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

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 statement of recent decisions in support of their motion to dismiss the plaintiffs' class action Complaint. This Court has deferred ruling on Defendants' motion to dismiss until after a class could be certified and notice could be given to class members. That process is now complete. The motions to dismiss are now ripe for decision.

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. Oral argument was scheduled for May 12, 1998.

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.

Since Defendants filed their reply brief on March 20, 1998, 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.

Defendants now submit 14 such decisions. Defendants recognize that there have been an unusual number of cases submitted since the briefing was completed. Defendants will provide this Court with whatever further assistance it desires in organizing the authorities submitted or explaining the parties' current positions.

II. RECENT DECISIONS SUPPORTING DEFENDANTS' MOTION TO DISMISS

Defendants respectfully submit true and correct copies of the following 14 decisions that directly support the grounds for Defendants' pending motion to dismiss the Complaint:

III. EXCERPTS SUPPORTING DEFENDANTS' ARGUMENTS

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

A. Additional Authority Supporting The Arguments That The Reform Act's Safe Harbor And The Bespeaks Caution Doctrine Preclude Liability.

The following cases support the arguments made at pages 5-10 of Defendants' motion to dismiss and pages 2-5 of Defendants' reply brief that the Reform Act's Safe Harbor and the bespeaks caution doctrine preclude liability.

In In re Advanta, Corp. Sec. Litig., [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,243 (E.D. Pa. July 9, 1998) (Exh. B), the United States District Court for the Eastern District of Pennsylvania held as follows:

Plaintiffs claim that a statement issued by [or] on September 12, 1996 by Janet Point, Vice President for Investor Relations was false and misleading. Point informed the Dow Jones New Service that Advanta expected large revenue increases from repricing more than $5 billion of credit card receivables with current teaser rates of about 7% to what she described as Advanta's normal interest rate of 17%. Yet, in the June 1997 Philadelphia Magazine article, Alter is quoted as saying, "[w]hat happened is when the introductory period ended, we were probably not as aggressive as could have been [repricing our rates]. . . Instead of repricing to 18 percent-we repriced closer to 13 or 14 percent in order to retain our image and the luster of being a low-cost provider." Comparison of these two statements, plaintiffs[] allege, leads to the inference that Point's statement was false and misleading.

Defendants contend that Point's statement is not actionable because it falls within a statutory safe harbor that protects forward-looking statements when the plaintiff fails to prove defendant made them with actual knowledge that they were false. Under the safe harbor that defendants refer to, 15 U.S.C. § 78u-5(c), "a person shall not be liable with respect to any forward-looking statement . . . to the extent that . . . the plaintiff fails to prove that the forward-looking statement . . . was made with actual knowledge by that person that the statement was false or misleading. . . ."

It is apparent that Point's statement meets the definition of a forward-looking statement -- "a statement of plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer," so I must determine whether it is worthy of statutory protection. In paragraph 33 of their complaint, plaintiffs allege generally that all statements by Advanta, or its representatives referred to in the complaint do not qualify for safe harbor protection because "at the time each of those forward-looking statements was made the particular speaker knew that the particular forward-looking statement was false, and/or the forward-looking statement was authorized and/or approved by an executive officer and/or director of Advanta who knew that those statements were false when made." Presumably, additional support for plaintiffs' allegations comes from Alter's later "inconsistent" comments to Philadelphia Magazine.

Defendants characterize these allegations as conclusory and assert that they fail to allege the required state of mind, that the speaker had actual knowledge that the statement was false or misleading when made. I agree. Plaintiffs' catch-all allegation that all speakers knew that their statements were false when made is too broad and Alter's comments indicate nothing more than Advanta's failure to follow through exactly as planned on its proposed interest increase, rather than purposeful intent to fool the investing public. Therefore, mindful of the pleading requirements of Rule 9(b) and the [Reform Act], I find plaintiffs' allegations as to Point's state of mind insufficient. Accordingly, [p]laintiffs' claims of fraud based on such statement are dismissed pursuant to Rule 9(b) and the [Reform Act].

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,243, at 91,062-63.

In Harris v. IVAX Corp., 998 F. Supp. 1449 (S.D. Fla. 1998) (Exh. K), the United States District Court for the Southern District of Florida held as follows:

Pursuant to 15 U.S.C. § 78u-5(c)(1), a forward-looking statement cannot as a matter of law be the basis of liability under Section 10(b) if either the forward-looking statement is accompanied by meaningful cautionary language, or the plaintiff fails to prove that the person making the statement made it with actual knowledge that the statement was false or misleading.

998 F. Supp. at 1452 (footnote omitted).

Representations regarding the state of a business' position in a changing market or the soundness of its growth strategies are necessarily forward-looking. This is especially true where, as here, the representations are made mid-quarter, before the calculations businesses use to quantitatively evaluate their financial well being are completed. The IVAX press releases were not formal, periodic SEC filings. Until the numbers were crunched at the end of the quarter, the statements in IVAX's press releases that the hard times were over and that the state of the company was strong were nothing more than projections intended to advise the market of anticipated third quarter financial results. These are exactly the kind of forward-looking statements that the Reform Act's safe harbor was intended to shield.

Id. at 1453 (footnote omitted).

Thus, while Plaintiffs describe IVAX's warning statements as vague and general cautions about the generic drug industry, they turned out to be precisely those factors which led to IVAX's poorer than expected third quarter performance. That IVAX's cautionary statements did not include all of the factors that affected the third quarter results is immaterial. The Court will not, looking in hindsight, hold the Defendants to the impossible burden of having to warn of every factor that ultimately causes the forward-looking statement not to come true. Such an approach was not the intent of Congress and would effectively eviscerate the safe harbor. It is sufficient that the cautionary statements identify meaningful and important factors that could affect future performance. Such was clearly the case here. IVAX's cautionary statements "directly address[ed] the substance" of the statements the Plaintiffs challenge and "were tailored precisely to address the uncertainty concerning" the projections contained in the IVAX press releases. In re Donald J. Trump, 7 F.3d 357, 371 (3d Cir. 1993). Accordingly, the projections contained in IVAX's press releases are immunized from liability.

Id. at 1454 (footnote omitted).

B. 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 Malin v. IVAX Corp., No. 96-1843-Civ., 1998 WL 519595 (S.D. Fla. Aug. 18, 1998) (Exh. A), the United States District Court for the Southern District of Florida held that:

[T]he Court agrees with the Defendants that the Plaintiffs' allegations fail to satisfy the specificity requirement of § 21D(b)(1). While few courts have addressed this section 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.

The Plaintiffs' Complaint is short on such facts. Plaintiffs essentially allege that a practice of shelf-stock adjustment existed, was employed by the Defendants in order to boost IVAX short-term sales and profits to further IVAX's interests in possible mergers or acquisitions, severely impaired the accuracy of IVAX's projected earnings, and was not disclosed in IVAX's SEC filings. The Plaintiffs have gone to great lengths to set forth explicitly the motive for this practice, citing IVAX's acquisition strategy and detailing the mergers with other companies that were rumored at the time. Plaintiffs have also explained in detail why the failure to disclose and set up a reserve for the shelf-stock adjustment allegedly violates GAAP. But § 21D(b)(1) requires more. Upon what facts do the Plaintiffs base their belief that the shelf-stock adjustment practice existed? As to which products was the practice in place? Who were the customers given such shelf-stock adjustments? How much inventory of product did those customers buy? When was IVAX forced to adjust the price of that inventory and to what extent? To what extent did these adjustments affect IVAX's financial projections? These are just some of the questions that a complaint must answer to satisfy the requirements of § 21D(b)(1). Accordingly, the Court grants the Defendants' motion to dismiss for failure to state with particularity all of the facts upon which the beliefs contained in the Complaint are formed.

1998 WL 519595, at *13-*14.

In In re Advanta, Corp. Sec. Litig., [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,243 (E.D. Pa. July 9, 1998) (Exh. B), the United States District Court for the Eastern District of Pennsylvania held that:

Under the [Reform Act], a plaintiff alleging that a defendant made a misleading statement must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1).

On the first page of the Complaint, plaintiffs state that the allegations contained within are based on information and belief, thus they must explain in some detail the basis for such belief.

[Current Transfer Binder], Fed. Sec. L. Rep. (CCH) ¶ 90,243, at 91,061.

In In re Health Management Sys., Inc. Sec. Litig., [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,235 (S.D.N.Y. May 27, 1998) (Exh. E), the United States District Court for the Southern District of New York held that:

All of the allegations in the complaint are prefaced by the phrase "upon information and belief," except those specifically pertaining to the named plaintiffs, their counsel and their own acts. In general, under Rule 9(b) of the Federal Rules of Civil Procedure, pleadings alleging fraud cannot be based on information and belief, except where matters are [particularly] within the adverse party's knowledge. The plaintiffs may invoke this exception only if they include "a statement of facts upon which [their] pleaded information and belief are founded." Leslie v. Minson, 679 F. Supp. 280, 282 (S.D.N.Y. 1988). Moreover, the [Reform Act] provides that "if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). The complaint here is devoid of any such particularity.

Plaintiffs attempt to satisfy this pleading requirement in a single paragraph preceding paragraph 1 of their complaint, which states:

Plaintiffs' information and belief is predicated upon, among other things, the investigation made by plaintiffs by and through their attorneys, which investigation included analyses of publicly available new articles, press releases, filings made by defendant Health Management Systems Inc. . . . with the Securities and Exchange Commission ("SEC") and other matters of public record.

The plaintiffs' allegations provide little, if any, specificity about the foundation for their attorneys' allegations. In particular, the above quoted paragraph is insufficient because it does not indicate what publicly available articles, releases and filings the plaintiffs relied on, nor does it indicate what "other matters" of public record plaintiffs reviewed. See Crystal v. Foy, [[1981-1982 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,204] (S.D.N.Y. June 30, 1981) (where complaint provided that the basis for plaintiff's information and belief were public filings, news articles, press releases, research reports, and other public sources of information, complaint was deficient, because it failed to delineate the specific documents, articles and reports relied upon by plaintiff); Branch v. Tower Air. Inc., 94 Civ. 649935, 1995 WL 649935 (S.D.N.Y. Nov. 3, 1995) (paragraph listing source of plaintiff's information and belief was insufficient where it failed to particularize portions of prospectus relied on, or even the title and author of numerous articles and reports plaintiff alleges it relied on).

Indeed, a paragraph similar to the one at issue here, was rejected as insufficiently specific in a recent case in this District, Novak v. Kasaks, --- F. Supp. ---, 1998 WL 107033 (S.D.N.Y. March 10, 1998). In Novak, the plaintiffs based their allegations on an investigation of counsel, which included a "review of [defendant's] SEC filings, securities analysts reports and advisories about the Company, press releases issued by the Company, media reports about the Company and discussions with consultants." Id. at *7. The court held that this paragraph failed to provide the required facts underlying the plaintiffs' allegations. Id. Similarly, here, none of the information specified in plaintiffs' introductory paragraph sufficiently delineates the source of the plaintiffs' allegations.

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,235, at 91,020-21.

In Howard Gunty Profit Sharing v. Quantum Corporation, No. 96 20711 SW, slip op. (N.D. Cal., Apr. 6, 1998) (Exh. H), Judge Williams held that:

As Plaintiff's allegations apparently are not based on information and belief, Plaintiff must plead with particularity all circumstances constituting the alleged fraud. Fn. 4/

Fn. 4/ Plaintiff again asserts that it obtained its facts through "the investigation of counsel." [Complaint] ¶ 68. If by this Plaintiff intends to convey that it is pleading on information and belief, the [complaint] must be dismissed in its entirety, as the [complaint] does not "state with particularity" all facts on which its beliefs are formed, as required by the Reform Act. To survive a motion to dismiss, a complaint in a securities class action lawsuit must either (1) plead with particularity all circumstances constituting the alleged fraud, or (2) plead facts on information and belief, while "stat[ing] with particularity all facts on which that belief is formed." In the present action, Plaintiff has failed to follow either route and there is no middle road.

Slip op. at 8-9 & n.4.

In Hockey v. Medhekar, No. C-96-0815-MHP, 1998 U.S. Dist. LEXIS 4297 (N.D. Cal. Mar. 31, 1998) (Exh. I), Judge Patel held that:

Based on further review of the [Reform Act] and the applicable legislative history, the court now concludes that the [Reform Act] has somewhat altered the standard for pleading false and misleading statements. Specifically, the [Reform Act] mandates that "if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1)(emphasis added). In cases of information and belief pleading, pre-[Reform Act] Ninth Circuit caselaw did require "a statement of the facts upon which the belief is formed." Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987). However, the Ninth Circuit did not specifically require a plaintiff, as the [Reform Act] does pleading, to state all facts upon which a belief is based.

1988 U.S. Dist LEXIS 4297, at *14-*15.

In Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998) (Exh. J), Judge Whyte held that:

[T]o the extent that any of plaintiff's allegations are understood to be pled on information and belief, the Complaint must be dismissed in its entirety. Nowhere in the Complaint does plaintiff state, with or without particularity, any facts on which any particular belief is formed. This is a direct violation of the Reform Act, 15 U.S.C. § 78u-4(b)(1).

2 F. Supp. 2d at 1244.

In Polk v. Fritz, No. C96-2712 MHP, slip op. (N.D. Cal. Mar. 5, 1998) (Exh. M), Judge Patel held that:

[T]he court finds that the [Reform Act] imposes more stringent pleading standards for false and misleading statements than did pre-[Reform Act] Ninth Circuit case law.

Slip op. at 8.

At oral argument, plaintiffs argued that under the recent case Cooper v. Pickett, 122 F.3d 1186 (9th Cir. 1997), as amended [137 F.3d 616] (1998), the complaint adequately pleads a securities fraud cause of action based on false financial statements. In Cooper, the Ninth Circuit reversed the district court's dismissal with prejudice of the plaintiffs' complaint, holding that plaintiffs had met their pleading burdens under Glenfed. Cooper, [137 F.3d at 1193-95]. Plaintiffs here maintain that their complaint is comparable to that at issue in Cooper and thus sufficient to withstand defendant's motion to dismiss.

The court disagrees. Cooper, although recently decided, did not deal with the pleading requirements under the [Reform Act] as the complaint at issue was filed on August 15, 1994. [137 F.3d at 1189]. Thus, it did not consider the heightened pleading standards incorporated into the [Reform Act], such as the requirement that a complaint pleaded on information and belief disclose all facts underlying the beliefs. In addition, the court respectfully notes that Cooper, while not purporting to overrule existing law, appears to conflict with earlier Ninth Circuit securities cases that required greater particularity in the pleading of fraud claims. See, e.g., [In re] GlenFed [Inc. Sec. Litig.], 42 F.3d [1541,] 1549 [(9th Cir. 1994)]; In re Stac [Elecs. Sec. Litig.], 89 F.3d [1399,]1405 [(9th Cir. 1996) cert. denied, 117 S. Ct. 1105 (1997)]; Wool, 818 F.2d at 1439. The court will not parse these conflicts, however, since they arise in pre-[Reform Act] cases.

Id. at 12.

Based on further review of the [Reform Act] and the applicable legislative history, the court now concludes that the [Reform Act] has somewhat altered the standard for pleading false and misleading statements. . . . In cases of information and belief pleading, pre-[Reform Act] Ninth Circuit caselaw did require "a statement of facts upon which the belief is formed." Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987). However, the Ninth Circuit did not specifically require a plaintiff, as the [Reform Act] does, to state all facts upon which a belief is based.

Id. at 6-7.

In In re Boston Technology, Inc. Securities Litigation,[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,174 (D. Mass. Feb. 5, 1998) (Exh. N), the United States District Court for the District of Massachusetts held, interpreting pre-Reform Act case law, held that:

[T]he First Circuit looks cautiously upon plaintiffs alleging fraud purely on the basis of information and belief. When plaintiffs do so, either explicitly or implicitly, "the complaint must set forth the source of the information and the reasons for the belief." Romani v. Shearon Lehman Hutton, 929 F.2d 875, 878 (1st Cir. 1991). In the end, to make a sufficient claim, a 10b-5 plaintiff must allege facts that give rise to a "strong" inference of fraudulent intent. Suna v. Bailey Corp., 107 F.3d 64, 68 (1st Cir. 1997).

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,174, at 90,568-69.

[S]crutiny under Rule 9(b) in the securities context is "especially strict" in the First Circuit. See Gross [v. Summa Four, Inc.], 93 F.3d [987,] 991 [(1st Cir. 1996)]. The Rule requires that a 10b-5 plaintiff not only allege specific facts supporting the claim that the statements at issue were false or misleading (e.g., facts as to poor market conditions, increasing competition, declining customer needs, or negative events in business operations), but also specific facts from which defendants' knowledge of those events or conditions can reasonably be inferred. Greenstone [v. Cambex Corp.], 975 F.2d [22,] 25 [(1st Cir. 1992)]. As the Court asked in Tapogna v. Egan, 141 F.R.D. 370, 377 (D. Mass. 1992), when dismissing a 10b-5 claim pursuant to Rule 9(b):

What is the source of this [negative] information? What is the reason for believing that it is true? What is the factual basis for stating that, if true, the defendants both knew of this information and knew it to be true at the time they made the statements?

A complaint which fails to address these questions with particularized factual allegations is not sufficient.

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,174, at 90,572.

C. Additional Authority Supporting The Argument That The Complaint Does Not Plead Specific Facts Supporting Plaintiffs' Conclusory Beliefs That Defendants Made False Statements.

The following cases support the arguments made at pages 12-15 of Defendants' motion to dismiss and pages 11-12 of Defendants' reply brief that the Complaint does not plead specific facts supporting plaintiffs' conclusory beliefs that Defendants made false statements. In this regard, the following authority also supports Defendants' arguments that the Complaint's forecasting allegations are insufficient to state a claim.

In In re Advanta, Corp. Sec. Litig., [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,243 (E.D. Pa. July 9, 1998) (Exh. B), the United States District Court for the Eastern District of Pennsylvania held that:

Taken together, and assuming for present purposes only that defendants had a duty to disclose, plaintiffs['] support for their belief that defendants were aware of negative facts during the class period is insufficient. Plaintiffs['] first "fact", that their positions within the company rendered defendants knowledgeable, is merely an unsupported conclusion. 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, Rosenbloom v. Adams, Scott & Conway, Inc., 552 F.2d 1336, 1338-39 (9th Cir. 1977) (citations omitted), and plaintiffs have not pointed to specific reports, circulated among defendants, which contained the adverse information defendants are charged with knowing. See San Leandro Emer. Med. Group Profit Sharing Plan v. Phillip Morris Co., 75 F.3d 801, 812-13 (2d Cir. 1996).

Additionally, Advanta's after the fact statements recognizing the causes of its first quarter losses do not constitute a basis for charging defendants with prior knowledge. Courts have uniformly rejected such attempts to plead fraud by hindsight, acknowledging that a plaintiff does not state a claim for securities fraud merely because a company discloses, after the fact, that its performance failed to meet expectations. See Wallace v. Systems and Computer Technology Corporation, 1997 WL 602808 [at]* 5 (E.D. Pa. Sept. 23, 1997); In re Goodyear Tire & Rubber Co. Sec. Lit., 1993 WL 130381 at *2 (E.D. Pa. Apr. 22, 1993) [aff'd, 16 F.3d (3rd Cir. 1993)]; Sinay v. Lamson & Sessions Co., 948 F.2d 1037, 1040 (6th Cir. 1991); DiLeo v. Ernst & Young, 901 F.2d 624, 626 (7th Cir. 1990). During 1995 and 1996 Advanta reassured investors that it was capable of maintaining its earnings momentum. During the Class Period, Advanta continued issuing encouraging messages. Later the company had to report significant losses in its credit card division. Yet, simple comparison of these descriptions does not create underlying factual support for plaintiffs' claims. Plaintiffs[] must point to specific facts suggesting that the difference is attributable to fraud. See In re Donald J. Trump Casino Securities Litigation, 793 F. Supp. 543, 556-57 (D.N.J. 1992); DiLeo v. Ernst & Young, 901 F.2d at 627. In the instant case plaintiffs have not brought such facts to the Court's attention. Therefore, because they have not alleged circumstances indicating that any of the "positive portrayals" identified in the Complaint were false or misleading, plaintiffs have failed to adequately plead fraud.

Accordingly, plaintiffs' claims based on these statements are dismissed pursuant to Rule 9(b) and the [Reform Act].

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,243, at 91,062 (footnotes omitted).

In Gupta v. Terra Nitrogen Corp., No. 5:97-CV-3353, 1998 WL 394320 (N.D. Ohio July 7, 1998) (Exh. C), the United States District Court for the Northern District of Ohio held that:

At a minimum, a plaintiff must allege the time, place and contents of the misrepresentation(s) upon which he relied. Bender v. Southland Corp., 749 F.2d 1205, 1216 (6th Cir. 1984). Courts have freely dismissed complaints where the plaintiffs have failed to allege fraud with sufficient particularity, by, for example, asserting "mere conclusory allegations to the effect that defendant's conduct was fraudulent or in violation of Rule 10b-5," or that the defendant corporation's representations presented a "false, misleading, and inflated picture of assets, earning, and business" without sufficient explanation about how or why such representations were false.

In the instant case, Plaintiffs Gupta only generally allege that Defendant Terra Nitrogen misled them as to the nature and the risks of the securities the Guptas had purchased. Plaintiffs Gupta do not give facts detailing the time, place, or method of how Terra Nitrogen defrauded them. Plaintiffs Gupta also fail to set forth facts showing either direct evidence or a strong inference of fraudulent intent. Plaintiffs Gupta further do not set forth facts showing that Defendant Terra Nitrogen, through its agents, had both motive and opportunity to commit fraud.

Id. at *4 (footnote omitted).

In this regard, Plaintiffs Gupta's complaint fails to meet the traditional pleading standards for fraud under Rule 9(b). First, the complaint does not identify specific statements by Defendant Terra Nitrogen that are allegedly fraudulent. Second, the complaint fails to identify the specific actors or "speakers" responsible for making the alleged false or misleading statements. Third, Plaintiffs Gupta fail to detail when and where these alleged false statements were made. Most important, Plaintiffs Gupta do not explain how the alleged misstatements were fraudulent. Although they state general conclusions that the whole of Defendant Terra Nitrogen's actions caused them to suffer financial loss, Plaintiffs Gupta do not establish some sufficient causal link connecting specific illegal or misleading acts by Defendant Terra Nitrogen to the purchase or sale of the securities at issue.

Id. at *5.

In In re Health Management Systems, Inc. Securities Litigation, [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,235 (S.D.N.Y. May 27, 1998) (Exh. E), the United States District Court for the Southern District of New York held:

The essence of the plaintiffs' complaint is that defendants made statements about the company's financial situation, but failed to disclose the financial difficulties that the company was having, including difficulties with several customers, decreasing margins and slowing or reversing revenue growth. Indeed, the complaint is replete with allegations that certain press releases and public filings were misleading because they failed to reveal that HMS was having problems receiving payments from unspecified customers, including HHL, and that HMS was suffering from "increased competition," lower margins, decreased profitability and "fee erosion." E.g., Compl. ¶¶ 78, 82, 86, 100, 111, 115. These general, conclusory allegations are wholly insufficient under Rule 9(b), let alone the [Reform Act]. See Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115 (2d Cir. 1982). These allegations do not specify the customers involved, the nature of the customer's supposed payment problems, the nature or genesis of the alleged "increased competition," or the extent of the alleged lower margins or decreased profitability. See, e.g., Roots Partnership v. Lands' End, Inc., 965 F.2d 1411, 1418-19 (7th Cir. 1992) (complaint was insufficient where it failed to particularize alleged operational problems of "slackening demand, obsolete inventory, low-margin liquidations, and declining profit margins"); Tuchman v. DSC Comms. Corp., 818 F. Supp. 971, 977 (N.D. Tex. 1993) (dismissing complaint because it referred to problems of increased competition and customer defections but did not specify the nature of the competition or of the customer defections, such as how many and which customers defected), aff'd, 14 F.3d [1061] (5th Cir. 1994).

Plaintiffs' attempts to be more specific also fail. For example, plaintiffs point to several statements in press releases on February 27, 1996 and on May 28, 1996, indicating that the company had a solid quarter and looked forward to a fulfilling year. Compl. ¶¶ 77, 80. Plaintiffs allege that these statements were misleading because HMS failed to state that it was experiencing requests for contract and contract payment deferrals. HMS also allegedly failed to disclose its problems with HHL, and that HHL "had stopped making payment to [HMS] at least as early as December 1995." Compl. ¶¶ 78, 82. As with the allegations of unnamed customer problems, plaintiffs' allegations regarding requests for contract deferrals are insufficient as they do not specify who requested the deferrals, when they were requested, the amounts at issue or any other facts sufficient to show the purportedly omitted information was material. See, e.g., Tuchman, 818 F. Supp. at 977. The allegation that HHL had stopped making payments in December 1995 is similarly devoid of sufficient factual support.

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,235, at 91,021.

In Ronconi v. Larkin, [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,212 (N.D. Cal. May 4, 1998) (Exh. G), Judge Legge held that:

It is not enough simply to allege that the statements were false. Nor is the falsity established by an allegation that the opposite of the statement was true. And falsity is not established by an allegation that the statement was false because it did not later come true.

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,212, at 90,892.

In Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998) (Exh. J), Judge Whyte held that:

The Complaint alleges a number of paraphrased statements taken from three oral presentations: The pre-IPO Roadshow, the February Call, and the April Call. Plaintiff does not provide any direct quotations, but rather portrays Lumisys' alleged disclosures in vague terms. For example, plaintiff characterizes Weiss and Klosterman as representing that Lumisys' business was performing very well and ahead of plan with strong demand for its core digitizer products, that Imagraph's Imascan Precision product was succeeding and selling well, that Imagraph was successfully developing the ICE Clarity which would contribute to strong 1996 revenue growth for Lumisys, that Imagraph was doing very well, that Lumisys' investment in Drastic was succeeding, and that Drastic's digital video recorder was doing well in BETA testing.

The allegations lack the specificity required by Rule 9(b) and the Reform Act. Rather than "stating with particularity" the content of the alleged fraud, pursuant to Fed. R. Civ. P. 9(b), and "specifying each statement alleged to have been misleading," as required by the Reform Act, 15 U.S.C. [§ ]78u-4(b)(1), plaintiff repackages defendants' actual oral statements in vague and impressionistic terms.

2 F. Supp. 2d at 1246 (citation omitted).

Moreover, none of these "statements" appears to be in any of the reports alleged to have been released to the marketplace.

Id. at 1247.

Assuming that any of the alleged misrepresentations could be construed as false, the Complaint would still fail because plaintiff alleges no facts indicating that any of the alleged "true facts" arose before the allegedly misleading statements were made. See [In re] Oak [Technology Sec. Litig.], 1997 WL 448168 at *5 [(N.D. Cal. July 1, 1997)]; Hockey [v. Medhekar], 1997 WL 203704 at *8 [(N.D. Cal. Apr. 15, 1997)]; Zeid [v. Kimberley], 973 F. Supp. [910,] 920 [(N.D. Cal. 1997)]. Paragraph 88 only alleges that the myriad of "true facts" "were . . . available to the defendants" during and prior to the class period. [Complaint] ¶ 88. This conclusory allegation does not amount to a fact showing that any of the "true facts" arose prior to any related statement. As the post-Reform Act cases have emphasized, without specific references to specific facts demonstrating that the statements at issue were false or misleading when made, allegations regarding adverse information supposedly known to defendants are merely "speculation and conclusions drawn from hindsight." See, e.g., Zeid, 973 F. Supp. at 920-21; see also Genna v. Digital Link, 96-20867, slip op. at 16 (N.D. Cal. Sept. 11, 1997) (allegations that the product was "encountering serious and persistent difficulties," the software "did not work," and the product had "design and software problems" were so general that the court could not be sure that plaintiff was not basing his claim on hindsight).

Id. at 1250.

D. 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 9-11 of Defendants' reply brief that the Complaint does not plead specific facts supporting plaintiffs' conclusory beliefs that Defendants committed accounting fraud.

In Malin v. IVAX Corp., No. 96-1843-Civ., 1998 WL 519595 (S.D. Fla. Aug. 18, 1998) (Exh. A), the United States District Court for the Southern District of Florida held that:

This Court agrees that it is not sufficient for a plaintiff to state that because a defendant violated GAAP, the defendant knew or must have known that it was publishing materially false information. Such a violation, on its own, does not represent the extreme departure from the standards of ordinary care that the recklessness standard requires. McDonald [v. Alan Bush Brokerage Co.], 863 F. 2d [809,]814 [(11th Cir. 1989)]. Even when combined with the Plaintiffs' limited allegations of motive, the Plaintiffs' allegations of a GAAP violation do not give rise to a strong inference that Defendants acted knowingly or recklessly. The Court therefore grants Defendants' motions to dismiss for failure to satisfy the requirements of § 21D(b)(2).

1998 WL 519595, at *15.

In Polk v. Fritz, No. C96-2712 MHP, slip op. (N.D. Cal. Mar. 5, 1998) (Exh. M), Judge Patel held that:

[T]o properly state a claim for accounting fraud, plaintiffs must "plead facts sufficient to support a conclusion that [d]efendant[] prepared the fraudulent financial statements and that the alleged financial fraud was material." In re Oak Technology Securities Litig., 1997 WL 448168[, at] *8 [(N.D. Cal. July 1, 1997)]. In addition, plaintiffs "must identify the particular transactions underlying [the] alleged accounting deficiencies." Id., citing In re Wells Fargo Sec. Litig., 12 F.3d 922, 926-27 (9th Cir. 1993), cert. denied, 513 U.S. 917 (1994)[].

Here, plaintiffs' complaint fails to demonstrate how the financial statements were false when made and not just through benefit of hindsight. Merely arguing, for example, that "Fritz fraudulently recorded $26 million of potential merger candidate's pre-acquisition revenues as its own" does nothing to demonstrate that any statements in Fritz's financial statements were false when made and does not meet the high particularity standards established by the [Reform Act] and Ninth Circuit caselaw.

Polk v. Fritz, No. C96-2712 MHP, slip op. at 10-11.

E. 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 In re Health Management Systems, Inc. Securities Litigation, [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,235 (S.D.N.Y. May 27, 1998) (Exh. E), the United States District Court for the Southern District of New York held that:

Under the [Reform Act], a complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). The [Reform Act] has been interpreted to have strengthened the already stringent pleading requirements under Rule 9(b). Novak [v. Kasaks], 1998 WL 107033 at *5 [(S.D.N.Y. March 10, 1998)]. In order to satisfy this pleading requirement, a plaintiff must now plead specific facts that create a strong inference of either knowing misrepresentation or conscious recklessness. In re Glenayre Techs.[Inc. Sec. Litig.], 982 F. Supp. [294,] 298 [(S.D.N.Y. 1997)]. Moreover, under the [Reform Act], a showing of motive and opportunity, without more, no longer suffices to raise a strong inference of scienter, although such facts can nevertheless be relevant to the scienter analysis. In re Glenayre Techs., 982 F. Supp. at 298; In re Baesa Sec. Litig., 969 F. Supp. 238, 242 (S.D.N.Y. 1997).

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,235, at 91,022.

F. 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 Walish v. The Leverage Group, Inc., [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,229 (E.D. Pa. June 15, 1998) (Exh. D), the United States District Court for the Eastern District of Pennsylvania held that:

[A] plaintiff claiming securities fraud must allege that the defendant "(1) made misstatements or omissions, (2) of material fact, (3) with scienter, (4) in connection with the purchase or sale of securities, (5) upon which the plaintiff relied, and (6) that reliance proximately caused the plaintiff's injuries." [In re Phillips Petroleum Sec. Litig., 881 F. 2d 1236, 1244 (3d Cir. 1989)]. The complaint must specify each statement alleged to have been misleading and the reason or reasons why the statement is misleading. 15 U.S.C. § 78u-4(b)(1). The complaint must also state with particularity facts giving rise to a strong inference that the misstatements were made purposely or in reckless disregard of the truth. 15 U.S.C. § 78u-4(b)(2).

The complaint in this case does not meet these standards. The Plaintiffs do not specify the alleged misstatements and do not even attempt to identify the "who, what, when, where and how" of each statement. The complaint is largely made up of conclusory allegations without a factual basis. In re Donald J. Trump Casino Sec. Litig., 793 F. Supp. 543, 547 (D.N.J. 1992).

The complaint does not allege facts giving rise to a strong inference that any misstatements attributed to the Defendants were made purposely or recklessly. The rote allegations that Defendants "knowingly made false statements of material fact with the intent to deceive and defraud the Plaintiffs" and "recklessly created a false and misleading impression regarding Tenic's viability as a corporation" do not meet the standards for pleading scienter under the [Reform Act].

The allegation that the Defendants decided to change Tenic's product line from "lesser" to "substantial" software products does not raise an inference of fraudulent intent. The allegation that the Defendants stated that Tenic would be a "viable corporation and begin generating revenue in 1996" also does not raise an inference of wrongdoing. "A plaintiff cannot simply couple a factual statement with a conclusory allegation of fraudulent intent to adequately plead scienter. . . . Nor is it sufficient to simply allege statements of a prosperous future compared to a bleaker reality." Norwood Venture Corp.[v. Converse, Inc.], 959 F. Supp. [205,] 208 [(S.D.N.Y. 1997)].

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,229, at 90,983.

In Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998) (Exh. J), Judge Whyte held that:

The Complaint fails to plead facts that show a strong inference of fraud. The Complaint contains only generalized, boilerplate allegations that the defendants "knew" of the adverse undisclosed facts "via access to internal corporate documents." Plaintiff does not point to any specific internal reports or documents showing Lumisys knew any of its statements were false.

Id. at 1251 (footnote omitted).

G. 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 Health Management Systems, Inc. Securities Litigation, [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,235 (S.D.N.Y. May 27, 1998) (Exh. E), the United States District Court for the Southern District of New York held that:

Plaintiffs also argue that they have plead motive and opportunity based on suspicious insider selling activity by the individual defendants. Unusual insider trading activity during the class period may permit an inference of scienter; however, plaintiffs bear the burden of showing that any such sales are in fact unusual. Acito [v. IMCERA Group], 47 F.3d [47,] 54 [(2d Cir. 1995)]; In re Glenayre, 982 F. Supp. at 299. Plaintiffs argue that since defendants Simon, McIntyre, Krez, Carson, Staffa, Stowe and Holster sold on average in excess of 20% of their holdings during the Class period, this constitutes a strong inference of suspicious trading. Fn. 3/ However, defendant Siegel, the Chief Financial Officer of HMS sold no HMS shares during the Class Period and actually purchased shares during that period and defendant Holster also purchased shares during the Class Period. The fact that these defendants did not sell their shares undermines plaintiff's claim that defendants delayed notifying the public so that they could sell their stock at a huge profit. Acito, 57 F.3d at 54; In re Glenayre, 982 F. Supp. at 299. Moreover, the timing of the individual defendants' sales is not suspicious. There was no one particular event or events that triggered substantial sales by the individual defendants. Indeed, very few shares were sold after the May 28, 1996 press release, which plaintiffs claim artificially inflated HMS's share price; only defendants Simon and McIntyre sold any shares shortly after May 26. In addition, after the November 15, 1996 announcement which caused HMS's share price to plummet, both Kerz and Staff sold significant amounts of their shares. Therefore, I find that plaintiffs have failed to meet the [Reform Act]'s pleading requirements regarding scienter.

Fn. 3/ Defendants['] sales during the Class Period were: Kerz, 3.06%, Holster, 5.62%, Carson, 14.02%, Staffa, 22.94%, Simon 23.53%, Stowe 24.92%, and McIntyre 81.9%. While defendant McIntyre's sales were quite high during the Class Period, this was most likely on account of the fact that he resigned as an HMS director prior to January 1997 and was divesting himself of his shares. I note that absent his sales, the average sales of the individual defendants drops significantly, to about 15%.

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,235, at 91,022-23 & n.3 (footnote omitted).

In Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998) (Exh. J), Judge Whyte held that:

Moreover, stock sales alone cannot create a strong inference of scienter. [In re] Silicon Graphics [Inc. Sec. Litig.], 970 F. Supp. [746,] 768 [(N.D. Cal. 1997)]. Even if stock sales alone sufficed, the sales here do not appear unusual nor suspicious. See Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2nd Cir. 1995) (sales must be unusual or suspicious to raise inference of fraud). Lumisys' officers retained the vast majority of their holdings and none of the sales occurred at suspicious times, such as immediately before a negative earnings announcement. With regard to Treu and Domain Partners, they never sold any shares, but simply distributed them to Domain's limited partners investors. Moreover, the fact the defendants had not traded before is of no moment whatsoever because the lock-up prevented earlier trades.

2 F. Supp. 2d at 1251.

In Allison v. Brooktree Corp., 999 F. Supp. 1342 (S.D. Cal. 1998) (Exh. L), the United States District Court for the Southern District of California held that:

Next, Plaintiffs contend that Defendants were motivated to engage in securities fraud in order to sell stock and to cash-out their options in a later acquisition. (Compl. ¶¶ 27-29). "Insider trading in suspicious amounts or at suspicious time is probative of bad faith and scienter." In re Apple Computer Securities Litigation, 886 F.2d 1109, 1117 (9th Cir. 1989). Plaintiffs do not contend that Defendants sold stock at suspicious times but contend that the amounts sold are suspicious and probative of scienter. Fn. 2/

Since scienter must be pled as to each defendant, the court analyzes the stock sales of each defendant. Plaintiffs allege no stock sales by the alleged primary wrongdoer, Bixby. Nearly every communication to investors and the media was made by Bixby. Not only did Bixby not sell any shares, he actually purchased stock during the Class Period. Fn. 3/ The facts pled negate an inference of motive to defraud by Bixby. The Complaint alleges that defendant Canning sold 2,200 shares for gross proceeds of $41,328 and defendant Gelvin sold 2,000 for gross proceeds of $32,760. Fn. 4/ The amounts sold represent approximately 82% and 14%, respectively, of the shares then available for sale. (Compl.¶ 93). These amounts are minimal when compared to the proceeds received by defendants as a result of the sale of their options to Rockwell. There, Canning received gross proceeds of approximately $355,000 and Gelvin approximately $670,000. Fn. 5/

Given the ambiguous nature and suspect import of the relatively small amount of stock sales traded during the Class Period ($70,000), the allegations, even taken together, are insufficient to raise a strong inference of fraudulent intent. The court observes that Plaintiffs have a particularly difficult task to demonstrate motive by means of stock sales when the primary alleged wrongdoer was purchasing, and not selling, stock. Since Plaintiffs requested leave to amend at the time [of] oral argument, the court grants leave to amend the element of scienter.

Fn. 2/ The Complaint's allegations do not support insider trading at suspicious times. Nearly 90% of all insider shares sold during the Class Period were at or below $13 per share, which is 40% off the high of $21.75 and occurred four to five months before the stock reached its Class Period high.

Fn. 3/ The court takes judicial notice of Bixby's Form 4 wherein he reported the purchases to the SEC. Judicial notice of documents required to be filed by law is appropriate. See Kramer v. Time Warner, 937 F.2d 767, 774 (2nd Cir.1991).

Fn. 4/ The net proceeds to these defendants were significantly less than the gross amounts received because defendants exercised options to purchase those shares at $6.00 to $7.12 per share. (Compl.¶¶ 23(b), 23(c)).

Fn. 5/ Defendants Holtaway, Kelly and Zoltaway sold approximately 1,100, 12,000, and 15,000 shares during the Class Period and 63,001, 21,793, and 101,500 shares at the time of the Rockwell buy-out. As with the other defendants the stock sales during the Class Period are minimal when compared to the shares sold at the time of the Rockwell buy-out.

999 F. Supp. at 1352-53 & nn.2-4.

In In re Boston Technology, Inc. Securities Litigation, [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,174 (D. Mass. Feb. 5, 1998) (Exh. N), the United States District Court for the District of Massachusetts held that:

In the circumstances, plaintiffs rely heavily on the fact that the individual defendants sold, cumulatively, over 300,000 shares of BT stock during the proposed class period. However, "the mere fact that insider stock sales occurred does not suffice to establish scienter." Shaw [v. Digital Equip. Corp.], 82 F.[3]d [1194,] 1224 [(1st Cir. 1996)]. While some courts have found that stock sales can support an inference of fraud, they have generally required plaintiffs to allege facts establishing that the trading was out of the ordinary. See, e.g., Greenstone [v. Cambex Corp.], 975 F.2d [22,] 27 [(1st Cir. 1992)] (insider trading "in suspicious amounts or at suspicious times, of course, could help [a 10b-5 plaintiff]"). See also [In re] Chipcom [Corp. Sec. Litig., No. 95-1114], slip op. at 36 [(D. Mass. Apr. 29, 1996)] (noting that plaintiffs' failure to plead the amount of trading normally conducted by the individual defendants precluded necessary comparisons) (and cases cited therein). While perhaps the timing of the sales warrants consideration, plaintiffs have not asserted any facts as to amounts normally traded from which it would be reasonable to infer that the defendants' actions were out of the ordinary. In any event, insider trading alone cannot carry the day.

[Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 90,174, at 90,572.

H. 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 In re Yes! Entertainment Corp. Sec. Litig., Case No. C97-01388-CRB, slip op. (N.D. Cal. May 15, 1998) (Exh. F), Judge Breyer held that:

To state a claim against defendants for misrepresentations made in the securities analysts' forecasts, plaintiffs must demonstrate that defendants placed "their imprimatur, express or implied, on the projections." In re Syntex Corporation Securities Litigation, 95 F.3d 922, 934 (9th Cir. 1996) (quotation omitted). Plaintiffs must plead the required entanglement with the specificity required by Rule 9(b). In re Caere Corporate Securities Litigation, 837 F. Supp. 1054, 1059 (N.D. Cal. 1993). Plaintiffs' First Amended Complaint does not do so.

Id. at 2.

In Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998) (Exh. J), Judge Whyte held that:

The statements contained in the analysts' reports may not be attributed to Lumisys.

Even assuming plaintiff had adequately pled entanglement, he has failed to sufficiently allege that defendants knew that the analysts' forecasts were unreasonable when they were issued. An analyst's forecast is unreasonable only if there was no reasonable basis for it at the time at which it was made. Caere, 837 F. Supp. at 1060 (citing Wielgos v. Commonwealth Edison, 892 F.2d 509, 516 (7th Cir. 1989); [In re] Verifone [Sec. Litig.], 784 F. Supp. [1471,] 1487 [N.D. Cal. 1992, aff'd, 11 F.3d 865 (9th Cir. 1993)]). It is not enough that the forecast merely turned out to be wrong. Id. Further, because unreasonableness of the reports is central to the allegation of scienter, the facts supporting the allegation must "provide a strong inference of fraudulent intent." Id. (citing [In re] GlenFed[, Inc. Sec. Litig.], 11 F.3d [843,] 848 [(9th Cir. 1993), superseded, 42 F.3d 1541 (9th Cir. 1994) (en banc)]). Plaintiff's allegations do not do so.

Id. at 1249-50.

In Allison v. Brooktree Corp., 999 F. Supp. 1342 (S.D. Cal. 1998) (Exh. L), the United States District Court for the Southern District of California held that:

To be held liable for unreasonably disclosed third-party statements, not only must the statements comply with Rule 9(b) but defendants must have put their imprimatur, express or implied, on the projections or statements. In re Syntex Corp. Securities Litig., 95 F.3d 922, 934 (9th Cir. 1996). In the context of analyst statements, Rule 9(b) is satisfied where it is alleged "that the insider provided misleading information to an analyst, that the analyst relied on this information in preparing a report and that the insider somehow endorsed or approved the report prior to or after its publication." Stack v. Lobo, 903 F. Supp. 1361, 1372 (N.D. Cal. 1995).

The complaint makes conclusory allegations that "analysts relied in substantial part upon information" provided by Brooktree, (Compl. ¶ 32), "Brooktree and defendants Bixby, Canning and Gelvin communicated regularly with securities analyst" by means of conference calls, analysts meetings, and interviews with Bixby, (Compl. ¶ 34), "Brooktree directly and indirectly caused these analysts to issue false and misleading reports that contained false and misleading information about the Company and its prospects," (Compl. ¶ 35), and that Brooktree "used the analysts as conduits of misinformation." (Compl. ¶ 36). These conclusory allegations are insufficient to establish that Defendants could have controlled the content of any of the statements disseminated by analysts. The analysis does not end here, however, as certain analyst or third party statements provide the requisite detail and comply with Rule 9(b).

For example, the Complaint alleges a detailed dialogue between Bixby, Canning and Smith Barney analysts as well as identifying the date of the analyst report, its contents, the report's author, and allegations that Bixby and Canning reviewed and approved the report. (Compl. ¶ 61). This allegation[] sufficiently pleads a basis for liability as to defendants Bixby and Canning for statements of third parties. To the extent reasonably available to Plaintiffs, the allegations must contain sufficient detail to give rise to an inference that Defendants endorsed or adopted the statements of analysts to such an extent such that it could be fairly said that defendants placed their imprimatur on the statements. See In re Syntex Corp. Securities Litig., 95 F.3d 922, 934 (9th Cir.1996).

Other third party analyst statements fail to allege a sufficient basis for liability. For example, paragraph 62 alleges that Bixby spoke with unidentified securities analysts and made several positive statements about Brooktree's future business prospects. In conclusory fashion, the allegation states that "[a]nalysts reported this information to the market where it became part of the total mix of information." There is no indication when, who, what, or how the allegedly false statements were disseminated to the market. Moreover, there is no indication that any defendant adopted, controlled, or otherwise sufficiently entangled themselves with this statement such that liability could fairly be attributed any defendant. Therefore, paragraphs 59, 62, 65, 67, 68, 75, 78, 80, 83, 84, and 86 are dismissed with leave to amend.

Id. at 1349-50.

I. 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 Malin v. IVAX Corp., No. 96-1843-Civ., 1998 WL 519595 (S.D. Fla. Aug. 18, 1998) (Exh. A), the United States District Court for the Southern District of Florida held that:

[A] person cannot be liable under § 10(b) unless that person employs a manipulative device or makes a material misstatement or omission on which a purchaser or seller of securities relies. See Central Bank [of Denver v. First Interstate Bank of Denver], 511 U.S. [164,] 191 [(1994)]. Plaintiffs have alleged that [defendant] Klein knew about the scheme to inflate IVAX's sales through the shelf-stock adjustment plan, stood materially to gain from that scheme, and took every effort to increase IVAX's sales through such sales practices. These allegations alone fail to satisfy the Central Bank test as they nowhere allege that Klein employed a manipulative device or made a material misstatement.

1998 WL 519595, at *15.

In Allison v. Brooktree Corp., 999 F. Supp. 1342 (S.D. Cal. 1998) (Exh. L), the United States District Court for the Southern District of California held that:

Defendants Kelly (Vice President of the Communications Strategic Business Unit), Zabaronick (Vice President of Human Resources) and Holtaway (Vice President of Corporate Quality) move to dismiss the complaint because it fails to allege a factual basis for liability under [the Reform Act]. The complaint does not allege that these defendants made any misleading statements during the class period nor does the complaint allege that these defendants communicated to any securities analyst or any investor. The complaint does allege in conclusory fashion that these defendants each had access to unspecified non-public information, they sold stock during the Class Period, and that these defendants knew the truth of the statements and omissions made therein. (Compl. ¶¶ 23(d), (e), (f)).

In apparent recognition that the complaint fails to articulate any actionable conduct by these defendants, plaintiffs seek to invoke the group-published doctrine. In pre-[Reform Act] actions, allegedly false and misleading statements contained in group-published information such as prospectuses, registration statements, annual reports, and SEC filings benefit from a presumption that the statement contained therein is part of a collective work and therefore plaintiffs are excused from the particularity requirements of Rule 9(b). In re GlenFed, Inc., 60 F.3d 591 (9th Cir. 1995). To rely upon this presumption, "plaintiffs' complaint must contain allegations that . . . [the defendant] either participated in the day-to-day corporate activities or had a special relationship with the corporation, such as participation in preparing or communicating group information at particular times." Id. 60 F.3d at 593. This doctrine does not apply to information contained in analyst reports or oral remarks of other individuals.

Here, the court dismisses these defendants, without prejudice, for two reasons. To begin with, the continued vitality of the judicially created group-published doctrine is suspect since the [Reform Act] specifically requires that the untrue statements or omissions be set forth with particularity as to "the defendant" and that scienter be plead in regards to "each act or omission" sufficient to give "rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b) (emphasis added). 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 based solely on defendant's status as an officer or director of a corporation. Accordingly, should plaintiffs decide to file an amended complaint they are instructed to plead specific facts as to the misleading statements and omissions as to each defendant.

The second reason for dismissing these individuals is that the group published presumption "is grounded in reasonableness" and it is not reasonable to presume in every case that every officer joined in a scheme to defraud investors. In re GlenFed, 60 F.3d at 593. The court observes that plaintiffs fail to allege, with one exception, any material false or misleading statements or omissions contained in any group-published document. One group published document, the 1995 Annual Report[,] represented that Brooktree's "multimedia, communications and imaging . . . will enable us to enter new, emerging market to help fuel the Company's next phase of growth," and that it had made steady progress with the BtV chipset and that more than a dozen vendors adopted the BtV chipset into planned products. (Compl. ¶ 87). Although Plaintiffs adequately allege that this Annual Report was either false or misleading, (Compl. ¶ 88), it is unreasonable to presume, under the facts alleged and the requirements of Rule 9(b), that the Human Resource Officer, the Communications Business Unit Officer, or the Corporate Quality Officer had either direct or indirect involvement with the preparation or communication of information following outside their respective fields of expertise and spheres of influence: human resources, the communications business unit, and quality assurance. As to each of these defendants plaintiffs assert identical conclusory allegations that they had "access to internal corporate documents." (Compl. ¶ 23(c), (d), (f)). Without additional allegations demonstrating the reasonableness of applying the presumption to these defendants, these defendants are dismissed without prejudice and with leave to amend.

999 F. Supp. at 1350-51.