MILBERG WEISS BERSHAD

HYNES & LERACH LLP

WILLIAM S. LERACH (68581)

TOR GRONBORG (179109)

600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058

- and -

REED R. KATHREIN (139304)

JOHN K. GRANT (169813)

222 Kearny Street, 10th Floor

San Francisco, CA 94108

Telephone: 415/288-4545

Lead Counsel for Plaintiffs





UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION





In re SMART MODULAR TECHNOLOGIES, INC.

SECURITIES LITIGATION

__________________________________________

This Document Relates To:

ALL CASES.

__________________________________________

Master File No. C-98-20692-JW(PVT)

CLASS ACTION



DATE: May 10, 1999

TIME: 9:00 a.m.

CTRM: The Honorable James Ware



PLAINTIFFS' OPPOSITION TO DEFENDANTS'

MOTION TO DISMISS CONSOLIDATED COMPLAINT



TABLE OF CONTENTS

I. INTRODUCTION

II. ARGUMENT

III. CONCLUSION



I. INTRODUCTION

This class action is brought against Smart Modular Technologies, Inc. ("Smart Modular" or the "Company") and its senior officers for violations of §10(b) of the Securities Exchange Act of 1934 (the "1934 Act" or "Exchange Act"). Facing a collapsing market, excess inventory and notification by its largest customer that product orders would be substantially reduced, defendants issued a series of false and misleading statements regarding Smart Modular and its business prospects and operations between July 1, 1997 and May 21, 1998 (the "Class Period").

Supported by defendants' false representations, Smart Modular completed its secondary offering on September 11, 1997, selling 4,760,000 shares at $32.375 per share. ¶39.(1) Profiting from the inflated stock price, Smart Modular sold 2,821,000 shares for $91.3 million. Id. The Company's top insiders sold 1,940,000 shares for total proceeds of $62,807,500.

In total, defendants wrongfully obtained over $160 million in illegal trading proceeds. Those proceeds were extracted from innocent investors who lost tens of millions of dollars. As demonstrated by the chart below, defendants used their knowledge of Smart Modular's difficulties to dump their stock at peak prices, while at the same time falsely representing that Smart Modular continued to enjoy strong demand for its products, growing revenues and accelerating earnings:

Defendants move to dismiss plaintiffs' Complaint, arguing that: (1) the Complaint's allegations are not sufficiently detailed; (2) scienter is insufficiently alleged; and (3) defendants' boilerplate disclosures prevent liability. As shown below, these arguments are without merit.

II. ARGUMENT

Defendants cry that this suit does not meet the standard of a "typical securities fraud lawsuit,"(2) that plaintiffs fail to "cite a single internal document," Defs' Mem. at 2, that there is nothing "unusual or suspicious" about defendants' $160 million in stock sales, id., and that defendants adequately warned of the risks associated with investing in Smart Modular. Defs' Mem. at 3. What defendants don't explain is how a company that, just months earlier, conducted a stock offering on the basis of being "poised for even more spectacular growth," ¶29, based on its belief in the "fundamental size and strength of the markets we address," ¶31, could reverse its position so quickly and claim that it is plagued by inventory oversupply and expects a decline in revenues below those of the previous year. ¶72. Even assuming the best intentions, how is it that the Individual Defendants(3) were clairvoyant enough to unload $69.6 million worth of stock in this Company, in which defendants expected "significant opportunity" for growth? ¶61. The Complaint is neither illogical nor lacking in particularity.

Contrary to defendants' arguments, there is no set number of facts that must be pled. One fact is enough for §21D(b)(1), even for information and belief pleading. One fact may be enough for §21D(b)(2) pleading where it gives rise to a strong inference of scienter. And in pleading facts, there is no requirement that an evidentiary basis be alleged. That is the sole prerogative of §21D(c). Moreover, in pleading a complaint, plaintiffs need not plead facts sufficient to overcome application of the safe harbor for forward looking statements, §21E. Rather, application of the safe harbor is a summary judgment motion under which plaintiffs are entitled to discovery. See §21E(f).

Finally, the requirements of §21D(b) and (c) do not alter the standards under Rule 12(b)(6), which remain unchanged under the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737 (1995)("PSLRA"). Powers v. Eichen, 977 F. Supp. 1031, 1036-37 (S.D. Cal. 1997); Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297, 1301 (C.D. Cal. 1996). A motion to dismiss for "failure to state a claim upon which relief can be granted" pursuant to Fed. R. Civ. P. 12(b)(6) should be granted only if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Moore v. Costa Mesa, 886 F.2d 260, 262 (9th Cir. 1989). The factual allegations of a complaint must be taken as true, and the court must draw all reasonable inferences in favor of the non-movant. Gila River Indian Community v. Waddell, 967 F.2d 1404, 1413 (9th Cir. 1992); Usher v. Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). The issue is not whether plaintiffs ultimately will prevail but whether they are entitled to put forth evidence in support of their claims. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).

Section 21D(b)(1) of the 1934 Act states:

As shown below, the Complaint specifies each misleading statement and the reasons why it is misleading.

Defendants wrongly argue that the Complaint fails to specify each misleading statement. In Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997) the Ninth Circuit held that a similarly pled complaint was adequate where

Here, the Complaint identifies "what," i.e., the specific misrepresentations: (1) misleading earnings and revenue forecasts, e.g., ¶64 (estimating fiscal 1998 earnings per share ("EPS") of $1.35); see also ¶¶32, 39-40, 42-43, 45, 48, 50, 54, 69-70; (2) specific misrepresentations regarding existing demand for Smart Modular's products, e.g., ¶25 ("company is experiencing accelerating demand"); see also ¶¶28, 32, 41, 46, 50-52, 59, 64; (3) Smart Modular's expectations of future revenue growth, e.g., ¶25 ("growth rate will likely accelerate"), ¶41 ("continue to increase earnings more than 40% per annum"); see also ¶¶46-47, 64; (4) Smart Modular's sensitivity to price decreases, e.g., ¶24 ("declining component prices help"); see also ¶¶29, 32, 38; and (5) the success of Smart Modular's "options program," e.g., ¶24 ("options program . . . has ramped successfully"); see also ¶¶28, 32, 38, 50.

Similarly, the Complaint alleges "when" with specific dates and "where" these misrepresentations were made: press releases, ¶¶31, 53; roadshow presentations, ¶38; conference calls, ¶¶32, 54, 64; news interviews, ¶¶50, 60; investment conferences, ¶¶42, 49; newspaper articles, ¶¶26-27, 29, 60, 65; and analyst reports, ¶¶24-25, 28, 33-35, 40-41, 43, 45-47, 51-52, 55-59, 61, 66-67, 69-70.

Nor is it true, as defendants claim, that the Complaint fails to allege "who" made the misrepresentations. Defendant Shah separately made the misrepresentations identified in ¶¶26, 31, 49-50, 53, 60 and 65. Defendant Mullin made the misrepresentation identified in ¶65. (The statements alleged in ¶¶27 and 29 are attributed to Smart Modular. This, however, is precisely how they were reported in the financial press.)

The Complaint also alleges that defendants Shah, Krishnan and Patel made misrepresentations in joint presentations during specifically identified conference calls, roadshows and investor conferences. ¶¶32, 38, 42, 54, 64. These allegations are adequately particular.

Directly relying on a decision from this District, the court in Schlagel v. Learning Tree Int'l, [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,403, at 91,816 n.4 (C.D. Cal. 1998), expressly rejected defendants' argument here that plaintiffs must parse out exactly who said what in such joint presentations:

* * *

Here, as in Schlagel, plaintiffs have identified specific dates, types of communications, and the audience to those communications. Plaintiffs have identified Shaw, Krishnan and Patel as Smart Modular's top three executives who jointly participated and spoke at these events. Such allegations, cited above and found throughout the Complaint, are clearly adequate. The Complaint plainly alleges who made the misrepresentations, the content of the misrepresentations, and when and where they were made.

The Complaint similarly identifies defendants' misrepresentations made to financial analysts and repeated in reports published by those analysts. Under Ninth Circuit law, "if defendants intentionally misled securities analysts and the press . . . then these third-party reports would be relevant to determine [defendants'] securities fraud liability." Warshaw v. Xoma Corp., 74 F.3d 955, 959 (9th Cir. 1996). Thus, defendants' contention that they are not liable for false and misleading statements made to securities analysts with the intent that the analysts communicate those statements to the market is contradicted by Ninth Circuit authority.(5)

Here, the Complaint identifies communications between the defendants and the analysts and specifically alleges that the analyst reports were based on and repeated statements made to the analysts by defendants Shah, Krishnan and Patel. See, e.g., ¶¶24-25, 28, 33-35, 40-41, 43, 45-47, 51-52, 55-59, 61, 66-67, 69-70.(6)

According to defendants, since Marten "is not alleged to have made any of the alleged misstatements" and Mullin only made one statement after he sold 96% of his stock, they should be dismissed. Defs' Mem. at 9; ¶¶10, 15. These Individual Defendants are, however, liable as set forth below.

Where insiders trade, they have a duty to disclose. See United States v. O'Hagen, 521 U.S. 642 (1997) (insider trading violates Rule 10b-5); Voit v. Wonderware Corp., 977 F. Supp. 363, 368-69 (E.D. Pa. 1997) (trading on non-public information creates a duty to disclose). Marten sold stock, ¶73, concurrently with false statements but failed to disclose the false and misleading nature of the statements alleged at ¶¶38-42, 58-60 and 64-67. Mullin also sold stock, ¶73, concurrently with false statements alleged at ¶¶24-43 without disclosing the misleading or false nature of these statements. This conduct constitutes insider trading in violation of Rule 10b-5.

As participants in a fraudulent scheme (as alleged in ¶21), defendants Mullin and Marten are liable even if they made no statements. SEC v. First Jersey Secs., 101 F.3d 1450, 1471 (2d Cir. 1996) (defendants liable even though they made no statement).

Defendants are also liable under the group pleading doctrine. ¶¶19(f), 31, 53. Plaintiffs cannot be expected to possess detailed internal corporate information regarding all of the wrongdoing alleged in a securities class action complaint. See Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987). Thus, group pleading recognizes that:

Smith v. Network Equipment Technologies, Inc., [1990-1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶95,659, at 98,093 (N.D. Cal. 1990). When a plaintiff alleges corporate fraud in press releases or other "group published information," "'it is reasonable to presume that these are the collective actions of the officers and directors.'" In re Digital Microwave Corp. Sec. Litig., [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶97,044, at 94,594 (N.D. Cal. 1992) (quoting In re Worlds of Wonder Sec. Litig., 721 F. Supp. 1140, 1145 (N.D. Cal. 1989), and Wool, 818 F.2d at 1440); Blake v. Dierdorff, 856 F.2d 1365, 1369 (9th Cir. 1988). The PSLRA did not alter this conclusion. See In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 593 (9th Cir. 1995) (press releases assumed to be the collective work of senior officers and directors); In re Health Mgmt. Inc. Sec. Litig., 970 F. Supp. 192, 208-10 (E.D.N.Y. 1997); Powers, 977 F. Supp. at 1040; In re Grand Casinos Sec. Litig., 988 F. Supp. 1273, 1282 (D. Minn. 1997) (post-PSLRA decisions have approved the use of the doctrine to satisfy the pleading requirements of the PSLRA). Thus, all the defendants are liable for false statements made in the "group published" information alleged at ¶¶3, 19, 31 and 53.

Consistent with pre-PSLRA Ninth Circuit law, the PSLRA requires a complaint to specify "the reason or reasons why the statement is misleading." 15 U.S.C. §78u-4(b)(1). See In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) ("[T]he plaintiff must set forth an explanation as to why the statement or omission complained of was false or misleading.").

Here, plaintiffs allege that Smart Modular had been advised by its largest customer, Compaq, and by specialty assemblers of Compaq computers that these customers had accumulated excess inventories of Smart Modular products and that near-term orders would be substantially decreased. ¶37(e)-(f). Smart Modular also offered special price concessions in order to boost financial results and was threatened by lower DRAM and component prices, which devalued the DRAM inventory it already held. ¶37(c)-(d), (h). Indeed, Smart Modular itself had accumulated a glut of memory modules. ¶37(e).

Furthermore, by persuading customers to advance orders through sales concessions prior to the secondary offering, Smart Modular was depleting long-term demand in order to misrepresent the strength of current demand for its products. ¶37(b).

Smart Modular also lost substantial revenue when manufacturing and quality problems with its 66MHz memory modules forced a large computer manufacturer to refuse to qualify the product. ¶62(h). The anticipated transition to the new 100MHz SDRAM memory products was also delayed due to an oversupply of computer components. ¶62(i).

These alleged difficulties directly contradict defendants' contemporaneous representations that demand was strong and that revenue growth was accelerating and entirely undermined defendants' assurances for EPS and revenue. ¶¶38, 70. The Complaint identifies specific Smart Modular customers that had advised Smart Modular that they would decrease orders, specific products for which demand was decreasing and specific products suffering from manufacturing difficulties. ¶¶37(c)-(f), 62(h)-(i). Such allegations are adequate under Ninth Circuit law, as set out in GlenFed, Fecht and Cooper.

Here, the "reasons" requirement is satisfied by plaintiffs' identification of contemporaneous conditions within Smart Modular that undermine or contradict defendants' public statements. Cooper, 137 F.3d at 625; Fecht, 70 F.3d at 1083 nn.5-6; Warshaw, 74 F.3d at 959; GlenFed, 42 F.3d at 1548-49. Indeed, Smart Modular is similar to Fecht, where a retail chain made positive public statements about its expansion program. 70 F.3d at 1083 nn.5-6. Observing that "[a] plaintiff may 'draw on contemporaneous statements or conditions to demonstrate why statements were false when made," the Ninth Circuit held that "allegations of specific problems undermining a defendants' optimistic claims suffice to explain how the claims are false." Id. at 1083. As the Ninth Circuit summed up in Cooper, Fecht "found sufficiently particular allegations that newly opened Price Co. stores had low sales volumes and that nine named stores (three in particular) were losing money." Cooper, 137 F.3d at 627. "We did not require a specific number or a precise time frame." Id.(7)

The Complaint is based upon "the investigation of [plaintiffs'] counsel, which included a review of Smart Modular's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company, media reports about the Company and discussions with consultants." ¶89. Defendants contend, incorrectly, that this is inadequate under the PSLRA's pleading standard. Defs' Mem. at 5-8.

Section 21D(c) requires that a complaint comply with Fed. R. Civ. P. 11(b). This Rule requires the identification of allegations "likely to have evidentiary support after a reasonable opportunity for further investigation or discovery." Paragraph 89 of the Complaint identifies those paragraphs. Nothing in §21D(b) prohibits or circumscribes such pleading.

Moreover, such allegations do "not constitute pleading on information and belief." Schlagel, ¶90,403, at 91,816 n.4; see also Lister v. Oakley, Inc., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,409, at 91,849 (C.D. Cal. 1999) ("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 the facts on which the belief is formed"), Cherednichenko v. Quarterdeck Corp., [1998 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶90,108, at 90,142 n.3 (C.D. Cal. 1997) (allegations "based on investigation of their counsel, [are] not [based] on . . . information and belief," so that information and belief pleading standards do not apply).(8) Thus, plaintiffs' basis of allegations, i.e., ¶89, satisfies the PSLRA's requirements.

Even accepting defendants' contention, plaintiffs satisfy §21D(b)(1) of the 1934 Act, which requires only that plaintiffs state "with particularity all facts on which [their] belief is formed." 15 U.S.C. §78u-4(b)(1); Defs' Mem. at 5.

The PSLRA's standard is patterned after the "information and belief" pleading standard established by, among other courts, the Ninth and Second Circuits long before the PSLRA was enacted.(9) Information and belief allegations are adequate if "[e]ach alleged misstatement is identified by content, date, and the document or announcement in which it appeared," and if they specify "the manner in which such representations were false and misleading." Wool, 818 F.2d at 1440. Here, the Complaint satisfies this standard. See §§II.B.1 & 2, supra.

Contrary to defendants' contention, nothing in the PSLRA requires plaintiffs to identify sources, witnesses or evidence for every single allegation made in the Complaint.(10) See In re Digi Int'l Inc. Sec. Litig., 6 F. Supp. 2d 1089, 1096-97 (D. Minn. 1998) (rejecting argument that language of the PSLRA mandates that each and every "'information and belief' allegation must be supported by underlying documentary evidence" and finding sufficient to meet information and belief standard plaintiffs' allegations of "particularized facts derived from Digi's various public disclosures and its statements after it determined . . . that it needed to modify its previous disclosures"); In re Cephalon Sec. Litig., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,562, at 97,799 (E.D. Pa. 1997) ("[the PSLRA] does not require pleading all of the evidence and proof thereunder supporting a plaintiff's claim").

Importantly, requiring an attorney to reveal the content of communications with clients and expert consultants and to identify sources he or she interviewed would reveal the attorney's mental impressions and opinions -- opinion work product that is immune from discovery. See Hickman v. Taylor, 329 U.S. 495, 533 (1947); Fed. R. Civ. P. 26(b)(3); see also Admiral Ins. Co. v. United States Dist. Court, 881 F.2d 1486, 1494 (9th Cir. 1989); Laxalt v. McClatchy, 116 F.R.D. 438, 443 (D. Nev. 1987) (investigators employed by counsel could not be compelled to reveal the identity of witnesses they interviewed because this was work product that might reveal counsel's opinions and litigation strategy).

Finally, plaintiffs provide ¶89 to comply with requirements not of §21D(b)(1) but §21D(c), which requires that plaintiffs plead in conformance with Fed. R. Civ. P. 11(b). Certainly, if Congress had wanted to skew litigation so unfavorably against defrauded investors by forcing only plaintiffs' counsel to reveal all work product, evidence and sources, so that a defendant would have such a tremendous advantage, it knew how to do so. But the statute says nothing about evidence or work product.

Nevertheless, courts have held that this allegation constitutes the pleading of "all facts" sufficient to meet the requirement of §21D(b)(1) without impinging on work product or requiring the pleading of evidence. See In re Employee Solutions Sec. Litig., [1998 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶90,293, at 91,368 (D. Ariz. 1998) (In responding to defendants' arguments that plaintiffs had not complied with the "information and belief" standard, the court noted that plaintiffs' complaint "states that its allegations are based on an extensive investigation by plaintiffs' attorneys, and mentioned the documents reviewed by the attorneys. That is sufficient.").

Section 21D(b)(2) of the PSLRA states:

15 U.S.C. §78u-4(b)(2). A complaint may raise this strong inference of scienter by alleging either direct knowledge or by alleging (1) defendants' motive and opportunity to commit fraud; or (2) facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.(11) In Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 537 (2d Cir. 1999), the Second Circuit recently held that the PSLRA "heightened the requirement for pleading scienter to the level used by the Second Circuit" -- i.e., motive and opportunity or conscious misbehavior or recklessness. Press expressly recognized that requiring more "would make virtually impossible a plaintiff's ability to plead scienter in a financial transaction involving a corporation, institution, bank or the like that did not involve specifically greedy comments from an authorized corporate individual." Id. at 538. Indeed if Congress wished to supplant the Second Circuit "motive and opportunity" test, it could have done so. "The Court has little doubt that when Congress wishes to supplant a judicially-created rule it knows how to do so explicitly, and in the body of the statute." Marksman Partners, 927 F. Supp. at 1312.(12) In sharp contrast to defendants' reliance on an ambiguous footnote, Congress, President Clinton and the SEC recently confirmed the viability of the Second Circuit standard upon the enactment of the Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227 (1998) ("SLUSA").(13)

Defendants' conduct here raises a strong inference of conscious, or reckless, conduct. The Complaint specifically pleads that insiders knew Compaq, the Company's largest customer, had accumulated excess inventories of PCs and memory module products and, as a result, would curtail their orders in the near term. ¶¶13, 37, 48, 62.(14) In these circumstances, defendants knew that Smart Modular was not experiencing accelerating demand and that Smart Modular's growth rate was not accelerating.(15) Thus, defendants knew facts that contravened their optimistic statements.(16)

In addition, materially adverse information from a company's largest customer about the company's only product is core information that each of the Individual Defendants should have known. As observed by one court in this Circuit:

Epstein v. Itron, Inc., 993 F. Supp. 1314, 1325-26 (E.D. Wash. 1998). See also Cosmas v. Hassett, 886 F.2d 8, 12-13 (2d Cir. 1989) (plaintiffs pled "facts which give rise to a strong inference that the defendants possessed the requisite fraudulent intent" simply by "alleg[ing] facts from which one can reasonably infer that sales to the [People's Republic of China] were to represent a significant part of [the company's] business").

The Complaint's specificity as to information from Compaq, the Company's largest's customer, is greater than that presented in Itron or Cosmas and thus rebuts defendants' claims that the Complaint lacks particularity.(17) See also §II.B.2, supra; Defs' Mem. at 13 n.14. Furthermore, in October 1997, when Smart Modular stock fell just after the secondary offering over concerns about falling DRAM prices, defendants put their own spin on this problem by claiming that "business trends remained strong" and that the Company "had limited exposure to volatile pricing." ¶¶44-47. In Rehm, the court inferred scienter from similar circumstances. Rehm, 954 F. Supp. at 1256. The court noted "the defendants' attempts to mollify public doubt about [their] financial health by putting an optimistic reassuring 'spin' on otherwise damaging [reports], shows that defendants acted with knowledge of [their] deteriorating earnings." Id.(18) Also, as set forth above in §II.B.2, the Complaint details contemporaneous conditions that contradict statements issued by defendants and create a strong inference of scienter.(19)

The Complaint also satisfies the motive and opportunity test for scienter. Both post and pre-PSLRA decisions recognize that insider stock sales create a motive to defraud.(20) Finding that insider sales adequately alleged scienter, the Second Circuit recently explained:

* * *

Stevelman v. Alias Research Inc., Docket No. 97-9544, 1999 WL 187646, at ** 6-7 (2d Cir. Apr. 5, 1999). See also In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir. 1989) ("Insider sales in suspicious amounts or at suspicious times is probative of bad faith and scienter.").

Contrary to defendants' contentions, the Complaint clearly alleges that defendants' stock sales throughout the Class Period were both unusual and suspicious and are defendants' motive for making false and misleading statements in conference calls, roadshows and analyst reports. ¶¶8-9, 12, 22, 39, 44, 73-77; Defs' Mem. at 13-16. In the Complaint, all per-share amounts are adjusted for Smart Modular's two-for-one stock split in December 1997. ¶6 n.1. Defendants complain that this adjustment creates "the impression that defendants sold many more shares tha[n] is actually the case." Defs' Mem. at 13 n.16. This is incorrect. As defendants are well aware, the per-share amounts and stock prices must be adjusted to fairly compare per-share amounts throughout the Class Period. The percentage of stock sold by defendants, which defendants challenge as insufficient to give rise to an inference of fraud, remains unchanged. Defs' Mem. at 15; ¶¶12-20, 73.

Here, the top five insiders sold, over a six-to-eight-month period, between 10% and 96% of their holdings worth more than $69 million in illegal proceeds. ¶¶72-73. Insiders all sold out at prices ranging from $32.375 to $22.85 before Smart Modular stock collapsed to $13.13, a 41% decline, on defendants' disclosure that Smart Modular's revenues and EPS would significantly decline. ¶72. As motive entails "concrete benefits that could be realized by one or more of the false statements and wrongful disclosures alleged," defendants were clearly motivated to dispose of their stock at fraudulently inflated prices. Shields v. Citytrust Bancorp., 25 F.3d 1124, 1130 (2d Cir. 1994). Such allegations on their face raise a strong inference of scienter.(21)

Defendants' attempts to cast these stock sales as "normal" or "usual" because certain defendants sold their stock several months (and not days) before the May 21, 1998 stock collapse is ridiculous.(22)

First, due to the mechanics of market regulation, an insider simply cannot dump two million shares of stock in a short time frame (as defendants pose is necessary to show scienter) and maintain the stock's inflated value. Such a large one-time sale would depress the overall market value of the stock. Instead, selling in the secondary offering allowed these insiders to sell shares without Rule 144 volume restrictions, in a transaction where underwriters would buy all their shares at a firm price, and then, using special marketing techniques not permitted in open-market transactions, stabilize or support the price of Smart Modular stock while these large stock sales were taking place. ¶22.(23)

Second, defendants ignore the Complaint's allegations of false and misleading statements made before and during the secondary offering -- especially false statements made during the multi-city roadshow by Shah, Krishnan and Patel -- to promote and inflate the value of the stock. See ¶¶24-39; roadshow statements at ¶38.

Finally, under defendants' theory of §10(b) liability, a defendant could never be liable for false and misleading statements made after he or she sold stock, no matter how much stock the insider sold. Defs' Mem. at 14; ¶¶5-26. This argument was rejected in Stevelman, 1999 WL 187646 at *6. Motive, however, is not so narrowly defined. In fact, the total amount and value of insider sales -- $69 million and 2.1 million shares -- is unusual enough to sufficiently allege motive. See Schlagel, ¶90,403 (sale of $10.6 million in stock, as well as insider trading proceeds in excess of $2 million, is itself unusual and provides motive).

Defendants' opportunity is also clear because they controlled public dissemination of information about Smart Modular, and they were the ones speaking to analysts and the markets and had access to inside information.(24) Under such circumstances, "no one doubts that the defendants had the opportunity, if they wished, to manipulate the price of [the] stock." Cohen, 25 F.3d at 1174 Marksman Partners, 927 F. Supp. at 1312. Defendants do not contend otherwise.

A strong inference of scienter is also supported by the fact that defendants continued to mislead and coach analysts with false information immediately prior to Smart Modular's collapse. On May 18, 1998, no less than three days before the adverse disclosures concerning Smart Modular, a Cowen & Co. analyst report, based on conversations with and information obtained from Shah, Krishnan and Patel, again forecast that fiscal 1998 EPS would increase to $1.37. Three days later, defendants were forced to admit that 1998 EPS would actually decrease, not dramatically increase, from the prior year. ¶72. As the Ninth Circuit explained in Fecht, "[t]his shortness of time is circumstantial evidence that the optimistic statements were false when made." 70 F.3d at 1083. Numerous decisions have similarly recognized that such a proximity between false statements and contrary disclosures does not merely evidence falsity but supports an inference of scienter, i.e., knowledge of that falsity. See Grand Casinos, 988 F. Supp. 1273; Powers, 977 F. Supp. 1031; Seoane, et al. v. Mills, et al., CV-S-97-1579-HDM (RJJ), Order (D. Nev. Sept. 11, 1998) (admission that projections were unrealistic, made six days after projections were made, raises inference of scienter) (Grant Decl., Ex. D).

Defendants improperly seek, at this stage, application of §21E's safe harbor for forward looking statements under the guise of the "bespeaks caution" doctrine. Section 21E(c)(A) states that in certain circumstances, a defendant is not liable with respect to a forward-looking statement if the statement is

Oral forward-looking statements have similar, but more stringent, requirements. See §21E(c)(2). However, a dispositive motion on the safe harbor is one for summary judgment, and the plaintiff is entitled to discovery "directed to the application of the [safe harbor]." See §21E(f). Thus, if the Court is inclined to consider this motion, plaintiffs request leave to conduct such discovery.

Even under pre-PSLRA doctrines, defendants' "risk disclosure" arguments are improper. Oddly, defendants fail to indicate whether they rely on the "bespeaks caution" doctrine or the "truth-on-the-market" defense. Rather, defendants simply refer the Court to isolated boilerplate statements of "risk factors" in a few public filings and analyst reports to argue that plaintiffs' §10(b) claim should be dismissed because Smart Modular "prominently and repeatedly warned" of the "risks associated with its business." Defs' Mem. at 16. Defendants' purported warnings are improperly submitted on a motion to dismiss and are the subject of a separate motion to strike filed concurrently herewith. However, even considering defendants' improper submissions, defendants' argument is without merit.

The "bespeaks caution" doctrine presents issues of fact that are not appropriate for resolution on a motion to dismiss. "Only if a disclosure is 'so obvious that reasonable minds could not differ' can the issue of whether shareholders have been adequately cautioned about the risks be settled as a matter of law." Warshaw, 74 F.3d at 959 (citing Fecht, 70 F.3d at 1081).

The bespeaks caution doctrine "applies only to precise cautionary language which directly addresses itself to future projections, estimates or forecasts."(25) Thus, the unambiguous cautionary language must appear "in the document" itself and does not apply to any documents that do not include the language. Worlds of Wonder, 35 F.3d at 1413 n.2; 15 U.S.C. §78u-5(c)(1)(A)(i). Here, defendants' purportedly cautionary language does not appear in the same documents as defendants' misrepresentations.(26)

Here, defendants' boilerplate "risk factors" are not meaningfully cautionary and do not address the misrepresentations alleged in the Complaint. The "risk factors" quoted from Smart Modular's Prospectus, August 1997 Form 10-Q and 1997 Form 10-K (all subject to plaintiffs' Motion to Strike) merely identify generic possibilities (changes in demand "can have a rapid and exaggerated effect," "[l]oss of any major customers . . . would have a material adverse effect") as "risks." These are little more than truisms which the Ninth Circuit has repeatedly rejected as adequate. See Gray v. First Winthrop Corp., 82 F.3d 877, 884 (9th Cir. 1996).(27)

The mere "[i]nclusion of some cautionary language in a company's disclosures is 'not enough to support a determination as a matter of law that defendants' statements were not misleading.'" Warshaw, 74 F.3d at 959 (quoting Fecht, 70 F.3d at 1081). The statements must be "precise and directly address[] . . . the [defendants'] future projections"; "[b]lanket warnings that securities involve a high degree of risk [are] insufficient to ward against a federal securities law claim." Provenz, 102 F.3d at 1493. Thus, the purported cautionary language contained in the three analyst reports cited by defendants is equally to no avail. Such statements cannot, as a matter of law, neutralize the barrage of misinformation fed to the market through defendants' 1997 multi-city roadshow, ¶¶3, 6, 38, numerous presentations and discussions with Cowen & Co., Donaldson Lufkin & Jenrette and Morgan Stanley Dean Witter analysts, ¶¶4, 24-25, 28, 32-35, 40-41, 43, 45-47, 51-52, 54-59, 61, 66-67, 69-70, statements at conferences and in public releases, ¶¶31, 42, 49, 53, and statements to the public through the print and broadcast media. ¶¶27, 29, 50, 60, 65. This task clearly requires an assessment of the total mix of information and, as explained above, must be left to the trier of fact. Fecht, 70 F.3d at 1080; In re Wells Fargo Sec. Litig., 12 F.3d 922, 930 (9th Cir. 1993); Durning v. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir. 1987).

The "truth-on-the-market" defense, defendants' other apparent argument, is an affirmative defense on which "[t]he defendants bear a heavy burden of proof." Provenz, 102 F.3d at 1493. The "truth-on-the-market" defense is also a question of fact, i.e., whether the truth has "credibly entered the market and dissipated the effects of the misstatements," requires evidence of the total mix of information in the market and is improperly considered on a motion to dismiss. Basic Inc. v. Levinson, 485 U.S. 224, 249 & n.29 (1988). The impropriety of considering the "truth-on-the-market" defense on a motion to dismiss is explained by the fact that defendants cannot carry their burden of proof without affording plaintiffs an opportunity to submit evidence in rebuttal. See id. ("[p]roof of that sort is a matter for trial"); Kaplan, 49 F.3d at 1378 n.3 (reversing summary judgment because "the ultimate resolution of this question is an issue for trial"); In re Taxable Mun. Bonds Litig., [1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶98,405, at 90,780 (E.D. La. 1994) ("it is a rare case in which the defendant can carry its 'staggering burden' under the truth on the market defense, particularly at the summary judgment stage"); Warshaw, 74 F.3d at 959; Fecht, 70 F.3d at 1082.

III. CONCLUSION

Plaintiffs respectfully request that the Court deny defendants' motion to dismiss. In the alternative, plaintiffs hereby request leave to amend their Complaint.

DATED: April 14, 1999

Respectfully submitted,



MILBERG WEISS BERSHAD

HYNES & LERACH LLP

REED R. KATHREIN

JOHN K. GRANT





______________________________

JOHN K. GRANT



222 Kearny Street, 10th Floor

San Francisco, CA 94108

Telephone: 415/288-4545



MILBERG WEISS BERSHAD

HYNES & LERACH LLP

WILLIAM S. LERACH

TOR GRONBORG

600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058

Lead Counsel for Plaintiffs

SMARTMOD\BM000744.BRF

DECLARATION OF SERVICE BY MAIL

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 Francisco, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 222 Kearny Street, 10th Floor, San Francisco, California 94108.

2. That on April 14, 1999, declarant served the PLAINTIFFS' OPPOSITION TO DEFENDANTS' MOTION TO DISMISS CONSOLIDATED COMPLAINT by depositing a true copy thereof in a United States mailbox at San Francisco, 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:

http://securities.milberg.com

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 14th day of April, 1999, at San Francisco, California.



______________________________

CATHERINE B. MARASIGAN

1. All paragraph references ("¶") are to the Consolidated Class Action Complaint for Violation of the Federal Securities Laws, filed November 30, 1998 ("Complaint") unless otherwise indicated.

2. See Defendants' Notice of Motion, Motion and Memorandum of Law in Support of Motion to Dismiss Consolidated Complaint ("Defs' Mem.") at 1.

3. "Individual Defendants" are Ajay Shah, Lata Krishnan, Makesh Patel, Alan Marten and David Mullin.

4. Here, as elsewhere throughout, emphasis has been added and citations and footnotes have been omitted, unless otherwise indicated.

5. Cooper, 137 F.3d at 624. E.g., Provenz v. Miller, 102 F.3d 1478, 1487-88 (9th Cir. 1996) (liability predicated on "conference call with market analysts" in which a corporate officer projected "'higher technology revenue performance . . . for the total year'"); Fecht v. Price Co., 70 F.3d 1078, 1080 (9th Cir. 1995) (claims stated based on various public statements -- either prepared by the company itself or by securities analysts with the approval and guidance of the company); In re Cirrus Logic Sec. Litig., 946 F. Supp. 1446, 1466-67 (N.D. Cal. 1996).

6. Numerous decisions also recognize that liability arises if corporate officers adopt or approve misleading statements made by analysts or other third parties either prior to or after their publication. In re Syntex Corp. Sec. Litig., 95 F.3d 922, 934 (9th Cir. 1996); Stack v. Lobo, 903 F. Supp. 1361, 1372 (N.D. Cal. 1995); Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980). This is precisely what the Complaint alleges: that defendants reviewed the analysts' reports and assured the analysts that the reports were accurate. See ¶¶24-25, 28, 40-41, 43, 45-47, 51-52, 57-59, 61, 69-70. Such conduct is more than adequate to support liability.

7. Contrary to defendants' argument, nothing in the PSLRA or Ninth Circuit case law requires plaintiffs to more specifically plead the existence of evidentiary materials to show falsity. In Cooper, 137 F.3d at 626, where "'allegations of specific problems undermining a defendant's optimistic claims suffice[d] to explain how the claims are false,'" the Ninth Circuit did not require the identification of any particular document reflecting the "problems." Similarly, in GlenFed, 42 F.3d at 1548, the Ninth Circuit did not require a plaintiff to plead and identify documents. Defs' Mem. at 2.

8. See also Warman v. Overland Data, [1998 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶90,167, at 90,529 (S.D. Cal. 1998); Cherednichenko, ¶90,108, at 90,142 n.3; Queen Uno Ltd. Partnership v. Coeur D'Alene Mines Corp., 2 F. Supp. 2d 1345, 1353-54 (D. Colo. 1998); Zeid v. Kimberley, 973 F. Supp. 910, 915 (N.D. Cal. 1997).

9. See Wool, 818 F.2d at 1439 (information and belief allegations must be sustained "if the allegations are accompanied by a statement of the facts upon which the belief is founded"); see also Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 378-79 (2d Cir. 1974) (same).

10. Defendants rely on In re Silicon Graphics Sec. Litig., 970 F. Supp. 746 (N.D. Cal. 1997), and its limited progeny, but the court in that case (which is on appeal) misconstrued the legislative history of the PSLRA to impose the additional requirement of pleading sources. Defs' Mem. at 6. As Representative Cox, the bill's sponsor, stated regarding the information and belief pleading standard, "[y]ou simply allege it and you get on with your lawsuit, you go through discovery . . . and see if you can back up those allegations. But you make the allegations in your complaint; you do not put the proof in your complaint." 141 Cong. Rec. H2836, cols. 2-3 (daily ed. Mar. 8, 1995). See Exhibit A attached to the Declaration of John K. Grant in Support of Opposition to Defendants' Motion to Dismiss Consolidated Complaint ("Grant Decl."). The view of a bill's proponents, not that of its opponents, is what matters. Edward J. DeBartolo Corp. v. Florida Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568 (1988); Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384, 391 (1951).

11. See Zeid, 973 F. Supp. at 918 (recognizing the continuing viability of the motive and opportunity test to demonstrate scienter under the PSLRA), cited at Defs' Mem. at 13 n.14 (used by defendants to support their scienter argument). The following cases adopt this standard from the Second Circuit: Lister, ¶90,409; Marksman Partners, 927 F. Supp. at 1309-10; Rehm v. Eagle Fin. Corp., 954 F. Supp. 1246, 1252-53 (N.D. Ill. 1997); Fugman v. Aprogenex, Inc., 961 F. Supp. 1190, 1195 (N.D. Ill. 1997); STI Classic Fund v. Bollinger Indus., 3-96-CV-823-R, 1996 U.S. Dist. LEXIS 21553 (N.D. Tex. Oct. 25, 1996), adopted as a finding of the court, [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,539, at 97,660 (N.D. Tex. 1996); Fischler v. Amsouth Bancorporation, CASE NO. 96-1567-CIV-T-17A, 1996 U.S. Dist. LEXIS 17670, at *8 (M.D. Fla. Nov. 14, 1996) ("motive and opportunity" standard for raising "strong inference"); Health Mgmt., 970 F. Supp. at 201; OnBank & Trust Co. v. FDIC, 967 F. Supp. 81, 88 (W.D.N.Y. 1997); In re Wellcare Mgmt. Group Sec. Litig., 964 F. Supp. 632, 638-40 (N.D.N.Y. 1997); Bryant v. Apple South, 25 F. Supp. 2d 1372 (N.D. Ga. 1998); Robertson v. Strassner, 32 F. Supp. 2d 443 (S.D. Tex. 1998); In re Centocor, Inc. Sec. Litig. III, [1998 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶90,338, at 91,620 (E.D. Pa. 1998).

12. As in Marksman Partners, other courts have declined to treat footnote 23 of the Conference Committee Report as "statutory text," as defendants propose. Marksman Partners, 927 F. Supp. at 1312; Defs' Mem. at 11-12. See Bryant, 25 F. Supp. 2d at 1381 ("Because Congress did not explicitly disapprove of the well-established, judicially-created rule . . . a plaintiff may satisfy the pleading requirements of a securities fraud action with evidence of motive, opportunity and recklessness."). Defendants rely on Silicon Graphics, 970 F. Supp. 746 (currently on appeal to the Ninth Circuit), to support their position that "allegations of motive and opportunity" alone do not plead scienter under the PSLRA. Better reasoned and more compelling than Silicon Graphics is Marksman Partners.

13. See In re Silicon Graphics Sec. Litig., No. 97-16240, Supplemental Memorandum of the Securities and Exchange Commission, Amicus Curiae (9th Cir. Nov. 17, 1998) (Grant Decl., Ex. B). The Conference Report to the SLUSA emphasizes the "clear understanding of the managers that Congress did not, in adopting the [PSLRA], intend to alter the standards of liability under the Exchange Act. . . . [N]either the [PSLRA] nor S. 1260 in any way alters the scienter standard in Federal securities fraud suits." H.R. Conf. Rep. No. 105-803, Joint Explanatory Statement at 15 (1998) (Grant Decl., Ex. C). In signing the Joint Explanatory Statement, President Clinton reiterated the point:

Statement by the President, Nov. 3, 1998 (Grant Decl., Ex. D).

14. As defendants acknowledge, Defs' Mem. at 11, plaintiffs raise an inference of scienter if they allege that defendants knew or recklessly ignored the fact that their statements were false. Although defendants mention in a footnote that some courts "have held actual knowledge of falsity [not recklessness] as the required state of mind," defendants' authority, Novak v. Kasaks, 997 F. Supp. 425, 430 (S.D.N.Y. 1998), actually adopts a "conscious recklessness" standard. Defs' Mem. at 11 n.12. Although plaintiffs have pled actual knowledge, ¶¶13, 37, 48, 71, the law is clear that the required state of mind for §10(b) liability encompasses both actual knowledge and recklessness. Cooper, 137 F.3d at 625; Zeid v. Kimberley, 930 F. Supp. 431, 438 (N.D. Cal. 1996); Fugman, 961 F. Supp. at 1195.

15. See Powers, 977 F. Supp. 1031 (allegations that defendants knew about supply and component part shortages yet failed to disclose same to the investing public sufficient to plead scienter); Voit, 977 F. Supp. 363 (allegations that defendants knew CEO was going to resign and that results would decline along with stock sales between 10% and 71% plead strong inference of fraud); Robertson, 32 F. Supp. 2d 443 (allegations that defendants "knew" misrepresentations made in an IPO and five months into the aftermarket were false combined with motivation of allowing controlling shareholder to sell in IPO plead scienter).

16. As to certain forward-looking statements, the PSLRA may require plaintiffs to plead actual knowledge. 15 U.S.C. §78u-5(c)(1)(B). Here, any forward-looking statements alleged in the Complaint are not protected under the PSLRA's safe harbor provision. Defendants do not claim otherwise.

17. The alleged facts in defendants' authorities also dramatically differ from plaintiffs' allegations. In In re WRT Energy Sec. Litig., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,560 (S.D.N.Y. 1997), the allegations were limited to "allegations of access, standing alone"; and in Duncan v. Pencer, [1995-1996 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,043 (S.D.N.Y. 1996), allegations were limited to "listed job titles" Defs' Mem. at 13 n.14. Here, plaintiffs' allegations include defendants' access and job titles, ¶19, but then detail what defendants knew and how defendants knew it. ¶¶13, 37, 48, 62, 71. These specific allegations of what defendants knew also distinguish Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998), Defs' Mem. at 14-15, which was dismissed by the court, as in that case plaintiffs only pointed to the individual defendants' stock sales. Also, in contrast to Wenger, defendants here sold over 50% more stock.

18. See also Fugman, 961 F. Supp. at 1196 (defendant's statements mitigating the seriousness of their failure to complete the cell enrichment component of the GenSite system created a strong inference of scienter).

19. Contrary to defendants' contentions, plaintiffs need not identify specific internal documents to plead scienter. Defs' Mem. at 12-13; ¶¶3, 15. The Second Circuit precedents from which the PSLRA standard comes have typically found a strong inference of scienter without identification of specific internal documents that provided insiders with knowledge of the falsity of their statements. See, e.g., Cosmas, 886 F.2d at 12-13; Cohen v. Koenig, 25 F.3d 1168, 1174 (2d Cir. 1994); Goldman v. Belden, 754 F.2d 1059, 1070 (2d Cir. 1985). In In re Bausch & Lomb. Sec. Litig., 941 F. Supp. 1352, 1361 (W.D.N.Y. 1996), the court observed, "[i]t is true that the complaint does not point to any specific documents that defendants saw, nor does it state precisely when or how each individual defendant became aware that B&L's statements to the public were false and misleading." "Since may of these facts lie particularly within the defendants' knowledge," the district court held, "plaintiffs cannot reasonably be expected to be able to state at this stage exactly when and how defendants learned that B&L's sales figures were being overstated." Id. "We will not demand clairvoyance from pleaders." Id. See also Cherednichenko, ¶90,108, at 90,143 (finding sufficient to plead strong inference of scienter allegations that defendants' knowledge arose from their access to internal corporate records, as well as their attendance at management meetings and involvement with customers). See also STI Classic Fund v. Bollinger Indus., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,539, at 97,661 (N.D. Tex. 1996) (based upon the individual defendants' positions with the company, a strong inference may be drawn that "the actual contents of the books and records are peculiarly within [their] knowledge and control").

20. See Provenz, 102 F.3d at 1491 (one insider sold 20% of shares for $1.3 million and a second sold 90,000 shares, while a third -- who made many of the false statements -- sold 3,265 shares); Fecht, 70 F.3d at 1084 (sales of 30,000 shares for $1.6 million by two insiders); Kaplan v. Rose, 49 F.3d 1363, 1379 (9th Cir. 1994) ($13.5 million in sales by two officers); Klein v. King, [1989-1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶95,002, at 95,605 (N.D. Cal. 1990) (sales by 11 insiders for $36 million); Alfus v. Pyramid Tech. Corp., 764 F. Supp. 598, 605 (N.D. Cal. 1991) (sales of 271,459 shares for $4.5 million by five officers and directors -- 11%, 21%, 61%, 68% and 80% of their respective holdings); In re 3COM Sec. Litig., 761 F. Supp. 1411, 1417 (N.D. Cal. 1990) ($2 million in stock sales by two insiders). Friedberg v. Discreet Logic, 959 F. Supp. 42, 51-52 (D. Mass. 1997); Voit, 977 F. Supp. at 363 (three executives sold 129,570 shares for $4.6 million, or 10% to 71% of their holdings).

21. The Complaint specifically alleges that defendants used the vehicle of a secondary offering to dispose of a large block of stock at inflated prices while concealing specific adverse business conditions that they knew had already impacted Smart Modular's business. ¶¶5-7, 12, 14, 24-38, 73. Just as insiders completed this profitable sellout, conditions worsened, and Smart Modular stock plunged from its Class Period high of $44-5/8 on October 3, 1997 to $17-1/2 on October 28, 1997, as information that DRAM/SDRAM prices were falling entered the market. ¶44. Defendants knew that such a sharp stock decline immediately following a large securities offering would expose them to significant damages under §§11 and 12(2) of the Securities Act of 1933, which do not require proof of fraud, as required under §10(b). ¶44. In order to avoid this significant exposure, defendants carefully drafted a barrage of favorable but false statements for over six months until forced to reveal the truth in May 1998. See ¶¶45-48, 49-61, 64-71. Nonetheless, throughout this barrage of favorable but false statements, Marten continued to dispose of blocks of stock, ultimately disposing of an additional 120,000 shares of stock, resulting in insider sales of over $4 million, or over $8 million for the Class Period. ¶73.

22. In Robertson, 32 F. Supp. 2d at 449, the court was not persuaded by the same argument that defendants make here, i.e., that stock sales in an offering are not "suspicious" even though the class period continued for another five months. Defendants' case law also does not alter this conclusion and, in fact, only addresses the generic issue that some showing must be made that stock sales are suspicious or unusual. See Berger, et al. v. Ludwick, et al., No. C-97-0728-CAL, Order on Motions to Dismiss at 7 (N.D. Cal. Sept. 15, 1998); Chan, et al. v. Orthologic Corp., et al., No. CIV-96-1514-PHX-RCB, Order (D. Ariz. Feb. 5, 1998) (no showing that the sales were unusual or suspicious). Defs' Mem. at 15. Defendants' reliance on Head v. NetManage, Inc., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,412 (N.D. Cal. 1998), is also misplaced. In Head the defendants collectively sold less than 5%. Defs' Mem. at 15. Here, the Individual Defendants' sales of 11% to 96% of their holdings, amounting to 2.1 million shares for $69 million, is unusual and exceeds Head's collective 5%. Plaintiffs' allegations also differ from Blum v. Semiconductor Packaging Materials Co., C.A. NO. 97-7078, 1998 U.S. Dist. LEXIS 6868, at **11-12 (E.D. Pa. May 5, 1998), as plaintiffs allege what each defendant received from the sale of his stock, as well as what percentage of total holdings was sold. ¶73; Defs' Mem. at 15.

23. Defendants also negotiated a very unusual exception to the customary 90-day "lock-up" on insider stock sales and permitted Mullin and Marten to sell 38,000 and 40,000 shares, respectively, immediately after the secondary offering, for illegal insider proceeds of $2.8 million. ¶¶7, 77.

24. ¶¶19(f), 24-29, 31-35, 38, 40-43, 45-47, 49-52, 54-61, 64-71.

25. In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1414 (9th Cir. 1994); accord Kaplan, 49 F.3d at 1373-74.

26. See Notice of Motion and Motion to Strike Exhibits 1, 4, and 6-8 Submitted in Support of Defendants' Motion to Dismiss Or, in the Alternative, Plaintiffs' Objection to the Court's Taking Judicial Notice of Same ("Motion to Strike") at 2-3.

27. Cautionary language must alert investors to then-existing adverse conditions. Kaplan, 49 F.3d at 1373-74. "The doctrine of bespeaks caution provides no protection to someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away." In re Prudential Sec. Ltd. Partnerships Litig., 930 F. Supp. 68, 72 (S.D.N.Y. 1996).