BORIS FELDMAN (State Bar # 128838)
AILEEN L. ARRIETA (State Bar # 130868)
DAVID PRIEBE (State Bar # 148679)
DOROTHY L. FERNANDEZ (State Bar # 184266)
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone: (415) 493-9300

Attorneys for Defendants
QUANTUM CORPORATION, MICHAEL A. BROWN,
WILLIAM F. ROACH, YOUNG K. SOHN,
GINA M. BORNINO, DEBORAH E. BARBER,
MARK JACKSON AND STEVEN C. WHEELWRIGHT

INTRODUCTION

STATEMENT OF FACTS

ISSUES TO BE DECIDED

ARGUMENT

I. THE COMPLAINT DOES NOT PLEAD WHY ANY STATEMENT WAS FALSE WHEN MADE

II. THE COMPLAINT DOES NOT PLEAD SCIENTER

III. THE SAFE HARBOR PROTECTS QUANTUM'S FORWARD-LOOKING STATEMENTS

CONCLUSION

APPENDIX CALCULATING QUANTUM OFFICERS' AND DIRECTORS' STOCK SALES

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

Branch v. Tunnell, 14 F.3d 449 (9th Cir.), cert. denied, 512 U.S. 1219 (1994)

Fecht v. The Price Co., 70 F.3d 1078 (9th Cir. 1995), cert. denied, 116 S. Ct. 1422 (1996)

Fisher v. Acuson Corp., No. C 93-20477 RMW, 1995 WL 261439 (N.D. Cal. April 26, 1995)

In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir. 1989), cert. denied, 496 U.S. 943 (1990)

In re Chaus Sec. Litig., [1990-91 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,646 (S.D.N.Y. Nov. 20, 1990)

In re Exabyte Corp. Sec. Litig., 823 F. Supp. 866 (D. Colo. 1993)

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

In re Hunter Environmental Servs., Inc. Sec. Litig., 921 F. Supp. 914 (D. Conn. 1996)

In re Interactive Network Sec. Litig., No. C-95-0026 DLJ (N.D. Cal. Apr. 7, 1997)

In re OPTi, Inc. Sec. Litig., No. C 95-3434 SBA (N.D. Cal. Mar. 31, 1997)

In re SciClone Pharmaceuticals Sec. Litig., No. C 94-1485 SBA (N.D. Cal. Mar. 10, 1995)

In re Silicon Graphics, Inc. Sec. Litig., [1996-97 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,325 (N.D. Cal. Sept. 25, 1996)

In re Software Pub. Sec. Litig., [1993-94 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,094 (N.D. Cal. Feb. 2, 1994)

In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996), cert. denied, 117 S. Ct. 1105 (1997)

In re Sun Microsystems, Inc. Sec. Litig., [1990 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,504 (N.D. Cal. Aug. 20, 1990)

In re Syntex Corp. Sec. Litig., [1993 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,747 (N.D. Cal. Sept. 1, 1993)

In re Syntex Corp. Sec. Litig., 95 F.3d 922 (9th Cir. 1996)

In re Time Warner, Inc. Sec. Litig., 9 F.3d 259 (2d Cir.), cert. denied, 511 U.S. 1017 (1994)

Johnson v. Hui, 811 F. Supp. 479 (N.D. Cal. 1991)

Kramer v. Time Warner, Inc., 937 F.2d 767 (2d Cir. 1991)

Medhekar v. United States Dist. Court, 99 F.3d 325 (9th Cir. 1996)

O'Sullivan v. Trident Microsytems, Inc., [1994 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,116 (N.D. Cal. Jan. 31, 1994)

San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801 (2d Cir. 1996)

Shuster v. Symmetricom, Inc., No. C 94-20024 RMW (N.D. Cal. Feb. 25, 1997)

Strassman v. Fresh Choice, Inc., No. C-95-20017 RPA, 1995 WL 743728 (N.D. Cal. Dec. 7, 1995)

Wielgos v. Commonwealth Edison Co., 892 F.2d 509 (7th Cir. 1989)

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

Securities & Exchange Act of 1934 § 21D(b)(1), 15 U.S.C. § 78u-4(b)(1)

Securities & Exchange Act of 1934 § 21D(b)(2), 15 U.S.C. § 78u-4(b)(2)

Securities & Exchange Act of 1934 § 21D(b)(3)(A), 15 U.S.C. § 78u-4(b)(3)(B)

Securities & Exchange Act of 1934 § 21D(b)(3)(B), 15 U.S.C. § 78u-4(b)(3)(B)

Securities & Exchange Act of 1934 § 21E(c)(1)(A), 15 U.S.C. § 78u-5(c)(1)(A)

Securities & Exchange Act of 1934 § 21E(c)(1)(B)(i), 15 U.S.C. § 78u-5(c)(1)(B)(i)

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

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

Securities & Exchange Comm'n Rule 10b-5, 17 C.F.R. § 240.10b-5

H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. 31 (1995)

Notice is hereby given that on May 28, 1997, at 10:00 a.m., before the Honorable Spencer Williams, defendants Quantum Corporation ("Quantum"), Michael A. Brown, William F. Roach, Young K. Sohn, Gina M. Bornino, Deborah E. Barber, Mark Jackson, and Steven C. Wheelwright ("defendants") shall move for an order dismissing the Complaint.

Defendants request that the Court dismiss plaintiff's Complaint for failure to plead falsity and scienter with the particularity required by the Private Securities Litigation Reform Act of 1995, and for failure to state a claim. Fed. R. Civ. P. 12(b)(6).

In December 1995, "prompted by significant evidence of abuse in private securities lawsuits," Congress enacted the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. 31 (1995) ("Conference Report"). The Reform Act significantly changed the ground rules for pleading and proving securities fraud. Today, in order to survive a motion to dismiss, a complaint must plead the specific factual circumstances underlying plaintiff's belief that a statement was false when made. It also must plead specific facts giving rise to a strong inference that each defendant acted with scienter.

The Complaint in this case treats the Reform Act as an irritant to be avoided. Like the complaints filed prior to the Act, the Complaint asserts, on information and belief, that defendants had prior knowledge that Quantum would experience a poor quarter. Such assertions could be made about any company that experienced a temporary business slowdown. Conspicuously absent from the Complaint are specifically pleaded facts that would allow the Court to infer that any defendant made any false statement with scienter. Instead, plaintiff claims that discovery will provide the factual details for the Complaint's assertions.

Under the Reform Act, before discovery may commence, a complaint must plead some reason to infer that a business setback was due to fraud, and not to the inherent uncertainty of competing in high technology industries. As the Complaint fails to do this, it must be dismissed.

Quantum is a leading manufacturer of disk drives for computers. The putative class period in this case runs from February 26, 1996 through June 13, 1996. During that period, the closing price of Quantum stock ranged from $16 1/4 to $26 per share. Plaintiff alleges that it bought 400 shares of Quantum stock on March 11, 1996. Quantum stock closed at $17 3/4 on that day. Today, Quantum stock trades at $ 42.

This lawsuit focuses on a new line of high capacity disk drives called the "Bigfoot" family. On February 26, 1996, Quantum announced the Bigfoot family of drives. Complaint ¶¶ 20, 21. On May 7, 1996, Quantum announced its results for Fiscal Year 1996, in a press release that also expressed Quantum's pleasure at the early customer acceptance of Bigfoot drives. Complaint ¶ 25. The press release also explicitly urged investors to review the risk factors disclosed in Quantum's most recent annual and quarterly SEC reports. In the Form 10-Q referenced by the press release, Quantum had disclosed the very information that plaintiff now asserts was concealed. See Section III, infra. Quantum repeated these warnings in a Registration Statement filed with the SEC on May 8, 1996. Id.

On June 12, 1996 -- well before the quarter had ended, and weeks before its normal earnings release -- Quantum announced that projected revenue and earnings for its First Quarter 1997 (ending June 30, 1996) would be lower than anticipated. Complaint ¶ 39. Quantum explained that sales of Bigfoot drives in the First Quarter were below prior internal expectations due to a slowdown in the personal computer market. This lawsuit followed.

1. Does the Complaint plead fraud with the particularity required by the Private Securities Litigation Reform Act of 1995, and do its allegations state a claim under Fed. R. Civ. P. 12(b)(6)?

2. Does the Complaint plead facts giving rise to a strong inference of scienter, as required by the Reform Act?

3. Are Quantum's statements protected by the Reform Act's safe harbor provisions?

I. THE COMPLAINT DOES NOT PLEAD WHY ANY STATEMENT WAS FALSE WHEN MADE

The Complaint asserts that prospective statements about Quantum's First Quarter 1997 earnings were false when made. Even before the Reform Act, Fed. R. Civ. P. 9(b) required plaintiffs to plead facts explaining why the failure to achieve forecasted results was due to fraud, rather than to one of the many benign reasons why companies sometimes do not achieve forecasts. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1994) (en banc) ("In order to allege the circumstances constituting fraud, plaintiffs must set forth facts explaining why the difference between the earlier and the later statements is not merely the difference between two permissible judgments, but rather the result of a falsehood").

The Reform Act raised the standard for pleading falsity. Congress found that preexisting law allowed "the routine filing of lawsuits . . . whenever there is a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer, and with only faint hope that the discovery process might lead eventually to some plausible cause of action . . . ." Conference Report at 31. Congress further found that Rule 9(b) "had not prevented abuse of the securities laws by private litigants." Id. at 41. To address these problems, the Reform Act enacted a "[h]eightened pleading standard." Id. Today, in every Rule 10b-5 action, "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." Securities & Exchange Act of 1934 § 21D(b)(1), 15 U.S.C. § 78u-4(b)(1). If a complaint does not do this, it must be dismissed. Id. § 21D(b)(3)(A), 15 U.S.C. § 78u-4(b)(3)(A).

Plaintiff's Complaint does not meet this standard. It is not difficult to find press releases and analyst reports on NEXIS or the Internet. Thus, the Complaint is fulsome in alleging the time, place, and contents of statements that were made about Quantum. It is equally adept at crafting an accusatory story from heavily edited excerpts from those statements, whether they were made by Quantum or someone else. Complaint ¶ 3. This form of pleading should be familiar to the Court, and to other courts in this Circuit that have reviewed pre-Reform Act complaints.¹

Entirely absent from the Complaint, however, are the time, place, and contents of the events constituting the "true" state of affairs at the time of the challenged statements. Instead, a boilerplate paragraph titled "Basis of Allegations" purportedly demonstrates why fraud is the only explanation for Quantum's disappointing quarter:

Plaintiff has alleged the foregoing based upon the investigation of its counsel, which included a review of Quantum'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. Substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

Complaint ¶ 56. This paragraph does not even attempt to "state with particularity all facts" that form plaintiff's belief that Quantum committed fraud. Rather, it tacitly admits that discovery is required to provide factual support for that belief. Under the Reform Act, however, a complaint must plead fraud with factual specificity before discovery may commence. Securities & Exchange Act of 1934 § 21D(b)(3)(B), 15 U.S.C. § 78u-4(b)(3)(B) (all discovery shall be stayed during the pendency of a motion to dismiss); Medhekar v. United States Dist. Court, 99 F.3d 325, 328 (9th Cir. 1996) ("Congress clearly intended that complaints in these securities actions should stand or fall based on the actual knowledge of the plaintiffs rather than information produced by the defendants after the action has been filed."). Therefore, this paragraph does not meet plaintiff's obligation to plead fraud with the particularity required by the Reform Act.

Additional proof of the Complaint's failure to plead fraud is found in the single paragraph that purports to reveal the adverse information supposedly hidden from investors. Complaint ¶ 37. All of these alleged omissions are either: (1) factually unsupported; (2) predicated on information not unique to Quantum; or (3) predicated on a nonexistent duty to disclose.

Factually unsupported. Plaintiff asserts that Apple, Compaq, and Hewlett-Packard cancelled or delayed orders for Bigfoot drives due to "vibration" problems. Complaint ¶¶ 37(a), (c). The Complaint does not plead the time, place, or contents of the supposed communications or events in which these companies cancelled or delayed orders. See Zeid v. Kimberley, 930 F. Supp. 431, 436 (N.D. Cal. 1996) (rejecting complaint that did not allege any contemporaneous inconsistent statement or information that indicated defendant company's business was declining).² In the same vein, plaintiff alleges, without factual support or explanation, that demand was "much weaker in ... Europe, especially in Germany." Id. ¶ 37(g). Even before the Reform Act, this allegation did not suffice to plead fraud. Fisher v. Acuson Corp., No. C 93-20477 RMW, 1995 WL 261439, at *6 (N.D. Cal. April 26, 1995) (allegation that the company faced undisclosed slowdown in European sales insufficient because plaintiffs had "not shown why these problems ... precluded . . . [the company] from anticipating that international sales growth rate would outpace domestic sales growth") (Fernandez Decl., Ex. C).

Information not unique to Quantum. Plaintiff asserts that Quantum concealed information about the underlying consumer preferences among potential disk drive purchasers. See Complaint ¶ 37(f) (Quantum somehow had exclusive knowledge about the prevalence of 5.25" disk drive slots in personal computers sold to home users).³ Plaintiff, however, does not and cannot explain how Quantum possessed unique knowledge about these matters. Information about mass consumer preferences is equally knowable (or, more accurately, unknowable) to all. See, e.g., In re GlenFed Inc. Sec. Litig., 42 F.3d at 1548 (recognizing that a shift in consumer demand is the very sort of unanticipated and unforeseeable event that indicates that a business reversal is due to fate and not to fraud). As a matter of law, Quantum cannot be liable for failing to disclose this type of public (as opposed to firm-specific) information. In re SciClone Pharmaceuticals Sec. Litig., No. C 94-1485 SBA, slip op. at 20 (N.D. Cal. Mar. 10, 1995) (a company cannot be held "liable for failing to educate the public about [the] potential impact on [the] company of publicly known facts") (Fernandez Decl., Ex. D).⁴

In a similar manner, plaintiff asserts that Quantum concealed information about the data storage capacity of its competitors' disk drives. Complaint ¶ 37(b). Again, plaintiff does not and cannot explain how Quantum possessed unique knowledge about this topic. For disk drives models sold to the public, Quantum could not prevent anyone from comparing the capacity of Quantum drives to the drives sold by competitors.⁵ For disk drives models still in development, Quantum could not have known about its competitors' plans, even if they had been foolish enough to disclose those plans to Quantum. In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1407 (9th Cir. 1996) (even if a competitor gives advance warning of its product plans, a company cannot know whether the competitor will actually follow through on those plans), cert. denied, 117 S. Ct. 1105 (1997).

No duty to disclose. Plaintiff asserts that Quantum did not disclose its "severe management problems." Complaint ¶ 37(m). Quantum did not have a duty to disclose inadequacies in its management's performance. In re Software Pub. Sec. Litig., [1993-94 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,094, at 98,759 (N.D. Cal. Feb. 2, 1994) (Fernandez Decl., Ex. G).⁶ Moreover, the Complaint provides no hint at the nature or impact of these so-called "severe management problems."

In sum, because the Complaint does not specifically allege the time, place, and contents of Quantum's true state of affairs during the purported class period, nor the factual basis for plaintiff's belief that fraud occurred, it does not plead fraud with the particularity required by the Reform Act.

II. THE COMPLAINT DOES NOT PLEAD SCIENTER

Congress also recognized that "[n]aming a party in a civil suit for fraud is a serious matter. Unwarranted fraud claims can lead to serious injury to reputation for which our legal system effectively offers no redress." Conference Report at 41. To ensure that each person's reputation is protected from baseless fraud accusations, the Reform Act requires plaintiffs to plead, with particularity, facts that give rise to a strong inference that each defendant acted with scienter. Securities & Exchange Act of 1934 § 21D(b)(2), 15 U.S.C. § 78u-4(b)(2). A complaint that fails to plead these facts must be dismissed. Id. § 21D(b)(3)(A), 15 U.S.C. § 78u-4(b)(3)(A).

The Complaint does not permit any inference of scienter. It does not plead any basis from which one may infer that Quantum did not expect to achieve the sales projected in the statements pleaded therein. Instead, the Complaint alleges the opposite. Plaintiff asserts that Quantum developed excess disk drive inventory during the purported class period. Complaint ¶ 37(e). If Quantum had not expected to sell more disk drives than it actually sold, it would not have developed excess inventory.

Unable to plead facts about Quantum that imply scienter, the Complaint relies on stock sales by Quantum officers or directors.⁷ Even in the abstract, these sales do not create a strong inference of scienter. Employees in high technology companies generally receive stock options on a periodic basis. For many employees, stock options are an element of compensation, equivalent to salary or commissions.

In any event, the Complaint dramatically inflates the percentage of outstanding shares actually sold by Quantum officers or directors during the purported class period. Plaintiff alleges that Quantum officials sold a high percentage of "the Quantum stock they owned" in May 1996. Complaint ¶ 40. The alleged factual basis for plaintiff's stock sale allegations is contained in a chart in paragraph 40 of the Complaint. Id. Paragraph 40, however, shows that plaintiff did not calculate the percentages based on the number of shares that Quantum's officers or directors owned at the time of their stock sales. Rather, the denominator used in the calculation of the percentages appears to be the number of shares that those persons purchased during May 1996. Thus, even on its own terms, the Complaint cannot possibly support plaintiff's stock sale allegations. See Zeid, 930 F. Supp. at 438 (rejecting motive theory based on conclusory allegations not supported by factual allegations of complaint).⁸ Moreover, as of May 1996, the shares and stock options owned by the Quantum officials in question were disclosed in Form 3s and 4s filed with the SEC.⁹ Had plaintiff considered this data and performed correct calculations, it might have refrained from filing suit:

See Appendix Calculating Quantum Officers' and Directors' Stock Sales, infra at 14.

Plaintiff further asserts that Quantum's executives had the "opportunity" and "motive" to defraud because they controlled the Company's public statements and held stock options. Complaint ¶¶ 15-16. These allegations can be made against the executives of every public company. In recognition of this fact, even under pre-Reform Act law, courts in the Second Circuit had held that if these allegations sufficed to plead scienter, then the duty to plead a strong inference of scienter would be meaningless. See San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 814 (2d Cir. 1996) (alleged motive to maintain a high bond or credit rating cannot suffice to plead scienter, as this would apply to every corporation); Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995) ("Plaintiffs' allegations that defendants were motivated to defraud the public because an inflated stock price would increase their compensation is without merit," as this would allow scienter to be pleaded in every case). Certainly, Congress -- which drafted the Reform Act to strengthen pleading requirements beyond those imposed by Second Circuit cases¹⁰ -- could not have intended to render meaningless the duty to plead a strong inference of scienter.

Because the Complaint relies on inflated stock sale allegations to make up for the lack of facts that might imply that Quantum did not expect to achieve a successful quarter, it does not plead facts giving rise to a strong inference of scienter.

III. THE SAFE HARBOR PROTECTS QUANTUM'S FORWARD-LOOKING STATEMENTS

In considering the Reform Act, Congress also found that under pre-existing law, "[f]ear that inaccurate projections will trigger the filing of a securities class action lawsuit has muzzled corporate management." Conference Report at 43.¹¹ Thus, the Reform Act enacted safe harbor provisions that "seek[] to provide certainty that forward-looking statements will not be actionable . . . if they are accompanied by a meaningful cautionary statement." Id. at 44. A company cannot be liable "if and to the extent that the forward-looking statement is identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or [is] immaterial." Securities & Exchange Act of 1934 § 21E(c)(1)(A), 15 U.S.C. § 78u-5(c)(1)(A). Even if there are not sufficient cautionary disclosures, liability cannot be premised on a forward-looking statement unless the person making it had actual knowledge of its falsity.¹²

Quantum is protected by the safe harbor due to its exhaustive risk disclosures. Immediately prior to the start of the class period, Quantum filed its third quarter report on Form 10-Q. Third Quarter 10-Q (Feb. 5, 1996) (Fernandez Decl., Ex. K). This document disclosed the risks of Quantum's competitive environment:

• "Any significant decrease in sales to a major customer or the loss of a major customer could have a material adverse effect on the Company's results of operations."

• "A slowdown in demand for PCs would have a material adverse effect on the Company's results of operations . . . . Based on the foregoing, the Company could experience a decrease in demand for its products in the near future. Any such slowdown in demand would have a material adverse effect on the Company."

• "If price competition intensifies, the Company may be forced to lower prices further than expected, which could adversely affect its sales and gross margin."

• "The Company is generally unable to predict whether or not there will be any significant change in demand for its customers' products in the future. In the event that any such changes result in decreased demand for the Company's products, whether by loss or delays in orders, the Company would be materially adversely affected."

See Third Quarter 10-Q at 8, 13, 16. These warnings were repeated in Quantum's May 8, 1996 Registration Statement on SEC Form S-3. Fernandez Decl., Ex. L.

The Third Quarter 10-Q also disclosed the risks regarding Quantum's ability to introduce new products. Quantum stated that its future is "dependent on its ability to develop new products, to successfully introduce these products to the market on a timely basis and to commence volume production to meet customer demands." Third Quarter 10-Q at 15. Quantum further cautioned that "[i]f the Company is unable, for technological or other reasons, to develop and introduce new products in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results and financial condition would be materially adversely affected." Id. at 15-16. Quantum then disclosed its intent to develop new products, while warning that "there can be no assurance that it will be successful in this regard." Id. at 13. "If this does not occur," Quantum reiterated, "the Company would be materially and adversely affected." Id. Again, these warnings were repeated in Quantum's May 8, 1996 Registration Statement.

Quantum's extensive efforts to refer investors to the risk factors in its SEC filings allow it to invoke the Reform Act's safe harbor. The Complaint cites only one Quantum press release discussing the Company's earnings. Complaint ¶ 25 (press release dated May 7, 1996) (Fernandez Decl., Ex. M). That document stated that it "contains forward-looking statements based on current expectations," and that "[a]ctual results could differ materially as a result of several factors including those related to the change in the high-end manufacturing strategy." Id. It also directed readers to Quantum's SEC filings (including the filings discussed in the previous paragraphs, supra) for further discussion of risk factors. Id. The Complaint also asserts that Quantum published an Internet site throughout the class period. Complaint ¶ 22. That Internet site allowed investors to access Quantum's SEC filings, including the filings presenting the risk factors quoted above. Every Quantum press release cited in the Complaint informed investors of the address of the Internet site, and was published on the Internet site. Thus, investors were provided access to the risk factors affecting Quantum's business, with respect to and in connection with all of the statements made by the Company.

In anticipation (and derogation) of the protections provided by Reform Act, the Complaint contains an introductory paragraph titled "Statutory Safe Harbor." Complaint ¶ 18. The paragraph mouths the words of every conceivable defense to the safe harbor: e.g., that "[n]one of the forward-looking statements pleaded were identified as 'forward-looking statements' when made"; that the statements were not "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from the statements made"; and that "[a]lternatively, to the extent that the statutory safe harbor does apply . . ., the defendants are liable for those statements because at the time each of those statements was made, the speaker knew the statement was false and the statement was authorized and/or approved by an executive officer at Quantum who knew those statements were false when made." Id. The Complaint is completely silent on the factual particulars of these allegations. This method of pleading cannot be used to plead around the safe harbor, just as it cannot be used to plead fraud or scienter. See Sections I, II, supra. Rather, Congress has held that in challenging the safe harbor, the Reform Act requires that "plaintiff must plead with particularity all facts giving rise to a strong inference of a material misstatement in the cautionary statement to survive a motion to dismiss." Conference Report at 44.

Independent of the Reform Act safe harbor, Quantum's risk warnings are so specific that they allow dismissal of the Complaint under the bespeaks caution doctrine. See, e.g., In re Stac Elecs. Sec. Litig., 89 F.3d at 1408 (court may dismiss allegation if optimistic projection is coupled with cautionary language affecting the reasonableness of reliance on and the materiality of those projections). The risk disclosures quoted above were specific descriptions of the very "problems" that plaintiff now alleges were concealed. In the context of such disclosures, defendants' forward-looking statements cannot have been misleading. See id. at 1409 (bespeaks caution doctrine barred challenge to optimistic earnings projections where company disclosed the same risks that plaintiff alleged undermined earnings).¹³

It is time to take the Reform Act literally and seriously. If plaintiff believes that Quantum committed fraud, at a minimum, it must plead the factual basis for its belief. The Complaint does not do this. Therefore, it should be dismissed.

Dated: April __, 1997

WILSON SONSINI GOODRICH & ROSATI, P.C.

By ______________________________
Boris Feldman

Attorneys for Defendants
QUANTUM CORPORATION, MICHAEL A. BROWN,
WILLIAM F. ROACH, YOUNG K. SOHN,
GINA M. BORNINO, DEBORAH E. BARBER,
MARK JACKSON AND STEVEN C. WHEELWRIGHT

¹ See, e.g., In re GlenFed, Inc. Sec. Litig., 42 F.3d at 1554 (a complaint that renders unclear plaintiff's specific challenges to specific statements creates a puzzle that imposes an unfair burden on defendants); In re Syntex Corp. Sec. Litig., 95 F.3d 922, 932-33 n.9 (9th Cir. 1996) (a complaint that "repeat[s] general allegations, mix[es] together allegations about Defendants' statements and analysts' statements, and omit[s] pertinent parts of the challenged statements," imposes "an almost impossible task" for a court to unravel); Shuster v. Symmetricom, Inc., No. C 94-20024 RMW, slip op. at 5 (N.D. Cal. Feb. 25, 1997) ("The Complaint as it now stands is a rambling set of allegations which is almost impossible to effectively review") (attached as Exhibit A to the accompanying Declaration of Dorothy L. Fernandez); Strassman v. Fresh Choice, Inc., No. C-95-20017 RPA, 1995 WL 743728, at *4 (N.D. Cal. Dec. 7, 1995) (complaints drafted like the puzzle described in GlenFed place an unwelcome and unnecessary strain on defendants and the courts) (Fernandez Decl., Ex. B).

² Indeed, the Complaint cannot state a claim on this theory because it does not even allege that Apple, Compaq, or Hewlett-Packard had placed any orders for Bigfoot drives. See Shuster v. Symmetricom, Inc., slip op. at 5-7 (no §10(b) claim where complaint did not allege that company had firm orders for its new computer products, nor cite to any contemporaneous statements inconsistent with defendants' alleged optimism regarding those products). Even if the Complaint had alleged that these customers had placed orders, as a matter of law, investors knew that orders in the computer industry are "soft" and can be cancelled. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1119 (9th Cir. 1989), cert. denied, 496 U.S. 943 (1990).

³ See also id. ¶ 37(j) (Quantum somehow had exclusive knowledge about the market share held by its competitor Western Digital); id. ¶ 37(k) (Quantum somehow had exclusive knowledge about the factors that would make Western Digital drives attractive to consumers).

⁴ See also Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 517 (7th Cir. 1989) ("Issuers of securities must reveal firm-specific information. Investors combine this with public information to derive estimates about the securities' value. It is pointless and costly to compel firms to reprint information already in the public domain"); O'Sullivan v. Trident Microsytems, Inc., [1994 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,116, at 98,909 (N.D. Cal. Jan. 31, 1994) ("Trident adequately disclosed that it faced competitive pricing in competitive markets. After disclosing these facts, Trident had no duty to disclose basic economics principles such as the principle that when competition increases and selling prices decrease, revenues and profits decrease") (Fernandez Decl., Ex. E); In re Exabyte Corp. Sec. Litig., 823 F. Supp. 866, 871-72 (D. Colo. 1993) (the "[f]ailure to disclose general economic trends, as opposed to firm-specific information, cannot form the basis for securities fraud"); Johnson v. Hui, 811 F. Supp. 479, 488 (N.D. Cal. 1991) (no liability where omission did not relate to "idiosyncratic inside information about [the defendant computer company]").

⁵ See In re Sun Microsystems, Inc. Sec. Litig., [1990 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,504, at 97,637 (N.D. Cal. Aug. 20, 1990) ("investors were free to draw their own conclusions" regarding competitiveness of company's products versus the competition) (Fernandez Decl., Ex. F); In re Apple Computer Sec. Litig., 886 F.2d at 1111-12, 1116 (rejecting claim that company misrepresented potential competitive success of new computer, where company had submitted prototypes of computer for evaluation by press, industry analysts, and potential customers).

⁶ See also In re Chaus Sec. Litig., [1990-91 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,646, at 98,001 (S.D.N.Y. Nov. 20, 1990) (dismissing claim that company failed to disclose management's inadequacy and incompetence) (Fernandez Decl., Ex. H); In re Syntex Corp. Sec. Litig., [1993 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 97,747, at 97,569 (N.D. Cal. Sept. 1, 1993) (dismissing claim that company should have characterized its sales force as "inadequate") (Fernandez Decl., Ex. I).

⁷ For some reason, the Complaint also alleges sales by Gina M. Bornino. Ms. Bornino was no longer a Quantum employee by the time she sold her Quantum shares. Compare Complaint ¶ 13(e) (alleging that Ms. Bornino left the Company during the class period).

⁸ In Zeid, the Court held that the Reform Act adopted the standard enunciated in In re Time Warner, Inc. Securities Litigation, 9 F.3d 259, 269 (2d Cir.), cert. denied, 511 U.S. 1017 (1994), allowing pleading of scienter by alleging either: (1) facts constituting circumstantial evidence of reckless or conscious behavior, or (2) facts establishing a motive to commit fraud and an opportunity to do so. Zeid, 930 F. Supp. at 438. Subsequent decisions have held that the Reform Act adopted a more stringent pleading standard. See ,e.g., In re Silicon Graphics, Inc. Sec. Litig., [1996-97 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,325 (N.D. Cal. Sept. 25, 1996) (Reform Act requires pleading of specific facts giving rise to a strong inference of conscious misbehavior) (Fernandez Decl., Ex. J). Under either standard, the Complaint here fails to plead facts giving rise to a strong inference of scienter.

⁹ The Court may consider these publicly filed SEC reports on a motion to dismiss. Kramer v. Time Warner, Inc., 937 F.2d 767 (2d Cir. 1991). Moreover, plaintiff appears to have relied on these documents in drafting its Complaint. See Complaint ¶ 56 (basis of allegations included "a review of Quantum's SEC filings"). This provides an independent basis on which to consider the documents. Fecht v. The Price Co., 70 F.3d 1078, 1080 n.1 (9th Cir. 1995), cert. denied, 116 S. Ct. 1422 (1996); Branch v. Tunnell, 14 F.3d 449, 453-54 (9th Cir.), cert. denied, 512 U.S. 1219 (1994); In re Hunter Environmental Servs., Inc. Sec. Litig., 921 F. Supp. 914, 917 (D. Conn. 1996) ("[I]n passing upon a 12(b)(6) motion, in a securities fraud action the court also may consider . . . statements or documents incorporated into the complaint by reference, and any statements or documents upon which the plaintiff relied in bringing suit").

¹⁰ See Conf. Rep. at 41 ("Regarded as the most stringent pleading standard, the Second Circuit requirement is that the plaintiff state facts with particularity, and that these facts, in turn, must give rise to a 'strong inference' of the defendant's fraudulent intent. Because the Conference Committee intends to strengthen existing pleading requirements, it does not intend to codify the Second Circuit's case law interpreting this pleading standard").

¹¹ Congress further recognized that "[t]echnology companies -- because of the volatility of their stock prices -- are particularly vulnerable to securities fraud lawsuits when projections do not materialize." Id.

¹² See Securities & Exchange Act of 1934 § 21E(c)(1)(B)(i), 15 U.S.C. § 78u-5(c)(1)(B)(i) (plaintiff must prove that a forward-looking statement, "if made by a natural person, was made with actual knowledge . . . that the statement was misleading"); id. § 21E(c)(1)(B)(ii), 15 U.S.C. § 78u-5(c)(1)(B)(ii) (plaintiff must prove that a forward-looking statement made by a company was "made by or with the approval of the executive officer of that entity . . . with actual knowledge by that officer that the statement was false or misleading").

¹³ See also In re Syntex Corp. Sec. Litig., 95 F.3d at 929-30 (under bespeaks caution doctrine, no reasonable investor could have been misled by company's opinion regarding effect of regulatory decree, where company disclaimed certainty of its opinion); In re Interactive Network Sec. Litig., No. C-95-0026 DLJ, slip op. at 8-10 (N.D. Cal. Apr. 4, 1997) (Fernandez Decl., Ex. N) (bespeaks caution doctrine barred claim where company's SEC filings warned of "exactly the problem . . . that doomed the company"); In re OPTi, Inc. Sec. Litig., No. C 95-3434 SBA, slip op. at 11-12, 19-20, 22, 33 (N.D. Cal. Mar. 31, 1997) (Fernandez Decl., Ex. O) (bespeaks caution doctrine barred claim where company's SEC filings disclosed production capacity problems that led to poor financial results).