MELVIN R. GOLDMAN (BAR NO. 34097)
JORDAN ETH (BAR NO. 121617)
TERRI GARLAND (BAR NO. 169563)
MORRISON & FOERSTER LLP
425 Market Street
San Francisco, California 94105-2482
Telephone: (415) 268-7000

Attorneys for Defendants
HYBRID NETWORKS, INC., CARL S.
LEDBETTER, DAN E. STEIMLE, HOWARD L.
STRACHMAN, JAMES R. FLACH, STEPHEN E.
HALPRIN, GARY M. LAUDER, and DOUGLAS M.
LEONE

Pursuant to paragraph 2 of this Court's Standing Orders, defendants Hybrid Networks, Inc. ("Hybrid), Carl. S. Ledbetter, Dan E. Steimle, Howard L. Strachman, James R. Flach, Stephen E. Halprin, Gary M. Lauder, and Douglas M. Leone ("the Hybrid Defendants") submit the following Separate Summary of Argument in Support of the Hybrid Defendants' Reply Memorandum in Support of Motion to Dismiss Plaintiffs' Complaint:

First, plaintiffs do not meet the Reform Act's requirement that they plead with particularity facts creating a strong inference of scienter. All plaintiffs say is that defendants had a motive to commit fraud because they wanted Hybrid to go public. Cases directly on point, however, hold that the desire to go public creates no inference of scienter. See, e.g., Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir. 1994); Geiger v. The Soloman-Page Group, Ltd., 933 F. Supp. 1180, 1189-90 (S.D.N.Y. 1996). In addition, plaintiffs ignore the fact that none of the defendants personally profited, as they sold no shares in Hybrid's public offering. See, e.g., In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1427 (9th Cir. 1994) (officers' minimal stock sales negate scienter). Plaintiffs other allegations also fail to create a strong inference of scienter. See, e.g., Zeid v. Kimberley, 973 F. Supp. 910, 924-25 (N.D. Cal. 1997) (rejecting scienter allegations based on access to internal documents); In re Software Toolworks Inc. Sec. Litig., 50 F.3d 615, 627 (9th Cir. 1994) (rejecting scienter allegations based on GAAP violations).

Second, plaintiffs fail to allege falsity with particularity. Instead, they allege the same sort of circumstances one would expect to see in any company that unexpectedly finds its customers unable to pay their bills. To those allegations, plaintiffs add conclusory assertions about "side agreements" and violations of GAAP. Plaintiffs fail to specify who drafted the alleged "side agreements," what they said, when they were drafted or who at Hybrid approved or even knew about them. The complaint should be dismissed for this additional reason. See, e.g., Hockey v. Medhekar, No. C-96-0815 (MHP), 1998 U.S. Dist. LEXIS 4297, at *20 (N.D. Cal. Mar. 31, 1998) (dismissing accounting fraud allegations where "plaintiffs plead[ed] no factual support for their allegations that [defendant's] customers had a right to return product").

Third, plaintiffs ignore the precise cautions contained in Hybrid's prospectus. In the almost identical circumstances of In re Stac Elec. Sec. Litig., 89 F.3d 1399, cert. denied, 117 S. Ct. 1105 (1997), the Ninth Circuit held that the "bespeaks caution" doctrine shielded the company from liability. Where, as here, the prospectus contains pages of warnings about payment terms, the company's losses, and the immaturity of the industry, plaintiffs cannot claim that anyone was misled.

Fourth, as to standing for their 1933 Act claims, all plaintiffs do is offer two out-of-circuit opinions that ruled contrary to this Court's decision in Lilley v. Charren, No. C-95-3450 SI, slip op. (N.D. Cal. Mar. 24, 1997). In essence, they are asking this Court to reconsider its ruling, even though no intervening appellate authority has been issued and the overwhelming weight of the cases reaches the same result as Lilley.

The Complaint fails for additional reasons. For example, the claims against the directors fails because the Complaint does not allege that any of them participated in the preparation of the challenged documents, nor does it allege any facts showing that the group pleading exception applies here. Plaintiffs' claims under sections 15 and 20(a) also fail because they fail to plead with particularity how the individual defendants controlled Hybrid. See Arthur Children's Trust v. Keim, 994 F.2d 1390, 1397 (9th Cir. 1993).

For all these reasons, the Court should dismiss the Complaint.

Dated: August 21, 1998

Source: File to epost from Morrison & Foerster LLP