Stanford University Law School - Securities Class Action Clearinghouse
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
SPENCER A. BURKHOLZ (147029)
600 West Broadway, Suite 1800
San Diego, CA 92101
- and -
REED R. KATHREIN (139304)
STANLEY S. MALLISON (184181)
222 Kearny Street
San Francisco, CA 94108
- and -
KAREN T. ROGERS (185465)
355 South Grand Avenue
Los Angeles, CA 90071
Lead Counsel for Plaintiffs
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
ADOLFO MARTIN EUREDJIAN, et al.,
3COM CORPORATION, et al.,
DATE: February 5, 1999
III. ON A MOTION TO DISMISS, ALL MATTERS OUTSIDE THE COMPLAINT MUST BE EXCLUDED
TO: ALL PARTIES AND THEIR ATTORNEYS OF RECORD
PLEASE TAKE NOTICE that on February 5, 1999, at 10:00 a.m., or as soon thereafter as the matter may be heard, in the Courtroom of the Honorable Charles R. Breyer, United States District Court, Northern District of California, 450 Golden Gate Avenue, San Francisco, plaintiffs will, and hereby do, move the Court to strike and/or refuse judicial notice of Exhibits 2-4 and 20-23 to the Declaration of Kimberly A. Fonner ("Fonner Decl."), Exhibits B, C, E, F, and G to and ¶¶4, 5, and 7-9 of the Declaration of William Slakey ("Slakey Decl.") and ¶¶3-4 of the Declaration of Mark D. Michael, submitted in support of defendants' motion to dismiss and all references thereto. This counter-motion, filed pursuant to Civil L.R. 7-3(c), is based on the accompanying memorandum of points and authorities, the pleadings and papers on file in this action, and such other argument as may be presented at the hearing on the motion.
The Ninth Circuit has consistently held that a court may not consider materials beyond the complaint in deciding a motion to dismiss. Cooper v. Pickett, 137 F.3d 616, 622 (9th Cir. 1998). See also Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994); Fecht v. Price Co., 70 F.3d 1078, 1080 n.1 (9th Cir. 1995).(1) A document is outside the complaint if its contents are not alleged in the complaint, or if its authenticity is questioned. See Branch, 14 F.3d at 453-54. Even if judicial notice of matters outside the complaint is appropriate, they may not be considered for the truth of the matter asserted therein. Fecht, 70 F.3d at 1080. As the consideration of matters outside the complaint must be excluded on a motion to dismiss, all references to these documents should be stricken.
On November 5, 1998, defendants filed a motion to dismiss the Complaint. As "evidentiary" support for their Rule 12(b)(6) motion, defendants filed a Request for Judicial Notice and submitted 26 documents as exhibits to the Fonner Decl.; 7 documents as exhibits to the Slakey Decl.; and statements in the Slakey and Michael declarations regarding the content of statements made at conference calls and presentations.
Exhibits 2-4 and 20-23 to the Fonner Decl. are documents that are not referenced in the Complaint.(2) Several of the documents contain information from outside the Class Period, which runs from September 24, 1996 through February 10, 1997. These documents are:
(a) Exhibit 2: 3Com Corporation's ("3Com") Annual Report on Form 10-K for the fiscal year ended May 31, 1996;
(b) Exhibit 3: 3Com's quarterly report on Form 10-Q for the fiscal quarter ended August 31, 1996;
(c) Exhibit 4: 3Com's quarterly report on Form 10-Q for the fiscal quarter ended November 30, 1996;
(d) Exhibit 20: 3Com's 1996 Proxy Statement, dated August 20, 1996;
(e) Exhibit 21: Form 4's filed with the SEC by defendants Debra J. Engel, John H. Hart, Richard W. Joyce, Alan J. Kessler, and Janice M. Roberts (collectively, the "Individual Defendants");
(f) Exhibit 22: June 30, 1998 letter from Keith E. Eggleton to Jeffrey W. Lawrence; and
(g) Exhibit 23: July 28, 1998 letter from Keith E. Eggleton to Spencer A. Burkholz.
Exhibits B, C, E, F and G to the Slakey Decl. are documents that are not referenced in the Complaint. These documents are:
(a) Exhibit B: An edited version of a partial script of 3Com's September 24, 1996 conference call;
(b) Exhibit C: A series of slides from an American Electronic Association Conference;
(c) Exhibit E: An edited version of a partial transcript of 3Com's December 19, 1996 conference call;
(d) Exhibit F: A series of slides from a Morgan Stanley Software Services & Networking Conference; and
(e) Exhibit G: A series of slides from a 3Com Financial Analyst Meeting.
Defendants seek to use these challenged exhibits as factual evidence to rebut plaintiffs' allegations. This use is improper. Plaintiffs move to strike these exhibits and all arguments relying on the exhibits in defendants' motion to dismiss and supporting papers.
Despite these well-settled principles of law, defendants have submitted purported "edited" transcripts of September 24, 1996 and December 19, 1996 conference calls with securities analysts and "slides" presented at conferences in connection with their motion to dismiss, offering the documents to show that the requirements of the PSLRA safe-harbor were met. This attempt must fail as a matter of law.
The documents on their face raise questions regarding their authenticity and completeness and are clearly subject to material dispute. Both conference call transcripts are "edited" versions of remarks made by defendants Benhamou and Paisley. See Exs. B, E of Slakey Decl., at 1 ("These remarks have been edited."). Not included in the transcripts are any of the questions and answer sessions held with analysts. There is no proper identification of how the transcripts were prepared to test their authentication of the words spoken on the conference calls. Thus, these transcripts are not complete documents and should not be considered by the Court. Furthermore, the safe-harbor statements that supposedly prefaced the conference calls as set forth in Mr. Slakey's declaration (¶¶4, 7) and Mr. Michael's declaration (¶¶3-4), are open to question since Mr. Slakey's declaration states that it is only based on "to the best of my recollection" (¶¶4, 7) and these statements are not even reflected on the edited transcripts.
The slides submitted from the three presentations (Slakey Decl., Exs. C, F, G) that contain purported "safe-harbor" statements are also open to material dispute since Mr. Slakey can only declare that he believes it was either himself, Mr. Benhamou or Mr. Finnochio who made the safe-harbor statements at the presentations.
In addition, nowhere in the Complaint do plaintiffs refer, mention or even identify the existence of the purported transcripts or slides. As such, these documents clearly fall outside of the pleadings and, therefore, should not be considered by the Court in connection with defendants' motion to dismiss. Cooper, 137 F.3d at 623. Indeed, in Cooper, the court specifically held that such a submission, in connection with a motion to dismiss, is improper. Id. In so holding, the Court explained:
In the complaint, plaintiffs . . . [did] not expressly mention or refer to the transcripts, or even identify their existence. . . . Further, plaintiffs disputed the authenticity and accuracy of the transcripts in the district court, and objected to their use . . . . The transcripts therefore cannot be considered in ruling on the motion to dismiss.
Cooper is directly on point here. The Complaint does not mention or refer to the transcripts of the conference calls or the slides or even identify their existence. Moreover, plaintiffs dispute both the authenticity and the accuracy of the transcripts and slides. Neither has been established and, indeed, both are subject to doubt, especially considering that the transcript was prepared by an adverse party to this litigation.
Even if this Court were to find that the transcripts were authentic and accurate, however, the Court still could not consider them in connection with defendants' motion to dismiss. At trial, the transcripts would be deemed inadmissible evidence. Only the actual tape of the conference call, properly authenticated, could be considered by the fact-finder. United States v. Carter, No. 97-1351, 1998 U.S. App. LEXIS 12191, at *6-*7 (10th Cir. June 9, 1998) (citing United States v. Davis, 929 F.2d 554, 559 (10th Cir. 1991)). Defendants' transcription, at most, could be utilized by the fact-finder to assist in the understanding of the tape. Id. But even then, plaintiffs would be able to challenge the accuracy of the transcript and offer their own transcript of the conference call. Id. Thus, the transcripts of the conference calls and slides may not properly be considered in connection with defendants' motion, and any reference to the transcripts or slides, whether direct or indirect, should be stricken from defendants' moving papers and their counsel's declarations.
Defendants have submitted copies of 3Com's SEC Form 10-K for fiscal year 1996, and 3Com's SEC Forms 10-Q for the first and second quarters of fiscal year 1997 in connection with their motion to dismiss. Yet, not one of these documents was mentioned, identified or even referred to in the Complaint. As such, these documents also clearly fall outside of the pleadings and, therefore, should not be considered by the Court in connection with defendants' motion to dismiss. Schwartz v. Celestial Seasonings, 124 F.3d 1246, 1251 (10th Cir. 1997); GFF Corp. v. Associated Wholesale Grocers, 130 F.3d 1381, 1384 (10th Cir. 1997).
Moreover, to the extent that the defendants are seeking to rely on the purported risk disclosures in these documents, the documents are stale or provide boilerplate warnings at best. First, the "cautionary language" in each of the documents is copied virtually word for word from one document to the next. (See SEC filings attached to Fonner Decl., Ex. 2 (1996 10-K) at 25-27; Ex. 3 (1Q97 10-Q) at 10-12; Ex. 4 (2Q97 10-Q) at 10-11 (switching order of third paragraph only)). Cherednichenko v. Quarterdeck Corp., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,108 (C.D. Cal. 1997) (boilerplate disclosures do not "bespeak caution"). Second, the main disclosure relied upon by defendants -- that a change "in the market demand for products based on a particular technology could have a material adverse effect on [3Com's] operating results" (emphasis added) was not a meaningful disclosure since it failed to disclose that 3Com was already experiencing weak demand for its key adapter card and stackable hub business and had engaged in business practices with its distributors and resellers to hide this problem. Rubinstein v. Collins, 20 F.3d 160, 171 (5th Cir. 1994) ("[T]he inclusion of general cautionary language regarding a prediction would not excuse the alleged failure to reveal known material, adverse facts.") (emphasis added). See also In re Apple Computer Sec. Litig., 886 F.2d 1109, 1115 (9th Cir. 1989). The other disclosure relied upon by defendants -- that "aggressive pricing practices" could impact future results -- was also not meaningful since it failed to also disclose 3Com's use of price protection agreements with distributors which would negatively impact 3Com if prices declined.
Accordingly, neither 3Com's 10-K nor 10-Q's for the first and second quarters of fiscal year 1997 may properly be considered in connection with defendants' motion, and any reference to these documents should be stricken from defendants' moving papers and their counsel's declarations.
The Court should similarly refuse to consider the Individual Defendants' SEC filings or 3Com's 1996 Proxy which are submitted in support of defendants' argument that options should be included in calculating the total holdings of the Individual Defendants. These document were neither quoted, cited nor referenced in the Complaint. These documents fall outside the text of the Complaint and, therefore, any reference to them -- whether direct or indirect -- should be stricken from defendants' motion and the accompanying declarations. Schwartz, 124 F.3d at 1251.
While the Individual Defendants ask the Court to take judicial notice of their SEC Form 4 filings for purposes of their options argument, this is improper. Cooper, 137 F.3d at 622-23. Plaintiffs are entitled to have the Complaint's allegations of insider trading accepted as true. Voit v. Wonderware Corp., 977 F. Supp. 363, 374 (E.D. Pa. 1997) ("Accepting Plaintiff's figures, as we must for present purposes, the three individual defendants sold 71.9%, 14.9% and 10.6% of their holdings, respectively."); Powers v. Eichen, 977 F. Supp. 1031, 1039 (S.D. Cal. 1997) (declining to engage in the "stock option" analysis proffered by the Individual Defendants here). See Fecht, 70 F.3d at 1084 (vested stock options not considered in determining the significance of insider trading even though insiders involved had vested options which, if considered, would have resulted in stock sales being a much smaller percentage of their total stock holdings). More important, a stock option is not the equivalent of a share of common stock that is actually owned and, therefore, should not be considered as part of an individual's total stock holdings. Reporting services covering insider trading do not consider options as stock for purposes of computing an insider's total holdings of stock. In addition, a vested option does not carry the same economic risks as actual stock ownership. If a stock's price declines, the actual owner of the stock suffers a real economic loss of the money paid for the stock. The holder of a vested stock option does not lose any invested money. In many cases, the options are simply "repriced" to the stock's lower price level. E.S. Browning & Laura Jereski, In the Money: Firms With Sagging Stocks Set New 'Repricings' of Executive Options, Wall St. J., June 11, 1997, at C1 (attached as Ex. H to the Declaration of Spencer A. Burkholz in Support of Plaintiffs' Opposition to Defendants' Motion to Strike). For all of these reasons, the defendants' "options" arguments must be rejected.
Moreover, under prevailing law in this Circuit and elsewhere, this Court should not take judicial notice of the SEC filings for the purpose of establishing the facts contained therein. See also In re Sun Microsystems, Inc. Sec. Litig., No. C 89 20351 RPA, 1990 U.S. Dist. LEXIS 18740, at *5-*6 (N.D. Cal. Aug. 20, 1990) (court refused to take judicial notice of defendants' SEC filings because to do so would convert motion to dismiss into one for summary judgment); In re Wickes Cos. Sec. Litig., [1982-1983 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,055, at 95,002 (S.D. Cal. 1983) (refusing to take judicial notice of SEC filings in a motion to dismiss). A "judicially noticed fact must be one not subject to reasonable dispute." Fed. R. Evid. 201(b). The facts contained within these SEC filings, however, are subject to dispute. Initially, plaintiffs note that these documents were filed by adverse parties to this litigation. The accuracy of these filings is further called into question by the fact that corporate insiders frequently avoid, or misunderstand, their reporting requirements. See, e.g., SEC v. Sands, 902 F. Supp. 1149, 1165 (C.D. Cal. 1995), aff'd, 142 F.3d 1186 (9th Cir. 1998) (SEC granted summary judgment on CEO's failure to timely file a Form 4); SEC v. Palmer Fin. Corp., No. 88-305-NHJ, 1988 U.S. Dist. LEXIS 9216, at *7 (D.D.C. Aug. 18, 1988) (defendants ordered to file "complete and accurate" Form 4's). Consequently, these documents and, more specifically, the facts contained therein, cannot be the subject of judicial notice.
Indeed, even when courts do take judicial notice of SEC filings, they do so only to take notice of the fact that the documents exist or contain certain assertions -- not as proof of the truth of those assertions. Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991). Thus, SEC filings may not be considered on a motion to dismiss if used to prove the truth of their contents; rather, such filings may only be utilized to establish the fact that the documents were filed. See Hennessy v. Penril Datacomm Networks, 69 F.3d 1344, 1354-55 (7th Cir. 1995); Lovelace v. Software Spectrum, 78 F.3d 1015, 1018 (5th Cir. 1996). Accordingly, the decisions that have permitted judicial notice of SEC filings have done so only because the documents noticed were the very documents alleged to contain the misrepresentations at issue, and even then "not to prove the truth of their contents but only to determine what the documents stated." Kramer, 937 F.2d at 774.
In this case, the Individual Defendants' SEC filings do not contain the misrepresentations alleged in the Complaint. Instead, defendants offer these filings to prove the truth of the matters asserted therein -- that is, that the Individual Defendants owned certain options at certain prices that they did not exercise. Defs.' Mem. at 12-13. In effect, defendants ask the Court to accept their filings as factual evidence on an issue of scienter. This clearly is an improper use of judicial notice. In re Network Equip. Techs., Inc. Litig., 762 F. Supp. 1359, 1363 (N.D. Cal. 1991) (courts "should not use judicial notice to generate an evidentiary record and then weigh evidence -- which plaintiffs have not had the opportunity to challenge -- to dismiss [a] complaint"). The purpose of a Rule 12(b)(6) motion is to test the legal sufficiency of the allegations of a complaint, which determination necessarily precludes the weighing of contrary evidence and inferences that are appropriately the province of a jury to decide.
Defendants submit two letters written by defendants' attorneys to plaintiffs' counsel requesting that plaintiffs amend their Complaint before it is first reviewed by the Court (Fonner Decl., Exs. 22, 23). These letters are not referenced in the Complaint and should not be considered by the Court.
For the foregoing reasons, plaintiffs respectfully request that this Court refrain from taking judicial notice of defendants' submissions and strike the corresponding portions of the Fonner, Slakey and Michael declarations.
DATED: January 6, 1999
MILBERG WEISS BERSHAD
600 West Broadway, Suite 1800
MILBERG WEISS BERSHAD
MILBERG WEISS BERSHAD
Lead Counsel for Plaintiffs
1. The Private Securities Litigation Reform Act of 1995 ("PSLRA") does not alter the necessary exclusion of any matters outside the pleadings under Rule 12(b)(6). Like the Ninth Circuit precedents on motions to dismiss, under the PSLRA, a district court may "consider any statement cited in the complaint and any cautionary statement accompanying the forward-looking statement, which are not subject to material dispute." 15 U.S.C. §78u-5(e) (emphasis added). This language does not authorize consideration of extraneous documents submitted by defendants which are clearly subject to material dispute.
2. "Complaint" refers to plaintiffs' Complaint for Violation of the Securities Exchange Act of 1934, filed February 9, 1998.
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 January 6, 1999, declarant served PLAINTIFFS' NOTICE OF COUNTER-MOTION AND COUNTER-MOTION TO STRIKE EXHIBITS SUBMITTED IN SUPPORT OF DEFENDANTS' MOTION TO DISMISS; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF by depositing a true copy thereof in a United States mailbox at San Diego, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at:
3. That there is a regular communication by mail between the place of mailing and the places so addressed.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 6th day of January, 1999, at San Diego, California.