BORIS FELDMAN, State Bar # 128838
DOUGLAS J. CLARK, State Bar # 171499
CYNTHIA A. DY, State Bar # 172761
DAVID SLOSS, State Bar # 189954
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone: (650) 493-9300

Attorneys for Defendants
RATIONAL SOFTWARE CORPORATION AND
PAUL D. LEVY

NOTICE OF MOTION AND MOTION

MEMORANDUM OF POINTS AND AUTHORITIES

INTRODUCTION

STATEMENT OF FACTS

ARGUMENT

I. THE COMPLAINT DOES NOT PLEAD SCIENTER

II. THE COMPLAINT DOES NOT ADEQUATELY PLEAD "PERSONAL BENEFIT"

III. THE COMPLAINT FAILS TO STATE A CLAIM UNDER SECTION 20A OF THE SECURITIES EXCHANGE ACT

IV. THE COMPLAINT FAILS TO STATE CLAIMS UNDER THE CALIFORNIA CORPORATIONS CODE

CONCLUSION

Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir. 1995)

Burlington Indus., Inc. v. Edelman, 666 F. Supp. 799 (M.D.N.C. 1987),
     aff'd [1987 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 93,339
     (4th Cir. Jun. 22, 1987)

Chan v. Orthologic Corp., No. Civ-96-1514-PHX-RCB (D. Ariz. Feb. 2, 1988)

Daisy Sys. Corp. v. Finegold, [1989 Tr. Binder] Fed. Sec. L. Rep.
     (CCH) ¶ 94,520 (N.D. Cal. Sept. 19, 1988)

Dirks v. S.E.C., 463 U.S. 646 (1983)

Energy Factors Inc. v. Nuevo Energy Co., [1992 Tr. Binder]
     Fed. Sec. L. Rep. (CCH) ¶ 96,883 (S.D.N.Y. Jul. 7, 1992)

Elkind v. Liggett & Myers, Inc., 635 F.2d 156 (2d Cir. 1980)

Erdos v. Securities and Exch. Comm'n., 749 F.2d 507 (9th Cir. 1984)

Howard Gunty Profit Sharing v. Quantum Corp.,
     No. 9620711 SW 1997 WL 514993, (N.D. Cal. Aug. 14, 1997)

In re Cady, Roberts & Co., 40 S.E.C. 907 (1961)

In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994)

In re Rasterops Corp. Sec. Litig., [1992-93 Tr. Binder] Fed. Sec. L. Rep. (CCH)
     ¶ 97,445 (N.D. Cal. Jan. 6, 1993)

In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746 (N.D. Cal. 1997)

In re VeriFone Sec. Litig., 11 F.3d 865 (9th Cir. 1993)

In re VeriFone Sec. Litig., 784 F. Supp. 1471 (N.D. Cal. 1992), aff'd, 11 F.3d 865
     (9th Cir. 1993)

In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994)

Jackson Nat'l Life Ins. v. Merrill Lynch & Co., 32 F.3d 697 (2d Cir. 1994)

Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993)

S.E.C. v. Davis, 689 F. Supp. 767 (S.D. Ohio 1988)

S.E.C. v. Maio, 51 F.3d 623 (7th Cir. 1995)

State Teachers Retirement Bd. v. Fluor Corp., 576 F. Supp. 1116 (S.D.N.Y. 1983)

Utah State Univ. of Agric. and Applied Science v. Bear, Stearns & Co.,
     549 F.2d 164 (10th Cir. 1977)

Zeid v. Kimberley, 930 F. Supp. 431 (N.D. Cal. 1996)

Securities Exchange Act of 1934

§ 10(b), 15 U.S.C. §78j(b)

§ 20A, 15 U.S.C. § 78t-1(a)

§ 20A, 15 U.S.C. § 78t-1(c)

§ 78u-4(b)(2)

Cal. Corp. Code § 25402

Cal. Corp. Code § 25502

Cal. Corp. Code § 25504.1

Fed. R. Civ. P. 9(b)

Fed. R. Civ. P. 12(b)(6)

Securities Exchange Act of 1934, Rule 10b-5
     17 C.F.R. 240.10b-5

H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. (1995)

H.R. No. 100-910 (1988), 1988 U.S.C.A.A.N.
     (102 Stat.) 6043

Notice is hereby given that on September 28, 1998, at 9:00 a.m., before the Honorable Jeremy Fogel, that defendants Rational Software Corporation ("Rational" or the "Company") and Paul D. Levy (collectively, the "Rational Defendants") shall move for an order dismissing plaintiff's Consolidated Amended Class Action Complaint for Violation of the Federal Securities Laws (the "Complaint"). The Rational Defendants request that the Court dismiss the Complaint with prejudice for failure to plead fraud with particularity under Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act of 1995 (the "Reform Act"); for failure to plead a strong inference of scienter with the particularity required by the Reform Act; and, for failure to state a claim upon which relief can be granted under Fed. R. Civ. P. 12(b)(6).

The Complaint begs a critical question: why?

The Complaint alleges that on October 8, 1998, Paul Levy, Rational's Chief Executive Officer, had a telephone conversation with Cowen & Company, Inc. ("Cowen") securities analyst Rehan Syed during which Mr. Levy conveyed material inside information about Rational. The Complaint avers that Syed then tipped unspecified Cowen customers, who traded based on that information. The Complaint also claims that when the information was made public, Rational's stock declined by $5.13. Although the Complaint alleges that Mr. Levy owned 1.8 million shares of Rational stock, it does not allege that Mr. Levy sold a single share. Mr. Levy thus saw the value of his Rational stock decline by more than $9 million during the Class Period.

Why did Mr. Levy allegedly selectively disclose information to Syed? To state a claim, the Complaint must answer that question. It does not.

For this reason, the Complaint fails to plead scienter in accordance with the Reform Act's stringent pleading requirements. Specifically, the Complaint has failed to plead with particularity facts giving rise to a strong inference that Mr. Levy acted with scienter.

For the same reason, the Complaint fails to allege adequately that the Rational Defendants breached a duty. To do so, plaintiffs must allege with particularity that the Rational Defendants received a "personal benefit" in exchange for the information supposedly given to Syed. The Complaint contains only a vague description of the supposed benefits sought by the Rational Defendants.

The Complaint is defective in other ways. For example, the Complaint fails to state a claim under Section 20A of the Securities Exchange Act because it does not allege a predicate violation of Section 10(b), and does not state a claim against a trading "tippee".

Finally, the Complaint fails to state a claim under California Corporations Code Sections 25402 and 25502. The Complaint fails to allege privity, an essential element of a claim under those statutes.

Cupertino-based Rational is a software company that develops, markets, and supports a comprehensive solution that automates the component-based development of computer software. The putative class period in this Complaint is the period of time on October 8, 1997 between approximately 11 a.m. (the alleged time of the telephone conversation between Messrs. Levy and Syed) and 2:18 p.m. (the time trading in Rational stock was halted).¹ Complaint ¶ 39.

According to the Complaint, sometime in the morning of October 8, 1997, Mr. Levy (Rational's Chief Executive Officer) had a telephone conversation with Cowen's Syed. Id. at ¶ 13. The Complaint alleges that Mr. Levy told Syed that Rational's earnings for the third and fourth quarters of Rational's 1998 fiscal year (ending March 31, 1998) and all of Rational's 1999 fiscal year, would be lower than the consensus analyst estimates. Id.

The Complaint further alleges that Syed tipped Cowen customers as to this purportedly material inside information. The Complaint also alleges that unspecified Cowen customers began selling based on that information. Id. at ¶¶ 14-15. Rational's stock price began to decline late in the morning of October 8. Id. at ¶ 15. At around 2 p.m., the Dow Jones News Service reported: "Rational Off; Cowen Says Co. Tells Analysts to Lower Views." Id. at ¶ 17.

At 2:18 p.m., NASDAQ halted trading in Rational stock. Id. at ¶ 16. After the close of trading, Rational held a conference call with securities analysts. The Complaint asserts that during the call Mr. Levy disclosed to the market that Rational was adjusting downward its earnings guidance for fiscal years 1998 and 1999. Id. at ¶ 20.

Rational's stock price, which was $14 13/16 at the close of the market on October 7, closed at $12.50 prior to the trading halt on October 8. On October 9, the stock closed at $9.06. Id. at ¶ 23. The next day, plaintiff filed the original complaint in this action. As of the date of this Memorandum, Rational's stock price was $16.19.

I. THE COMPLAINT DOES NOT PLEAD SCIENTER

To sustain their claim for insider trading under Sections 10(b) and 20A, plaintiffs must successfully plead that Mr. Levy acted with scienter. See Dirks v. S.E.C., 463 U.S. 646, 663 n.23 (1983) (noting in an insider trading case that "[s]cienter . . . is an independent element of a Rule 10b-5 violation"); In re VeriFone Sec. Litig., 11 F.3d 865, 872 (9th Cir. 1993) (holding that if plaintiffs "failed to allege an actionable independent underlying violation of the [Securities Exchange Act of 1934], they similarly cannot maintain a claim under Section 20A.") This Complaint cannot survive because plaintiffs fail to meet the heightened scienter pleading requirements of the Reform Act.

In passing the Reform Act, Congress recognized that "[n]aming a party in a civil suit for fraud is a serious matter. Unwarranted fraud claims can lead to serious injury to reputation for which our legal system effectively offers no redress." H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. at 41 (1995) (attached as Exhibit A to the Declaration of Douglas J. Clark ("Clark Decl.") filed herewith). To ensure that each person's reputation is protected from baseless fraud accusations, the Reform Act requires plaintiffs to plead, with particularity, facts that give rise to a strong inference that each defendant acted with scienter. Securities Exchange Act of 1934, 15 U.S.C. § 78u-4(b)(2). Gone is the old standard allowing scienter to be averred generally without any factual basis, "simply by saying that scienter existed." In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1545, 1547 (9th Cir. 1994).²

As an initial matter, the Complaint actually refutes an inference of scienter by demonstrating how any selective disclosure harmed Mr. Levy. The Complaint alleges that "Levy had either shares or options to acquire shares equal to approximately 1.8 million shares of Rational Software, or about 2% of the Company's total shares." See Complaint ¶ 27. The Complaint does not (and could not) allege that Mr. Levy sold his Rational stock on October 8. The price of Rational's stock declined from $15.0625 per share (when the market opened on October 8, 1997) to $9.93 per share (when the market closed on October 9, 1997). Id. at ¶¶ 12, 23. By holding his Rational stock through October 8-9, Mr. Levy thus saw the value of his holdings decline by $9.23 million. Id. at ¶¶ 12, 23, 27.

Plaintiffs ask this Court to believe that Mr. Levy intentionally tipped Syed, causing a precipitous decline in Rational's stock price, at a cost to Mr. Levy of more than $9 million. This is absurd. The fact that Mr. Levy held on to his stock refutes any inference of scienter. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1427-28 (9th Cir. 1994) (holding that insider's sale of 50,000 of 970,000 shares negates inference of scienter); Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995) (dismissing claims against a director, despite his sale of approximately 380,000 shares, holding that the sales did not create a strong inference because the director retained a large number of shares); Chan v. Orthologic Corp., No. Civ-96-1514-PHX-RCB, slip op. at 24 (D. Ariz. Feb. 2, 1998) (Clark Decl. Ex. B) (holding that scienter was not adequately plead; "many of the individuals who had large holdings in the company and sold stock during the period in question retained more shares than they sold. Accordingly, these individuals suffered greater financial losses than gains.")

The Complaint's only allegations of scienter stem from the Rational Defendants' alleged violation of securities laws, exchange rules and some non-binding guidelines. The Complaint asserts that Levy was (or should have been) aware of (1) Section 10(b) and SEC Rule 10b-5; (2) an NASD rule regarding public disclosure; (3) Section 18 of the NASD Rules of Fair Practice (an analogue to Rule 10b-5); and, (4) guidelines published by the National Investor Relations Institute. See Complaint ¶¶ 33-36. The Complaint then concludes that Levy must have acted with scienter because he knowingly or recklessly violated those rules or guidelines. This is inadequate for three reasons

First, "[a] claim of violations of the NASD, NYSE and AMEX rules does not take the place of the scienter requirement." Utah State Univ. of Agric. and Applied Science v. Bear, Stearns & Co., 549 F.2d 164, 169 (10th Cir. 1977) (holding that scienter is not established based on allegation that defendant violated, among other rules, an NASD Rule of Fair Practice). See also Erdos v. Securities and Exch. Comm'n, 742 F.2d 507, 508 (9th Cir. 1984) (holding that "A NASD violation does not require that the dealer act with scienter.").³

Second, plaintiffs' scienter allegations are conclusory. Plaintiffs allege that Mr. Levy knew of the securities laws exchange rules and that he violated those rules. Complaint ¶ 36. Plaintiffs merely assume, however, that if Mr. Levy violated the rules, he must have done so intentionally. Plaintiffs allege no facts which support a strong inference of an intentional or even reckless violation of the various laws or rules. The Reform Act forbids such an assumption of fraudulent intent. See Silicon Graphics, 970 F. Supp. at 757; Howard Gunty Profit Sharing v. Quantum Corp., No. 96 20711 SW 1997 WL 514993, *7 (N.D. Cal. Aug. 14, 1997) (Clark Decl. Ex. C) ("the Reform Act makes it clear that olfactory speculation alone is insufficient to support a claim for securities fraud. At a minimum, the Reform Act requires some allegations of gills and fins before Plaintiff can cast the nets of discovery").

Finally, the Complaint fails to allege that the Rational Defendants disclosed information to Syed with the knowledge that Syed would use the information to his advantage. See Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 168 (2d Cir. 1980) (holding that "[a]bsent evidence from which it may be inferred that the tipper knows or should certainly appreciate that the disclosure could reasonably be expected to be used by the tippee to his advantage, the essential state of mind for 10b-5 liability is lacking."). The Complaint alleges only that the Rational Defendants communicated material non-public information. Complaint ¶ 36. That is not enough to state a claim for fraud.

Because the Complaint fails to plead scienter, an essential element of plaintiffs' Section 10(b) and 20A claims, the Complaint should be dismissed.

II. THE COMPLAINT DOES NOT ADEQUATELY PLEAD "PERSONAL BENEFIT"

The Complaint should be dismissed on an independent ground: it fails to allege adequately that the Rational Defendants would receive a "personal benefit" from the purported selective disclosure. A selective disclosure securities fraud claim requires an allegation that the insider defendants breached a duty to the corporation and its shareholders by failing to publicly disclose material non-public information and instead enabled specific "tippees" to trade based on that information. Dirks, 463 U.S. at 653 (citing In re Cady, Roberts & Co., 40 S.E.C. 907 (1961)).

The Supreme Court in Dirks recognized that without limits on actionable selective disclosure, there could be "an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market." Id. at 658. Therefore, the Supreme Court established a test for determining whether an insider has breached his duty by "tipping" non-public information:

[T]he initial inquiry is whether there has been a breach of duty by the insider. This requires courts to focus on objective criteria, i.e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings.

Id. at 663 (emphasis added).

The Supreme Court identified two circumstances which could justify an inference that an insider received a direct or indirect personal benefit: a relationship between the insider and his tippee that "suggests a quid pro quo from the latter, or an intention to benefit the particular recipient"; or a situation where "an insider makes a gift of confidential information to a trading relative or friend." Id. at 664. Plaintiff does not plead any fact suggesting a quid pro quo or intent to benefit Syed or Cowen; the "gift" scenario is obviously inapplicable here. The Complaint does not allege the existence of a personal (e.g., friendly or familial) relationship among the Rational Defendants and Cowen or Syed. See S.E.C. v. Maio, 51 F.3d 623, 632 (7th Cir. 1995) (tip was gift from trading friend); S.E.C. v. Davis, 689 F. Supp. 767 (S.D. Ohio 1988) (chairman tipped his two sons).

To survive this motion, plaintiffs must allege the "personal benefit" with particularity. See Neubronner v. Milken, 6 F.3d 666, 668 (9th Cir. 1993) (affirming dismissal of insider trading claim for failure to plead fraud with particularity); Worlds of Wonder, 35 F.3d at 1420 (applying Rule 9(b) to insider trading allegations). Plaintiffs do not state with particularity that the Rational Defendants received or expected to receive any pecuniary gain in return for the alleged tip. Dirks, 463 U.S. at 663; compare Complaint ¶ 29 with Burlington Indus., Inc. v. Edelman, 666 F. Supp. 799, 814 (M.D.N.C. 1987), aff'd, [1987 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 93,339 (4th Cir. Jun. 22, 1987) (stating that tipper stood to gain 5 - 10% of net profits from sale of stock by tippee). Indeed, the Complaint's own allegations show that the value of Mr. Levy's Rational holdings declined more than $9 million as a direct result of his supposed "tip."⁴

The Complaint alleges only that the Rational Defendants expected to obtain three vague benefits in exchange for providing information to Cowen's Syed: (1) continued publication of reports by Cowen and Syed recommending Rational stock; (2) access to market information about unspecified other high-technology companies; and (3) an undefined "reciprocal favor." Complaint ¶ 29. These allegations do not satisfy the Supreme Court's Dirks test.

None of these vague benefits suffices to show that the Rational Defendants received or expected to receive a "reputational benefit that will translate into future earnings." Dirks, 463 U.S. at 663. The Complaint is entirely silent as to how either Rational's or Mr. Levy's "reputation" was enhanced by virtue of the alleged communication with Cowen's Syed.

These allegations also do not plead with particularity a relationship between the Rational Defendants on the one hand, and Cowen or Syed, on the other, which suggests that the Rational Defendants intended "to benefit the particular recipient" (Cowen/Syed). Id. at 664 (emphasis added). For example, the Complaint alleges that the Rational Defendants sought the benefit of continued analyst coverage by Cowen. Complaint ¶ 29. That allegation is no more than a facile statement of the obvious fact that Rational, like all public companies, desired analyst coverage. The Complaint lacks particular allegations about why Levy would favor Cowen over the many other investment banks who covered Rational. The Complaint also asserts that the Rational Defendants sought the benefit of "market information" possessed by Cowen. Id. But plaintiffs do not identify what information the Rational Defendants wanted or obtained or explain how that information may have benefitted the Rational Defendants. Finally, the Complaint speculates that the Rational Defendants could expect some future "reciprocal favor," but does not identify the purported favor. Id.

The dearth of detail in the Complaint stands in stark contrast to cases in which courts have held that a personal benefit was adequately alleged. For example, in Energy Factors Inc. v. Nuevo Energy Co., [1992 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 96,883 at 93,606 (S.D.N.Y. Jul. 7, 1992), the court held that the complaint alleged a relationship between the tipper company official and a tippee investment bank which could support a Section 10(b) claim. The Energy Factors court stated:

As part of a "close and continuing relationship" between the two defendants, Southcoast provided Nuevo assistance in marketing its stock during the initial months of Nuevo's existence. Specifically, one month after Nuevo went public, Southcoast produced a highly favorable report on Nuevo, which Nuevo distributed to 2,000 brokers. Later in the fall, [Southcoast banker] Myers introduced Gerry and other members of Nuevo management to some Southcoast institutional investors in Europe. The substantial assistance Southcoast is alleged to have rendered to Nuevo gave Nuevo a motive to return the favor in some way.

Id. at 93,610. The court held that plaintiffs properly alleged personal benefit by pleading particular facts that distinguished the tipper/tippee relationship from generic descriptions of common commercial relationships. The Complaint in this action is bereft of such facts. Accordingly, the Complaint fails to adequately plead that the Rational Defendants received a direct or indirect personal benefit in return for the supposed "tip." The Complaint should be dismissed.

III. THE COMPLAINT FAILS TO STATE A CLAIM UNDER SECTION 20A OF THE SECURITIES EXCHANGE ACT

Because plaintiffs have not alleged a violation of Rule 10b-5, their Section 20A claim must also fail. Section 20A provides a private right of action only for insider trading in violation of other statutory provisions; there can be no Section 20A liability without an independent violation of the Securities Exchange Act. 15 U.S.C. § 78t-1(a); In re VeriFone Sec. Litig., 784 F. Supp. 1471, 1488-1489 (N.D. Cal. 1992), aff'd, 11 F.3d 865, 872 (9th Cir. 1993) (granting motion to dismiss with prejudice; insider may only violate Section 20A when independent violation of securities laws has occurred); Jackson Nat'l Life Ins. v. Merrill Lynch & Co., 32 F.3d 697 (2d Cir. 1994) ("to state a claim under § 20A, a plaintiff must plead a predicate violation of the '34 Act or its rules and regulations").

The Complaint's Section 20A claim is defective for another reason: it fails to identify any person who engaged in illegal insider trading based on "tips" from the Rational Defendants. Plaintiffs do not specify a single person or entity who actually sold Rational stock based on the information which was allegedly conveyed by Mr. Levy to Syed, and from Syed to Cowen customers. The Rational Defendants are not aware of a single insider trading case in which a plaintiff failed to identify a trading tippee.

Importantly, because the Rational Defendants did not trade any stock, they can only be liable under Section 20A "to the same extent as" any trading tippee. 15 U.S.C. § 78t-1(c) (liability "to the same extent as any person or persons liable under subsection (a) of this section to whom the communication was directed"). The legislative history of the provision explains that this limitation prevents the threat of unchecked exposure to liability from discouraging corporate disclosures:

This . . . ensures that the communicator would not be subject to potential liability for the profits gained or losses avoided by all persons who may have ultimately learned of the information. This provision is intended to ensure that the potential liability of communicators is not so enormous that it would chill legitimate communication.

H.R. No. 100-910 (1988), 1988 U.S.C.A.A.N. (102 Stat.) 6043, 6064 (Clark Decl. Ex. D) (emphasis added). Because Section 20A liability for any alleged tipper is limited to that of the trading tippees, and the Complaint here fails to identify any trading tippees, the Complaint does not state a claim against the Rational Defendants.

IV. THE COMPLAINT FAILS TO STATE CLAIMS UNDER THE CALIFORNIA CORPORATIONS CODE

As a threshold matter, to state a claim against the Rational Defendants under Corporations Code Sections 25402 and 25502 (California's insider trading statutes), the Complaint must allege that plaintiffs purchased stock directly from either Mr. Levy or Rational. Privity is an essential element of claims under Sections 25402 and 25502. Daisy Sys. Corp. v. Finegold, [1989 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 94,520 at 93,311 (N.D. Cal. Sept. 19, 1988) (Sections 25402 and 25502 "only allow recovery by a person who [bought or sold] the security from the alleged wrongdoer"); In re Rasterops Corp. Sec. Litig., [1992-93 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,445 at 96,489 (N.D. Cal. Jan. 6, 1993) (privity required under Sections 25402 and 25502); see also Cal. Corp. Code § 25502 (insider who trades on material nonpublic information only "liable to the person who purchases a security from him or sells a security to him").

Neither of the Rational Defendants, however, is alleged to have sold stock. Accordingly, the Complaint's Corporations Code claims must be dismissed. Rasterops, [1992-93 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,445 at 96,489 (dismissing claims for failure to allege privity); Daisy Sys., [1989 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 94,520 at 93,311 (same).⁵

For the foregoing reasons, the Rational Defendants respectfully request that the Court dismiss plaintiffs' Amended Complaint with prejudice.

¹ All times referred to in this Memorandum are Eastern Standard Time.

² There is a debate among district courts interpreting the Reform Act as to what constitutes a "strong inference" of scienter. Sompare In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 757 (N.D. Cal. 1997) (holding that plaintiffs "must create a strong inference of knowing or intentional misconduct") with Zeid v. Kimberley, 930 F. Supp. 431, 434 (N.D. Cal. 1996) (holding that strong inference could be satisfied by pleading facts demonstrating motive and opportunity or recklessness). This Court need not address the issue. Plaintiffs' scienter allegations fail to satisfy either interpretation of the strong inference standard.

³ Moreover, a supposed violation of non-binding guidelines issued by the National Investor Relations Institute, an advisory group for investment relations professionals, does not satisfy the scienter pleading requirement.

⁴ The fact that any purported selective disclosure would have negatively impacted Rational's stock price also distinguishes this case from State Teachers Retirement Bd. v. Fluor Corp., 576 F. Supp. 1116 (S.D.N.Y. 1983) (pre-Reform Act decision reluctantly inferring personal benefit from rise in stock price and later promotion).

⁵ Neither Rational nor Levy can be liable for aiding and abetting or conspiracy to violate Sections 25402 and 25502. See Complaint ¶ 75. The specific provision governing liability for materially assisting violations of the Corporations Code does not extend to Section 25502. See Cal. Corp. Code § 25504.1 (providing joint and several liability for "any person who materially assists in any violation" of various Corporations Code sections, not including 25502).