MILBERG WEISS BERSHAD

HYNES & LERACH LLP

WILLIAM S. LERACH (68581)

PATRICK J. COUGHLIN (111070)

RANDI D. BANDMAN (145212)

HENRY ROSEN (156963)

600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058

- and -

LENA C. CHANG (156280)

355 South Grand Avenue

Suite 4170

Los Angeles, CA 90071

Telephone: 213/617-9007



BERMAN, DeVALERIO, PEASE

& TABACCO

JOSEPH J. TABACCO, JR. (75484)

NICOLE LAVALLEE (165755)

425 California Street, Suite 2025

San Francisco, CA 94104

Telephone: 415/433-3200

Co-Lead Counsel for Plaintiffs

[Additional counsel appear on signature page.]





UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA





In re SYBASE INC. II SECURITIES LITIGATION

__________________________________________

This Document Relates To:

ALL ACTIONS.

__________________________________________

Master File No. C-98-0252-CAL

CLASS ACTION



DATE: September 4, 1998

TIME: 2:00 p.m.

DEPT.: 10

COURTROOM: The Honorable

Charles A. Legge



PLAINTIFFS' MEMORANDUM OF LAW IN SUPPORT OF THEIR

OPPOSITION TO DEFENDANTS' MOTION TO DISMISS





TABLE OF CONTENTS


I. INTRODUCTION

II. STATEMENT OF FACTS

III. PLAINTIFFS ADEQUATELY STATE A CLAIM FOR CONTROL PERSON LIABILITY AGAINST MOVANTS

IV. PLAINTIFFS ADEQUATELY STATE A CLAIM AGAINST SYBASE AND THE INDIVIDUAL DEFENDANTS FOR SECTION 10(b) LIABILITY

V. CONCLUSION



I. INTRODUCTION

Sybase, Inc. ("Sybase" or the "Company") and certain of its officers and directors(1) artificially inflated the price of Sybase securities between April 17, 1997 and January 21, 1998 (the "Class Period") by issuing false financial results for each quarter of 1997 and making false statements about the financial condition of the Company.

Although its North American and European divisions were struggling, Sybase reported a profit in the first three quarters of 1997 because its Intercontinental division ("ICON") reported an increase in revenues throughout 1997. ¶¶3, 48, 54.(2) However, as Sybase admitted on January 21, 1998, its 1997 quarterly financial results were intentionally overstated and the Company had actually sustained a loss of $.39 per share, not a profit of $.18 per share as previously reported for the first three quarters of 1997. ¶3. Sybase has since restated its consolidated financial statements for the first three quarters of 1997, reversing nearly $43 million in previously reported revenues, and erased $26 million of revenues reported a few days after the fourth quarter ended, thereby eliminating virtually all revenue previously recognized by its Japanese sales office. ¶¶3, 9, 11, 79, 82-87.

Despite having admitted that Sybase's quarterly 1997 reported financial results were intentionally falsified, Movants claim that they owe no liability to the thousands of investors who lost tens of millions of dollars. Instead, Movants try to pass the blame to Sybase's sales office, Sybase K.K, pointing to their characterization of a January 12, 1998 voice mail message, allegedly left by Sybase K.K.'s former president, defendant Ogawa.(3) Movants erroneously argue that Ogawa's admission establishes, as a matter of law, that Sybase K.K. and its employees were the only participants in this fraud. Defs' Mem. at 1, 2, 4, 7.(4) But, plaintiffs have set forth facts demonstrating that Ogawa and Sybase K.K. did not act alone. ¶¶5, 21, 34-42. And, a court "is not required to accept defendants' characterization of the alleged facts."(5) Miller v. Material Sciences Corp., No. 97-C-2450, 1998 U.S. Dist. LEXIS 10052, at *11 (N.D. Ill. June 25, 1998) (court rejected defendants' argument that plaintiff's allegations showed that the controller acted alone in overstating the value of inventory).

Instead, a court must accept as true all allegations contained in the complaint and must give plaintiff the benefit of every favorable inference that can be drawn from those allegations. Cooper, 137 F.3d 616, 623 (9th Cir. 1998) (on a motion to dismiss, all of plaintiff's allegations are accepted as true and construed in the light most favorable to plaintiffs); NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). In this instance, Movants were direct participants in the fraudulent scheme they seek to attribute solely to Ogawa and Sybase K.K.: Ogawa reported directly to Sybase's Vice President of Worldwide Operations; Ogawa participated in weekly conference calls with Sybase's management about sales at Sybase K.K.; Sybase's own controller served as Sybase K.K.'s Statutory Auditor; Sybase established and oversaw Sybase K.K.'s revenue recognition practices and internal controls; Ernst & Young ("E&Y") audited the financial statements for all of Sybase, including Sybase K.K.; and Sybase reviewed all documentation for Sybase K.K.'s significant transactions. ¶¶5, 19-21, 28-29, 34-42.

Movants also assert that they are not liable under §20 of the Securities Exchange Act of 1934 ("Exchange Act"), for the admitted acts of Sybase K.K. or Ogawa. Movants are wrong. The facts clearly establish Sybase K.K.'s and Ogawa's primary violations of the federal securities laws because, as Movants emphasize, those defendants have admitted to falsifying millions of dollars of revenue, knowing that this information would be publicly disseminated in Sybase's consolidated financial statements. ¶¶20, 29. See Kidder, 1998 U.S. Dist. LEXIS 9905, at *21-24 (court held a subsidiary could be held liable under §10(b) for falsified revenues disseminated to the public by its parent). Movants' power of control over Sybase K.K. and Ogawa is established not only because Sybase is the sole shareholder of Sybase K.K., but also because Sybase K.K. is only a sales office for Sybase and Movants monitored Sybase K.K.'s day-to-day operations and oversaw its revenue recognition practices. ¶¶5, 19-21, 35.

Relying on Chill v. GE, 101 F.3d 263 (2d Cir. 1996), In re Baesa Sec. Litig., 969 F. Supp. 238 (S.D.N.Y. 1997) and Glickman v. Alexander & Alexander Servs., [1995-1996 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,101 (S.D.N.Y. 1996), Movants erroneously argue that plaintiffs' §10(b) claims should be dismissed because a parent corporation is never liable for accounting frauds committed by its subsidiaries. Defs' Mem. at 6-7. Movants are wrong. The facts in these three cases are inapposite. In stark contrast, here, plaintiffs have adequately alleged Movants' knowing or reckless behavior with respect to the underlying accounting improprieties at Sybase K.K. See, e.g., ¶¶5, 35-42, 113. Movants' scienter may also be inferred from their high-level positions at Sybase and Sybase K.K. and their involvement and responsibility not only for the issuance of Sybase's consolidated financial statements, but also review of documentation concerning the revenue recognized therein. A strong inference of scienter is also warranted because extensive accounting manipulations are necessarily the product of conscious or reckless behavior, not only by Ogawa, but by the high-level officers at the Company. Cohen v. Koenig, 25 F.3d 1168, 1174 (2d Cir. 1994). Additional facts establishing Movants' conscious misbehavior and motive to commit fraud include that: (i) Movants sold millions of dollars of their Sybase stock holdings after approving the issuance of false financial statements and while in possession of relevant information showing the fraud; (ii) Movants sought to increase their compensation; and (iii) Movants sought to regain investor confidence. The ultimate question of whether Movants were knowing or reckless participants in the fraud is a question of fact for the jury.(6)

II. STATEMENT OF FACTS

Sybase sells relational database management systems and other related software products. ¶2. The Company has sales offices worldwide, including one in Japan, Sybase K.K, a wholly-owned subsidiary. ¶19. Sybase K.K. belongs to Sybase's ICON division and its sole function is to sell and distribute Sybase products. ¶¶5, 19-20.

Sybase not only consolidated the financial results of its North America, Europe and ICON divisions, it also exercised direct control and oversight over the financial operations of these divisions. E.g., ¶¶5, 19-21, 35, 43, 118. For example, in 1995, when it learned that the Japanese sales office was not adhering to the Company's revenue recognition policy, Sybase implemented revenue recognition policy training sessions for Sybase K.K. and put its ICON controller, Dave Warner, in charge of this matter. ¶¶5, 24, 35, 43. Thus, Sybase K.K. operated completely under the auspices of Sybase during the Class Period:

As a result of product problems and increased competition, Sybase's business significantly declined in the first three quarters of 1996. ¶44. After reporting a net profit for its fourth quarter of 1996, defendants sought to convince the investing public that it was on the road to profitability for 1997. ¶¶42, 45. However, securities analysts reserved judgment until they saw if Sybase would be reporting sustained revenue growth in 1997. ¶¶42(iv), (v), 45-46.

Defendants then embarked on a scheme to falsify Sybase's financial results and report profits in its consolidated financial statements for 1997. ¶¶3, 5, 11, 37, 42(vi), 61. In contravention of GAAP, Sybase improperly recognized revenue on sales of software to customers of the Company's Japanese sales office when it knew customer payment was not reasonably expected because (1) Sybase granted certain customers virtually unlimited rights to return the product and the sale was contingent upon the customer's resale of the product; (2) Sybase provided certain customers with significant concessions including delayed payment terms; and (3) Sybase knew certain sales were contingent upon the customer obtaining financing and that the customer did not have financing in place to pay for the product at the date of the sale, if ever. ¶¶5, 11, 77, 80, 91, 93, 97.

During the Class Period, defendants also made false statements about Sybase's on-going business. ¶¶47-49, 51-53, 57, 60, 66, 68-69, 75-77. For example, defendant Kertzman stated on July 18, 1997, that defendants had "return[ed] the company to profitability." ¶60.

On January 2, 1998, defendants disclosed that Sybase would report earnings per share of at most $.02 for the fourth quarter of 1997, causing Sybase's stock to fall 25% to $9.94 per share. ¶¶9, 78. Defendants falsely attributed the poor results to the Asian crisis. ¶76.

However, on January 21, 1998, defendants stunned the market by announcing that all of the Company's 1997 revenue growth had been obtained by means of accounting fraud and that Sybase would report a loss "substantially" beyond the worst case hinted at on January 2, 1998. ¶¶9, 79-82. It was also revealed that Sybase would restate its results for the first three quarters of 1997 and would reverse its previously announced fourth quarter results. ¶¶9, 79. On this startling revelation, Sybase stock fell further to a low of $7.13 per share, a drop of more than 65% from its Class Period high of $23.50 per share. ¶¶8-9, 81.

III. PLAINTIFFS ADEQUATELY STATE A CLAIM FOR CONTROL PERSON LIABILITY AGAINST MOVANTS

Movants are liable as control persons of Sybase K.K. and Ogawa, who have confessed to falsifying millions of dollars of revenue included in Sybase's consolidated financial statements filed with the SEC and disseminated to the investing public. ¶¶5, 20, 29, 117-119.(7) Ogawa and Sybase K.K. "made false assertions `in a manner reasonably calculated to influence the investing public,' and thus `in connection with' securities trading in violation of Section 10(b) and Rule 10b-5." McGann v. Ernst & Young, 102 F.3d 390, 397 (9th Cir. 1996) (refusing to dismiss §10(b) action against accounting firm that produced an audit report which it knew would be included in an SEC filing and finding that Central Bank did not overturn this traditional understanding of direct liability under §10(b)), cert. denied, ___ U.S. ___, 117 S. Ct. 1460 (1997) (citation omitted).(8)

In the very recent case of Kidder, arising out of the same scheme at issue in Chill, the court held that General Electric's ("GE") subsidiary, Kidder Peabody, could be liable for providing false financial statements that GE included in its consolidated financial statements. 1998 U.S. Dist. LEXIS 9905, at *22 ("Cooper v. Pickett, 137 F.3d 616, 624 (9th Cir. 1997) (defendant `"`cannot escape liability simply because it carried out its alleged fraud through the public statements of third parties'"' (quoting Warshaw v. Xoma Corp., 74 F.3d 955, 959 (9th Cir. 1996)))") (citations omitted). The Court further held that "[t]here is no dispute that Kidder provided GE with financial data on a quarterly basis and that the data was incorporated in GECS's financial statements and GE's quarterly and annual reports. . . . Also undisputed is that GE's role in disseminating information was limited to serving as a conduit. . . . Given these facts, it is clear that defendants should be held liable for GE's statements if the other requirements of primary liability are met." Id. at *24-25.

Since the Complaint establishes Sybase K.K.'s and Ogawa's primary violation of §10(b), §20(a) imposes joint and several liability on any "person who, directly or indirectly, controls" them. See Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297, 1315 (C.D. Cal. 1996) (citing 15 U.S.C. §78t(a)); Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1575 (9th Cir. 1990). The Ninth Circuit and the SEC define "control" to include: "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a [violator], whether through ownership of voting securities, by contract, or otherwise." 17 C.F.R. §230.405; Hollinger, 914 F.2d at 1572 n.16 (emphasis added). Plaintiffs need only allege facts which show that ability to control in order to properly allege control person status in the Ninth Circuit. Id. at 1575 ("[T]he statute premises liability solely on the control relationship."). Thus, under Hollinger, a plaintiff is not required to plead or prove that controlling persons were culpable participants in the circumstances constituting fraud. 914 F.2d at 1575.(9)

Here, the fact that Sybase is the sole shareholder of its wholly-owned subsidiary, Sybase K.K., is by itself enough to allege control. ¶20. See HB Holdings Corp. v. Scovill, Inc., [1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶95,201 (S.D.N.Y. 1990); Borden, Inc. v. Spoor Behrins Campbell & Young, 735 F. Supp. 587, 590-91 (S.D.N.Y. 1990); Wells v. Monarch Capital Corp., [1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶96,892, at 93,669 (D. Mass. 1991).(10) Indeed, as the court noted in Rochez Bros., Inc. v. Rhoades, 390 F. Supp. 470, 473-74 (W.D. Pa. 1974), aff'd in part, 527 F.2d 880 (3d Cir. 1975), "the purpose of [§20(a)] obviously is to prevent the true owner of a business from escaping liability by insulating . . . activities by use of subsidiary corporations."

Moreover, the Complaint also sets forth facts showing how Sybase and the other Movants had the power to dictate the management and policies and exercised their power by participating in the day-to-day affairs of Sybase K.K. E.g., ¶¶5, 24, 28, 35, 37, 41. It is well established that "where, as here, the corporate officers are a narrowly defined group charged with the day-to-day operations of a public corporation, it is reasonable to presume that these officers had the power to control or influence the particular transactions giving rise to the securities violation." Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1441 (9th Cir. 1987); Arthur Children's Trust, 994 F.2d at 1396.

Sybase was responsible for the development of and monitoring compliance with financial and operational controls of ICON and Sybase K.K. and appointed one of its officers to oversee their operations. E.g., ¶¶5, 35, 43. Sybase also exercised its control over Sybase K.K.'s operations when Pervere approved the hiring of a new Chief Financial Officer for Sybase K.K. ¶¶5, 24, 35, 43. One revenue recognition policy applied to the entire Company. ¶35. Sybase K.K.'s financial results were included in Sybase's consolidated financial statements because, in accordance with Financial Accounting Standard 94, Sybase had to include the results of any subsidiaries in which it has, either directly or indirectly, a controlling interest in its consolidated financial statements. ¶¶20-21, 29, 35. Sybase's controller had to review documentation for any Sybase K.K. sale in excess of several hundred thousand dollars and Sybase regularly monitored collections on receivables at Sybase K.K. ¶35. Sybase issued a letter to its auditors representing that it was responsible for the fair presentation of its consolidated financials. ¶¶35, 40. Defendant Van der Vorst served as both Sybase's controller and Sybase K.K.'s statutory auditor. ¶¶5, 28, 35. Moreover, the Audit Committee Defendants oversaw the financials for the entire Sybase company and E&Y audited the entire Company's consolidated financials. ¶¶34-35.(11)

Sybase K.K. also regularly reported its sales and financial information to Movants during the Class Period. This occurred through (i) regular communications between Sybase's corporate controller for ICON and Sybase K.K.'s officers, including its President (Ogawa), its Chief Financial Officer and its Finance and Accounting Manager; (ii) weekly worldwide conference calls with sales people and officers from all divisions; (iii) visits by Sybase employees to Japan to review the status of transactions and Ogawa's visits to Sybase. ¶¶5, 24, 28-29, 35. Sybase K.K. served no purpose other than acting as Sybase's sales office and Sybase specifically controlled Sybase K.K.'s sales and financial operations.(12)

Nothing more is required.(13) As control persons, defendants are "subject to liability unless [they] establish[] that [they] `acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action,'" Arthur Children's Trust, 994 F.2d at 1398, but these questions are affirmative defenses which may not be considered on a motion to dismiss. (Citation omitted.) See Neubauer, 158 F.R.D. at 284.

IV. PLAINTIFFS ADEQUATELY STATE A CLAIM AGAINST SYBASE AND THE INDIVIDUAL DEFENDANTS FOR SECTION 10(b) LIABILITY

In Chill, plaintiffs alleged no more than that the parent company GE was responsible for the fact that a broker at Kidder, one of its many "third-tier subsidiaries" had created phantom trades. 101 F.3d at 269. The Sybase-Sybase K.K. relationship could not be more distinct from the Kidder-GE relationship present in Chill. GE is a large conglomerate with 12 different areas of business, one of which was the financial services area, which fell under its GE Capital Services, Inc. unit ("GEC"). Kidder was only one of the 24 separate business owned by GEC. By contrast, Sybase K.K. is not a separate business; it operates solely as a sales office for Sybase. ¶¶20, 35.

In Chill, there were no officers of GE who also served as officers of Kidder -- here, defendant Van der Vorst, Sybase's Controller, is also the Statutory Auditor for Sybase K.K., and Ogawa reported directly to Sybase's Vice President, Worldwide Operations. ¶¶28-29, 35. In Chill, there were no allegations that Kidder's senior management were hired by the chairman of GE. By contrast, Sybase hired Sybase K.K.'s Chief Financial Officer. ¶¶15, 24. Further, GE's top management were not alleged to be directly involved in Kidder's operations and the court in Chill noted that GE would not normally expect to see any documentation other than monthly accounting reports from its third-tier subsidiaries. 101 F.3d at 270.(14) By contrast, Sybase routinely received sales and financial information from Sybase K.K. ¶¶28, 34-36, 40. It is Sybase's oversight and actual involvement in Sybase K.K.'s financial reporting which gives rise to a significant inference of scienter here.

In Chill, the thrust of plaintiffs' scienter allegations was that GE was reckless in relying on Kidder to monitor Kidder's own financial reporting through its internal controls at a time when Kidder was reporting increasing profits. The court held that "`[i]ntentional misconduct or recklessness cannot be presumed from a parent's reliance on its subsidiary's internal controls.'" 101 F.3d at 271 (citation omitted). By contrast, plaintiffs do not complain that Sybase was reckless in relying on Sybase K.K.'s internal controls. To the contrary, Sybase imposed its own internal controls on Sybase K.K. ¶35(b). The Complaint also details how as early as 1995, Sybase knew about accounting improprieties at Sybase K.K. ¶¶40, 43. Indeed, the Complaint contains allegations Sybase had one revenue recognition policy for the entire Company, and that in 1995, after Sybase became aware of accounting improprieties by Sybase K.K., Sybase's controller conducted training in the Company's revenue recognition policy. ¶¶35, 43.(15)

The instant Complaint here is more like the second amended complaint in In re Baesa Sec. Litig., No. 96 Civ. 7435 (S.D.N.Y.) ("SAC ¶__")(16) whose §10(b) allegations of financial fraud by the subsidiary were upheld against the parent. The court held that plaintiffs had cured the deficiencies in their first complaint by inserting allegations that defendants Buenos Aires Eabottellacleia S.A. ("Baesa") and Charles H. Beach ("Beach") -- its President, Principal Executive Officer and President of Board of Directors -- knew or recklessly disregarded that Baesa's wholly-owned Brazilian subsidiary, Pepsi-Cola Eugarrafadora Lituritada ("PCE"), was fraudulently inflating its earnings. These new allegations are remarkably similar to those here. For example, (1) compare allegations that Beach visited the Brazilian subsidiary on a quarterly basis to discuss operations (SAC ¶¶42-43, 59) with allegations that Sybase Officers travelled to Japan regularly to discuss Sybase K.K.'s financial operations (¶¶28, 35); (2) compare allegations that officers of PCE travelled to Florida to meet with Baesa officers to discuss PCE's financial performance (SAC ¶45) with allegations that Sybase K.K.'s officers, including Ogawa, travelled to the United States to discuss Sybase K.K.'s financial operations and Ogawa communicated regularly by phone with Sybase officers (¶¶29, 35); and (3) compare allegations that Baesa was provided copies of reports of PCE's operations (SAC ¶44) with allegations that Sybase K.K. reported sales information to Sybase at weekly worldwide conference sales, that Van der Vorst had full access to Sybase K.K.'s financial reports and that Sybase reviewed documentation for Sybase K.K.'s large sales. ¶¶28, 35.(17)

Movants' attempt to evade liability by pointing to Ogawa's statements that he is "100% responsible" is also baseless. Defs' Mem. at 1, 3-4. Ogawa and Sybase K.K. did not act alone. E.g., ¶¶5, 21, 34-42. Ogawa's statements are nothing more than a reflection of Japanese culture in which corporate leaders are expected to take full responsibility for any corporate failure even if they are not.(18)

A complaint satisfies the Private Securities Litigation Reform Act of 1995 ("PSLRA") pleading standard if the complaint "state[s] with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. §78u-4(b)(2). Defendants concede that a complaint pleads scienter if it alleges that defendants acted "either with a knowledge of [the] falsity [of their statements] or with reckless disregard for a known and obvious danger of their being untrue." Defs' Mem. at 8 (citing Baesa, 969 F. Supp. at 242). See also Hollinger, 914 F.2d at 1568-69 nn.6, 8. A "strong inference" is adequately pled by showing specific facts that either: (i) establish a motive to commit fraud and an opportunity to do so; or (ii) that constitute strong circumstantial evidence of either reckless or conscious behavior. See, e.g., In re Time Warner Sec. Litig., 9 F.3d 259, 268-69 (2d Cir. 1993). As set forth below, plaintiffs have adequately pled scienter under either the conscious behavior or the motive and opportunity test.(19) Thus, the Court need not even resolve the issue of whether the PSLRA adopted the Second Circuit "motive and opportunity" test. Gross v. Medaphis Corp., 977 F. Supp. 1463, 1472 (N.D. Ga. 1997).(20)

Movants' knowledge of falsity or recklessness may be inferred from their positions and likely exposure to the adverse information that they allegedly ignored or concealed. See, e.g., Cosmas v. Hassett, 886 F.2d 8, 12-13 (2d Cir. 1989); In re Leslie Fay Cos. Sec. Litig., 835 F. Supp. 167, 172 (S.D.N.Y. 1993); Cohen, 23 F.3d at 1174; Epstein, 993 F. Supp. at 1319.

Movants were senior officers or directors of Sybase. Kertzman was Chief Executive Officer of Sybase throughout the Class Period and President for the first half of the Class Period. ¶22. Chen was President and Chief Operating Officer of Sybase during the latter half of the Class Period. ¶25. As presidents of Sybase, Kertzman and Chen were both ultimately responsible for its financial reporting and were Ogawa's supervisors. ¶¶29, 35-41. (Ogawa reported to Sybase's Vice President, Worldwide Operations, ¶29.) Indeed, Kertzman and Chen both made numerous representations during the Class Period regarding Sybase's financial position, including ICON's alleged revenues and profits. ¶¶47, 51-52, 57, 60, 66, 69, 75-76, 78. Defendant Epstein was Sybase's Executive Vice President, Chief Information Officer and a member of the Board of Directors. ¶27. Defendant Hoffman was Chairman of the Board. ¶26. Movants' positions at the Company obliged them to ensure that the Company's consolidated financial statements were prepared in compliance with GAAP. ¶¶35-41.

Defendants Van der Vorst, Acosta and Pervere were actively involved in and responsible for ensuring that Sybase K.K. complied with Sybase's revenue recognition policy and GAAP and were specifically charged with overseeing and approving Sybase K.K.'s financial reporting. ¶¶5, 23-24, 28, 35-41. As Statutory Auditor for Sybase K.K., defendant Van Der Vorst was responsible for supervising its directors, business activities, financial and business reporting and for preparing reports on his observations. ¶¶5, 28, 35. Defendant Acosta was Chief Financial Officer and thus charged with approving Sybase's consolidated financial results, which included Sybase K.K.'s results, and signed the Forms 10-Q for each of the interim financial periods at issue. ¶¶23, 35. As Sybase's Vice President and Controller, Pervere oversaw Sybase K.K.'s financial reporting and its application of Sybase's revenue recognition policy. ¶¶5, 24, 35. In response to past violations by Sybase K.K., Pervere oversaw the selection of Sybase K.K.'s Chief Financial Officer. ¶¶5, 24, 35. Pervere implemented a training program to purportedly ensure future compliance and appointed the Controller for the ICON division to oversee Sybase K.K.'s compliance with the revenue recognition policies. Id. Thus, each of these defendants was directly involved in ensuring that Sybase K.K.'s financial statements complied with Sybase's revenue recognition policy and GAAP.(21)

Movants also had access to all financial information from Sybase K.K. ¶¶5, 28-29, 35-36, 39-41. As Statutory Auditor, Van der Vorst had full access to all of Sybase K.K.'s financial and accounting materials. ¶¶28, 35. Ogawa regularly participated in Sybase's weekly worldwide conference calls and communicated with officers at Sybase by phone and in person. ¶¶5, 29, 35. All documentation from large deals at Sybase K.K. were reviewed by Sybase. ¶35(a).(22)

Sybase's financial results were "irregularities" and intentionally falsified. ¶¶9, 11, 79, 83-86. While Ogawa has admitted committing accounting fraud, plaintiffs have pled facts raising a strong inference that Movants also consciously deceived investors. After all, extensive accounting manipulations of the sort alleged here are necessarily the product of conscious behavior by high-level executives. Cohen, 25 F.3d at 1174.

Where, as here, defendants controlled and approved the issuance of the financial statements and had access to relevant information, allegations of accounting irregularities raise a strong inference of scienter even under the PSLRA. Marksman, 927 F. Supp. at 1313 (citing Wechsler v. Steinberg, 733 F.2d 1054, 1058-59 (2d Cir. 1984)); Digi, ¶90,226, at 90,965-66 (while allegations of departure from GAAP, coupled with allegations that defendants had direct access to the company's financial information, and controlled and approved the issuance of public statements, satisfy the scienter pleading requirement).(23)

Lastly, all of the defendants participated in the scheme to defraud the class. This is sufficient to allege a primary violation of §10(b) even after the PSLRA and Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994). Cooper made it clear that

137 F.3d at 624 (citation omitted).

The magnitude of the GAAP violations here also lends weight to the allegations that Movants had the requisite scienter. Rehm, 954 F. Supp. at 1256 (court found that the "magnitude of reporting errors may lend weight to allegations of recklessness where defendants were in a position to detect the errors"); Leslie Fay, 835 F. Supp. at 175; In re Wellcare Management Group Sec. Litig., 964 F. Supp. 632, 640 (N.D.N.Y. 1997).

The falsification of financial information was significant both in terms of the period of time the violations continued as well as the impact to Sybase's bottom line. Movants issued false quarterly financial statements for three quarters and reported false revenue figures for a fourth quarter. ¶¶3, 6-9, 11, 50, 55-56, 58, 62-64, 66-67, 71-72, 74-75, 78, 82-103. Over the first three quarters of 1997, Sybase overstated revenues by $43 million and reported earnings per share of $.18 when it actually suffered a loss of $.39 per share. ¶3.(24) The falsified revenue at ICON was the key to Sybase's turn around efforts. See, e.g., ¶¶42(vi), 48-49, 51, 53-55, 61-62, 70-71, 76. Courts recognize that "the fact that a particular matter constitutes a significant source of income to a company can establish a strong inference that the company and its relevant officers knew of easily discoverable additional facts that directly affected that source of income." Epstein, 993 F. Supp. at 1325-26 (citing Cosmas, 886 F.2d at 10, 13) (plaintiffs' allegations that defendants knew that a significant segment of the company's business - sales to China - was threatened by China's new import restrictions, gave rise to an inference of conscious misconduct); Bell v. Fore Sys., C.A. No. 97-1265, 1998 U.S. Dist. LEXIS 7910, at *6 (W.D. Pa. May 26, 1998) (adopted in Bell v. Fore Sys., C.A. No. 97-1265, 1998 U.S. Dist. LEXIS 9589 (W.D. Pa. June 29, 1998)) (allegations that defendants were "engaging in improper accounting practices, falsely representing that the Company's Asian markets were strong and expanding, while failing to disclose that the Company had experienced several problems with its Asian business plan" satisfied even the more rigid "conscious behavior" test); In re Ancor Communications, Inc. Sec. Litig., No. 97-1696 (ADM/JGL), 1998 U.S. Dist. LEXIS 10988 (D. Minn. July 14, 1998) (allegations that defendants attributed increased revenues to the growing acceptance of its technology rather than its improper revenue recognition satisfied even the more stringent test of conscious behavior).

Movants knew that Sybase K.K. had a history of failing to adhere to Sybase's revenue recognition policy. ¶¶40, 43. This knowledge should have made Movants suspicious of the fact that Sybase K.K. was reporting improvements in sales in ICON, in the face of the Asian crisis, and while all its other divisions were suffering. Health Management, 970 F. Supp. at 202-03 (allegations of facts which should have made defendant suspicious of management's reporting present sufficient evidence of fraudulent intent); Miller, 1998 U.S. Dist. LEXIS 10052, at *12 ("[d]eliberately ignoring `red flags' such as those alleged here can constitute the sort of recklessness necessary to support §10(b) liability").(25) Moreover, plaintiffs have alleged that similar accounting irregularities plaguing Sybase K.K. in Japan were occurring in Thailand. ¶100.

The Complaint is replete with allegations detailing defendants' knowledge and control of the revenue recognition problems at its Japanese sales office and the ICON division while at the same time issuing consolidated financial statements containing those false revenues and making representations about the strong revenues being generated there. E.g., ¶¶5, 35-38, 40, 42(b)(vi), 103. See discussion, supra, at §III.(26)

Movants' insider trading of millions of dollars of Sybase stock while simultaneously issuing falsified financial results is an additional circumstance that gives rise to an inference of conscious behavior. See, e.g., Provenz v. Miller, 102 F.3d 1478, 1491 (9th Cir. 1996), cert. denied, ___ U.S. ___, 118 S. Ct. 48 (1997); Marksman, 927 F. Supp. at 1313. The Ninth Circuit has long recognized that insider trading in suspicious amounts or at suspicious times is probative of scienter. Kaplan v. Rose, 49 F.3d 1363, 1379 (9th Cir. 1994); Fecht, 70 F.3d at 1083-84; In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir. 1989). Movants do not dispute this.(27)

Here, Movants' trading was indeed suspicious in that they sold 395,543 shares of their Sybase stock during the Class Period for over $6.3 million, at an average price of $16 per share: Kertzman sold nearly 200,000 shares for proceeds of over $3 million; Hoffman sold 120,000 shares for over $1.8 million; Epstein sold over 40,000 shares for $660,000. Defendants Webber and Pervere sold a total of 15,000 shares for a combined total of approximately $260,000. ¶¶6, 8, 12-13, 22, 24, 26-27, 33, 41(b)(i). Ninth Circuit law holds that much smaller trades establish motive to commit fraud and/or raise an inference of scienter.(28)

Movants theorize that their trades are not suspicious because their "sales took place in trading windows in the middle of quarters, following the announcement of Sybase's financial statements." Defs' Mem. at 10-11. This theory is wrong. The sales did occur prior to the disclosure of the material non-public information on January 23, 1998. The fact that the sales did not occur just prior to the disclosure is irrelevant.(29) What is relevant is that defendants sold their shares shortly after the release of false quarterly financial statements when the stock price was artificially inflated thereby. ¶13.(30)

In Marksman, the court rejected defendants' arguments that a footnote in the PSLRA Conference Committee Report demonstrates that Congress discarded the motive-and-opportunity test. 927 F. Supp. at 1311 ("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.").

While defendants cite Silicon Graphics(31) to support their position, the overwhelming majority of courts that have considered this issue have held that the PSLRA did not abrogate recklessness liability or the Second Circuit's motive and opportunity for pleading scienter.(32) The PSLRA's principal authors recently confirmed that "[i]t was [their] intent, as . . . expressly stated during the legislative debate in 1995 . . . that the PSLRA adopt the pleading standard applied in the Second Circuit." (emphasis in original). A copy of the letter from Senators Dodd, Gramm and D'Amato to SEC Chairman Arthur Levitt and Chairman Levitt's Response is attached as Exhibit C to the Bandman Decl. Since the court in Silicon Graphics based its opinion on its interpretation of the legislative intent, it is no longer persuasive authority.

Movants do not contest plaintiffs' allegations that Movants had the opportunity to commit fraud. Key directors and officers of a company have the opportunity to manipulate its stock prices. Cohen, 25 F.3d at 1174; Marksman, 927 F. Supp. at 1312. As for motive, "[a]llegations that a corporate insider either presented materially false information, or delayed disclosing materially adverse information, in order to sell personally-held stock at a huge profit can supply the requisite `motive' for a scienter allegation." Marksman, 927 F. Supp. at 1312. See §IV(B)(1)(d). As summarized below, plaintiffs allege other factors which also motivated defendants to commit fraud.

Movants defrauded investors in order to regain investor confidence and stock market interest in the Company. ¶¶42, 44-46. This type of motivation is indicative of scienter. Berti v. VideoLan Tech., C.A. No. 3:97-CV-296-H, Memorandum Opinion at 10 (W.D. Ky. June 10, 1998) ("[d]uring this critical time in the growth of the Company, Defendants would obviously have had a motive to overstate the strength of this single agreement and to conceal its demise") (Bandman Decl., Ex. D). See also Digi, ¶90,226, at 90,965-66.

Each of the Individual Defendants' compensation was tied to the price of Sybase's stock. ¶41(b)(ii). Thus, these defendants' performance-based compensation is indicative of fraud. Leslie Fay, 835 F. Supp. at 172; Digi, ¶90,226, at 90,966 (the court expressly "decline[d] defendants' invitation to adopt a per se rule that executive compensation premised on performance can never form part of the basis supporting an inference of [fraud]").(33)

V. CONCLUSION

For the foregoing reasons, Movants' motion to dismiss should be denied in its entirety.

DATED: July 31, 1998

Respectfully submitted,



MILBERG WEISS BERSHAD

HYNES & LERACH LLP

WILLIAM S. LERACH

PATRICK J. COUGHLIN

RANDI D. BANDMAN

HENRY ROSEN







____________________________________

PATRICK J. COUGHLIN



600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058



BERMAN, DeVALERIO, PEASE

& TABACCO

JOSEPH J. TABACCO, JR.

NICOLE LAVALLEE







____________________________________

JOSEPH J. TABACCO, JR.



425 California Street

Suite 2025

San Francisco, CA 94104

Telephone: 415/433-3200

Co-Lead Counsel for Plaintiffs



BARRACK, RODOS & BACINE

STEPHEN R. BASSER

BLAIR A. NICHOLAS

600 West Broadway, Suite 1700

San Diego, CA 92101

Telephone: 619/230-0800



BERNSTEIN LITOWITZ BERGER &

GROSSMANN LLP

JEFFREY A. KLAFTER

ROCHELLE FEDER HANSEN

1285 Avenue of the Americas

33rd Floor

New York, NY 10019

Telephone: 212/554-1400



BERGER & MONTAGUE, P.C.

STANLEY R. WOLFE

ROBIN B. SHORE

1622 Locust Street

Philadelphia, PA 19103

Telephone: 215/875-3000



KAUFMAN, MALCHMAN, KIRBY

& SQUIRE, LLP

JEFFREY H. SQUIRE

919 Third Avenue, 11th Floor

New York, NY 10022

Telephone: 212/371-6600



Executive Committee for Plaintiffs



SYBASE2\PLC04301.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 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 July 30, 1998, declarant served the PLAINTIFFS' MEMORANDUM OF LAW IN SUPPORT OF THEIR OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 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:

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 30th day of July, 1998, at San Diego, California.



______________________________

PILAR COLINA

1. These include (i) Mitchell E. Kertzman, Jack L. Acosta, Peter F. Pervere, Mark B. Hoffman, Robert S. Epstein, John Chen and Pieter Van der Vorst (collectively the "Individual Defendants"); and (ii) Alan B. Salisbury, Robert B. Wayman and Jeffrey T. Webber (collectively the "Audit Committee Defendants"). Sybase, the Individual Defendants and the Audit Committee Defendants are collectively referred to herein as the "Movants." Plaintiffs also assert claims against defendants Sybase K.K., Sybase's Japanese sales office, and Yoshi Ogawa, Sybase K.K.'s former president. Because Movants' counsel refused to accept service of the Complaint on behalf of Sybase K.K. and Ogawa, plaintiffs are proceeding with service pursuant to the Hague Convention.

2. Hereinafter, "¶__" or "Complaint" refers to allegations of the Consolidated Amended Class Action Complaint for Violation of the Federal Securities Laws.

3. Movants misconstrue the allegations regarding the improper revenue recognition policies employed by Sybase's Thailand sales office. Plaintiffs have alleged that, in violation of Generally Accepted Accounting Principles ("GAAP"), Sybase was manipulating financial statements in offices (other than Japan) that were part of its ICON division. ¶¶100-101. This allegation shows that Sybase's revenue recognition violations are not isolated to only Japan and Sybase K.K. and Ogawa, and that these improper practices were so pervasive in ICON that it makes Movants' assertion that they did not know of the rampant improper revenue recognition incredulous. Moreover, the $2 million sales improperly recorded during Sybase's third quarter is indeed material. It is material when considered with the $69 million overstated by Japan for the year, and it is also material to Sybase's revenues for its ICON division for its third quarter in the amount of $41.8 million, i.e., 5%. ¶54. Furthermore, this Court is not supposed to "adopt a statistical bright line rule to determine what a reasonable investor would consider significant . . . the Court must view the misstatements in the context of what a reasonable investor would have considered important at the time." In re Kidder Peabody Sec. Litig., 94 Civ. 3954 (BSJ), 1998 U.S. Dist. LEXIS 9905, *35-36 (S.D.N.Y. July 2, 1998). Furthermore, materiality is a question of fact for the jury. Fecht v. Price Co., 70 F.3d 1078, 1080-81 (9th Cir. 1995), cert. denied, 517 U.S. 1136 (1996).

4. Movants' argument that Ogawa's admission of liability at Sybase K.K. exonerates them of liability is also factually wrong. Ogawa simply accepts responsibility for the conduct of his subordinates. ¶5. He does not comment about the knowledge of his superiors. Thus, their unsubstantiated self-serving denial of knowledge does not relieve Movants of responsibility.

5. The Court's task on a motion to dismiss is to "`assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'" Ryder Energy Distrib. Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) (citation omitted); Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1998) ("we do not test the evidence at this stage").

6. This Court must deny the motion even if it doubts "whether plaintiffs will be able to demonstrate actual knowledge on the part of [defendants] at a trial" unless "`it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Carson v. Merrill Lynch, Pierce, Fenner & Smith, No. 97-5147, 1998 U.S. Dist. LEXIS 6903, at *38, *53-54 (W.D. Ark. Mar. 30, 1998) (citation omitted); Conley v. Gibson, 355 U.S. 41, 45-46 (1957). In re Caremark Int'l, 698 A.2d 959 (Del. Ch. 1996), is inapposite since the court there evaluated the parties' claims after extensive discovery and in the context of settlement approval.

7. Movants do not dispute that Sybase is a controlling person over its officers and directors or that the Individual Defendants control Sybase. Instead, they contend that these defendants are not liable for their control of each other because plaintiffs fail to properly allege primary liability by any of these defendants. Defs' Mem. at 13. However, since plaintiffs do properly allege primary liability, those defendants are liable as control persons. See §IV, infra.

8. Movants also imply that if plaintiffs are unable to pursue their claims against Sybase K.K. and Ogawa for lack of personal jurisdiction, the §20(a) claims must be dismissed. Defs' Mem. at 13 n.12. While there must be allegations of primary wrongdoing, plaintiffs "need not actually proceed against the principal perpetrator in order to pursue §20(a) claims. Kemmerer v. Weaver, 445 F.2d 76, 78-79 (7th Cir. 1971); In re CitiSource, Inc. Sec. Litig., 694 F. Supp. 1069, 1077 (S.D.N.Y. 1988); Keys v. Wolfe, 540 F. Supp. 1054, 1061 (N.D. Tex. 1982), rev'd on other grounds, 709 F.2d 413 (5th Cir. 1983); Briggs v. Sterner, 529 F. Supp. 1155, 1171 (S.D. Iowa 1981); SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1170 (D.C. Cir. 1977).

9. Movants' reliance upon Gray v. First Winthrop Corp., 776 F. Supp. 504 (N.D. Cal. 1991) and Burgess v. Premier Corp., 727 F.2d 826 (9th Cir. 1984), for the proposition that plaintiffs "must show that the allegedly controlling persons exercised actual power and influence over" the liable person, is misplaced. Defs' Mem. at 13 (emphasis added). While the court in Gray held that the alleged controlling person was unaware of and had no involvement in the wrongful conduct, it addressed the question on summary judgment. Moreover, the court clearly considered the question of good faith to be a defense for which defendant bore the burden of proof. 776 F. Supp. at 511. Burgess was decided before Hollinger, which abolished the culpable participation showing in the Ninth Circuit. See Arthur Children's Trust v. Keim, 994 F.2d 1390, 1396 (9th Cir. 1993).

10. See also De Marco v. Security Planning Serv., Inc., 462 F. Supp. 1066, 1069 (D. Ariz. 1978); Hall v. Security Planning Servs., Inc., 462 F. Supp. 1058, 1061 (D. Ariz. 1978); Sanders v. John Nuveen & Co., 524 F.2d 1064, 1072 (7th Cir. 1975), vacated on other grounds, 425 U.S. 929 (1976); Klapmeier v. Telecheck Int'l, Inc., 315 F. Supp. 1360, 1361 (D. Minn. 1970); Roth v. Bank of the Commonwealth, [1981-1982 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶98,267, 91,707 (W.D.N.Y. 1981); Sun First Nat'l Bank v. Miller, 77 F.R.D. 430 (S.D.N.Y. 1978); Healey v. Chelsea Resources, Ltd., 736 F. Supp. 488, 494 (S.D.N.Y. 1990).

11. Contrary to Movants' assertions, plaintiffs do allege facts beyond director status which show that defendants Salisbury, Wayman and Webber are controlling persons. Specifically, these defendants form the Company's Audit Committee and are responsible for, among other things, reviewing and evaluating the entire Company's accounting principles and systems of internal accounting controls and the adequacy of Sybase's financial reports, including those of Sybase K.K. ¶¶34-36. The Audit Committee Defendants were also responsible for the accuracy of the entire Company's financial statements. ¶¶34-36. Moreover, the Audit Committee Defendants met with appropriate financial personnel of Sybase, including the Statutory Auditor of Sybase K.K. and were privy to confidential and proprietary information concerning Sybase and Sybase K.K.'s operations and financial conditions. ¶¶34-35. Plaintiffs further allege that the Audit Committee Defendants were aware of the existence of inadequate controls by at least 1997. ¶40.

Courts routinely find such allegations properly state a claim for control person liability. See, e.g., Persky v. Turley, [1991-1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶96,483, at 92,128 (D. Ariz. 1991) ("[t]he power and control allegedly held by the directors was based on their involvement in various company committees"); In re Digital Microwave Corp. Sec. Litig., [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶97,044, at 94,594-95 (N.D. Cal. 1992); In re AM Int'l, Inc. Sec. Litig., 606 F. Supp. 600, 605 (S.D.N.Y. 1985) (Audit Committee members who have access to substantial information regarding the Company and its financial condition "are much closer to the position occupied by an inside director, than they are to a typical outside director."); In re JWP, Inc. Sec. Litig., 928 F. Supp. 1239, 1260 (S.D.N.Y. 1996); Prostic v. Xerox, Corp., [1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶96,196, at 91,037 (D. Conn. 1991). See also Greenfield v. Professional Care, Inc., 677 F. Supp. 110, 115 (E.D.N.Y. 1987); In re Chambers Dev. Sec. Litig., 848 F. Supp. 602, 623 (W.D. Pa. 1994). The finding in Lilley v. Charren, 936 F. Supp. 708, 716 (N.D. Cal. 1996), is inapposite because plaintiffs there failed to allege any facts, such as those here, that the outside directors were members of an audit committee.

12. The decision in Novak v. Kasaks, 997 F. Supp. 425 (S.D.N.Y. 1998), is inapposite. Having concluded that plaintiffs failed to properly allege primary liability, the court noted in dicta that it would not "automatically impute" a primary violation to a parent company. However, it reached this conclusion on the basis that plaintiffs must establish defendants' culpable participation. As discussed above, plaintiffs simply do not have to allege culpable participation in the Ninth Circuit. Although Novak points to Chill and Baesa for this proposition, neither of those decisions reached the question of §20(a) liability.

13. Whether a given defendant is a controlling person is impossible to determine on a motion to dismiss since it is "a complex question of fact requiring a close examination of the particular situation and organization." Wool, 818 F.2d at 1441. In Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 168 (1993), the Supreme Court held that Rule 9(b)'s demand for heightened pleading is strictly limited to the "circumstances constituting fraud or mistake." As a consequence, controlling person allegations are not subject to Rule 9(b)'s requirement that "`circumstances constituting fraud or mistake shall be stated with particularity.'" Id. (citation omitted). See, e.g., Pollack v. Laidlaw Holdings, [1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶98,741, at 92,510-11 (S.D.N.Y. 1995); Neubauer v. Eva-Health USA, 158 F.R.D. 281, 284 (S.D.N.Y. 1994). Thus, plaintiffs' allegations are sufficient under Fed. R. Civ. P. 8 if they place defendants on notice that they are charged with being controlling persons.

14. See Kidder, 1998 U.S. Dist. LEXIS 9905, at *24-25 ("GE apparently did nothing more than collect the information and transcribe it onto the page. Kidder controlled the content of the information. When GE opened its mouth regarding Kidder, Kidder's words came out.").

15. Glickman is also factually distinguishable. The court in Glickman found that plaintiffs' allegations amounted to no more than mismanagement because plaintiffs failed to connect the "underlying set of facts concerning [the subsidiary's] inaccurate reporting to any conscious misconduct or recklessness" and because "[i]ntentional misconduct or recklessness cannot be presumed from a parent's reliance on its subsidiary's internal controls." Glickman, ¶99,101, at 94,641.

16. See Declaration of Randi Bandman in Support of Plaintiffs' Opposition to Defendants' Motion to Dismiss ("Bandman Decl."), Ex. A.

17. Even the few documents provided in defendants' Initial Disclosures support plaintiffs' allegations.

18. A prime example of such behavior is the recent resignation of the Prime Minister of Japan when he stated:

Nicholas D. Kristof, "Japanese Premier Resigns As Voters Rebuke His Party," New York Times, July 13, 1998, at A1 (Bandman Decl., Ex. B). Clearly, Mr. Harashimoto is not solely responsible for the worst economic crisis ever faced by Japan.

19. The Court must examine all factual allegations in the aggregate to decide whether they amount to a strong inference of scienter. STI Classic Fund v. Bollinger Indus., Inc., No. 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 (N.D. Tex. 1996); Epstein v. Itron, Inc., 993 F. Supp. 1314, 1326-27 (E.D. Wa. 1998); In re Digi Int'l Sec. Litig., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,226, at 90,965 (D. Minn. 1998).

20. Significantly, even courts which contend that allegations of "motive and opportunity" are insufficient in and of themselves, acknowledge that these allegations may be considered in determining whether, as whole, plaintiffs allege sufficient facts constituting circumstantial evidence of conscious behavior. See Baesa, 969 F. Supp. at 242. Thus, the allegations of motive and opportunity described below must also be considered in evaluating whether the totality of the facts alleged constitute circumstantial evidence of scienter. See also Voit v. Wonderware Corp., 977 F. Supp. 363 (E.D. Pa. 1997) (the court held that insider trading constituted evidence of conscious behavior).

21. As a corporate entity, Sybase possesses the collective knowledge of all its officers and employees. Hanon v. Dataproducts Corp., 976 F.2d 497, 507 (9th Cir. 1992); Comprehensive Care Corp. v. RehabCare Corp., 98 F.3d 1063, 1066 (8th Cir. 1996); United States v. Bank of New England, N.A., 821 F.2d 844, 856 (1st Cir. 1987). By alleging scienter by one or more of its officers or directors, plaintiffs properly allege Sybase's scienter. Id.

22. Plaintiffs have further pled that each of the Individual Defendants was provided with copies of Sybase's management reports, press releases and SEC filings, and had the opportunity to prevent their issuance or to correct them. ¶¶35-41. As a result, these defendants are liable for the "group-published" information in the public reports and releases identified. ¶36. See Wool, 818 F.2d at 1440. In re Health Management Sec. Litig., 970 F. Supp. 192, 208 (E.D.N.Y. 1997); Powers v. Eichen, 977 F. Supp. 1031, 1040 (S.D. Cal. 1997); In re Stratosphere Corp. Sec. Litig., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,198, at 90,742-43 (D. Nev. 1998); Digi, ¶90,226, at 90,968.

Given the specificity of plaintiffs' allegations, Movants' reliance upon In re WRT Energy Sec. Litig., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,560 (S.D.N.Y. 1997) and Zeid v. Kimberley, 973 F. Supp. 910 (N.D. Cal. 1997) is misplaced. Plaintiffs in WRT, only asserted generally that defendants had "access to adverse-public information" about [WRT]'s business. ¶99,560, at 97,795. Likewise, plaintiffs only alleged that defendants had access to "internal corporate information" in Zeid, 973 F. Supp. at 924. The decision in Hockey v. Medhekar, [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,465 (N.D. Cal. 1997), is also inapposite because the misstatements were forward looking and thus required allegations of actual knowledge, not simply allegations of scienter. The court applied the wrong pleading standard in In re Silicon Graphics Sec. Litig., 970 F. Supp. 746, 767 (N.D. Cal. 1997) and thus offers this Court no assistance on this point.

23. See also Rehm v. Eagle Fin. Corp., 954 F. Supp. 1246, 1256 (N.D. Ill. 1997); Page v. Derrickson, No. 96-842-CIV-T-17C, 1997 U.S. Dist. LEXIS 3673, at *14 (M.D. Fla. Mar. 24, 1997); Cherednichenko v. Quarterdeck Corp., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,108, at 90,142 (C.D. Cal. 1997); Adair v. Bristol Tech. Sys., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,218, at 90,923-24 (S.D.N.Y. 1998); Gross, 977 F. Supp. at 1471-72.

24. Ogawa's admission underscores the significance of the falsification of Sybase's financial statements. "The violations are, major violations . . . I know this is killing not only Sybase K.K. and the Sybase K.K. people but also total Sybase, Inc. and total Sybase, Inc. people." ¶5.

25. In contrast to the alleged red flags in Baesa, Sybase K.K.'s prior violations relate directly to the misconduct at issue. Baesa, 969 F. Supp. at 243 (already aware of "mismanagement"). Likewise, the alleged red flags in Chill are entirely differently from those here. In Chill, plaintiff simply alleged that GE should have been suspicious because Kidder reported a profit after consistent losses. 101 F.3d at 269. Here, Movants were specifically on notice of prior GAAP violations.

26. Plaintiffs are not required to provide details about negative internal reports to plead defendants' scienter. "A plaintiff may `draw on contemporaneous statements or conditions' to demonstrate why statements were false when made." Fecht, 70 F.3d at 1083 (citation omitted). A requirement that plaintiffs specify internal corporate documents to plead scienter would be inconsistent with long-standing precedents that scienter can be proved -- and thus pleaded -- circumstantially. Herman & MacLean v. Huddleston, 459 U.S. 375, 390 n.30 (1983). See In re Bausch & Lomb Sec. Litig., 941 F. Supp. 1352, 1361 (W.D.N.Y. 1996) (court found a strong inference of scienter based on allegations that management knew the company was overshipping to distributors to create the appearance that sales volume was higher than it actually was, even though details concerning internal corporate documents had not been alleged). Id.

27. Whether insider trading is suspicious or questionable is primarily a question of fact. Alfus v. Pyramid Tech. Corp., 764 F. Supp. 598, 605 (N.D. Cal. 1991); Leslie Fay, 835 F. Supp. at 172 n.7. Apple, was decided on a motion for summary judgment after full discovery.

28. See Provenz, 102 F.3d at 1491 (one insider sold shares for $1.3 million, a second sold 90,000 shares for $1.4 million); Fecht, 70 F.3d at 1084 (sales of 30,000 shares for $1.6 million by two insiders); In re Gupta Corp. Sec. Litig., 900 F. Supp. 1217, 1231-32 (N.D. Cal. 1994) (sales by six insiders for $4.2 million); Marksman, 927 F. Supp. at 1313 (sale of 300,000 shares by one defendant for $6.3 million). See also Voit, 977 F. Supp. at 374 (applying the most stringent view of the PSLRA pleading standards.

29. Movants' comparison with Lilly v. State Teachers Retirement Sys., 608 F.2d 55 (2d Cir. 1979), an omission case where defendants sold stock without disclosing certain material information, is misguided. Plaintiffs asserted that an REIT advised Lehman Brothers of their financial difficulties on the eve of the release of its audit results. Lehman Brothers then disclosed this information to defendant who, in turn, sold shares in the REIT to plaintiffs prior to the actual release of this inside information and the resulting drop in share price. By contrast, this is a misstatement case. Thus, the relevant fact for determining if the sales of shares are suspicious is the timing of sales relative to the release of false information, not the timing of the ultimate disclosure of the fraud. Plaintiff in SEC v. Musella, 578 F. Supp. 425 (S.D.N.Y. 1984) sought the rescission of a trade by an executive officer of the Equity Fund. The court concluded that insider trading by the defendant one week prior to the commencement of an SEC action against Equity Fund was indicative that the defendant had learned of the SEC investigation; the court was not considering whether this was indicative of defendant's participation in the underlying fraud.

30. Movants' reliance on Duncan v. Pencer, [1995-1996 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,043 (S.D.N.Y. 1996), is erroneous because that court held that defendants' insider trading was not suspicious because plaintiff does not allege that defendants in the group "sold shares during the time when the Individual Defendants were making the statements of which [he] complains." Id. at 94,208. Defendants' reliance upon Acito v. IMCERA Group, 47 F.3d 47 (2d Cir. 1995), for the proposition that the stock selling is not indicative of fraud, is also misplaced. Plaintiff there alleged that only one of defendants sold any stock and he only sold 11% of his holdings. See discussion in Voit, 977 F. Supp. at 374 (distinguishing Acito on this ground).

31. The Ninth Circuit is presently reviewing the second Silicon Graphics, (9th Cir. No. 97-16240). The SEC has filed an amicus brief explaining the district court's error in that case.

32. See Zeid, 930 F. Supp. at 438; Rehm, 954 F. Supp. at 1252; Marksman, 927 F. Supp. at 1309 n.9; Fugman v. Aprogenex, Inc., 961 F. Supp. 1190, 1195 (N.D. Ill. 1997); STI Classic Fund, 1996 U.S. Dist. LEXIS 21553, at *4; Fischler v. AmSouth Bancorp., No. 96-1567-CIV-T-17A, 1996 U.S. Dist. LEXIS 17670, at *8 (M.D. Fla. 1996); Page, 1997 U.S. Dist. LEXIS 3673, at *27; Health Management, 970 F. Supp. at 201; Wellcare, 964 F. Supp. at 638-40; Galaxy Inv. Fund v. Fenchurch Capital Management, No. 96 C 8098, 1997 U.S. Dist. LEXIS 13207 (N.D. Ill. Aug. 29 1997) adopted as a finding of the court, Galaxy Inv. Fund v. Fenchurch Capital, No. 96 C 8098, 1997 U.S. Dist. LEXIS 21498 (N.D. Ill. Sept. 22, 1997); Zuckerman v. Foxmeyer Health Corp., [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,186 (N.D. Tex. 1998). See also Williams v. WMX Techs., 112 F.3d 175, 178 (5th Cir.), cert. denied, ___ U.S. ___, 118 S. Ct. 412 (1997); Sloane Overseas Fund v. Sapiens Int'l Corp., 941 F. Supp. 1369, 1377 (S.D.N.Y. 1996); Shahzad v. H.J. Meyers & Co., No. 95 Civ. 6196 (DAB), 1997 U.S. Dist. LEXIS 1128, at *19-20 n.6 (S.D.N.Y. Feb. 4, 1997).

33. Wellcare, 964 F. Supp. at 639; Carson v. Merrill Lynch, Pierce, Fenner & Smith, No. 97-5147, 1998 U.S. Dist. LEXIS 6903, at *45 (W.D. Ark. Mar. 30, 1998) ("We believe that such allegations are relevant to the court's scienter analysis.") (emphasis added); In re Wells Fargo Sec. Litig., 12 F.3d 922, 931 (9th Cir. 1993).

The cases cited by Movants to support their assertion that allegations of performance-based compensation is irrelevant to a finding of scienter is misplaced. Defs' Mem. at 9-10. As explained in Digi, Acito, simply held that the existence, without more, of executive compensation dependent upon stock value does not give rise to a strong inference of scienter." ¶90,226, at 90,966 (citing Acito, 47 F.3d at 54). As demonstrated herein, plaintiffs' evidence of scienter does not rest on this fact alone.