, adopted, or somehow entangled themselves in the analysts' forecasts. FAC ¶¶ 65, 66, 67, 76, 77.

G. Additional Authority Supporting The Argument That Miller, Bolger, Hasler, and Messerschmitt Cannot be Liable Because They Are Not Alleged to Have Made a False Statement.

The following cases support the argument made at pages 21-22 of Defendants' motion to dismiss and pages 19-20 of Defendants' reply brief that Miller, Bolger, Hasler, and Messerschmitt cannot be liable because they are not alleged to have made a false statement.

In In re Informix Corp. Sec. Litig., No. C-97-1289-CRB, slip op. at 2 (Ex. E), this Court held that:

In order to state a claim against a defendant for a statement which the defendant did not make and did not sign, plaintiff must plead with particularity each defendant's participation in the day-to-day control of the corporation and each defendant's participation in the preparation of the allegedly false statement. See In re Oak Technology Securities Litigation, 1997 WL 448168 [, at] *10-11 (N.D. Cal. July 1, 1997). Boilerplate allegations that a defendant "prepared, reviewed and caused" a statement to be made, or "prepared, drafted, approved and caused" a statement are insufficient.

Plaintiffs cannot state a claim against the individual defendants under a "scheme to defraud" theory. See Silicon Graphics, Inc. Securities Litigation, 970 F.Supp. 746, 761-62 (N.D. Cal. 1997)[, appeal docketed, No. 96-16240 (9th Cir. argued June 11, 1998)]; In re Oak Technology Securities Litigation, 1997 WL 448168 [, at] *9-10.

In Allison v. Brooktree Corp., No. 97-CV-0852-TW(POR), slip op. at 16 (Ex. F), the Court held that:

As with the initial complaint, none of the allegedly false or misleading statements in the amended complaint came from these three defendants. However, plaintiffs contend that the amended complaint adequately responds to these problems by alleging that defendants Kelly, Holtaway, and Zabaronick were all "hands-on managers" who "deal[t] with important issues facing Brooktree's business." FAC ¶ 28. However, this conclusory allegation does not remedy the amended complaint's failure to allege any facts suggesting these defendants had any control over dissemination of information to the public.

Plaintiffs' continued reliance on the "group published presumption" is unavailing. Judge Miller persuasively argued and held in his previous order that this doctrine did not survive enactment of the [Reform Act]. See Allison [v. Brooktree Corp.], 999 F.Supp. [1342,] 1350-1351[(S.D. Cal. 1998)]; see also Coates v. Heartland Wireless [Communications], Inc., F.Supp. , 1998 WL 770495, [at]*13 n.3 (N.D. Tex. Nov. 02, 1998) (same). Plaintiffs urge this court to reconsider this issue because they contend other courts have "[o]verwhelmingly" held that the group publication presumption survives the [Reform Act]. Plaintiff's Opposition at 20. However, the cases cited by plaintiffs are unpersuasive because they do not thoroughly analyze the impact of the [Reform Act] on the group published presumption. Id. at 20, n.24. Most of the those either ignore the effect of the PSLRA on the group published presumption or express reluctance at being the first court to address the question.

In Coates v. Heartland Wireless Communications, Inc., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,331, at 91,577-78 (N.D. Tex. Nov. 2, 1998) (Ex. D), the Court held:

Second, a plaintiff must state with particularity the facts that give rise to a strong inference that the defendant acted with the required state of mind. 15 U.S.C. § 78u-4(b)(2). This requirement is fairly interpreted to require that a plaintiff allege facts regarding scienter as to each defendant. So interpreted, § 78u-4(b)(2) is consistent with the [Reform Act]'s policy of protecting defendants from unwarranted fraud claims and strike suits. It is nonsensical to require that a plaintiff specifically allege facts regarding scienter as to each defendant, but to allow him to rely on group pleading in asserting that the defendant made the statement or omission.

Any remnant of the group pleading presumption that remained in this circuit before enactment of the [Reform Act] did not survive it. The court therefore respectively disagrees with Zuckerman [v. Foxmeyer Health Corp., 4 F. Supp. 2d 618 (N.D. Tex. 1998)] to the extent that it holds to the contrary.n.3.

Fn. 3/ At least one other court has followed similar reasoning in a post-[Reform Act] case. See Allison v. Brooktree Corp., 999 F. Supp. 1342, 1350 (S.D. Cal. 1998) (noting that group pleading is suspect under the [Reform Act] and stating, "to permit a judicial presumption as to particularity simply cannot be reconciled with the statutory mandate that plaintiffs must plead specific facts as to each act or omission by the defendant. The group published doctrine permits an inference of wrongdoing not based on defendant's conduct, but solely on defendant's status as an officer or director of a corporation."). The court respectfully disagrees with decisions to the contrary. See, e.g., In re Miller Indus., Inc. Secs. Litig., 12 F. Supp. 2d 1323, 1329 (N.D. Ga. 1998) (allowing use of group pleading in post-[Reform Act] case); In re Stratosphere Corp. Secs. Litig., 1 F. Supp. 2d 1096, 1108 (D. Nev. 1998) (concluding that group pleading survives the [Reform Act]).

Plaintiffs fail to plead with particularity the allegations against each of the individual defendants. They do not allege specifically the wrongdoing or scienter of each such defendant. Although defendant Webb made some of the challenged statements, the only mention of the other five individual defendants is to identify their affiliation with Heartland and their address. In their briefing, plaintiffs argue that all of the individual defendants signed the December 1996 debt offering prospectus and the February 1997 debt offering prospectus and thus made material misleading statements. The complaint itself lacks such allegations. Nevertheless, asserting such facts alone will not prevent dismissal. Plaintiffs must properly plead wrongdoing and scienter as to each individual defendant and cannot merely rely on the individuals' positions or committee memberships within the Heartland organization. See In re Advanta, Corp., Secs. Litig., 1998 U.S. Dist. LEXIS 10189, 1998 WL 387595, at *7 (E.D. Pa. July 9, 1998) ("A director, officer, or even the president of a corporation often has superior knowledge and information, but neither the knowledge nor the information invariably attaches to those positions, and plaintiffs have not pointed to specific reports, circulated among defendants, which contained the adverse information defendants are charged with knowing." (citations omitted)).

As in Tuchman, the court holds that plaintiffs have failed to meet the Rule 9(b) particularity requirement with respect to the individual defendants. Tuchman [v. DSC Communications Corp.], 818 F. Supp. [971,] 978 [(N.D. Tex. 1993), aff'd 14 F.3d 1061 (5th Cir. 1994)](holding that where four of six individual defendants were not mentioned im complaint other than to identify, among other things, their relationship with company, plaintiffs failed to meet Rule 9(b) particularity requirement).

IV. RESPONSE TO PLAINTIFFS' SUBMISSION OF SUPPLEMENTAL AUTHORITY REGARDING THE UNIFORM STANDARDS ACT

In their corrected supplemental submission of recent authorities dated November 24, 1998, plaintiffs submit legislative materials related to the Uniform Standards Act, which President Clinton signed on November 3, 1998. The Uniform Standards Act requires private securities class actions to be filed in federal court. Congress passed the Act to "prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive [securities] litigation by filing suit in State, rather than in Federal court." H.R. Conf. Rep. No. 105-803, 105th Cong. 2d Sess., at 13 (1998). The Uniform Standards Act does not change the pleading standard and scienter requirement for securities fraud established in the statutory text of the Reform Act.

Plaintiffs also seek to introduce a supplemental amicus curiae memorandum filed by the SEC in the appeal pending before the Ninth Circuit in Silicon Graphics, as an authoritative interpretation of impact of the legislative history of the Uniform Standards Act on the Reform Act. This memorandum also should not be considered because it is improperly submitted, and in any event is entitled to no deference.

A. Plaintiffs' Legislative Materials Relating To The Uniform Standards Act, Enacted in 1998, Cannot Interpret the Reform Act, Enacted in 1995

Plaintiffs do not rely on the text of the Uniform Standards Act itself. Rather, plaintiffs ask the Court to consider certain legislative material relating to the Uniform Standards Act, namely the Statement of Managers to the Uniform Standards Act and President Clinton's November 3, 1998 Statement (Exhibits A and B to Plaintiffs' Corrected Supplemental Submission of Authority ("Pltfs' Corrected Supp. Sub.") to interpret the Reform Act.

Plaintiffs' submission should be rejected. Legislative materials associated with the Uniform Standards Act signed by the President on November 3, 1998 should not be used to interpret the Reform Act passed three years earlier by a different Congress and over the President's veto. Well-established case law unequivocally holds that post-enactment legislative materials should be given little or no weight in interpreting the congressional intent of an earlier Congress. See Consumer Product Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 117-18 n.13 (1980) (the Court refused to give weight to remarks by a member of Congress and statements of the Conference Report of a later-enacted bill that amended the CPSA because a "mere statement in a conference report of such legislation as to what the Committee believes an earlier statute meant is obviously less weighty"); United States v. X-Citement Video, Inc., 513 U.S. 64, 77 n.6 (1994) ("the views of one Congress as to the meaning of an Act passed by an earlier Congress are not ordinarily of great weight"); United States v. Southwestern Cable Co., 392 U.S. 157, 170 (1968) ("the views of one Congress as to the construction of a statute adopted many years before by another Congress have very little, if any significance") (internal quotations omitted); Pierce v. Underwood, 487 U.S. 552, 566 (1988) ("it is the function of the courts and not the Legislature, much less a Committee of one House of the Legislature, to say what an enacted statute means"); Slaven v. BP America, Inc., 973 F.2d 1468, 1475 (9th Cir. 1992) ("[i]t is well settled that the views of a later Congress regarding the legislative intent of a previous Congress do not deserve much weight"); Longview Fibre Co. v. Rasmussen, 980 F.2d 1307, 1311-12 (9th Cir. 1992) ("This legislative history does not persuade us, because it is not part of the law, was written long after the law was passed . . . . This is 1997 'history' about a 1972 law"); In re Glenayre Technologies Inc. Securities Litigation, 1998 U.S. Dist. LEXIS 20344, at *7 & n.3 (S.D.N.Y. Dec. 30, 1998) (Ex. I) .

As these cases make clear, the Statement of Managers that accompanied the Uniform Standards Act simply cannot be used to determine what the 104th Congress intended when it passed the Reform Act's pleading provisions and thus should be disregarded.

B. Neither The Text Nor The Legislative History Of The Uniform Standards Act Support Plaintiffs' Position

Plaintiffs contend that the legislative materials related to the Uniform Standards Act of 1998 show that the 1995 Congress did not intend to eliminate the recklessness standard for pleading and proving the scienter requirement and that the 1995 Congress intended to adopt the Second Circuit pleading standard. Plaintiffs' position is not supported by the Act or its legislative history.

Plaintiffs concede that the Uniform Standards Act does not address these issues. If the 1998 Congress had intended to endorse recklessness as a basis for liability under Section 10(b) or adopt the Second Circuit pleading standard, it would have said so right in the text of the Uniform Standards Act. It did not. The only reasonable conclusion to be drawn from the absence of such a provision is that Congress decided not to legislate in these areas.

Indeed, the Statement of Managers to the Uniform Standards Act, relied upon by plaintiffs, recognizes that the Supreme Court left open the question of whether reckless behavior is sufficient. (Ex. A at 15-16 to Pltfs' Corrected Supp. Sub.). Thus, the Statement of Managers shows that Congress was aware of the recklessness issue but took no position and left the question to the courts.

Moreover, the Statement of Managers states that the Reform Act's heightened pleading standard is "based upon" the Second Circuit standard. (Ex. A at 15 to Pltfs' Corrected Supp. Sub.). It does not say that the Reform Act standard is the "same as" the Second Circuit standard. Indeed, the Managers of the Uniform Standards Act rejected a Senate report on the bill proposing that the Reform Act "adopt[ed] the pleading standard applied by the Second Circuit Court of Appeals." S. Rep. No. 105-182, 105th Cong. 2d Sess. at 5 (1998). The only reasonable conclusion that can be drawn is that the Conference Committee on the Uniform Standards Act rejected the Senate's attempt to codify the Second Circuit's pleading standard. In any event, the point is moot since the legislative history of the Reform Act shows that Congress did not codify the Second Circuit pleading standard. See Defs' Motion to Dismiss at 16.

Plaintiffs' only other legislative material is the President's statement upon signing the Uniform Securities Act. (Ex. B to Pltfs' Corrected Supp. Sub.). Such a statement made on November 3, 1998, cannot be either a relevant or accurate interpretation of the meaning of the Reform Act that was passed three years before over his veto. Just as Courts give little or no weight to the remarks of individual legislators in determining Congressional intent of a contemporaneously enacted statute, let alone a statute enacted three years earlier, no more deference should be given to statements by the President. See Garcia v. United States, 469 U.S. 70, 76 (1984) ("We have eschewed reliance on the passing comments of one Member [of Congress] and casual statements from the floor debates") (citation omitted); see In re Kelly, 841 F.2d 908, 912 n.3 (9th Cir. 1988) ("Stray comments by individual legislators, not otherwise supported by statutory language or committee reports, cannot be attributed to the full body that voted on the bill. The opposite inference is far more likely."). Remarks by the President when signing the Uniform Standards Act do not evidence congressional intent about the Reform Act. Love v. Morton, 112 F.3d 131, 136 (3d Cir. 1997) (noting that the President's statement did not evidence congressional intent). At most, President Clinton's remarks reflect a political interpretation of the Uniform Standards Act and its relationship to the pleading standards under the Reform Act and should not be considered legislative history.

If the Court were inclined to consider plaintiffs' snippets of legislative materials, Defendants offer a few more equally availing snippets to complete the picture. Representatives Bliley and Cox, Managers of the Uniform Standards Act and the Reform Act stated that Section 10(b) does not impose liability for reckless conduct: "As Chairman of the Conference Committee that considered the Reform Act and as the bill's author, respectively, it is our view that non-intentional conduct can never be sufficient for liability under section 10(b) of the Exchange Act. We believe that the structure and history of the securities laws indicates no basis for liability under this section for non-intentional conduct. . . ." 144 Cong. Rec. H11021-1102 (daily ed. Oct. 15, 1998) (Ex. J) (emphasis added).

Representatives Bliley and Cox also agreed in colloquy that through the Reform Act, Congress "adopted a higher standard than the Second Circuit and in particular we rejected the Second Circuit caselaw embodied in the Specter amendment regarding motive, opportunity and recklessness." 144 Cong. Rec. H10771, H10780-107781 (daily ed. Oct. 13, 1998) (Ex. K).

Representative Cox further stated that with the Reform Act, Congress "intended to codify a pleading standard higher than that of the Second Circuit, and that we did not intend to codify or incorporate by reference the Second Circuit's caselaw . . ." 144 Cong. Rec. H6052, H6060 (daily ed. July 21, 1998) (Ex. L).

In sum, the Uniform Standards Act and related legislative materials do not clarify the Reform Act's pleading standard. These materials represent a hodge-podge of contrary individual views about the Reform Act. The most that can be said of these materials is that they provide a classic example of why stray comments by representatives and the President and post-enactment legislation should be given no weight in interpreting statutes enacted by a prior Congress.

C. This Court Should Not Take Judicial Notice of The SEC's Supplemental Memorandum To The Ninth Circuit In Silicon Graphics

Plaintiffs also submit the SEC's supplemental amicus curiae memorandum to the Ninth Circuit in Silicon Graphics, even though the Ninth Circuit has not yet even decided whether to grant the SEC's request to file that memorandum.

Plaintiffs submission should be rejected. The submission of this brief is procedurally improper. Local Rule 7-3(e) clearly states that counsel may bring to the court's attention a "relevant judicial opinion published after the date the reply was filed. . ." The SEC's supplemental amicus curiae brief is not a judicial opinion. Therefore, plaintiffs are prohibited from submitting this material without prior court approval pursuant to Local Rule 7-3(e) or without a formal request for judicial notice pursuant to Fed. Rule of Evid. 201 upon which Defendants may be heard.

Even if this Court were to consider the SEC's brief as supplemental authority, it should not be afforded any weight because the SEC is not charged with enforcing the Reform Act. In this regard, plaintiffs contend that the SEC's views are entitled to considerable weight as the agency responsible for administering and enforcing federal securities laws. Pltfs' Corrected Supp. Sub. at 1 n.2. They are wrong. As plaintiffs admit, the general rule is that courts defer to the interpretation of a statute adopted by the agency charged with administering the statute. See, e.g., City and County of San Francisco v. F.A.A., 942 F.2d 1391, 1396 (9th Cir. 1991); Todd Shipyards Corp. v. Director, O.W.C.P., 950 F.2d 607, 610 (9th Cir. 1991). The courts, not the SEC, administer and enforce the Reform Act. The Reform Act states that "the court shall, on the motion of any defendant, dismiss the complaint if the requirements of paragraphs (1) and (2) [setting the pleading standards for alleging false statements and scienter] are not met." 15 U.S.C. § 78u-4(b)(3)(A). The SEC has no involvement in determining whether or not a complaint should be dismissed for failure to meet the pleading standards. Thus, the SEC's interpretation of the Reform Act and the Uniform Securities Act should not accorded any deference.

If the Court were inclined to consider the SEC's amicus curiae memorandum, then Defendants incorporate herein the memorandum submitted by the Silicon Graphics defendants in response to the SEC's memorandum, attached as Ex. M. That memorandum shows in detail that the SEC incorrectly relies on the legislative materials relating to the Uniform Standards Act to interpret the Reform Act. Rather than repeating those arguments here, Defendants respectfully incorporate them here.

In sum, plaintiffs mistakenly rely on post-enactment legislative materials relating to the Uniform Securities Act to interpret the Reform Act. Since those materials fail to aid the Court's interpretation of the Reform Act in any meaningful way, they should be not be considered in ruling on Defendants' motion to dismiss.

I, Christina Capurro Sand, declare:

I am a citizen of the United States and a resident of the County of Santa Clara. I am over the age of 18 years and not a party to the within action. I am readily familiar with Wilson, Sonsini, Goodrich & Rosati's practice for collection and processing of correspondence for sameday delivery by messenger. In the ordinary course of business, correspondence would be consigned to a messenger service on this date.

On January 11, 1999, I caused to be served SUPPLEMENTAL STATEMENT OF RECENT DECISIONS IN SUPPORT OF MOTION TO DISMISS THE CLASS ACTION COMPLAINT, AND RESPONSE TO PLAINTIFFS¹ SUPPLEMENTAL ARGUMENT REGARDING THE UNIFORM STANDARDS ACT, BY DEFENDANTS TCSI CORPORATION, STRAUCH, MILLER, BOLGER, BANIN, HASLER, MESSERSCHMITT, and FARMER on the persons listed below by placing the document described above in an envelope addressed as indicated below, which I sealed. I consigned the envelopes to an overnight delivery service by placing them for collection and processing this day following ordinary business practices at Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050, to be personally served on the following:

Declarant also forwarded these documents to the Securities Class Action Clearinghouse,

Securities Class Action Clearinghouse, Stanford Law School Crown Quadrangle, Stanford, California 94305-8610 at the designated Internet site at: epost@securities.stanford.edu.

I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct. Executed at Palo Alto, California on January 11, 1999.

Jeffrey Lawrence
Milberg, Weiss, Bershad, Hynes & Lerach
222 Kearny Street, 10th Floor
San Francisco, CA 94108
T:(415)288-4545
F:(415)288-4534

James V. Bashian
Law Offices of James V. Bashian, P.C.
500 Fifth Ave., Suite 2700
New York, NY 10110
T:(212)921-4110
F:(212)921-4249

Patricia I. Avery
Wolf Popper Ross Wolf & Jones, L.L.P.
845 Third Avenue
New York, NY 10019
T:(212)759-4600
F:(212)486-2093

Frank E. Merideth, Jr.
Bryan Cave LLP
120 Broadway, Suite 500
Santa Monica, CA 90401-2305
T:(310)576-2125
F:(310)576-2200

Martin H. Myers
Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301-1825
T:(415)833-2237
F:(415)327-3699

Shirli Weiss
Gray Cary Ware & Freidenrich
401 B Street, Suite 1700
San Diego, CA 92101
T:(619)699-3650
F:(619)236-1048

Source: File to epost from Wilson Sonsini Goodrich & Rosati