Stanford University Law School - Securities Class Action Clearinghouse

 

MILBERG WEISS BERSHAD

HYNES & LERACH LLP

WILLIAM S. LERACH (68581)

KIRK B. HULETT (110726)

HENRY ROSEN (156963)

TOR GRONBORG (179109)

600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058



LAW OFFICES OF LAWRENCE G.

SOICHER

LAWRENCE G. SOICHER

300 Park Avenue, 20th Floor

New York, NY 10022

Telephone: 212/980-7000

Attorneys for Plaintiffs

[Additional counsel appear on signature page.]





UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA





In re YES! ENTERTAINMENT CORP.

SECURITIES LITIGATION

__________________________________________

This Document Relates To:

ALL ACTIONS.

__________________________________________

Master File No.

C-97-1388-CRB

CLASS ACTION



DATE: May 22, 1998

TIME: 10:00 a.m.

COURTROOM: Honorable

Charles Breyer



PLAINTIFFS' OPPOSITION TO DEFENDANTS' MOTION TO DISMISS





TABLE OF CONTENTS

I. INTRODUCTION

II. STATEMENT OF FACTS

III. LEGAL STANDARD ON A MOTION TO DISMISS

IV. THE AMENDED COMPLAINT PLEADS WHY DEFENDANTS' STATEMENTS WERE FALSE WHEN MADE

V. DEFENDANTS HAD A DUTY TO DISCLOSE MATERIAL FACTS WHICH UNDERMINED THEIR FORWARD-LOOKING STATEMENTS

VI. THE COMPLAINT ADEQUATELY PLEADS FACTS GIVING RISE TO A STRONG INFERENCE OF SCIENTER

VII. NEITHER THE PSLRA'S SAFE HARBOR PROVISION NOR THE BESPEAKS-CAUTION DOCTRINE IMMUNIZE DEFENDANTS' FALSE AND MISLEADING FORWARD-LOOKING STATEMENTS

VIII. THE COMPLAINT ADEQUATELY ALLEGES LOSS CAUSATION AND PLAINTIFFS' INJURY

IX. CONCLUSION



I. INTRODUCTION

This case is simple. In order to artificially inflate the price of Yes! Entertainment Corp. ("Yes!" or the "Company") stock, and increase the defendants' and their private venture investors' wealth, the defendants initiated a plan in 1996 to stimulate investor interest by promising the release of several new toy lines which would sell, according to defendants, "hundreds of thousands" of units during the 1996 holiday selling season. ¶49.(1) Defendants brazenly stated that Yes! would "conservatively" report revenues in excess of $100 million and profits of over $7.5 million in 1996, compared with revenues and earnings of only $55.6 million and $3.4 million, respectively, for 1995. ¶10.

Despite the numerous delays, production problems, and lack of market testing, defendants never modified or corrected these statements until December 1996 -- the end of the class period. As a result of the disastrously late introduction of the V-Link, which defendants originally promised would be shipped in August 1996, but was not actually shipped until after November 19, 1996 -- Yes! reported sales of only $69 million for the year and reported losses of over $12 million. Moreover, to avoid earlier detection of its serious product development failings Yes! had suffered throughout 1996, the defendants falsified Yes!'s financial statement for the quarter ended September 30, 1996. The quarterly revenue figures were intentionally overstated by approximately 30%, or more than $7.0 million. ¶75.

Ultimately, defendants' arguments amount to nothing more than an attack on the merits of plaintiffs' allegations of fact. In so arguing, however, defendants ignore the factual disputes which may not properly be resolved on a motion to dismiss, and virtually ignore recent Ninth Circuit precedent which rejects most of the arguments raised by defendants. See Cooper v. Pickett, No. 95-55657, 1997 U.S. App. LEXIS 39330 (9th Cir. Jan. 30, 1998). In Cooper, the court found financial fraud, allegations sufficient, where, as here, plaintiff identified customers with whom the phony transactions occurred, the types of phony transactions, their timing by quarter and their impact on the financial statements and concluded that "[c]omparable precedent does not require greater detail." Id. at *30.

After Cooper, the only real issue is whether the Complaint adequately alleges scienter, i.e., pleads with "particularity facts giving rise to a strong inference that the defendant[s] acted with the required state of mind." 15 U.S.C. §78u-4(b)(2). The scienter requirement under §10(b) may be satisfied by pleading defendants' motive and opportunity to commit fraud, or facts giving rise to a strong inference that defendants knew the truth or acted consciously or recklessly in disregard of the truth. See, e.g., Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297, 1309 (C.D. Cal. 1996). Here, there is no question that scienter is adequately pled since plaintiffs allege defendants committed financial fraud. Courts have also found sufficient allegations of motive where, as here, the defendants' wealth was tied directly to the company's financial and stock performance.

Despite defendants' rhetoric, the Private Securities Reform Act of 1995 ("PSLRA") was not intended to hinder meritorious suits such as this one. Nothing about this suit bears any indicia of the types of suits which prompted passage of the PSLRA. This Complaint was not filed by a "professional plaintiff," but rather by seven investors who have never before brought a class action suit and who collectively purchased 115,000 shares of Yes! common stock, and the filing of the Complaint was not based merely on a stock drop. Rather, the Complaint reflects the significant pre-filing investigation of counsel and includes specific and repeatedly sustained factual allegations of financial fraud and securities law violations.

II. STATEMENT OF FACTS

Yes! is a publicly traded toy manufacturer and was founded by defendant Donald D. Kingsborough ("Kingsborough") in 1992, shortly after having caused his earlier founded publicly-traded toy company, Worlds of Wonder to file bankruptcy. ¶4. Since its inception, Yes! has suffered substantial losses. ¶5. Despite the fact that Yes! was continually losing money (suffering losses of over $21 million in 1994 alone) Kingsborough was able to continue to raise money through private placements of debt and equity because the Company was generating substantial revenue ($36.4 million by 1994) and Kingsborough was promising that Yes! would become profitable by 1995. Id. Yes! completed no less than nine rounds of debt and/or equity financing between January 1993 and April 1995. By late Spring 1995, many of the investors who had collectively invested over $40 million in Yes!'s money-losing operations were unwilling to continue to invest more money in Yes!. Likewise, defendants Kingsborough and Sol Kershner ("Kershner") were unwilling to put additional funds into Yes!'s money-losing operations. Id. Consequently, Kingsborough sought to take Yes! public, so that the defendants could raise a large sum of money from the public and provide the venture investors with a viable exit strategy. Defendants' public offering was designed to accomplish the following: (a) raise the millions of dollars necessary to fund Yes!'s operations for another 6-12 months; (b) minimize their own liability for the unfounded promises that were made by them to induce the venture investors to invest in Yes!; (c) create a liquid market for Yes! stock so that they could later sell their own Yes! stockholdings; (d) reduce their own exposure for Yes!'s debt which they had personally guaranteed; and (e) receive repayment on loans they had made to Yes!.

With these motives in mind, the defendants took Yes! public in June 1995, selling 2.5 million units in a $9.5 million public offering underwritten by GKN Securities ("GKN"). The price of the Company's stock did not, however, perform as defendants had promised the venture investors it would and, in fact, traded below $10 per share. ¶6. Finally, after years of repeated losses, in February 1996, Yes! reported substantial earnings of almost $4.3 million for the year ended December 1995. Even this, however, did not invigorate the price of Yes! stock. This caused defendants Kingsborough and Kershner grave concern as they collectively held almost 500,000 shares and options to purchase Yes! shares. ¶¶6, 30. Defendants realized that the various investors who had financed Yes!'s operations during the years prior to the IPO with over $40 million were getting restless, as defendants Kingsborough and Kershner had assured them that Yes! would perform well once it received the substantial cash infusion from the Company's 1995 IPO and subsequent warrant conversion. Id. In order to allow Yes!'s venture investors to register and/or dump substantial amounts of their Yes! stock, and importantly, get V-Link (the Company's flagship product for 1996) on store shelves in time to exploit the 1996 holiday season, the defendants embarked on the scheme and wrongful course of business complained of herein. ¶¶5-6, 30.

Just after the end of the 1995 Christmas selling season, defendants instituted a calculated strategy designed to lure investors and inflate the price of the Company's stock by promises that Yes! would introduce several new products during 1996 and that the new toy lines would cause the Company to achieve revenue of at least $100 million. ¶¶1, 6. On March 29, 1996, the beginning of the Class Period, when the Company released its 1995 Annual Report on Form 10-K, Yes! stated that it "does not currently anticipate any delays in the shipment of its 1996 products." ¶37. Thereafter, as a necessary part of their plan to inflate the price of Yes! stock, defendants engaged in one-on-one conversations with securities analysts and told them that the Company's new, but not yet available for sale toys, including the V-Link, Power Penz and T.R.A.P.S. products, would cause Yes! to grow exponentially, achieving over $100 million in revenue for 1996 and EPS of $0.75. ¶¶10, 41. Because timely delivery of a product is so critical in the toy industry and to investors defendants told analysts, that the Company would roll-out the V-Link by August 1996 -- which is just in time to meet the beginning of Christmas retail demand. Id. These analysts, based on what they were told by defendants, also reported on April 17, 1996 that "[f]or the first time, the company now has the financial wherewithal to plan and deliver large sales increases," and pointed to the anticipated arrival of V-Link, Power Penz and T.R.A.P.S. products during 1996 to meet the promises made by Yes!. ¶42.

Only weeks later in a press release announcing first quarter 1996 results and in its 1995 Annual Report, dated April 24, 1996 Yes! reiterated that its newest under development toys would "contribute significantly" to 1996 results. ¶¶44, 46. These statements were materially misleading because: (a) Yes! had been and was then experiencing serious problems producing working models of V-Link; (b) Yes! had no working production model of the V-Link; (c) Yes! had not conducted marketing and customer testing of the product; (d) the Company knew it needed at least six more months to develop the V-Link which Yes! knew would miss much of the holiday selling season; and (e) the Company was then experiencing delays in the receipt of volume shipments of operable Power Penz and T.R.A.P.S. products from its Hong Kong manufacturers. ¶48(a)-(g).

Despite these facts, on June 5, 1996, defendant Kingsborough made a presentation to securities analysts in New York and again stated that the V-Link would be ready in August 1996 and thus be shipped in time to fully exploit the 1996 holiday selling season, that Yes! would sell hundred of thousands of the V-Links before year end, and that Yes! would report more than $100 million in revenue for 1996. ¶49. Specifically, Kingsborough stated:

Id.

Defendant Kingsborough had no basis for the statements made during the June 5, 1996 conference call because he knew: (a) the V-Link was not yet functional; (b) Yes! was not close to commencing volume production of the V-Link; (c) Yes! had not yet obtained FCC approval; (d) the Company was not 3-4 weeks early in completing development of and was not experiencing a less than 1% defect rate in manufacturing V-Link, Power Penz and T.R.A.P.S. products; and (e) the Company's increased expenses would make it impossible for the Company to achieve its margin forecasts. ¶51(a)-(g). Kingsborough also knew that in May 1996, Yes! had breached its licensing agreement with Kids One -- a company from whom it had licensed its most successful toy concept, the YAK BAK in 1996 -- by ceasing to make royalty payments. Defendants never disclosed Yes!'s default of the licensing agreement and the threat of the loss of its single most successful product line. ¶76.

In late July defendants repeated to analysts that the Company would achieve over $100 million in revenue for 1996, knowing and intending that these statements would be reported publicly. ¶53. Following these conversations with analysts, GKN issued a report on July 29, 1996 reiterating defendants' forecast of revenue of $105 million and $0.75 per share for 1996. Id. These forecasts were baseless and the defendants knew it. ¶55. The Company still did not have the capability to ship working versions of the V-Link, Power-Penz and T.R.A.P.S products, volume production could not commence in time to fully exploit the 1996 holiday selling season, the Company had not yet obtained FCC approval for the V-Link, and Yes!'s Chinese manufacturing facilities were unable to generate functioning V-Link units within the cost range established by defendants thus seriously undermining Yes!'s future earnings. ¶55(a)-(g).

Thereafter, between late July and October 23, 1996, defendants were silent. Defendants kept quiet despite knowing that the V-Link did not ship in August 1996 as promised, and that continuing quality and production delays threatened the Company's ability to ship the V-Link before Christmas. Even when they finally did speak again on October 23, 1996, Yes! failed to reveal the truth. Yes! ignored the earlier promises it made about the August launch date and simply stated "we . . . look forward to commencing shipments of the V-Link, . . . which we expect to take place in October." ¶56. These, like their other statements, were materially false and misleading because Yes! was still unable to ship any V-Link units and even if shipped immediately would not be in time to fully exploit the 1996 holiday selling season, Yes! had been unable to ship projected quantities of its Power Penz and T.R.A.P.S. products because of persistent production problems, and Yes!'s September 30, 1996 financial results were overstated due to having improperly recording over $7.0 million in revenue. ¶60(a)-(h). Ultimately, the V-Link did not ship until late November 1996, which was months too late to exploit the 1996 holiday season. ¶58.

The defendants were so late that when they finally had a product, Yes! shipped the V-Link before obtaining FCC approval in order to at least have it in the stores in time for part of the holiday season. ¶8. Defendants knew, however, that FCC approval was necessary and that a likely penalty for such wilful violation was an injunction against further sales. ¶¶38, 48, 51, 60. Indeed, the FCC did just that and shut down sales of the V-Link just days after learning of Yes!'s violation. ¶3.

On December 12, 1996, a San Francisco news columnist revealed that Yes! had not obtained FCC approval for V-Link and that sales had been halted. ¶¶3, 9, 61. These revelations stunned the securities market and the price of Yes! stock tumbled as much as 20%, closing at $6-3/4 per share compared to the Class period high of over $16 per share. Thereafter, on February 6, 1997, the defendants reported Yes!'s disastrous fourth quarter and fiscal 1996 results, and revealed that Yes! had suffered a loss of $12.6 million on only $69 million in revenue compared to the repeated statements that the Company would "conservatively" achieve 1996 revenue and earnings of $100 million and $7.5 million, respectively. Ultimately, in addition to the problems with the V-Link, defendants admitted that manufacturing defect rates prevented the Company from achieving volume shipments of Power Penz and T.R.A.P.S. in time for the 1996 holiday season. ¶¶10, 63-64.

Since these revelations the V-Link has been dropped from Yes!'s product line. ¶65. The reason is simple: the same product defendants claimed during the class period would sell by the "hundreds of thousands" and would have a 1-2 mile range by 1997, was a fiasco. ¶¶49, 65. Defendant Kingsborough later admitted that "[w]e messed up and we know it." ¶66.

In their desperation to avoid detection for the false misleading statements they had made during the Summer of 1996 about the status of the V-Link and Yes!'s other toy lines, defendants caused Yes! to misstate its financial results for the quarter ended September 30, 1996. ¶¶67-77. Specifically, defendants improperly recognized revenue on contracts with the Company's largest customers, Wal-Mart and Toys-R-Us, when such transactions were wholly contingent and thus not "sales" within the meaning of GAAP. ¶¶72-73. Yes! granted its largest customers unlimited return privileges and other contingencies as inducement to accept larger amounts of product than they would otherwise purchase. ¶¶73-74. These other contingencies included a provision that there was no obligation to pay for the product unless and until it was resold and resulted in an overstatement of at least $7.0 million or 30% of revenues for the September 30, 1996 Quarter, and overstated net income by $3.0 million or over 300%. ¶¶74-75.

Defendants' accounting manipulations also included causing Yes! to materially understate its accrued royalties. ¶76. Specifically, in May 1996, Yes! breached its licensing agreement with Kids One by ceasing to make royalty payments. By October 1996, Kids One filed an arbitration claim. Despite its failure to pay royalties to Kids One on a contract responsible for 46% of the Company's sales in 1996, Yes! did not accrue the cost or disclose the amount as a contingency. Thus, defendants caused Yes! to issue financial statements that overstated earnings before taxes by at least an additional $500,000. Id.

Despite these well-pleaded facts and details, defendants urge dismissal. Their motion should be denied.

III. LEGAL STANDARD ON A MOTION TO DISMISS

The standards under Rule 12(b)(6) remain unchanged under the PSLRA. Powers v. Eichen, 977 F. Supp. 1031, 1036-37 (S.D. Cal. 1997); Marksman, 927 F. Supp. at 1301; Cherednichenko v. Quarterdeck Corp., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,108, at 90,141 (C.D. Cal. 1997); In re ValuJet, Inc. Sec. Litig., 984 F.Supp. 1472, 1476 (N.D. Ga. 1997). This Court must accept the Complaint's allegations as true and draw every reasonable inference in favor of sustaining plaintiffs' case and the defendants' version of the facts must be rejected. Fed. R. Civ. P. 12(b)(6); Gila River Indian Community v. Waddell, 967 F.2d 1404, 1413 (9th Cir. 1992). "What Rule 12(b)(6) does not countenance are dismissals based on a judge's disbelief of a complaint's factual allegations." Neitzke v. Williams, 490 U.S. 319, 327 (1989).

IV. THE AMENDED COMPLAINT PLEADS WHY DEFENDANTS' STATEMENTS WERE FALSE WHEN MADE

The PSLRA requires that plaintiffs' §10(b) Complaint identify and state: (a) each statement alleged to have been misleading; and (b) the reason or reasons why the statement is misleading. 15 U.S.C. §78u-4(b)(1). In this respect, the PSLRA adopted Ninth Circuit law, which has long required a plaintiff to identify the false statements and explain why they were false:

In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) ("GlenFed I"). Here, the Complaint describes in detail the alleged misstatements and states the reasons why the statements were misleading when made, readily satisfying the requirements for pleading fraud under the PSLRA.(2)

The Complaint identifies two types of misleading statements: (a) misrepresentations of existing facts or conditions; and (b) misleading forward-looking statements. In GlenFed I, 42 F.3d at 1548, the Ninth Circuit addressed the pleading of falsity for statements of existing facts, and explained that falsity can be pled by alleging inconsistent facts:

Similarly, with respect to forward-looking statements, a plaintiff can allege falsity by including "`allegations of specific problems undermining a defendant's optimistic claims [that] suffice to explain how the claims are false.'" Cooper, 1997 U.S. App. LEXIS 39330, at *26.

Here, plaintiffs plead what actionable statements the defendants made (¶¶37, 41-42, 44, 46, 49, 52, 56 and 58), when, where and by whom they were made (id.), and the reasons why each was materially false and misleading, (¶¶38, 48, 51, 55, 60 and 68-78). Plaintiffs respectfully submit that such detail satisfies plaintiffs' pleading burden.

Two important Ninth Circuit decisions demonstrate how the GlenFed I falsity standard, effectively adopted by the PSLRA, should be applied to uphold allegations of falsity similar to those of the Complaint here. In Warshaw v. Xoma Corp., 74 F.3d 955 (9th Cir. 1996), the defendants had represented that "'everything [was] going fine,'" (id. at 957), and had "assured [investors] that their principal product, E5, was in perfect shape with respect to safety and FDA approval." Id. at 960. The plaintiffs, however, alleged that defendants knew, "based on its clinical studies, that E5 might not work and would never be approved by the FDA." Id. at 959. The Ninth Circuit found that these allegations explained what was "false or misleading about [defendants'] statement." Id. at 960. Here, similarly, plaintiffs have alleged that defendants misled investors into believing that everything was going fine with the Power Penz, T.R.A.P.S. and V-Link products. Plaintiffs have sufficiently alleged falsity by alleging that Yes! experienced significant design and manufacturing problems delaying the introduction of the Company's products. ¶¶38, 48, 51, 55, 60.

In Cooper, 1997 U.S. App. LEXIS 39330, at *26, the complaint alleged that the defendants had "misrepresented the state of its overseas operations and its overall prospects to stock analysts, who passed that misinformation on to the market." Id. Defendants had assured investors that "Merisel was in good shape due to its acquisition of Computerland, its reorganization overseas, and its positive sales figures." Id. at *24. The company also had represented that "business was strong" and "demand was strong." Id. at *5-6. To satisfy the falsity requirement, plaintiffs in Cooper alleged, inter alia, that "the Computerland acquisition had plunged Merisel deep into debt, its overseas operations continued to lose money, and it was improperly recognizing revenue from shipments of unordered goods." Id. at *24-25. The Ninth Circuit held that whether defendants' statements were actually false or misleading is a question for the trier of fact (id. at *17), and that "`falseness is clear from the facts that had existed all along and were later revealed.'" Id. at *25. See also Warman, 1998 U.S. Dist. LEXIS 2009, at *5 (falsity alleged by identifying unresolved supply problem).

Here, plaintiffs have alleged that defendants misled investors into believing that Yes!'s new products were being successfully designed and manufactured, that demand for the new products was strong at the retail level, that they would be shipped in time to fully exploit the 1996 holiday selling season and that the new products would add significantly to Yes!'s financial strength, earnings and revenue growth. ¶¶37, 41-42, 44, 46, 49, 52-53, 56. Plaintiffs have sufficiently alleged falsity by alleging that defendants in fact were unable to timely develop or manufacture the Power Penz, T.R.A.P.S. and V-Link products, that retailers such as Wal-Mart and Toys-R-Us were reluctant to order products before being assured that they could be successfully manufactured, and Yes! was improperly recognizing revenue on orders loaded with contingencies and price concessions. ¶¶38, 48, 51, 55, 60, 72-75. Thus, the allegations in this case are at least as particular as those sustained by the Ninth Circuit in Cooper and Warshaw.

Despite the details pled regarding why the complained of statements were false and misleading, defendants suggest that more is needed. Defendants assert that plaintiffs must provide even more detail about the internal reports Yes!'s management regularly received which notified them of the alleged problems. Defendants' argument, however, ignores the specificity of the pleadings and is not required under Ninth Circuit law. In Cooper, 1997 U.S. App. LEXIS 39330, at *30, the Ninth Circuit "did not require a specific number or a precise time frame" and did not require plaintiffs, in alleging falsity, to identify specific internal documents. "A plaintiff may 'draw on contemporaneous statements or conditions' to demonstrate why statements were false when made." Fecht v. Price Co., 70 F.3d 1078, 1083 (9th Cir. 1995), cert. denied, 517 U.S. 1136 (1996); see also GlenFed I, 42 F.3d at 1548-49; Warshaw, 74 F.3d at 960; Powers, 977 F. Supp. at 1037. In In re Bausch & Lomb Sec. Litig., 941 F. Supp. 1352, 1361 (W.D.N.Y. 1996), the court explained, "[i]t is true that the complaint does not point to any specific documents . . . . 'We will not demand clairvoyance from pleaders. Corporate entities who jealously guard the names of their clients, or other information, as they should, would be forever victorious in their motions to dismiss under Rule 9(b) if courts demanded the level of specificity at issue in this stage of a case.'"

V. DEFENDANTS HAD A DUTY TO DISCLOSE MATERIAL FACTS WHICH UNDERMINED THEIR FORWARD-LOOKING STATEMENTS

Defendants' arguments about materiality and actionability are easily rebutted. Defendants argue, for example, that Yes! did not say the V-Link would be shipped in August, had no duty to denigrate its products, had no duty to perform market analysis, had no duty to disclose low perceived value for an $80 teenager targeted toy phone, did not hide the poor price/performance fact, and had no duty to prematurely predict failure or to give legal advise. First, defendants' assertion that the Complaint "does not plead that Yes! had predicted that V-Link would be released by August" and therefore defendants had no duty to disclose that V-Link was not ready by August 1996 is factually inaccurate. Defendants' motion to dismiss ("Defs' Mem."), at 20. The Complaint specifically alleges that Kingsborough stated during the June 5, 1996 conference call with analysts that the V-Link would be ready for shipping in August. ¶49. Thus, the entirety of defendants' argument on this point is baseless.

Similarly frivolous is defendants' arguments that the public knew of the price and performance of the V-Link since the product was on retailers shelves. Defs' Mem. at 18. The V-Link never was delivered to stores for sale however, until after November 19, 1996 -- or just 21 days before the end of the nine month long class period.

More importantly, the Complaint is not charging defendants with an obligation to denigrate its own products or a duty to prematurely predict failure. The Complaint charges that Kingsborough chose to speak about V-Link's timing of delivery, and assured the market that Yes! would sell hundreds of thousands of V-Link's and that as a result analysts' revenue and earnings estimates of $100 million and $7.5 million were "conservative." ¶¶7, 49. Having so spoken, defendants assumed a duty to also disclose that Yes! was having trouble getting V-Link to work, had not yet obtained FCC approval, could not and did not make the August shipping date, and the Company had not conducted consumer testing and marketing.

Similarly, whether FCC approval should have been affirmatively disclosed is not the point. The point is that defendants knew Yes! needed such approval, and that such approval could not be obtained until a working model was available for testing and that the approval process would force further and costly delays. ¶¶8, 38, 48, 51, 60. Moreover, because Kingsborough also chose to speak about Yes!'s other new toy products and represented that Yes! had a less than 1% manufacturing defect rate (¶49), he had a duty to alert the market that Yes! was not obtaining working versions of Power Penz and T.R.A.P.S. products and therefore would be unable to ship these products during the 1996 holiday season, and that the Company was not achieving and could not achieve a less than 1% defect rate. ¶¶26, 51.

VI. THE COMPLAINT ADEQUATELY PLEADS FACTS GIVING RISE TO A STRONG INFERENCE OF SCIENTER

The PSLRA requires a federal securities complaint to "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).

For most §10(b) violations -- including allegations of financial fraud -- "the required state of mind" remains knowledge or recklessness. See Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-70 (9th Cir. 1990) (en banc). The PSLRA did not change this. Marksman Partners, 927 F. Supp. at 1309 n.9. For certain specifically defined and limited forward-looking projections -- and subject to many specified exceptions -- the PSLRA raised "the required state of mind" for §10(b) liability to actual knowledge. 15 U.S.C. §78u-5(c).

The "strong inference" standard of §21D(b)(2) is drawn from Second Circuit cases holding that a §10(b) plaintiffs must raise a "strong inference" of scienter and can do so either by pleading facts showing motive and opportunity for committing fraud, or by pleading circumstantial facts showing reckless or conscious behavior.(4) Most courts agree that this is the PSLRA pleading standard.(5)

The allegations in the Complaint of defendants Kingsborough's and Kershner's positions as Yes!'s Chief Executive Officer and Chief Financial Officer/Chief Operating Officer, respectively, their significant day-to-day control of Yes!'s operations, their responsibility for making the false and misleading statements at issue, and their acknowledgement of the importance of the V-Link and other new products in the Company's bottom line combined with the allegations of false and misleading statements and financial forecasts, raise a strong inference of scienter. See, e.g., Breard, 941 F.2d at 143-45; Cosmas, 886 F.2d at 12-13. This element is satisfied if the complaint's factual allegations "constitute strong circumstantial evidence that Defendants either recklessly disregarded or knew the challenged statements were materially false or misleading." Epstein, ¶90,157, at 90,462. In Epstein, the court denied a motion to dismiss on scienter grounds:

Id.

In Cosmas, 886 F.2d 8, cited by Epstein, plaintiffs alleged that defendants, who were directors of Inflight Services, Inc., knew that a significant segment of the company's business -- sales to China -- was threatened by China's new import restrictions. The court held those allegations gave rise to an inference of defendants' "conscious" misconduct. Id. at 13. The Cosmas court, explaining the scienter standard, stated:

Id.

It is inconceivable that the individual defendants, as the top two executives of Yes!, did not know the true impact of Yes!'s significant manufacturing and design problems associated with key products, or the financial losses these problems would cause. Epstein, ¶90,157, at 90,463 ("This basis alone -- knowledge of technological incompatibility -- is sufficient to support a strong inference that Defendants knew or recklessly disregarded the false or misleading nature of their statements . . . ."). Given that defendants were intimately involved in the business and financial decisions vital to Yes!, including the manufacturing and marketing of Power Penz, T.R.A.P.S. and V-Link, and regularly received and reviewed internal corporate documents, including budgets, operating plans and reports of actual operations and manufacturing (¶¶24, 25, 27), the Complaint raises a strong inference that the defendants actually knew their statements were false, or else acted with a reckless disregard of the truth. In Ouaknine -- where defendants allegedly made false promises and projections and concealed adverse financial data -- the court stated "[i]t is difficult to imagine how such events could have occurred if the defendants who controlled them had not actually intended to defraud." 897 F.2d at 81.

Defendants assert that the Complaint negates an inference of scienter because Yes! increased its advertising and marketing costs which is "consistent only with a belief that Yes! would sell large quantities of V-Link in 1996." Defs' Mem. at 10. This argument misses the point. Plaintiffs do not allege that defendants never believed the V-Link would be shipped in 1996. The Complaint charges only that the defendants knew or recklessly disregarded, based on the information they regularly received from their engineers and executives, that the V-Link would not be ready in time to fully exploit the 1996 selling season. ¶¶1, 8, 38, 48, 51, 60. It is not inconsistent to allege that defendants, who knew of delays, simultaneously increased advertising and marketing expenses to stimulate consumer interest even before the product shipped. ¶¶51, 55, 60. Moreover, advertising and marketing expenses are often increased and budgeted months before such advertising actually appears. Thus, securing advertising space and time as early as May-July for a product not ready for shipment until months later would not be inconsistent with knowing that the product would not ship in August.

The strong inference of scienter in this case in reinforced by the timing of defendants' statements. The First Circuit recently held, in evaluating allegations that optimistic statements or opinions were fraudulent, that "we need not turn a blind eye to the obvious: the proximity of the date of the allegedly fraudulent statements and omissions to . . . the date on which disclosure was eventually made." Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1224 (1st Cir. 1996). Thus, PSLRA decisions recognize that the close proximity in time between the revelations of the bad news and the last of the false positive statements -- here just 16 trading days -- "is circumstantial evidence that the Defendants knew that their optimistic statements were false." Powers, 977 F. Supp. at 1039 (three weeks). "The temporal proximity between an alleged misstatement and the later disclosure of inconsistent information can provide some circumstantial factual support of the defendants' scienter." Friedberg v. Discreet Logic, 959 F. Supp. 42, 51 (D. Mass. 1997). Prior to the December 12, 1996 disclosure of Yes!'s failure to acquire FCC approval for the V-Link, defendants made false and misleading statements as late as November 19, 1996 in Yes!'s SEC filing. ¶58.

In addition to the above detailed indicia of defendants' reckless and conscious misbehavior, the Complaint alleges defendants' scheme to boost Yes!'s stock price through improper revenue reporting. ¶¶68-78. These allegations, combined with plaintiffs' other allegations of scienter, are more than sufficient to raise a strong inference of scienter. For example, Smith v. Network Equip. Techs., Inc., [1990-1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶95,659 (N.D. Cal. 1990), recognized such an inference:

Id. at 98,092-93 (quoting Hollinger, 914 F.2d at 1569).

Recent PSLRA decisions have also held that allegations of financial fraud by top corporate executives (no more specific than the allegations here) constitute strong circumstantial evidence of conscious misbehavior.(6) Furthermore, a strong inference of actual knowledge is recognized in such circumstances because corporate books do not "cook" themselves! Accounting manipulations of the extensive sort alleged here are, of necessity, the product of conscious behavior by high level executives. Quarterdeck, 90,108, at 90,142.(7)

Defendants assert that plaintiffs' allegations of scienter must fail as a matter of law because defendants did not engage in insider selling. Defs' Mem. at 9-11. Defendants confuse a necessary element of §10(b) liability -- scienter -- with just one of many factors that can be plead to establish this element -- insider trading. Insider trading is not an element of a securities fraud claim, nor is insider trading necessary to establish scienter. As the Ninth Circuit has expressly held, "[w]hile `allegation[s] of unusual insider trading by defendants immediately preceding the disclosure of negative news' may be . . . a characteristic of a `typical securities fraud class action,' they are not required." In re Wells Fargo Sec. Litig., 12 F.3d 922, 931 (9th Cir. 1993).(8)

In addition to the circumstantial evidence of knowledge and recklessness, the Complaint pleads facts reflecting that defendants actually knew their statements were false and misleading. Specifically, plaintiffs allege that Defendants knew that the forward looking statements made during the class period were false and misleading based on their review of internal engineering, manufacturing, market survey, periodic sales and performance reports, accounting and other internal corporate reports, accounting and other internal corporate reports which revealed that:

¶79.

In addition to pleading facts showing reckless and conscious behavior, plaintiffs' Complaint also raises a strong inference of scienter by pleading defendants' motive and opportunity to commit the securities violations.

Defendants' motivations are clear. Defendants Kershner and Kingsborough had the motive to commit and participate in the violations, as these defendants were under extreme pressure from the venture investors to boost the price of Yes! stock as the venture investors had been funding Yes!'s money-losing operations with approximately $40 million and desperately viewed the Yes! IPO as the mechanism which would finally allow them to recapture their investment in the Company by selling Yes! shares into the open market. Consequently, when the price of Yes! stock stagnated in early 1996, the venture investors made their displeasure very clear to Kingsborough. Defendants Kershner and Kingsborough also had another more personal motive -- a substantial portion of their wealth consisted of Yes! stock and options to purchase Yes! stock. ¶30.(9)

Opportunity is also obvious. Each defendant controlled Yes!'s public statements and made the misrepresentations complained of. ¶¶24-27, 34.

VII. NEITHER THE PSLRA'S SAFE HARBOR PROVISION NOR THE BESPEAKS-CAUTION DOCTRINE IMMUNIZE DEFENDANTS' FALSE AND MISLEADING FORWARD-LOOKING STATEMENTS

Of the nine statements complained about, defendants urge dismissal of only in five claiming that as a matter of law, the forward-looking statements in these SEC filings and press releases are immunized from liability. Even if defendants' motion on this point is granted, which for the reasons set forth below it should not be, the case will proceed. Specifically, defendants' motion for immunity does not affect the statements made on April 17, 1996 (¶42), April 23, 1996 (¶44), June 5, 1996 (¶49), and July 29, 1996 (¶53). Moreover, the safe-harbor in which defendants seek sanctuary, has no application to the non-forward-looking statements about which plaintiffs complain, some of which are included in the SEC filings and October 23, 1996 press release which also contain forward-looking statements. For example, plaintiffs' allegations of false financial statements reported in Yes's October 23, 1996 press release are obviously not forward-looking.

With respect to the forward-looking statements which defendants do seek immunity for, no protection exists here. A statement qualifies for safe harbor protection only if it is identified as a "forward-looking statement" (15 U.S.C. §78u-5(c)(2)(A)(i)) and is accompanied by language indicating that actual results could differ materially from those projected, and states meaningful cautionary statements identifying important factors that could cause actual results to differ from those in the forward-looking statements. See 15 U.S.C. §78u-5(c)(1)(A). Whether a disclosure is "meaningful" or not is a question of fact not properly resolved at this stage. Hoffman v. Avant! Corp., No. C 97-20698 RMW, 1997 U.S. Dist. LEXIS 21823, at *4 (N.D. Cal. Dec. 16, 1997).

Moreover, none of the forward-looking statements were accompanied by "meaningful" cautionary language and thus fail to qualify for projection for this reason alone. Specifically, defendants March 29, 1996 "risk disclosure" statement included in Yes!'s 1995 10-K was itself a misleading statement since it failed to include statements identifying important factors already known to defendants, including for example, the already-existing development and quality control problems with the V-Link, the Company's inability to conduct market and customer research, and the lack of a working model of the V-Link. ¶¶38-40.

Similarly, Yes!'s 1995 Annual Report, filed with the SEC on April 23, 1996 used the same misleading statement of "risks" that failed to provide Yes! 1995 10K with safe harbor protection. ¶46. Again, defendants did not identify the important factors they were already aware of, including the on-going production and development problems with V-Link and Power Penz products, that the V-Link was still just a prototype that could not yet be mass produced, that V-Link was little more than a high-priced walkie-talkie device that could not be produced with the range or features promised, and that defendants were unable to obtain volume shipments of Power Penz or T.R.A.P.S. products from Yes!'s Hong Kong manufacturers. ¶48.

Defendants' October 23, 1996 press release was equally defective and contained only a boilerplate statement that the press release contained "forward-looking statements," but did not identify any of the adverse factors which could, and which already were materially and adversely affecting Yes!'s business. For example, defendants failed to disclose that the V-Link was still experiencing severe production and quality problems making it impossible to fully exploit the holiday selling season and that Yes! was already far below its internal revenue and earnings projections due to problems with the V-Link, Power Penz and T.R.A.P.S. products. ¶60.(10)

Defendants' reliance on the "bespeaks caution doctrine" is equally unavailing. The "bespeaks-caution" doctrine is "nothing more than `the unremarkable proposition that statements must be analyzed in context,'" and justifies granting a motion to dismiss only in rare circumstances. Fecht, 70 F.3d at 1082. See also Zuckerman, order at 13.(12) The inclusion of only "some" cautionary language cannot support a finding, as a matter of law, that statements were not misleading. Fecht, 70 F.3d at 1082; Warshaw, 74 F.3d at 959; Gray, 82 F.3d at 883-84. Despite this, defendants ask the Court to dismiss the Complaint in its entirety, including the allegations of falsification of financial statements, under the so-called "bespeaks-caution" defense. Defs' Mem. at 17. Defendants' argument is contrary to law.

First, the supposed warnings made by Yes! in its SEC filings were little more than generic boiler-plate warnings that failed to disclose the adverse factors already known to defendants which were actually impacting Yes!'s business during the class period. Yes! was not merely facing the abstract "risks" described by the Company, but was already experiencing development, manufacturing and quality control problems with the V-Link, T.R.A.P.S. and Power Penz products. Moreover, Yes! was already in violation of loan covenants contained in its Accounts Receivable Management agreement and falsely reporting revenue. But as one court succinctly put it, "'[t]o warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.'" In re Convergent Tech. Sec. Litig., 948 F.2d 507, 515 (9th Cir. 1991); accord Hanon, 976 F.2d at 502-03.

Defendants' reliance on Worlds of Wonder, 35 F.3d at 1413-15, and In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996), cert. denied, ___ U.S. ___, 117 S. Ct. 1105 (1997), is misplaced. Unlike those cases, where the challenged forward-looking statements were contained in the document that itself contained explicit warnings directly related to the allegedly misrepresented matter, i.e., a prospectus, this case involves a series of allegedly false and misleading statements made over a period of eight months in various contexts, i.e., press releases, analysts conference calls, analysts presentations, private communications with analysts, none of which were accompanied by cautionary language. This case is like Fecht, Provenz, Gray and Warshaw, in which the courts rejected, on a motion to dismiss, the assertion that cautionary language in SEC filings excused, as a matter of law, the false and misleading impression created by a series of optimistic statements made to the market which were themselves unaccompanied by warning language.

The Ninth Circuit has held that where, as here, the purported cautionary language and the alleged misrepresentations appear in separate documents, the bespeak caution defense cannot result in a Rule 12b(6) dismissal. In Fecht, the Ninth Circuit stated:

70 F.3d at 1082 (9th Cir. 1995) (emphasis in original).

Furthermore, true cautionary language, unlike the language at issue here, must truthfully address specific risks, and must exhaust the capacity of positive false statements to mislead investors,(13) and must disclose, as defendants failed to do here, then-existing adverse facts. See In re Apple Computer Sec. Litig., 886 F.2d 1109, 1115 (9th Cir. 1989); Wells Fargo, 12 F.3d at 926; Gray, 82 F.3d at 885-86; Hanon, 976 F.2d at 502-03; Kaplan, 49 F.3d at 1373-74. Thus, the cautionary language in Yes!'s SEC filings cannot provide a bespeaks-caution defense at this stage since they are both largely boilerplate and false and misleading in themselves.

VIII. THE COMPLAINT ADEQUATELY ALLEGES LOSS CAUSATION AND PLAINTIFFS' INJURY

Defendants finally assert that even if plaintiffs prove the allegations of financial fraud and misrepresentations none of that matters because Yes! was able to conceal many of these facts until after the Company's stock price first tumbled in December 1996. In essence, defendants seek to reward themselves for failing to disclose the truth, and in so doing misstate the seminal test to establish "loss causation." Loss causation is established as an element of a §10(b) claim "if [plaintiffs] have shown that the price on the date of purchase was inflated because of the misrepresentation." Knapp v. Ernst & Whinney, 90 F.3d 1431, 1438 (9th Cir. 1996) (loss causation present if disclosure of the truth would have reduced the proper valuation of the investment). See also Zuckerman, order at 16. For each plaintiff, the Complaint asserts that they were damaged by purchasing Yes! stock artificially inflated by defendants' misrepresentations. ¶22.

Defendants assert, as if it matters, that there is no allegation that Yes! sales suffered because of defective products or that Yes! ever disclosed manufacturing defects. Defs' Mem. 22. Plaintiffs do allege that Yes!'s dismal results, contrasted with the repeated statements of expected record results, was directly the result of Yes!'s inability to manufacture and ship in a timely fashion its new products. ¶62. The Complaint also alleges that Yes! was unable to introduce its new V-Link, Power Penz and T.R.A.P.S. products in time for the 1996 holiday season because of high defect rates of product received from China. ¶¶48, 55, 60. As alleged in the Complaint, defendants themselves disclosed that they were having trouble shipping working versions of Power Penz and T.R.A.P.S. products. ¶63. Thus, these allegations directly contradict defendants' characterization of the Complaint.

Defendants also assert that loss causation is lacking because plaintiffs do not allege that excessive advertising and marketing expenses were the cause of Yes!'s poor performance. Again, defendants miss the point. In allegations conveniently ignored by defendants, the Complaint alleges that defendants knew that Yes!'s performance would be negatively impacted when it could not ship new product during the holiday season because of the increased advertising and marketing expenses. In other words, because defendants knew that Yes! could not ship working versions of the Company's new products, they should have disclosed the inevitable consequences of the increased advertising and marketing expenses, i.e., increased losses. ¶51(f).

IX. CONCLUSION

For all of the foregoing reasons, plaintiffs respectfully request that the Court deny defendants' Motion to Dismiss the Complaint.

DATED: April 2, 1998

Respectfully submitted,



MILBERG WEISS BERSHAD

HYNES & LERACH LLP

WILLIAM S. LERACH

KIRK B. HULETT

HENRY ROSEN

TOR GRONBORG







______________________________

KIRK B. HULETT



600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058



LAW OFFICES OF LAWRENCE G.

SOICHER

LAWRENCE G. SOICHER

300 Park Avenue, 20th Floor

New York, NY 10022

Telephone: 212/980-7000



LAW OFFICES OF RICHARD

D. KRANICH

RICHARD D. KRANICH

120 Broadway, Suite 1016

New York, NY 10271-0074

Telephone: 212/608-8965



KAUFMAN, MALCHMAN, KIRBY

& SQUIRE, LLP

JEFFREY H. SQUIRE

IRA M. PRESS

919 Third Avenue, 11th Floor

New York, NY 10022

Telephone: 212/371-6600



Attorneys for Plaintiffs

YES!\BMG06944.brf

DECLARATION OF SERVICE BY FEDERAL EXPRESS

PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2)

I, the undersigned, declare:

1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Diego, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 600 West Broadway, Suite 1800, San Diego, California 92101.

2. That on April 6, 1998, declarant caused true copies of PLAINTIFFS' OPPOSITION TO DEFENDANTS' MOTION TO DISMISS to be delivered to Federal Express for service on each of the parties listed on the attached Service List on April 2, 1998.

3. That declarant caused this document to be forwarded to the following designated Internet site at:

http://securities.milberg.com

I declare under penalty of perjury that the foregoing is true and correct. Executed this 2nd day of April, 1998, at San Diego, California.



______________________________

KAROLIN SICKLES

1. "¶__" refers to the First Amended Consolidated Complaint for Violation of the Securities Exchange Act of 1934 filed on November 10, 1997 ("Complaint").

2. Contrary to defendants' conclusory assertion, the allegations in the Complaint are made on the basis of plaintiffs' counsel's investigation, not on "information and belief." ¶88. See Warman v. Overland Data, No. 97cv833 JM (JFS), 1998 U.S. Dist. LEXIS 2009, at *9 (S.D. Cal. Feb. 20, 1998) ("as plaintiffs have pled their allegations based on investigation of the attorney and not upon information and belief, the complaint need not state with particularity all facts on which the belief is formed"); Quarterdeck, ¶90,108, at 90,142 fn.3; Epstein v. Itron, Inc., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,157, at 90,460 (E.D. Wash. 1998). Thus, the PSLRA's heightened standards for "information and belief" pleading do not apply here.

3. Emphasis is added and citations are omitted unless otherwise stated.

4. Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994); Turkish v. Kasenetz, 27 F.3d 23, 28 (2d Cir. 1994); Breard v. Sachnoff & Weaver, Ltd., 941 F.2d 142, 143-44 (2d Cir. 1991); Ouaknine v. MacFarlane, 897 F.2d 75, 79-82 (2d Cir. 1990); Cosmas v. Hassett, 886 F.2d 8, 12-13 (2d Cir. 1989); Ross v. A.H. Robins Co., 607 F.2d 545, 556 (2d Cir. 1979).

5. The discussions by the courts in Marksman and Epstein of the legislative history of the PSLRA -- to which this Court respectfully is referred (see Marksman, 927 F. Supp. at 1308-12; Epstein, ¶90,157, at 90,457-62), demonstrate that the legislative history does not support the view that Congress abrogated Second Circuit law which recognized the motive and opportunity and reckless behavior pleading tests for scienter. See also Zuckerman v. Foxmeyer Health Corp., No. 3:96-CV-2258-T, Order at 9 (N.D. Tex. Mar. 31, 1998) attached as Ex. A to the Declaration of Tor Gronborg filed concurrently herewith.

6. In re Wellcare Management Group Sec. Litig., 964 F. Supp. 632, 640 (N.D.N.Y. 1997) (accepting as true allegations that corporate executive "had knowledge of, condoned and/or encouraged [] the deliberate overstatement of earnings by a number of means," sufficient to plead intent); Marksman, 927 F. Supp. at 1314 ("The facts that the allegedly overstated revenues constituted such a significant portion of Chantal's total revenues and that the allegedly misleading financial and other public statements bore defendants' imprimatur tend to support the conclusion that the defendants acted with scienter."); Page v. Derrickson, No. 96-842-CIV-T-17C, 1997 U.S. Dist. LEXIS 3673, at *14 (M.D. Fla. Mar. 24, 1997) (scheme employed to materially misstate company's liabilities and revenues sufficient to plead scienter), In re Health Management Sec. Litig., 970 F. Supp. 192, 204 (E.D.N.Y. 1997) (allegations that corporate insiders approved of plans of financial fraud, and directed it be put into effect, satisfies this test); Gross v. Medaphis Corp., 977 F. Supp. 1463, 1472 (N.D. Ga. 1997) (allegations that corporate insiders engaged in a pervasive accounting fraud sufficiently alleged scienter); Rehm v. Eagle Fin. Corp., 954 F. Supp. 1246, 1252 (N.D. Ill. 1997) (accounting fraud alleged, complaint sustained).

7. The presence or absence of a financial restatement after the fraud is revealed is irrelevant. Violations of GAAP are established where plaintiff's complaint "points to specific quarters and specific customers" for the improper revenue recognition. Cooper, 1997 U.S. App. LEXIS 39330, at *30.

8. See also Hanon v. Dataproducts Corp., 976 F.2d 497, 507 (9th Cir. 1992) (scienter established despite that the "officers did not sell their stock during the class period"); Cosmas, 886 F.2d at 12-13 (scienter requirement satisfied where no insider sales were alleged); Deutsch v. Flannery, 823 F.2d 1361, 1365 n.3 (9th Cir. 1987) (the opportunity to sell options raises inference of scienter); Quarterdeck, ¶90,018, at 90,143 (strong inference of scienter raised where no insider sales alleged); Epstein, ¶90,157, at 90,462-63 (same); Gross, 977 F. Supp. at 1472 (same); Wellcare, 964 F. Supp. at 638-40 (same); Harvey M. Jasper Retirement Trust v. Ivax Corp., 920 F. Supp. 1260, 1268 (S.D. Fla. 1995) (same).

9. In a post-PSLRA case, where no insider trading was alleged, increasing the value of defendants' individual holdings was a sufficient motive for the individual defendants to file false reports with the SEC in order to artificially inflate the value of the company's shares. STI Classic Fund v. Bollinger Indus., No. CA 3:96-CV-0823-R, 1996 U.S. Dist. LEXIS 21553, at *5-6 (N.D. Tex. Oct. 25, 1996), adopted as a finding of the court, [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,539 (N.D. Tex 1996).

10. Defendants claim that the safe harbor provision applies to defendant Kingsborough's June 5, 1996 presentation to securities analysts. In so arguing, defendants depend on the declaration of Kingsborough filed Aug. 18, 1997 to contradict the allegations of the Complaint and improperly attempt to introduce "facts" outside of the Complaint. Thus, such effort is improper on a motion to dismiss. Cooper, 1997 U.S. App. LEXIS 39330, at *14. See also Plaintiffs' Motion to Strike Declaration of Donald D. Kingsborough, filed concurrently herewith.

However, even if the Kingsborough declaration is considered, it fails to bring the false statements made during the June 5, 1996 securities analysts conference under the protection of the safe harbor. Kingsborough simply asserts in his declaration that it is his "practice" to provide cautionary language to the audience "at the outset of [securities analysts or media] presentations." This is not sufficient. Even if he had made the introductory comment, an oral forward-looking statement is immunized from liability only if the "particular oral statement" is identified as a forward-looking statement and it is stated that actual results might differ materially from those projected in that forward-looking statement. 15 U.S.C. §78u-4. Kingsborough's declaration does not provide any evidence, let alone establish, whether Kingsborough actually prefaced each of the particular forward-looking statements at issue by the requisite cautionary language. Indeed, plaintiffs question the accuracy of the declaration which is precisely why "evidence" is not properly considered at this stage.

11. The bespeaks-caution defense is available only for forward-looking statements and cannot result in the dismissal of the present tense misrepresentations alleged at ¶¶36-67 in the Complaint. Shaw, 82 F.3d at 1213; Gray v. First Winthorp Corp., 82 F.3d 877, 883 (9th Cir. 1996); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413 (9th Cir. 1994).

12. This is so because defendants must "prove that the information that was withheld or misrepresented" in specific documents and was "'"transmitted to the public with a degree of intensity and credibility sufficient to effectively counterbalance any misleading impression created by insider's one-sided representations."'" Provenz v. Miller, 102 F.3d 1478, 1492-93 (9th Cir. 1996), cert. denied, ___ U.S. ___, 118 S. Ct. 48 (1997). Whether the truth has "credibly entered the market and dissipated the effects of the misstatements," is a question of fact that requires evidence of the total mix of information in the market. Basic Inc. v. Levinson, 485 U.S. 224, 249 & n.29 (1988); see also Kaplan v. Rose, 49 F.3d 1363, 1378 n.3 (9th Cir. 1994) (reversing summary judgment because "the ultimate resolution of this question is an issue for trial"); Hanon, 976 F.2d at 503-04 (same).

13. See Provenz, 102 F.3d at 1493; Gray, 82 F.3d at 885-86; Kaplan, 49 F.3d at 1373-74.