in re: marvell technology group, ltd. securities...

Case 5:06-cv-06286-RMW Document 200 Filed 01/22/2008 of 41

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DANIEL J. BERGESON, SBN 105439, [email protected] McINTYRE, SBN 159005, [email protected] D. LEAR, SBN 122922, [email protected], LLP303 Almaden Blvd., Suite 500San Jose, CA 95110-2712Telephone: (408) 291-6200Facsimile: (408) 297-6000

Attorneys for DefendantGEORGE HERVEY

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

IN RE MARVELL TECHNOLOGY GROUP, Master File No. C-06-06286 RMWLTD. SECURITIES LITIGATION

CLASS ACTION

APPENDIX OF ADDITIONALAUTHORITIES IN SUPPORT

THIS DOCUMENT RELATES TO : DEFENDANT GEORGE HERVEY'SREPLY MEMORANDUM OF POINTS

ALL ACTIONS AND AUTHORITIES IN SUPPORT OFMOTION TO DISMISS

-Date: February 15, 2008Time: 9:00 a.m.Place: Courtroom: Fourth FloorJudge: Honorable Ronald M. Whyte

APPENDIX OF ADDITIONAL AUTHORITIES IN SUPPORT OF DEFENDANT GEORGE HERVEY'S REPLYMEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION TO DISMISS

Case No. C-06-06286


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Defendant George Hervey respectfully lodges the following additional authorities in

support of his Reply Memorandum of Points and Authorities in Support of Motion to Dismiss.

EXHIBIT CASESNo.

1. In re Ariba, Inc. Sec. Litig., No. C 03-00277 JF, 2005 WL 608278 (N.D. Cal. Mar.16, 2005)

2. In re Ditech Networks, Inc. Derivative Litig., No. C06-5157JF, 2007 WL 2070300(N.D. Cal. July 16, 2007)

3. In re Watchguard Sec. Litig., No. C05-678LR, 2006 WL 2927663 (W.D. Wash.Oct. 12, 2006)

4. Weiss v. Amkor Technology, Inc., No. CV07-0278-PHX-PGP, 2007 WL 2808224(D. Ariz. Sept . 25, 2007)

I Dated: January 22, 2008 BERGESON, LLP

By: IslCaroline McIntyre

Attorneys for DefendantGEORGE HERVEY

-1-APPENDIX OF ADDITIONAL AUTHORITIES IN SUPPORT OF DEFENDANT GEORGE HERVEY'S REPLY

MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION TO DISMISSCase No . C-06-46286


EXHIBIT 1

Case 5:06-cv-06286-RMW Document 200

Westlaw.

Not Reported in F.Supp.2d

Not Reported in F.Supp.2d, 2005 WL 608278 (N.D.Cal.)(Cite as : Not Reported in F.Supp.2d)

CIn re Ariba, Inc. Securities LitigationN.D.Cal.,2005.Only the Westlaw citation is currently available,

United States District Court,N.D. California.In re ARIBA, INC. SECURITIES LITIGATION

No. C 03-00277 JF.

March 16, 2005.

Reed R. Kathrein, Azra Z. Mehdi, Dennis J. Herman, Randi D. Bandman, Shirley H. Huang, LerachCoughlin Stoia Geller Rudman & Robbins LLP,Laurence D. King, Linda M. Fong, Kaplan Fox &Kilsheimer LLP, San Francisco, CA, Darren J.Robbins, William S. Lerach, Lerach Coughlin StoiaGeller Rudman & Robbins LLP, Betsy C. Manifold,Francis M. Gregorek, Wolf Haldenstein AdlerFreeman & Herz, San Diego, CA, Benjamin JamesSweet, Schiffrin & Barroway, LLP, Thomas W.Grammer, Bala Cynwyd, PA, for Plaintiffs.Bruce B. Kelson, Jeffrey S. Facter, Raymond A. Just, Shearman & Sterling, San Francisco, CA, Glen W.Schofield, Ruby & Schofield, San Jose, CA, forDefendants.Michael David Braun, Braun Law Group, P.C.,Patrice L. Bishop, Stull, Stull & Brody, Michael M.Goldberg, Glancy & Binkow LLP, Los Angeles,CA, for Movants.

ORDER GRANTING MOTION TO DISMISSSECOND CONSOLIDATED AMENDED

COMPLAINT

FOGEL, J.*1 This Document Relates to:

ALL ACTIONS.

Page 1

Defendants Ariba, Inc. ("Ariba"), Keith J.Krach ("Krach"), and Robert M. Calderoni ("

Calderoni") (collectively "Moving Defendants") FN1

move to dismiss this action for failure to statea claim upon which relief can be granted pursuantto Federal Rule of Civil Procedure 12(b)(6). LeadPlaintiff Aletti Gestielle, SGR, S.P.A. ("Plaintiff')opposes the motion. The Court has read the movingand responding papers and has considered the oralarguments of counsel presented on October 29,2004. For the reasons set forth below, the motionwill be granted.

Filed 01/22/2008 Page ag4l of l l

FN 1. Defendant Lawrence A. Mueller ("Mueller") is not a moving party.

I. BACKGROUND

This consolidated federal securities class actionlawsuit alleges violations of sections 10(b), 14(a),and 20(a) of the Securities Exchange Act of 1934,15 U.S.C. §§ 78j(b), 78n(a), 78t(a), and rules andregulations promulgated thereunder by the UnitedStates Securities and Exchange Commission ("SEC"), including Rule lOb-5, 1.7 C.F.R. § 240 .10b-5, andRule 14a-9, 17 C.F.R. § 240.14a-9 . The claims,which are presented in their current form in aSecond Consolidated Amended Complaint for

Violations of Federal Securities Laws ("SCAC"), FN2

are brought against Ariba, Krach, Calderoni,

and Mueller (collectively "Defendants") F`1 1 onbehalf of all persons and entities who purchased orotherwise acquired Ariba common stock on theopen market between April 2, 2001, and December31, 2002, inclusive ("the Class Period"), Plaintiffsallegations are as follows:

Docket No. 121 ]

FN2. On March 30, 2004, the Court issuedan Order adopting the parties' stipulationand agreement that, should the SCAC be

© 2008 Thomson/West. No Claim to Orig. U.S. Govt. Works.



Not Reported in F.Supp.2d, 2005 WL 608278 (N.D.Cal.)(Cite as : Not Reported in F.Supp.2d)

dismissed, such dismissal would be withprejudice, and Plaintiff would not seekleave to amend the complaint.

FN3. Specifically, all Defendants arealleged to have violated section 10(b) ofthe Securities Exchange Act and Rule1Ob-5 promulgated thereunder, allDefendants are alleged to have violatedsection 14(a) of the Securities ExchangeAct and Rule 14a-9 promulgatedthereunder, and Krach, Calderoni, andMueller are alleged to have violatedsection 20(a) of the Securities ExchangeAct.

In late March 2001, Krach, who was thenAriba' s board chairman and chief executive officer ("CEO"), "secretly" paid Mueller, who was thenAriba's president and chief operating officer, $10million in cash "to assume the position of CEO atAriba."SCAC ¶ 2. This payment was made fromKrach's own "personal accounts," which "improperly concealed a large compensation expensefrom appearing on [Ariba's] books."Id. ¶¶ 5,28.ln addition , between September 2000 and July2001, Mueller received another "secret payment"from Krach of $ 1.2 million in "travel benefits andrelated expenses." Id. ¶¶ 2, 7. As discussedbelow, Ariba did not disclose these payments invarious press releases or documents filed with theSEC. See id. ¶ 2.

The Class Period begins on April 2, 2001,when Ariba pre-announced its results for the secondquarter of fiscal year 2001, which ended on March31, 2001 .Id. ¶ 3. Analysts had been expectingAriba to report a net loss of approximately $14.5million , or $0.06 per share, F 14 but Aribaannounced a net loss of more than three times thatamount-$48.3 million , or $0.20 per share .FN5Id.

Ariba's management explained that the loss was theproduct of "a large unexpected drop-off' in salesclosure rates . Id. That explanation led analysts "toopenly question the credibility of Aribamanagement. "Id. For example, two analysts atDeutsche Banc Alex. Brown downgraded Ariba'sstock , "noting that Ariba management' s reference to`a large unexpected drop-off in sales closure rates

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lacked credibility given the information technologyspending environment" and stating that Ariba'smanagement "still needed to repair credibility with `the Street' following the belated disclosure ofrevenue recognition changes in the first quarter offiscal year 2001."1d. ¶ 26.Plaintiff alleges that, ifDefendants had disclosed Krach's $10 millionpayment to Mueller, "the already-erodingconfidence in management would have furtherdiminished."Id. ¶ 3. As a result of theannouncement, the price of Ariba's common stockdropped "significantly," id. ¶ 4, and at leasteighteen other analysts and securities firmsdowngraded Ariba's stock by the next day, id. ¶ 26.

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FN4. Elsewhere in the SCAC, Plaintiffstates that the expected net loss per sharewas $0.05 rather than $0.06. See id. ¶ 25.

FN5. Plaintiff states that thispre-announcement failed to discloseKrach' s cash payment to Mueller as a "compensation expense , which would haveincreased [Ariba' s] net loss significantly."Id. ¶ 3. However, Plaintiff does not allegeexplicitly that this omission constituted aviolation of any securities law.

*2 On April 30, 2001, Mueller replaced Krach,who had resigned, as CEO.Id. ¶¶ 4-5.Accordingto a former executive assistant to an executive vicepresident and chief marketing officer at Ariba ("Confidential Witness No. 1"), FN6,'Ariba's changein leadership , attempted to create the appearancethat [Ariba] was moving to a `higher level," ' andMueller was appointed as CEO " `to front thecompany." ' Id. ¶¶ 5, 27.Confidential WitnessNo. 1 also has stated that the $10 million was a " `side payment' of `hush money' to ensure thatDefendant Mueller would continue to play his partin making [Ariba] `look like it was doing betterthan it was." ' Id. ¶ 29.The press releaseannouncing Mueller's elevation to the position ofCEO did not disclose Krach's payments to Mueller.Id, ¶ 30.1t contained the following statement fromKrach:


Case 5:06-cv-06286-RMW


Not Reported in F.Supp.2d, 2005 WL 608278 (N.D.Cal.)(Cite as: Not Reported in F.Supp.2d)

FN6. This confidential witness wasemployed by Ariba from October 1999 toJuly 2001, and his or her duties requiredhim or her to "work closely with seniorexecutives of Ariba, including DefendantKrach, Ariba Executive Vice PresidentRobert J. DeSantis and Ariba Senior VicePresident of Product Development K.Charles Kleissner."Id. ¶ 27.

"We have built a tremendous team at Aribaover the past four years [sic] and a half years....This is a natural transition for Larry [Mueller] whohas demonstrated the vision, long-term drive,passion and ability to deliver value which arebenchmarks to the success of our customers and ouremployees. With Larry leading Ariba, I'm confidentwe will be successful in taking Ariba to the nextlevel."

Just Reply Decl., Ex. A at 1. Plaintiff allegesthat "Defendants' statements in connection with theApril 30, 2001 press release were materially falseand misleading, as no mention was made of thematerial fact that Krach had to pay Mueller $10million dollars [sic] out of his own pocket in orderfor Mueller to take the job."SCAC ¶ 30.

On May 15, 2001, Ariba reported its financialresults for the second quarter of fiscal year 2001 inits Form 10-Q, which was signed by Calderoni, whowas then Ariba's chief financial officer ("CFO"),and filed with. the SEC. Id. ¶ 31.Plaintiff allegesthat these results were "materially false andmisleading due to the material misstatement ofexpenses" (i.e., the omission of Krach's payments toMueller).Id. ¶ 32.Moreover, Plaintiff alleges thatthe results did not, "as falsely represented, containall adjustments necessary to present fairly inaccordance with GAAP the financial position,results [sic] of operations for the periods [sic]presented."Id. In particular, Plaintiff asserts thatKrach's payment of $10 million to Mueller was notdisclosed or properly accounted for, contrary to

Interpretation No. 1 , of APB No. 25 .1117See id.Krach and Mueller naturally are alleged to haveknown about the payment, as they were the payorand payee. Plaintiff also alleges that Calderoniknew about the $10 million payment. See id.Theallegation regarding Calderoni's knowledge is based

Document 200 Filed 01/22/2008 ?at4 of 11

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on a statement by Confidential Witness No. 1, who,prior to his or her departure from Ariba in July2001, "heard or had reason to know in the course ofhis/her duties ... that Defendant Calderoni also knewand had discussions with other senior executivesabout Defendant Krach's payment to DefendantMueller."Id,

FN7. As explained by Plaintiff, "Interpretation No. 1 of APB No. 25 statesthat a payment or compensatory stockoption given to an employee of a companyby a principal stockholder should, undermost circumstances , be treated as a capitalcontribution to the corporation and with[sic] the offsetting charge accounted for inthe same manner as compensatory plansadopted by the company . If the principalstockholder's intention is to enhance ormaintain the value of his investment in thecompany, the company is implicitlybenefiting from the retention of (orimproved performance by) the employeewho received the benefit."Id. ¶ 33.

*3 On July 19, 2001, Mueller resigned hisposition as CEO and received a multi-million-dollarseverance package. Id. ¶ 6. Krach replacedMueller, becoming interim CEO. Id. ¶ 34.Plaintiffalleges that "Defendants' statements in connectionwith the July 19, 2001 press release [announcingMueller's departure] were materially false andmisleading, as no mention was made of the materialfact that Krach paid Mueller $10 million dollars[sic] out of his own pocket in connection with hisacceptance of the CEO position."Id. .

On July 20, 2001, Ariba issued a press releaseannouncing its financial results for the third quarterof fiscal year 2001, which ended on June 30, 2001.Id. ¶ 35.For the quarter, it reported revenues of$85.3 million, down six percent from the previousquarter and up six percent from the same period theprior year, and it reported operating expenses of$132.5 million, resulting in a net loss of $26.1million. Id. Plaintiff alleges that these results were "materially false and misleading" for the samereasons that the financial results reported for the





second quarter of fiscal year 2001 were materiallyfalse and misleading . Id. ¶ 36.

On October 24, 2001, Ariba issued a pressrelease announcing its financial results for thefourth quarter of and full fiscal year 2001, whichended on September 30, 2001. Id.. ¶ 37.Plaintiffalleges that these results were "materially false andmisleading" for the same reasons that the financialresults reported for the second quarter of fiscal year2001 were materially false and misleading. Id.

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of Ariba common stock, reimbursement of pastbusiness expenses , and other benefits . Id. ¶ 41.

On December ' 31, 2001 , Ariba reported itsfinancial results for the fourth quarter of and fullfiscal year 2001 in its Form 10-KIA annual report,which was signed by Krach and Calderoni and filedwith the SEC and which represented that thefinancial statements therein were presented inaccordance with generally accepted accountingprinciples ("GAAP").Id. ¶ 38.This document didnot disclose Krach ' s payments to Mueller . Id. ¶ 2.

On January 24, 2002, Ariba filed its proxystatement ("2002 Proxy") pursuant to section 14(a)of the Securities Exchange Act. Id. ¶ 39.Thepurpose of the 2002 Proxy was to request, amongother things, that Plaintiff and other Aribashareholders vote in person or by proxy "forreelection of directors and various other issues."Id.¶ 79.The 2002 Proxy included a "SummaryCompensation Table," which set forth thecompensation earned by each individual who servedas Ariba's CEO during fiscal year 2001. Id. ¶ 39.Itstated that Mueller received the followingcompensation for fiscal year 2001: $240,625 as asalary, $79,707 as a bonus, $7,760,000 in restrictedstock awards, $5 million in "Securities UnderlyingOptions," and $28,313 as "All Other Compensation." Id. Plaintiff alleges that the 2002 Proxy was "false and misleading because Defendants failed todisclose that they knew or recklessly disregardedthat Defendant Mueller received additionalcompensation of'$10 million in fiscal year 2001 inthe form of a cash payment .... [and] $1.2 million ...

in the form of travel benefits and related services."FN8Id. ¶ 40.The 2002 Proxy also revealed for thefirst time that Mueller's October' 2001 severanceagreement provided him with a $2 millionlump-sum payment, two million fully vested shares

Filed 01/22/2008 Pg#t1 of 1.1

FN8. Plaintiff emphasizes that its claimunder section 14 (a) of the SecuritiesExchange Act "does not sound in fraud"and that its allegations of "fraud orfraudulent conduct and/or motive arespecifically excluded" from this claim. Id.¶74.

*4 The Class Period ends on December 31,2002, when Ariba announced it would restate itsfinancial results for the full fiscal year 2001 in orderto correct a violation of GAAP pertaining to theway it accounted for "what was characterized as `personal' transactions between two of its officers."Id. ¶ 7. Those transactions involved Krach's $10million payment to Mueller and Krach's provisionof an additional $1.2 million in travel benefits andother expenses to Mueller. Id. Ariba also announcedthat it would be delayed. in filing its Form 10-K forfiscal year 2002 due to an internal investigation byits audit committee. of "financial benefits" providedto some of its employees during fiscal years 2000and 2001. Id, ¶ 42.As a result of the investigationinto its accounting practices, Ariba eventuallyrestated its financial statements for fiscal years 2000and 2001 and for the quarters that ended on

December 31, 1999, through June 30, 2002.N9Id.¶¶ 43-45.In the restatements, Krach is deemed tohave contributed $11.2 million to Ariba inconnection with the cash payment and travelbenefits he provided to Mueller; these amounts arerecorded as capital contributions in accordance withInterpretation No. I of APB No.. 25 and charged tocompensation expense. Id. ¶ 53.Ariba alsoadjusted the preliminary financial statementinformation for the quarter and fiscal year thatended on September ' 30, 2002, and for the quarterthat ended on December 31, 2002. Id. ¶ 45.

FN9. Plaintiff argues that Ariba'srestatement of its financial results for fiscalyear 2001 and for the quarters that endedon June 30, 2001, through June 30, 2002,constitutes an "admission that the





originally reported figures were materiallyincorrect and in violation of GAAP."Id. ¶49.Federal securities regulations providethat financial statements filed with the SECthat are not prepared in accordance withGAAP will be "presumed to be misleadingor inaccurate, despite footnote or otherdisclosures ," unless the SEC has providedotherwise . 17 C.F.R. § 210.4-01(a)(1).Plaintiff discusses seven fundamentalaccounting principles alleged to have beenviolated by Ariba's financial statementsduring the Class Period . See SCAC ¶ 54.

Plaintiff alleges that Ariba's failure to disclosethe "secret payments" from Krach to Muellermaterially misled investors and analysts, preventingthem from evaluating the credibility of seniormanagement, as well as Ariba's future prospects. Id.T. 9. Plaintiff further alleges that Defendants' "fraudulent scheme" led to Ariba's artificiallyinflated common stock price throughout the ClassPeriod, which damaged Plaintiff and members ofthe proposed class who purchased shares but wouldnot have done so had they known the truth. Id. ¶¶10, 69.For pleading purposes, Plaintiff treats Krach,Calderoni, and Mueller as a group and alleges thatthe false and misleading information conveyed inAriba's public filings and statements resulted fromthe "collective action" of these individualDefendants. Id. ¶ 21.It asserts that. such treatmentis appropriate, because, in light of their respectivepositions with Ariba, they each "controlled and/orpossessed the authority to control the contents of[Ariba's] reports, press releases and presentations tosecurities analysts, ... directly participated in themanagement of [Ariba], [were] directly involved inthe day-to-day operations of [Ariba] at the highestlevel, and [were] privy to confidential proprietaryinformation concerning the statements."Id MovingDefendants now move to dismiss all claims forfailure to state a claim upon which relief can begranted.

II. LEGAL STANDARD

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*5 A complaint may be dismissed for failure tostate a claim upon which relief can be granted forone of two reasons: (1) lack of a.cognizable legaltheory or (2) insufficient facts under a cognizablelegal theory. See Conley v. Gibson, 355 U.S. 41,45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Robertsonv. Dean Witter Reynolds, Inc., 749 F.2d 530,533-34 (9th Cir.1984). For purposes of a motion todismiss, all allegations of material fact in thecomplaint are taken as true and construed in thelight most favorable to the nonmoving party. Cleggv. Cult Awareness Network, 18 F.3d 752, 754 (9thCir.1994). A complaint should not be dismissed "unless it appears beyond doubt the plaintiff canprove no' set of facts in support of his claim thatwould entitle him to relief."Id. However, the Court "is not required to accept legal conclusions cast inthe form of factual allegations if those conclusionscannot reasonably be drawn from the facts alleged."Id. at 754-55.

Although the Court generally may not considerany material beyond the pleadings when ruling on amotion to dismiss pursuant to Federal Rule of CivilProcedure 12(b)(6), Cooper v. Pickett, 137 F.3d616, 622 (9th Cir.1997), it may consider documentsthat are attached to and part of the complaint,Durning v. First Boston Corp., 815 F.2d 1265,1267 (9th Cir.1987). The Court also may consider "documents whose contents are alleged in acomplaint and whose authenticity no partyquestions , but which are not physically attached tothe pleading ."Branch v. Tunnell, 14 F.3d 449, 454(9th Cir.1994).

Ill. DISCUSSION

A. Claim Pursuant to Section I0(b) and Rule I Ob-5

Plaintiff alleges that all Defendants haveviolated section 10(b) of the Securities ExchangeAct ("Section 10(b)") and Rule 10b-5 promulgatedthereunder by the SEC. Section 10(b) makes itunlawful

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for any person, directly or indirectly, by the useof any means or instrumentality of interstatecommerce or of the mails, or of any facility of anynational securities exchange ... [t]o use or employ,in connection with the purchase or sale of anysecurity registered on a national securities exchange.., any manipulative or deceptive device orcontrivance in contravention of such rules andregulations as the [SEC] may prescribe....

15 U.S.C. § 78j(b). Rule lOb-5 makes itunlawful "for any person, directly or indirectly, bythe use of any means or instrumentality of interstatecommerce, or of the mails or of any facility of anynational securities exchange" to (a) "employ anydevice, scheme, or artifice to defraud," (b) "makeany untrue statement of a material fact or ... omit tostate a material fact necessary in order to make thestatements made, in the light of the circumstancesunder which they were made, not misleading," or(c) "engage in any act, practice, or course ofbusiness which operates or would operate as a fraudor deceit upon any person, in connection with thepurchase or sale of any security."17 C.F.A. §240.1 Ob-5.

*6 As interpreted by the United States SupremeCourt, Section 10(b) "imposes private civil liabilityon those who commit a manipulative or deceptiveact in connection with the purchase or sale ofsecurities."Cent, Bank of Denver, N.A. v. FirstInterstate Bank of Denver, N.A., 511 U.S. 164, 166,114 S.Ct. 1439, 128 L.Ed.2d 119 (1994). Itprohibits only two types of conduct: (1). "themaking of a material misstatement (or omission)"and (2) "the commission of a manipulative act."Id.at 177.The scope of liability under Rule lOb-5 doesnot extend to conduct that is not prohibited by thetext of Section 10(b).Id. at 173.To state a claimunder Section 10(b) and Rule 1Ob-5, a plaintiff

must allege (1) a misstatement or omission FNIO

(2) of material fact (3) made with scienter (4) onwhich the plaintiff justifiably relied (5) thatproximately caused the alleged loss. DSAM GlobalValue Fund v. Altris Software, Inc., 288 F.3d 385,388 (9th Cir.2002); see also Binder v. Gillespie,184 F.3d 1059, 1063 (9th Cir.1999).

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FNIO. To be actionable under thesecurities laws, an omission must bemisleading; that is, it must "affirmativelycreate an impression of a state of affairsthat differs in a material way from the onethat actually exists."Brody v. TransitionalHosps. Corp., 280 F.3d 997, 1006 (9thCir.2002).

The Private Securities Litigation Reform Act of1995, which amended the Securities Exchange Act,raised the pleading standards for plaintiffs allegingsecurities fraud in class action lawsuits broughtpursuant to the Federal Rules of Civil Procedure. Inre Silicon Graphics Inc. Sec. Litig., 183 F.3d 970,973 & n. 2 (9th Cir.1999). Where a plaintiff allegesthat the defendant either made an untrue statementof material fact or omitted to state a material factthat was necessary in order to make the statementsmade, in the light of the circumstances in whichthey were made, not misleading, the complaint must"specify each statement alleged to have beenmisleading," as well as "the reason or reasons whythe statement is misleading."15 U.S.C. § 78u-4(b)(1). If an allegation regarding the statement oromission is made on information and belief, thecomplaint must "state with particularity all facts onwhich that belief is formed."Id. In addition, in caseswhere the plaintiff must prove that the defendantacted with a particular state of mind, the complaintmust, with respect to each alleged act or omission, "state with particularity facts giving rise to a stronginference that the defendant acted with the. requiredstate of mind."15 U.S.C. § 78u-4(b)(2).

The "required state of mind" in the context of aclaim pursuant to Section 10(b) is, "at a minimum,deliberate recklessness." Silicon Graphics, 183F.3d at 977 (internal quotation marks omitted). Inorder to create a strong inference of the requiredstate of mind, the plaintiff "must plead, in greatdetail, facts that constitute strong circumstantialevidence of deliberately reckless or consciousmisconduct."Id. at 974;see also id. at 979 (requiringplaintiffs "to plead, at a minimum, particular factsgiving rise to a strong inference of deliberate orconscious recklessness"). To meet this pleadingrequirement, . the complaint "must containallegations of specific `contemporaneous statements





or conditions ' that demonstrate the intentional or thedeliberately reckless false or misleading nature ofthe statements when made."In re Read-Rite Corp.Sec. Litig., 335 F.3d 843, 846 (9th Cir.2003)(quoting Ronconi v. Larkin, 253 F.3d 423, 432 (9thCir.2001)). Facts showing "mere recklessness or amotive to commit fraud and opportunity to do so"are insufficient to establish a strong inference ofdeliberate recklessness . Silicon Graphics, 183 F.3dat 974.

*7 Plaintiff alleges that numerous statementsmade by Defendants during the Class Period were "materially false and misleading ." For the purpose ofanalysis, the statements can be grouped into threecategories . First , Plaintiff alleges that Defendants' "statements in connection with" the April 30, 2001,press release announcing Mueller' s promotion to the

position of CEO FNII were materially false andmisleading, because "no mention was made of thematerial fact that Krach had to pay Mueller $10million dollars [ sic] out of his own pocket in orderfor Mueller to take the job."SCAC ¶ 30. Second,Plaintiff alleges that Defendants ' "statements inconnection with" the July 19, 2001, press release

announcing Krach ' s replacement of Mueller as CEOFN12 were materially false and misleading, because"no mention was made of the material fact thatKrach paid Mueller $10 million dollars [sic] out ofhis own pocket in connection with his acceptance ofthe CEO position ."/d . ¶ 34.Third, Plaintiff allegesthat various statements reporting Ariba's financialresults for the second , third, and fourth quarters offiscal year 2001 and for the full fiscal year 2001,including forms filed with the SEC and pressreleases, were materially false and misleading,because they failed to disclose or account properlyfor Krach 's $10 million payment to Mueller, inviolation of GAAP (specifically , Interpretation No.1 of APB No. 25).See id. ¶¶ 31-32, 35-38.All ofthe above allegations are based on the omission ofinformation regarding Krach ' s payments to Mueller.

FN11. The SCAC is unclear as to whichparticular statements it alleges werematerially false and misleading . The onlystatements from the press release thatPlaintiff quotes in the SCAC are three

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sentences attributed to Krach, see supra p.4, which Plaintiff describes as having beenmade by Krach "[i]n connection with thepress release ," SCAC ¶ 30.

FN12. Plaintiff does not identify anyparticular statements from this pressrelease.

Although Moving Defendants challenge thesufficiency of Plaintiffs allegations on multiplegrounds, the Court is able to resolve the instantmotion on the basis of the sufficiency of Plaintiffsallegations of scienter. Plaintiffs overarching theoryis that Krach made secret payments from his ownpersonal accounts to Mueller in the amount of $11.2million in order for Mueller to assume the positionof CEO and create the false impression that Aribawas doing better than it was, in the face of analysts'criticism of Ariba's management under Krach'sleadership, a significant drop in the price of Ariba'scommon stock, and downgrading of expectationsfor Ariba's future performance. According toPlaintiff, Krach, Mueller, and Calderoni each knewabout these secret payments but concealed themfrom analysts, the SEC, and the public in anintentional or deliberately reckless attempt todefraud investors. Plaintiff asserts that confidencein Ariba's management would have "erodedcompletely" had Defendants disclosed that "Mueller only agreed to accept the position of AribaCEO after receiving a $10 million payment, or that[the payment] was made with the intent to give afalse impression of [Ariba's] performance."Opp'nBr. at 7.

Plaintiffs allegations of scienter rely heavily onstatements made by its Confidential Witness No. 1 ("CW 1 "), who was employed by Ariba fromOctober 1999 to July 2001 as an executive assistantto an executive vice president and chief marketingofficer and who "work[ed] closely with seniorexecutives of Ariba, including Defendant Krach,Ariba Executive Vice President Robert J. DeSantisand Ariba Senior Vice President of ProductDevelopment K. Charles Kleissner."SCAC ¶ 27.According to CWI, Mueller was appointed to theposition of CEO "to front the company" and tocreate the appearance that Ariba was moving to a "

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Not Reported in F.Supp.2d, 2005 WL 608278 (N.D.CaI.)(Cite as: Not Reported in F.Supp.2d)

higher level," id. ¶ 27 (internal quotation marksomitted), and the $10 million payment was a "sidepayment" of "hush money" to ensure that Muellerwould make Ariba "look like it was doing betterthan it was,"id . ¶ 29 (internal. quotation marksomitted). Moreover, Plaintiffs allegations regardingCalderoni's personal knowledge of Krach's $10million payment to Mueller depend wholly onCWI, who is alleged to have "heard or had reasonto know in the course of his/her duties ... thatDefendant Calderoni also knew and had discussionswith other senior executives about" the payment. Id.¶32.

*8 Neither Plaintiffs allegations individuallynor the sum of those allegations taken together FN13

constitute the strong circumstantial evidence ofdeliberately reckless or conscious misconduct withrespect to each omission required for Plaintiff to

overcome Moving Defendants' motion to dismiss.

F14See Silicon Graphics, 183 F.3d at 974. CW1'sstatements regarding Defendants' intent andCalderoni's knowledge lack particularized factssufficient to provide a basis for his or herobservations and conclusions and to persuade theCourt that he or she is speaking from personalknowledge rather than "merely regurgitating gossipand innuendo." In re Metawave CommunicationsCorp. Sec. Litig., 298 F.Supp.2d 1056, 1068(W.D.Wash.2003) (internal quotation marksomitted). While the fact that Ariba effectivelyadmitted-by filing restatements for 2000 and2001-that Krach's payments to Mueller should havebeen disclosed, Plaintiff has not alleged withsufficient particularity . that Defendants violatedGAAP knowingly or with deliberate recklessness;the "mere publication of inaccurate accountingfigures, or a failure to follow GAAP, without more,does not establish scienter."In re SoftwareToolworks Inc., 50 F.3d 615, 627 (9th Cir.1994)(internal quotation marks omitted). While Plaintiffsallegations perhaps could suggest a motive for andopportunity to commit fraud, the nature of Krachand Mueller's actual motives is not self-evident, andsuch a showing is insufficient to establish a stronginference of deliberate recklessness. See SiliconGraphics, 183 F.3d at 974. Finally, althoughPlaintiff suggested at the hearing on the instantmotion that Defendants' positions at Ariba (Krach

as outgoing CEO, Mueller as incoming CEO, andCalderoni as CFO), the magnitude of the $10million payment, and Defendants' allegedknowledge of the payment should constituteadequate circumstantial evidence of scienter,Plaintiff simultaneously acknowledged that itcannot cite any authority suggesting that a stronginference of scienter can be drawn from the nature

of Defendants' corporate positions alone.FN15

Accordingly, Moving Defendants' motion to dismiss

will be GRANTED as to this claim. )N16

FN13. Beyond each individual allegation,the Court also must consider whether thetotal of Plaintiffs allegations, even thoughindividually lacking, are sufficient tocreate a strong inference that Defendantsacted with deliberate or consciousrecklessness. No. 84 Employer-TeamsterJoint Council Pension Trust Fund v.America West Holding Corp., 320 F.3d920, 938 (9th Cir.2003).

FN14. Plaintiffs attempt to analogize theinstant case to In re JDN Realty Corp.Securities Litigation, 182 F.Supp.2d 1230(N.D.Ga.2002), in which the district courtfound the allegations of securities fraudsufficient to overcome. the defendantCEO's motion to dismiss, is unpersuasive.The allegations of scienter in JDN Realtywere considerably stronger than those inthe instant case, including allegations "ingreat factual detail" that the CEO "consciously directed and participated in ascheme to conceal excessive executivecompensation" paid to other defendantsfrom company funds and property over thecourse of five years, which resulted in falseand misleading financial statements.Id. at1242-43.

FN 15. Indeed, district courts in theNorthern District of California have heldthat scienter cannot be pled on the basis ofdefendants' positions alone, because toallow otherwise would be to eliminate theneed for specially pleading scienter. See,

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e.g., In re US. Aggregates, Inc. Sec. Litig.,235 F.Supp.2d 1063, 1074 (N.D.Cal.2002); In re Autodesk, Inc. Sec. Litig., 132F.Supp.2d 833, 844 (N.D.Cal.2000).

FN16. On November 2, 2004, four daysafter the hearing on the instant motion,Plaintiff submitted a request that the Courttake judicial notice of Motion in LimineNo. 3 filed on April 16, 2004, by Ariba inthe state court case of Chao v. Ariba, Inc.,-No. I-01-CV 802497 (Cal, Super. Ct.). Themotion in limine sought to exclude certainpieces of Mueller's deposition testimonythat were taken on August 19, 2002, in theunrelated case of Aghi v. Ariba, Inc. Thethree pieces of testimony sought to beexcluded were as follows: (1) "He wasrestricted from selling stock' in 2000with the exception of ... four to four or fivedays [sic] ... at the end of October." (2) " `[D]uring the September 17th, 2000through December 31, 2000 time frame[he] requested of Mr. Krach several timesthat the lockout ... be lifted' `so [he] couldsell [his] stock." ' (3) " `Keith [Krach]paid me ten million dollars because hewanted to keep me in the. company and Iwas not able to exercise any of my stock,or I was only able to exercise a smallportion of my stock, and I was ona-because . of my position and so forth, IIwas really continuously locked out and itlooked like it would be that way for a longtime." ' Pl.'s Req. for Judicial Notice, Ex.A at 3.

Plaintiff requests that the Court take judicialnotice of Mueller's testimony, because it "significantly bolsters" its allegations of scienter by "demonstrat[ing] that Krach's $10 million paymentwas made on behalf of Ariba as part of a quid proquo to keep Mueller at Ariba" and by "mak[ing]clear the additional reason for the $10 millionpay-off to circumvent the securities laws byallowing in effect a de facto insider sale during[Ariba's] blackout period."Pl.'s Req., for JudicialNotice at 1-2. As an initial matter, the Courtobserves that Plaintiff has not shown good cause forits failure to present this evidence in its opposition

Page 9

brief and/or at the hearing. Plaintiff admits that ithas been aware of this evidence since April 16,2004, see id. at 1, but offers no explanation for notincluding the evidence in its opposition brief, whichwas filed on August 20, 2004, or mentioning it atthe hearing in late October 2004. While the Courtcould deny the request for judicial notice on thesegrounds, it has considered the proffered evidence inlight of Plaintiffs request in the alternative that it begranted leave to amend the SCAC to incorporate theadditional evidence. The Court concludes that, even.if this evidence were alleged in the complaint,Plaintiff still would not succeed in creating a stronginference that Defendants acted with deliberaterecklessness.

B. Claim Pursuant to Section 14(a) and Rule 14a-9

. Plaintiff alleges that all Defendants haveviolated section 14(a) of the Securities ExchangeAct ("Section 14(a)") and Rule 14a-9 promulgatedthereunder by the SEC. Section 14(a) makes itunlawful

for any person, by the use of the mails or byany means or instrumentality of interstate commerceor of any facility of a national securities exchangeor otherwise, in contravention of such rules andregulations as the [SEC] may prescribe ..., to solicitor to permit the use of his name to solicit any proxyor consent or authorization in respect of anysecurity (other than an exempted security)registered pursuant to [15 U.S.C. § 781].

15 U.S.C. § 78n(a). Rule 14a-9 prohibits asolicitation made by means of a proxy statementthat contains "any statement which, at the time andin the light of the circumstances under which it ismade, is false or misleading with respect to anymaterial fact, or which omits to state any materialfact necessary in order to make the statementstherein not false or misleading."17 C.F.R. §240.14a-9(a). To state a claim under Section 14(a)and Rule 14a-9, a plaintiff must allege "that themisstatement or omission was made with therequisite level of culpability and that it was anessential link in the accomplishment of theproposed transaction."Desaigoudar v. Meyercord,223 F.3d 1020, 1022 (9th Cir.2000).

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Not Reported in F.Supp .2d, 2005 WL 608278 (N.D.Cal.)(Cite as: Not Reported in F.Supp.2d)

*9 Plaintiff alleges that the "SummaryCompensation Table" in Ariba's 2002 Proxy wasmaterially false and misleading, because it failed todisclose Mueller's "additional compensation", fromKrach of $10 million in cash and $1.2 million intravel benefits and related services in fiscal year2001. SCAC IT 39-40. However, Plaintiff hasfailed to allege that the omission was an "essentiallink" in the accomplishment of the transactionsproposed by-the 2002 Proxy. The 2002 Proxysolicited Ariba stockholders' proxies regarding two.items of business to be discussed at the annualmeeting of stockholders scheduled for March 18,2002:(1) election of two members of the board ofdirectors to serve until the 2005 annual meeting and(2) ratification of the appointment of KPMG LLP asAriba's independent public accountant for fiscalyear 2002. See Griffen Decl., Ex. B. Plaintiff hasnot alleged that, had the "Summary CompensationTable" included Krach's payments to Mueller, theboard members would not have been elected andKMPG LLP's appointment would not have been

ratified.FN17Without such an allegation, Plaintiffhas failed to state a viable claim pursuant to Section14(a) and Rule 14a-9. Accordingly, MovingDefendants' motion to dismiss will be GRANTEDas to this claim.

FN 17. Notwithstanding the absence of anallegation of the requisite "essential link,"Plaintiff argues that the omission wasmaterial to stockholders' decision as tohow to vote on the proposed transactions,because the false statement of Mueller'scompensation "relates directly to theconfidence the shareholders should have inthe existing leadership of [Ariba] and itspublic accountants."Opp'n Br. at 17. Thisargument does not save Plaintiffscomplaint. At most, it suggests one factorthat could have influenced stockholders'votes on the proposed transactions. Indeed,when questioned by the Court about itsSection 14(a) claim at the hearing on theinstant motion, Plaintiff conceded that itwas not its strongest claim.

C. Claim Pursuant to Section 20(a)

Page 10

Plaintiff alleges that Krach, . Calderoni, andMueller have . violated. section 20(a) of theSecurities Exchange Act ("Section 20(a)"). Section20(a) imposes joint and several liability on a "person who, directly or indirectly, controls anyperson liable under any provision of this .chapter orof any rule or regulation thereunder ... unless thecontrolling person acted in good faith and did notdirectly or indirectly induce the act or actsconstituting the violation or cause of action."15U.S.C. § 78t(a). Because Plaintiff has failed toallege viable claims pursuant to Section 10(b) andSection 14(a) and the rules promulgated thereunder,there is no basis for asserting controlling personliability pursuant to Section 20(a). Accordingly,Moving Defendants' motion to dismiss will beGRANTED as to this claim.

IV. ORDER

Good cause therefore appearing, IT ISHEREBY ORDERED that Moving Defendants'motion to dismiss is GRANTED. Pursuant to theparties' stipulation , which was adopted . by the Courton March 30, 2004., the action is dismissed withprejudice.

N.D.Cal.,2005.In re Ariba, Inc. Securities LitigationNot Reported in F.Supp.2d, 2005 WL 608278(N.D.Cal.)

END OF DOCUMENT

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EXHIBIT 2


W

Slip Copy

Slip Copy, 2007 WL 2070300 (N.D.Cal.), Fed. Sec . L. Rep. P 94,440(Cite as: Slip Copy)

CIn re Ditech Networks , Inc. Derivative LitigationN.D.CaI.,2007.

United States District Court , N.D. California,San Jose Division.

In re DITECH NETWORKS, INC. DERIVATIVELITIGATION.

No. C 06-5157 JF.

Page 1

initial complaint on August 23, 2006. The Court hasconsolidated the Newman action and two otheractions under the caption of the instant case. OnMarch 2, 2007, Plaintiffs filed an amendedconsolidated complaint ("the Complaint"). TheComplaint asserts claims against the followingindividuals ("the Individual Defendants").

July 16, 2007.

Darryl Paul Rains , Morrison & Foerster , LLP, PaloAlto, CA, Diane Elizabeth Pritchard , Morrison &Foerster, LLP, San Francisco , CA, for Defendants.

ORDER FN[ GRANTING MOTION TODISMISS FOR FAILURE TO STATE A CLAIMUPON WHICH RELIEF CAN BE GRANTEDWITH LEAVE TO AMEND; DEFERRINGMOTION TO DISMISS FOR FAILURE TO

MAKE DEMAND

FN I . This disposition is not designated forpublication and may not be cited .JEREMYFOGEL, United States District Judge.

L BACKGROUND

1. Procedural Background

*1 This derivative action arises from thealleged backdating and springloading of stockoptions by directors and officers of nominaldefendant Ditech Networks, Inc. ("Ditech" or "theCompany"). Plaintiff Donald W. Newman filed the

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Defe Role atndant the

Cornpany

Timothy PresiK. dent,Montg CEO,ornery and

director,September1998 topresent.

Chairman oftheBoard ofDirectors ("the Board11)

to

October1999 topresent.

SeniorVicePresident ofSalesandMarketing,November1997 toSeptember1998.

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Slip Copy

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Gregory Director,M. Avis February

1997 topresent.

Member,CompensationCommittee,1999 topresent.

William Director,A. Hasler May

1997 topresent.

Member,CompensationCommittee, atleast1999 topresent.

Member,AuditCommittee, atleast1999 topresent.

Andrei Director,M. JuneManoliu 2000 to

present.

Member,AuditCommittee,2003 topresent.

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Edwin L. Director,Harper Dece

mber2002 topresent.

David Director,M. FebruarySugishita 2003 to

present.

Member,AuditCommittee,2003 topresent;Chair ofAuditCommittee,2004 topresent.

ViceSerge PresiStepanoff dent of

Engineering &Developmentfor EchoCancellationProducts,Septetuber1996 toMay2002.

William ChiefJ. FinancialTamblyn Officer,

June1997 topresent.

Page 4



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ToniM. Bellin

RobertT.DeVincenzi

LowellB.Transgrud

Executive VicePresident,May2005 topresent.

VicePresident,June1997 toMay2005.

VicePresident ofOperations,December1998 toJuly2001.

SeniorVicePresident ofSales forAltamarNetworks, July2000 toJune2003.

VicePresident,Operations,July2001 topresent.

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ViceJames.H. PresiGrady dent,

BusinessDevelopment,2005 topresent.

VicePresident,WorldwideSales,July2003 to2005.

Lee ViceH. House Presi

dent,EchoEngineering,May2002 topresent.

IanM. SeniorWright Vice

President ofEngineering forOpticalNetworkingProducts,February2000 topresent.

ViceChalan PresiM. Aras dent of

Marketing,May2004 topresent.

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SeniorDirectorofProductManagement,October2003 toMay2004.

Complaint ¶¶ 14-30. The Complaintdescribes Montgomery, Stepanoff, Tamblyn, Bellin,DeVincenzi, Transgrud, Grady, House, Wright, andAras as "the Officer Defendants;" Avis and Hasleras "the Committee Defendants;" and Montgomery,Tamblyn, Transgrud, House, Avis, Hasler, Manoliu,Sugishita, and Grady as "the Insider SellingDefendants." Complaint 1124, 27.

The Complaint asserts nine claims: (1)violation of Section 10(b) of the SecuritiesExchange Act and Rule 10b-5 promulgatedthereunder, against the Individual Defendants; (2)violation of Section 14(a) of the SecuritiesExchange Act and Rule 14a-9 promulgatedthereunder, against the Individual Defendants; (3)violation of Section 20(a) of the SecuritiesExchange Act, against defendants Montgomery,Tamblyn, Avis, Hasler, Sugishita, Harper, andManoliu; (4) accounting, against the IndividualDefendants; (5) breach of fiduciary duty and/oraiding and abetting, against the IndividualDefendants; (6) unjust enrichment, against theIndividual Defendants; (7) rescission, against theOfficer Defendants; (8) insider selling andmisappropriation of information, against the InsiderSelling Defendants; and (9) breach of fiduciary dutyand/or aiding and abetting relating to the May 18,2004 option grants, against the IndividualDefendants.

oral argument on .tune 8, 2007.

2. Allegations Made in the Complaint

Page 7

Pursuant to the Company'sshareholder-approved stock option plans, theexercise price of options may not be less than thefair market value of the stock on the date the optionis granted. Complaint ¶ 38. However, theComplaint alleges that

[t]he Compensation Committee, with theknowledge and approval of the other members ofthe Board, knowingly and deliberately violated theterms of the [Company's stock option] Plans ... byknowingly and deliberately backdating grants ofstock options to make it appear as though the grantswere made on dates when the market price ofDitech stock was lower than the market price on theactual grant dates, thereby benefitting the recipientsof the backdated options.

Complaint ¶ 37; see also Complaint ¶ 46,Nine stock option grants allegedly were backdated:

*2 On April 2, 2007, the Individual Defendantsmoved to dismiss the Complaint for failure to statea claim upon which relief can be granted ("MotionOne"), and Ditech moved to dismiss the Complaintfor failure to make demand ("Motion Two").Plaintiffs oppose both motions. The Court heard

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Purpo Recipient Number Exerciserted Date of Price

Options

8/10 Montg 253,888 $9.00./1999 ornery

8/10 Stepanoff 125,020 $9.00/1999

8/10 Tamblyn 149,586 .$9.00/1999

10/4 Bellin 50,000 $24.69/1999

8/1/2000 DeVin 133,934 $22.50cenzi

1/10 Montg 400,000 $7.19/2001 ornery

1/10 DeVin 160,000 $7.19/2001 cenzi

1/10 Tamblyn 145,000 $7.19/2001

1/10 Wright 300,000 $7.19/2001

Complaint 1 41.FN2The.. grants dated August10, 1999 coincided with the second-lowest quarterlyprice, those dated October 4, 1999 and August 1,2000 coincided with the lowest price of theirrespective months, and those dated January 10,2001 coincided with the second-lowest price of thesix-month period ending on April 30, 2001.Complaint ¶j 43-45.FN3

FN2. Two further alleged backdated, grantswere made on July 6, 2000, but werecancelled on March 19, 2003. Complaint ¶41 n.3.

Page 8

FN3. The Complaint includes noallegations regarding the actual date of theoption grants , of any public announcementby the Company of options backdating orthe need to restate earnings, or of anyinvestigation by the Company or by theSEC.

Defendants allegedly engaged in optionspringloading in 2004. This is a practice "whendirectors grant options at the market value on thedate of grant, at a time the directors know that theshares are actually worth more than the marketvalue because the directors possess materialnon-public information."Complaint ¶ 48. Three



Slip Copy


springloaded stock option grants allegedly weremade on May 18, 2004.

Purpo Recipient Number Exerciserted Date of Price

Options

5/18/04 Tamblyn 125,000 $13.37

5/18/04 Tran 125,000 $13.37sgrud

Aras5/18/04 100,000 $13.37

Complaint ¶ 49. The grant price coincidedwith the third lowest price of 2004. Id. The-Company announced positive results on May 27,20.04, and Ditech shares closed at $20.61 per shareon May 28, 2004. Complaint 151.

As alleged in the Complaint, two proxystatements, filed on August 18, 2000 and August 8,2001, respectively, falsely reported the backdatedoption grants. Complaint ¶ 61. Defendants also arealleged to have disseminated false financial reports,Complaint ¶¶ 54-61, concealed their misconduct,Complaint ¶¶ 62-63, and violated GAAPaccounting principles, SEC regulations, and IRSrules and regulations. Complaint ¶¶ 64-86.During the period from October 5, 1999 toDecember 9, 2004, the Individual SellingDefendants are alleged to have sold over $100million in Ditech stock while in the possession ofmaterially adverse non-public information regardingthe backdating of stock options. Complaint ¶ 87.These alleged actions of the Individual Defendantsconstituted breaches of their fiduciary duties andwere not, and could not have been, products of theexercise of good faith business judgment.Complaint ¶'J 88-89.

Page 9

action."Complaint ¶ 94. At the time that this actionwas commenced, the Board consisted of sixdirectors: Montgomery, Avis, Hasler , Manoliu,Sugishita, and Harper. Complaint ¶ 95. Accordingto Plaintiffs, five directors are incapable ofconsidering independently and disinterestedly ademand to commence and prosecute this actionvigorously . Id. The reasons for each director'salleged incapacity to do so are summarized in thetable below:

*3 Plaintiffs claim that they have not made ademand on the Board because "demand would be afutile and useless act because the Board is incapableof making an independent and disinteresteddecision to institute and vigorously prosecute this

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Director Reasonsfor LackofIndependenceandDisinterestedness

Montg Receivedornery backd

atedstockoptions.

Avis

SoldDitechstock forproceedsin excessof $39millionon thebasis ofinsideinformation.

SoldDitechstock forproceedsin excessof $43millionon thebasis ofinsideinformation.

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Knowingly anddeliberatelybackdatedstockoptiongrants asamemberof theCompensationCommittee, andissubstantiallylikely tobe heldliable forbreaching hisfiduciaryduties.

Colludedwith theOfficerDefendants,demonstratingthat he isunableorunwilling toactindependently.

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Hasserved asMana

gingPartnerofSummit,a venturecapitalandprivate

firm,

since

1990.Summitinvestedin Ditechin 1997and isstilllisted asaSummitportfoliocompany.

Hasler SoldDitechstock forproceedsin excessof $4.4millionon thebasis ofinsideinformation.

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Knowingly anddeliberatelybackdatedstockoptiongrantsandapproved,signed,anddisseminatedfalsefinancialstatemeatsandotherfalseSECfilings as

memberof theAuditandCompensationCommittees, andissubstantiallylikely tobe heldliable forbreaching hisfiduciaryduties.

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Colludedwith theOfficerDefendants,demonst

rating

that he is

unable'

or

unwilling toactindependently.

Manoliu SoldDitechstock forproceedsin excessof$441,000 onthe basisof insideinformation.

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Knowingly anddeliberatelyapproved,signed,anddisseminatedfalsefinancialstaterentsandotherfalseSECfilings as

memberof theAuditCommittee, andissubstantiallylikely tobe heldlikely forbreaching hisfiduciaryduties.

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Sugishita SoldDitechstock forproceedsin excessof$516,000 onthe basisof insideinformation.

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Knowingly anddeliberatelyapproved,signed,

and

dissem

inated

false

financial

state

ments

and

otherfalseSECfilings asamemberandChair oftheAuditCommittee, andissubstantiallylikely tobe heldliable forbreaching hisfiduciaryduty.

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*41d.

II. LEGAL STANDARD

1. Motion to Dismiss

For purposes of a motion to dismiss, theplaintiffs allegations are taken as true, and theCourt must construe the complaint in the light mostfavorable to the plaintiff. Jenkins v. McKeithen, 395U.S. 411, 421, 89 S.Ct. 1843, 23 L.Ed.2d 404(1969). However, the court is not required "toaccept legal conclusions case in the form of factualallegations if those conclusions cannot reasonablybe drawn from the facts alleged."Clegg v. CultAwareness Network, 18 F.3d 752, 754-55 (9thCir.1994). Leave to amend must be granted unless itis clear that the complaint's deficiencies cannot becured by amendment. Lucas v. Department ofCorrections, 66 F.3d 245, 248 (9th Cir.1995).When amendment would be futile, however,dismissal may be ordered with prejudice. Dumas v.Kipp, 90 F.3d 386, 393 (9th Cir.1996). Leave toamend is to be granted with extreme liberality insecurities fraud cases, because the heightenedpleading requirements imposed by the PSLRA areso difficult to meet. See Eminence Capital, LLC v.

Page 18

Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir.2003).

On a motion to dismiss, the Court's review islimited to the face of the complaint and mattersj udicially noticeable . North Star International v.Arizona Corporation Commission, 720 F .2d 578,581 (9th Cir.1983 ); MGIC Indemnity Corp. v.Weisman, 803 F.2d 500 , 504 (9th Cir . 1986);Beliveau v. Caras, 873 F.Supp . 1393, 1395(C.D.Cal. 1995). However, under the "incorporationby reference " doctrine , the Court also may considerdocuments that are referenced extensively in thecomplaint and are accepted by all parties asauthentic , even though the documents are notphysically attached to the complaint. In re SiliconGraphics , Inc. Securities Litigation, 183 F.3d 970(9th Cir . 1999).

2. The Demand Requirement

A derivative complaint must "allege withparticularity the efforts, if any, made by the plaintiffto obtain the action the plaintiff desires from thedirectors or comparable authority and, if necessary,from the shareholders or members, and the reasonsfor the plaintiffs failure to obtain the action or fornot making the effort."Fed.R.Civ.P. 23.1. Theexistence and satisfaction of a demand requirementis a substantive issue governed by state law. SeeKamen v. Kemper Financial 'Services, Inc., 500U.S. 90, 96-97, 111 S.Ct. 1711, 114 L.Ed.2d 152

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(1991).4 When the challenged decision is that ofthe board in place at the time of the filing of thecomplaint, failure to make demand may be excusedif a plaintiff can raise a reason to doubt that. amajority of the board is disinterested or independentor that the challenged acts were the product of theboard's valid exercise of business judgment.Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984);see also Ryan v. Gifford, 918 A.2d 341, 352(Del.Ch.2007) (discussing Aronson ). However, "[w]here there is no conscious decision by thecorporate board of directors to act or refrain fromacting, the business judgment rule has noapplication."Rales v. Blasband 634 A.2d 927, 933(Del.1993); see also Ryan, 918 A.2d at 352(discussing Rales ). In such a situation, demand maybe excused only if a plaintiff "can create areasonable. doubt that, as of the time the complaintis filed, the board of directors could have properlyexercised its independent and disinterested businessjudgment in responding to a demand."Id. at 353(citing Rales, 634 A.3d 933-34).

FN4. The parties agree that Delaware lawapplies to the instant action because Ditechis incorporated in Delaware.

III. DISCUSSION

1. Motion to Dismiss for Failure to State.a ClaimUpon Which Relief Can Be Granted

a. Claim One: Violation of Section 10(b) and RulelOb-5

i. Sufficiency of the Allegations

Page 19

99. Plaintiffs summarize their claim as follows:Plaintiffs allege that (1) Defendants committed

a variety of manipulative and deceptive acts,including backdating stock option grants andproducing and . disseminating false financialstatements, false proxy statements, and false Form4s, ¶¶ 54-63; (2) Defendants' misconduct was infurtherance of their scheme to defraud theCompany, ¶¶ 88-90, 98-103; (3) Defendantsengaged in their fraudulent scheme knowingly anddeliberately, i.e., with - scienter, ¶¶ 54-59, 61-63;and (4) the Company relied on Defendants' fraud ingranting the Officer Defendants options to purchaseDitech common stock, IT 37-38, 41, 46-49-53.

Opposition to Motion One 18.YN5

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FN5. Plaintiffs do not assert thatspringloading supports liability under thefederal claims.

Section 10(b) makes it unlawful[t]o use or employ, in connection with the

purchase or sale of any security registered on anational securities exchange or any security not soregistered ... any manipulative or deceptive deviceor contrivance in contravention of such rules andregulations as the Commission may prescribe asnecessary or appropriate in the public interest or forthe protection of investors.

15 U.S.C. § 78j(b). Rule l0b-5 makes itunlawful for any person to use interstatecommerce(a) To employ any device , scheme, orartifice to defraud,

(b). To make any untrue statement of a materialfact or to omit to state a material fact necessary inorder to make the statements made, in the light ofthe circumstances under which they were made, notmisleading, or

(c) To engage in any act , practice , or course ofbusiness which operates or would operate as a fraudor deceit upon any person , in connection with thepurchase or sale of any security.

*5 Plaintiffs allege securities fraud in violationof Section 10(b) of the Securities Exchange Act andRule lob-5 promulgated thereunder. Complaint ¶

17 C.F.R. § 240. lOb- 5. In cases involvingpublicly-traded securities and purchases or sales inpublic securities markets, the elements of an action



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under Section 10(b) and Rule IOb-5 are. (1) amaterial misrepresentation or omission, (2) scienter,(3) a connection with the purchase or sale of asecurity, (4) reliance, (5) economic loss, and (6)loss causation. Dura Pharmaceuticals, Inc, v,Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161L.Ed.2d 577 (2005).

Plaintiffs must meet two heightened pleadingstandards. Fed.R.Civ.P. 9(b) requires that "thecircumstances constituting fraud ... be. stated withparticularity."The Ninth Circuit has explained that a"plaintiff must include statements regarding thetime, place, and nature of the alleged fraudulentactivities, and that mere conclusory allegations offraud are insufficient."In re GlenFed, Inc.Securities Litigation, 42 F.3d 1541, 1548 (9thCir.1994). A plaintiff asserting fraud "must set forthan explanation as to why the statement or omissioncomplained of was false or misleading."Id. (internalquotation marks omitted); see also Yourish v.California Amplifier, 191 F.3d 983, 992-93 (9thCir.1999). The Private Securities Litigation ReformAct ("PSLRA") raises the pleading standard further:

*6 (1) Misleading statements and omissionsIn any private action arising under this chapter

in which the plaintiff alleges that the defendant- .(A) made an untrue statement of a material fact;

or(B) omitted to state a material fact necessary in

order to make the statements made, in the light ofthe circumstances in which they were made, notmisleading; the complaint shall specify eachstatement alleged to have been misleading, thereason or reasons why the statement is misleading,and, if an allegation regarding the statement oromission is made on information and belief, thecomplaint shall state with particularity all facts onwhich that belief is formed.

(2) Required state of mindIn any private action arising under this chapter

in which the plaintiff may recover money damagesonly on proof that the defendant acted with aparticular state of mind, the complaint shall, withrespect to each act or omission alleged to violatethis chapter, state with particularity facts giving riseto a strong inference that the defendant acted withthe required state of mind.

15 U.S.C. § 78u-4b(1)-(2).

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Plaintiffs assert that they. "undeniably plead allof the elements necessary to state a claim forscheme liability." The Court disagrees. TheComplaint alleges a very limited number of factsthat pertain to a subset of the defendants, but thenattempts to impose liability on all the IndividualDefendants. In addition to this global deficiency, at

least two major inadequacies require dismissal.FN6

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FN6. In dismissing this claim on thesegrounds, the Court expresses no opinion asto other argued grounds for dismissalforwarded by the Individual Defendants,such as the sufficiency of the pleading ofdamage to Ditech or causation. Nor doesthe Court deem it necessary to discussarguments it does not reach as to the otherclaims.

First, Plaintiffs assert that their claim is forviolation of Rule lOb-5(a) and (c), not for violationof Rule 10b-5(b), which pertains to material untruestatements or omissions. Id. This assertion isconfusing given Plaintiffs' emphasis on the allegedproduction and dissemination of false financialstatements, proxy statements, and Form 4's. In lightof this ambiguity; while Plaintiffs may have statedwith particularity some portion of the supposed.universe of Defendants' fraudulent conduct, theextent of this alleged fraudulent conduct remainsunclear. Not only must Plaintiffs give Defendantsnotice of what acts constitute the alleged violations,but, as discussed below, the nature of the violationis relevant to the statute of limitations analysis.Accordingly, Plaintiffs may not proceed with thisclaim as presently stated.

Second, the Complaint fails to allege scientersufficiently. The Complaint alleges no facts thatgive rise to a strong inference that the non-directordefendants knew that the options they received werebackdated or that the directors who joined after thefinal alleged backdated grant participated in thebackdating scheme. Even the participation andknowledge of the remaining members of the boardduring the time of the options grants is pled without



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factual particularity. Instead, the Complaint allegesgenerically that the Compensation Committee acted"with the knowledge and approval of the othermembers of the Board."Complaint ¶J 37,. 40, 42.The high rank of various Defendants within theCompany is insufficient, without more, to imposeliability, and the conclusory allegation that eachindividual defendant had knowledge or acted withreckless disregard of the truth is insufficient to statea claim even under the more liberal Rule 12(b)(6)standard. See e.g. Assbc. Gen. Contractors, Inc. v.Metro. Water Dist. of So. Cal., 159 F.3d 1178, 1181(9th Cir.1998); see also Bell Atlantic v. Twombly,---U.S. ----, ---- - ----, 127 S.Ct. 1955, 1964-65, 167L.Ed.2d 929, ---- - ---- (May 21, 2007) (explainingthat a plaintiffs obligation to state the ground forrelief "requires more than labels and conclusions,and a formulaic recitation of the elements of a causeof action will not do") (citations omitted).

*7 Other courts within this district haveconsidered the presence or absence of a pattern ofbackdating, primarily in the context of the demandfutility requirement. See e.g. In re CNET Networks,Inc. Deriv. Litig., 483 F.Supp.2d 947(N.D.Cal.2007); In re Zoran Corp. Deriv. Litig.,2007 WL 1650948 (N.D.Cal. June 5, 2007); In reOpenwave Systems Inc. Deriv. Litig., 2007 WL1456039 (N.D.Cal., May 17, 2007); In re LinearTech. Corp. Deriv. Litig., 2006 WL 3533024(N.D.Cal. Dec.7, 2006). As currently pled, theComplaint alleges fraudulent conduct by labelingvarious grants as backdated and describing them ashaving been made at low points within certaindefined periods. See e.g. Complaint IT 37, 42-46.While counsel for Plaintiffs represented at oralargument that the statistical likelihood of theoptions having been granted properly is very low,that theory is not. alleged in the. Complaint or in adocument that the Court may consider on thismotion. Even assuming that the factual allegationsof the Complaint are true, many explanations otherthan options backdating exist for the coincidence of

the grants and a low share price.YN7The followingfactual detail likely . would strengthen theComplaint: the degree to which the options weregranted at the discretion of the compensationcommittee or the board, versus. at fixed,preestablished times; the actual grant dates of the

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options and the appropriate price of the options; thedate that the options were exercised ; whetherrequired performance goals were , met before theoptions were granted ; the ' presence or absence ofother major corporate events, . such as anacquisition , at the time of the grants; and the resultsof any requests by Plaintiff for information.

FN7. The Court does not hold that aplaintiff must allege a pattern ofbackdating in order to state a claim underSection 10(b), to establish demand futility,or to state a claim for breach of fiduciaryduty. See CNET, 483 F.Supp.2d at 956-58(describing analytical methods as one wayto support an inference of illegal conductwhen "direct evidence is rare and difficultto uncover"). For example, a plaintifflikely could proceed past the ` pleadingstage by alleging sufficient factual detail asto the mechanics of an option backdatingscheme, including the specific roles andmental states of the various participants. Insuch a case, the fact that the defendantsonly backdated one option grant or did notgrant themselves the largest possiblebenefit (and thus failed to generate astatistically implausible pattern) would notbe an automatic bar to liability.

ii. Statute of Limitations

[A] private right of action that involves a claimof fraud, deceit, manipulation, or contrivance incontravention of a regulatory requirementconcerning the securities laws, as defined in section3(a)(47) of the Securities Exchange Act of 1934 (15U.S.C. 78c(a)(47)), may be brought not later thanthe earlier of-

(1) 2 years after the discovery of the factsconstituting the violation; or

(2) 5 years after such violation.

28 U.S.C. § 1658(b); see e.g. In re HeritageBond Litig., 289 F. Supp .2d 1132, 1147-48(C.D.Cal.2003). This statute of limitations is not

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subject to equitable tolling. Durning v. CitibankIn'l, 990 F.2d 1133, 1136-37 (9th Cir.1993). Claimone, asserting a violation of Section 10(b) and RulelOb-5 of the Securities Exchange Act, alleges andinvolves fraud. See Complaint ¶ 99. Accordingly,Section 1658 applies to this claim. Because thepractice of backdating options came to light in2005, the Court concludes that the two-yeardiscovery period does not bar the instant action.Accordingly, the applicable period for this analysisis the five-year period of repose.FN8

FN8."A statute of repose is a fixed,statutory cutoff date, usually independentof any variable , such as claimant'sawareness of a violation ."Munoz v.Ashcroft,. 339 F. 3d 950 , 957 (9th Cir.2003)(citing Lampf Pleva, Lipkind, Prupis &Petigrow v. Gilbertson , 501 U.S . 350, 363,111 S.Ct . 2773, 115 L.Ed.2d 321 ( 1991)).

In light of the statute's focus on the "violation,"the Court first must decide what comprises thealleged violation. The primary focus of the claim

appears to be on the backdating of options.FN9Tothe extent that the claim is based upon thebackdating itself, the period of repose starts on thedate that the option grant was made. See Durning,.990 F.2d at 1136 (noting that the federal rule is thata cause of action accrues at the completion of thesale of the instrument); Falkowski v. Imation Corp.,309 F.3d 1123, 1130 (9th Cir.2002) (describing thegrant of an option as "a purchase or sale" under theSecurities Litigation Uniform Standards Act). Thelast alleged purported date of a backdated option isJanuary 10, 2001. This option was reported in aproxy statement filed with the SEC on August 8,2001, so even though the actual date of the optionsgrant is not alleged, it could not have been grantedafter that date. Because the initial complaint wasfiled on August 23, 2006, any improper transactionunder Section 10(b) must have occurred afterAugust 23, 2001. Accordingly, this claim istime-barred to the extent that it is based upon theactual backdated grants.

FN9. Plaintiffs do not argue that option

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springloading would support a claim underthe federal securities laws.

*8 Plaintiffs also appear to suggest that theIndividual Defendants violated Section 10(b) bydisseminating false financial statements. However,as noted above, Plaintiffs state in opposition to theinstant motion that they do not assert a claim underRule 10b-5(b), which makes it unlawful to make anuntrue statement or to omit a material fact.Opposition to Motion One 18. Consequently, it isby no means clear how the alleged fraudulentfinancial statements fit into the first claim. Plaintiffshave not pled them as an independent violation ofSection 10(b); indeed, they appear to acknowledgetheir failure to do so by disclaiming any need toplead the elements of a violation of Rule 10b-5(b).See Opposition to Motion One 18. While Plaintiffsrefer to a fraudulent scheme in the Complaint, seee.g. Complaint ¶¶ 2-4, they do not allege such ascheme with any particularity and, as noted above,fail to allege with any factual detail the involvementof a large number of the Individual Defendants. Inlight of these inadequacies, the Court concludes thatit is premature to rule out the possibility thatPlaintiffs will be able to plead a violation of Section10(b) based upon fraudulent financial statementsthat is not time-barred. In reaching this conclusion,the Court notes the.Individual Defendants' argumentthat the period of repose starts when themisrepresentation is made for the first time. At leastone court in this district has accepted this argument,see Zoran, 2007 WL 1650948 *21(citing AsdarGroup v. Pillsbury, Madison, and Sutro, 99 F.3d289, 294-95 (9th Cir.1996) ("[A] statute oflimitations for a Section 10(b) claim] ordinarilybegins to run when an act occurs that gives rise to

liability ....")) FN10 As it indicated at oralargument, the Court is highly skeptical of a

continuing wrong theory FN 11 that would allow therevival of a time-barred claim under Section 10(b)upon the issuance of a further financial statementthat failed to correct the prior false statement. Sucha theory appears to approximate the effects of thefraudulent concealment doctrine of equitabletolling, a doctrine that does not apply in the Section10(b) context.



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FN 10. The court explained in In re DynexCapital, Inc. Sec. Litig., 2006 WL 314524*5 (S.D.N.Y. Feb 10, 2006) that while itconcluded that a series ofmisrepresentations were not barred by theperiod of repose when . the allegedsecurities transaction fell within thefive-year period, it had held in a previouscase that a claim was time-barred when theunderlying securities transaction felloutside the five-year period.Dynex, 2006WL 314524 at Ti. 4 (citing Shalam v.KPMG, L.L.P,, 2005 WL 2139928 *2(S.D.N.Y. Sept.6, 2005)). Thus, even ifDynex were binding authority, which it isnot, it would not necessarily dictate theoutcome suggested by Plaintiffs.

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the time and in the light of the circumstances underwhich it is made, is false or misleading with respectto any material fact, or which omits to state anymaterial fact necessary in order to make thestatements therein not false or misleading ornecessary to correct any statement in any earliercommunication with respect to the solicitation of aproxy for the same meeting or subject matter whichhas become false or misleading.

*9 17 C.F.R. § 240. 14a-9(a). To state a claimunder Rule 14a-9 and Section 14(a), a plaintiff mustallege a false or misleading statement or omissionof material fact; that the misstatement or omissionwas made with the requisite level of culpability; andthat it was an essential link in the accomplishmentof the transaction . Desaigoudar v. Meyercord, 223F.3d 1020, 1022 (9th Cir.2000).

FN11. Any such theory would be distinctfrom the continuing wrong exception,recognized by other courts , see e.g.Bateson v . Magna Oil Corp., 414 F.2d128, 130 (5th Cir.1969), to the continuousownership requirement of Rule 23.1 thatallows standing to maintain a claim for anentire course of a continuing wrong even ifa portion of those events occurred .prior tothe plaintiffs acquisition of stock in thenominal defendant.

iii. Leave to Amend

Counsel for Plaintiffs represented at oralargument that he believed that Plaintiffs couldallege further facts that would allow them to addressboth the time-bar and the current lack ofparticularity in the Complaint. Accordingly, thisclaim will be dismissed with leave to amend.

b. Claim Two: Violation ofSection 14(a)

Rule 14a-9 provides:No solicitation subject to this regulation shall

be made by means of any proxy statement, form ofproxy, notice of meeting or other communication,written or oral, containing any statement which, at

The Individual Defendants argue that theextended limitations period under 28 U.S.C. § 1658does not apply to actions under Section 14(a), . andthat a Section 14(a) claim must be filed one yearafter discovery of the facts constituting theviolation, and in no event more than three yearsfollowing publication of the false statement.Individual Defendants' Motion 8 (citing In re ExxonMobil Corp. Sec. ' Litig„ 387 F.Supp.2d 407, 424(D.N.J.2005); In re Global Crossing, Ltd. Sec.Litig., 313 F.Supp.2d 189, 196-97 (S.D.N.Y.2003).Plaintiffs do not respond. to this argument, and theCourt concludes that it should apply theone/three-year limitations period. Accord Zoran,2007 WL 1650948 * 24. The last proxy statementcontaining an allegedly false statement was filed onAugust 8, 2001, Complaint ¶ 61, and the initialcomplaint was filed on August 23, 2006. Plaintiffsprovide no specific argument explaining why theSection 14(a) claim is not time-barred, but theyappear to imply that it survives under a continuingwrong theory. However, nothing is pled that wouldsupport such a theory, as even the part of thefraudulent scheme pled with respect to that claimapparently ends in 2001, outside the three-yearperiod of repose. See Complaint ¶ 106. Moreover,it is unclear how false statements in financial filingsother than proxy statements (such as Form 4's)could revive a claim under Section 14(a), whichpertains to proxy statements. Accordingly, the Court

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concludes that claim two is time-barred as currentlypled and should be dismissed with leave to amend.

The Individual Defendants also argue thatPlaintiffs fail to allege which Defendants made thefalse statements, specific facts that support a stronginference of negligence, and specific factssupporting causation. The Court does not reach theIndividual Defendants' challenges to the sufficiencyof the allegations, but notes that, assuming withoutdeciding that the PSLRA also applies to Section14(a) claims, see e.g. In re Textainer PartnershipSecurities Litig., 2005 WL 3801596 (N.D.Cal.March 8, 2005), In re McKesson HBOC, Inc. Sec.Litig., 126 F.Supp.2d 1248, 1267 (N.D.Cal.2000),greater specificity likely would strengthen this claim

considerably.' '2

FN12. This Court has held in anotheraction that the PSLRA has foreclosed theapplication of the "group publishedpleading" doctrine, which provides thatwhen false or misleading information isconveyed in group published statements, itis reasonable to presume that thestatements are the result of the collectiveactions of the company's officers. In reNextcard, Inc. Sec. Litig., 2006 WL708663 *2-3 (N.D.Cal. March 20, 2006).Since it is not clear to what extent the firstclaim is based upon false statements madeby the defendants, see Opposition toMotion One 18, that holding may not berelevant to the first claim. However, itlikely will be relevant to the sufficiency ofany amended claim under Section 14(a).

c. Claim Three: Violation ofSection 20(a)

To state a claim under Section 20(a), a plaintiffmust allege (1) a primary violation of federalsecurities laws; and (2) that the defendant exercisedactual power or control over the primary violator.Howard v. Everex Systems, Inc., 228 F.3d 1057,1065 (9th Cir.2000). As discussed above, Plaintiffshave failed to state a claim for a primary violationof the securities laws. The statute of limitations

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analysis pertaining to the Section 10(b) claimapplies equally to the Section 20(a) claim. See e.g.In re Heritage Bond Litigation, 289 F.Supp.2d at1148. Accordingly, this claim also will be dismissedwith leave to amend.

d. Claims Four to Nine: Violations ofDelaware Law

i. Statute of Limitations

*10 The parties agree that a three-year statuteof limitations applies to the claims asserted underDelaware law. Plaintiffs argue that the running ofthis period was tolled because the injury wasinherently unknowable, because the defendantsengaged, in fraudulent concealment, and becausePlaintiffs relied on the competence and good faithof a fiduciary. "[P]laintiffs bear the burden ofpleading specific facts to demonstrate that thestatute of limitations was, in fact, tolled."In re DeanWitter P'Ship Litig., 1998 WL 442456 *6 (Del.Ch.July 17, 1998). The Complaint alleges that theIndividual Defendants colluded with one another. to"conceal[ ] the improper backdating of stockoptions."Complaint ¶ 6(d); see also Complaint ¶1 57, 114, 120. It also identifies the signatories toseven Form 10-K filings that disseminated falsefinancial statements. Complaint 1 55. UnderDelaware taw, if a plaintiff "alleges that defendantsintentionally falsified public disclosures, defendantsmay, not rely on the statute of limitations as adefense until plaintiff is placed on inquiry noticethat such filings were fraudulent."Ryan, 918 A.2d at360. The Court concludes that Plaintiffs have pledintentional falsification of proxy statements andother public disclosures sufficiently to toll the statueof limitations under the fraudulent concealmentdoctrine. The Individual Defendants do not arguethat the claims would be time-barred even if thestatute of limitations was tolled until the Plaintiffswere put on inquiry notice. Accordingly, the Courtconcludes that the state law claims are nottime-barred.

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ii. Sufficiency of the Claims

Page 25

Accordingly, while. the Court concludes that theunjust enrichment claim should be dismissed, leaveto amend will be granted.

(1) Claims Four and Seven: Accounting andRescission

The Individual Defendants argue that the fourthand seventh claims in the Complaint should beincluded as remedies, not as independent claims.Plaintiffs do not respond to this argument in theiropposition. The Court agrees with Defendants thatPlaintiffs should include accounting and rescissionas remedies in any amended complaint.

(2) Claim Five: Breach of Fiduciary Duty

As discussed above, the Complaint contains nofactual allegations as to the knowledge of theoptions recipients and instead makes onlyconclusory allegations that do not satisfy Rule12(b)(6). While the PSLRA does not apply to thisclaim or the other claims under Delaware law,because the options backdating sounds in fraud, seeComplaint ¶ 99, Plaintiffs also must plead thecircumstances of the fraud with particularity.Fed.R.Civ.P. 9(b); Atlantis Plastic Corp. v.Sammons, 558 A.2d 1062, 1066 (Del.Ch.1989)(stating same rule under Delaware law). Plaintiffsfail to do so. Accordingly, this claim will bedismissed with leave to amend.

(3) Claim Six: Unjust Enrichment

The Individual Defendants argue that theComplaint fails to state a claim for unjustenrichment because Plaintiffs fail to allege thatother adequate remedies are not provided by law orthat the options recipients were enriched unjustly.Individual Defendants' Motion 25. Plaintiffs do notrespond to these arguments in their opposition.Plaintiffs asserted the validity of this claim at oralargument, however, and at least one Delaware casesuggests that option backdating will support a claimfor unjust enrichment. Ryan, 918 A.2d at 361.

(4) Claim Eight: Insider Selling

*11 The Complaint alleges that the InsiderSelling Defendants breached their fiduciary dutiesof loyalty and good faith by selling stock when inpossession of material, non-public information.Complaint ¶¶ 115-18. To determine thesufficiency of insider selling allegations, Delawarecourts look to whether a complaint contains "particularized facts providing an inference ofinsider trading."Guttman v. Huang, 823 A.2d 492,503 (Del.Ch.2003). The Complaint alleges that theInsider Selling Defendants sold a certain amount ofshares for a certain amount of "proceeds garnered"within a range of dates. Complaint ¶ 87. Forexample, it alleges that Montgomery sold 1,163,200shares between the dates of October 5, 1999 andDecember 16, 2004, for proceeds garnered of$39,188,259. Id. It does not identify the date oramount of individual transactions; instead, itprovides only aggregate totals by defendant.Accordingly, the Complaint fails to allegeparticularized facts sufficient to state a claim forinsider selling. The eighth claim will be dismissed

with leave to amend FN]3

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FN 13. Plaintiffs do not respond to theIndividual Defendants' argument that theComplaint fails to state a claim for insiderselling due to the lack of such specificityand appear to have abandoned this claim.However, in light of the statements madeby counsel for Plaintiffs and the grant ofleave to amend the rest of the Complaint,leave to amend is also appropriate as tothis claim.

(5) Claim Nine: Breach of Fiduciary Duty byOptions Springloading

The, Complaint alleges that the Individual



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Defendants "breached their fiduciary duties by ...engaging in a scheme to grant spring-loaded stockoptions to themselves and/or certain other officersand directors of the Company and cover up theirmisconduct."Complaint . ¶ 122.FN14The.Complaint alleges that Tamblyn, Transgrud, andAras received springloaded options on May 18,2004. Complaint ¶ 49. The Complaint also allegesthat "the Individual Defendants agreed to and didparticipate with and/or aided and abetted oneanother in a deliberate cause of action designed todivert corporate assets to themselves and/or other

Company insiders."Complaint ¶ 123.1 15

However, the Complaint does not allege whichdefendants authorized the grants, approved thegrants, or intended or had knowledge. that the grantswere springloaded. Nor does the Complaint allegethe specific material information that had not beenmade public previously. As is the case with the fifthclaim, because the springloading claim sounds infraud, see Complaint ¶ 128 (describing stockoption grants in the relevant period as obtained byfraud), Plaintiffs must plead the circumstances ofthe fraud with particularity. Fed.R.Civ.P. 9(b); seealso "Atlantis Plastics Corp., 558 A.2d at 1066(stating same rule under Delaware law). Plaintiffsfail to do so here. While it is not clear that Plaintiffwill be able to state a claim for breach of fiduciaryduty by identifying only one allegedly impropergrant date, the law in this area is still developingand the Delaware Chancery has permitted at leastone claim for breach of the duty of loyalty and goodfaith to proceed on a springloading theory. See In reTyson Foods, 919 A.2d 563, 593 (Del.Ch.2007).Accordingly, the claim will be dismissed with leaveto amend.

FN14. The Complaint repeats certainparagraph numbers. This cite refers to theparagraph bearing this number that appearsunder the heading "Count IX," not thatwhich appears under the heading "Count V.

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observed that a "spineless `and/or' is atelling concession that [plaintiff] cannotcross even the minimal Rule 11 threshold."Order Dismissing Complaint 51, Desimonev. Barrows, Case No. 2210-VCS (Del.Ch.,dune 7, 2007). While not directlyapplicable to the instant motion, thisreference to Rule 11 bears notice as itreminds Plaintiffs that any amendedcomplaint must be based upon appropriateinvestigation.

While the Court appreciates the efforts ofcounsel for each side to bring to its attention newcases in this rapidly developing area of law, itconcludes that it should defer a detailed discussionof Desimone.Its distinction of In re Tyson Foods,919 A.2d 563, 593 (Del.Ch.2007) and its discussionof demand futility likely will provide guidance tothe Court in subsequent motion practice. However,the Complaint's lack of detail makes a similaranalysis premature in the instant action.

2. Motion to Dismiss for Failure to MakeDemand

a. Standing Under Rule 23.1

*12 Ditech argues that Plaintiffs lack standingbecause they allege only that they have held stock inDitech at all relevant periods. See Complaint ¶J10-12. Ditech cites a number of non-binding casesfrom other districts in support of this proposition.Because the Court will dismiss the Complaint withleave to amend on other grounds, it need not decidethe appropriate level of detail in the pleading ofshare ownership. Nonetheless, it recommends thatPlaintiffs amend this aspect of the Complaint.

b. Disinterestedness and Independence

FN15. In a portion of a recent decisionconcluding that plaintiffs had failed toallege sufficient facts to establish demandfutility, the Delaware Court of Chancery

Ditech argues that Plaintiffs have failed toallege sufficient facts to raise .a reasonable doubt asto the disinterestedness and independence of amajority of the present Board. Ditech concedes that

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Montgomery is not independent or impartial, andPlaintiffs do not argue that Harper cannot actindependently or impartially. Accordingly, thequestion as to the independence anddisinterestedness of the Board revolves around fourmembers: Avis, Hasler, Manoliu, and Sugishita.Hasler and Avis were on the Board during the entireperiod of alleged backdating. Complaint ¶¶25-26. Manoliu joined the Board prior to the finalalleged backdated grant. Complaint ¶ 28. Sugishitajoined the Board prior to the alleged springloadedgrant. Complaint ¶ 29. Ditech points out that theCompany's policy that the compensation committeemakes option grant decisions would limit thechallenged decisions to a subset of the existingBoard. Motion Two 22. However, Plaintiffs allegethat this policy was not followed in multiplerespects and that, while the CompensationCommittee backdated the grants, the other membersof the Board had knowledge and approved of thebackdating. Complaint ¶ 37. Accordingly,assuming that an amended complaint alleges withsufficient particularity that each of these directorsapproved the option grants or otherwise participatedin wrongful conduct, Plaintiffs may be able to pleaddemand futility on the basis of an insufficientnumber of disinterested and independent directors.However, the Court concludes that it is premature tomake such a determination because Plaintiffs havefailed to, allege with sufficient particularity that anyoptions backdating or other actionable misconductoccurred at Ditech.

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in place at the time the complaint was filedapproved the underlying challenged transactions,which approval may be imputed to the entire boardfor purposes of proving demand, futility, the Aronsontest applies."Ryan, 918 A.2d at 353. As with thedisinterestedness and independence inquiry,assuming. that Plaintiffs can amend to add sufficientparticularity, it appears possible that this aspect ofthe Aronson test applies to some or all of thesurviving claims. However, the Court alsoconcludes that it is premature to determine thepresence or absence of a valid business judgmentbehind the decision to engage in the allegedmisconduct.

IV. ORDER

*13 Good cause therefor appearing, IT IS'HEREBY ORDERED that the motion to dismiss forfailure to state a claim upon which relief can begranted is GRANTED WITH LEAVE TO AMENDand the motion to dismiss for failure to makedemand is DEFERRED. Any amended complaintshall be filed within thirty days of the date of thisorder.

N.D.Cal.,2007.In re Ditech Networks, Inc. Derivative LitigationSlip Copy, 2007 WL 2070300 (N.D.Cal.), Fed. Sec.L. Rep. P 94,440

c. The Business Judgment Rule

Ditech argues that the second prong of theAronson demand futility test, which inquireswhether a plaintiff can identify a reason to doubtthat the challenged acts were the product of theboard's valid exercise of business judgment, doesnot apply because the "board that would beconsidering,the demand did not make a businessdecision which is being challenged in the derivativesuit."Rates, 634 A.2d at 933-34. As discussedabove, the threshold question is the role of themembers of the board when the Complaint wasfiled. "Where at least one half or more of the board

END OF DOCUMENT

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Case 5:06-cv-06286-RMW Document 200-2 Filed 01/22/2008 Page 1 of 31

EXHIBIT 3

Case 5:06-cv-06286-RMW Document 200-2

VUestlaw.

Slip Copy

Slip Copy, 2006 WL 2927663 (W.D.Wash.)(Cite as: Slip Copy)

HIn re Watchguard Securities LitigationW.D.Wash.,2006.Only the Westlaw citation is currently available.

United States District Court, W.D. Washington,at Seattle.

In re WATCHGUARD SECURITIESLITIGATION.

This Document Relates to: All Actions.No. C05-678LR.

Page I

below, the court GRANTS Defendants' motion andDISMISSES Plaintiffs' complaint with prejudice.

Filed 01/22/2008 Page NpIlof 12

II. BACKGROUND & ANALYSIS

A. Summary of Prior Order and Proceedings

Oct. 12, 2006.

Tamara J. Driscoll , Lerach Coughlin Stoia GellerRudman & Robbins, Elizabeth Ann Leland, JuliFarris Desper , Lynn Lincoln Sarko , KellerRohrback , Jay H . Zulauf, W. Scott Zanzig, HallZanzigZulauf Claflin McEachern , Seattle, WA,Aelish M. Baig, Lerach Coughlin Stoia GellerRudman & Robbins , Azra Mehdi, San Francisco,CA, for Plaintiffs.James N. Kramer, Justin M . Lichterman , MichaelD. Torpey, Stephen M. Knaster , Orrick Herrington& Sutcliffe, San Francisco , CA, Louis DavidPeterson , Hillis Clark Martin & Peterson , Seattle,WA, for Defendants.Dan Drachler, Zwerling Schachter & Zwerling,Seattle , WA, for Petitioner.

ORDER

JAMEIS L. ROBART, District Judge.

1. INTRODUCTION

*1 This matter comes before the court onDefendants' second motion to dismiss (Dkt.9 60).The court has reviewed the parties' briefing andsupporting materials, and finds that further oralargument is unnecessary. For the reasons stated

The court's analysis in this order assumesfamiliarity with the court's April 2006 orderdismissing Plaintiffs' original complaint (Dkt.# 54).Where necessary, the court will repeat factualinformation and principles of law from the priororder, but will generally not repeat citations.

Plaintiffs brought this securities fraud action inthe wake of WatchGuard's March 2005 restatementof its earnings for the first three quarters of 2004.The restatement implicitly admitted errors inapplying generally accepted account principles ("GAAP"), and explicitly admitted three types oferrors:

(i) inaccurate income statement classification ofearly pay incentive discounts taken by customers,(ii) under-accrual of customer rebate obligations,and (iii) timing of revenue recognition associatedwith specific products and services (resulting in anoverstatement of product revenue and anunderstatement of deferred revenue).

Mar. 15, 2005 Form 8-K. The restatementrevealed not only that WatchGuard falsely stated itsfinancial results for the first three quarters of 2004,but that the Sarbanes-Oxley certifications includedin each of its quarterly statements were also false.The certifications contained assurances' that thestated financial results were adequate, and that thecertifying officers had designed adequate financialcontrols, evaluated those controls, and disclosedany material weaknesses. E.g., Nov. 9, 2004 Form



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10-Q Exs. 31.1, 31.2. In addition to false statementscontained within WatchGuard' s earnings reports,Plaintiffs also claimed falsity in a 2004 pressrelease touting WatchGuard's "Firebox X" product.

False statements are an insufficient basis for asecurities fraud claim . This truism receivedsubstantial attention in the court's prior orderdismissing Plaintiffs original complaint. In asecurities fraud action under Section 10(b) of the1934 Exchange Act, 15 U.S.C. § 78j(b), and RulelOb-5, 17 C.F.R. § 240. 10b-5, culpability arisesonly when a defendant makes a false statement withscienter . Scienter is the mental state encompassingthe intent to deceive, mislead , or defraud . It alsoencompasses deliberate recklessness-a degree ofrecklessness that strongly suggests actual intent.

At the pleading stage , a plaintiff must pleadspecific facts that. create a strong inference ofscienter. See Nevius v.. Read-Rite Corp. (In reRead-Rite Corp. Secs. Litig.), 335 F .3d 843, 848(9th Cir.2003) (noting that a mere "reasonableinference" of scienter does not satisfy the PSLRA).A plaintiffs scienter-related allegations do notreceive the traditional deference afforded pleadings.The court must consider all inferences that arisefrom the plaintiffs allegations , not merely those thatfavor the plaintiff.FNI

FNI. Plaintiffs improperly use theiropposition to the instant motion to move,sub silentio , for reconsideration of thecourt ' s prior order . In that order, the courtset forth the applicable pleading standards.Order at 5-6. Plaintiffs ' counsel ignores theorder, providing a textbook example ofwhat not to do when attempting to salvagea deficient complaint. Counsel states that "[n]either the PSLRA nor the Ninth Circuithas discarded the well -settled rule that `allegations of material fact made in thecomplaint should be . taken as true andconstrued in the light most favorable to theplaintiff.' " Opp'n at 4-5. Counsel'sinternal quotation is to Nursing HomePension Fund, Local 144 ("NHPF') v.Oracle Corp., 380 F.3d 1226, 1229 (9th

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Cir.2004). In NHPF, the court statednearly the opposite of the proposition forwhich Plaintiffs ' counsel cites it. Thesentence from which counsel extracts themisleading quotation merely states the "general rule" for a motion underFed.R.Civ.P. 12(b)(6).NHPF, 380 F.3d at1229. The court further notes that for acomplaint alleging securities fraud, thegeneral rule gives way to the heightenedpleading standards of Fed .R.Civ.P. 9(b)and the PSLRA . Id. at 1229-30.It notes inparticular that the PSLRA requires a courtto consider "all reasonable inferences"related to scienter , "whether or notfavorable to the plaintiff." Id. at1230.Plaintiffs repeat their misleadingcitation of NHPF later, adding anothermisleading citation . Opp'n at 16 (citing No.84 Employer- Teamster Joint CouncilPension Trust Fund ("EJCPTF') v. Am.West Holding Corp., 320 F. 3d 920, 931(9th Cir.2003)). In EJCPTF, much as inNHPF, the court acknowledges the generalrule for construing a complaint, and againnotes that the general. rule does not applyto allegations of scienter . EJCPTF, 320F.3d at 931 (citing general rule); id at 938(noting that court must consider allinferences , favorable and unfavorable).Counsel's transparent misstatement of thelaw calls their legal scholarship intoquestion ( at best), and fails to advancetheir clients ' cause.

*2 The court dismissed Plaintiffs' originalcomplaint because its allegations , taken as a whole,did not create a strong inference of scienter. Thecourt repeatedly observed that Plaintiffs failed toallege facts supporting a strong. inference that anyDefendant acted culpably . Eg., Order at 21 (notingthat Plaintiffs "offer little more than WatchGuard'srestatement and their insistence that Defendantsmust have known of the accounting problemsunderlying the restatement "); see also Bielski. v.Cabletron Sys., Inc. (In Re Cabletron Sys.), 311F.3d 11, 31 ( 1st Cir.2002) ("Merely stating inconclusory fashion that a company ' s books are outof compliance with GAAP would not in itself

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demonstrate liability under section 10(b) or Rule1 Ob-5. ")..

Based on Plaintiffs' representation that theirinvestigation had revealed additional informationsupporting new scienter-related allegations, thecourt granted Plaintiffs leave to amend theircomplaint. Plaintiffs filed an amended complaintfeaturing allegations from four new unidentifiedwitnesses ("UWs") in addition to new allegationsfrom the, UW named in the original complaint.Defendants responded with the instant motion.

B. Review of New Allegations in AmendedComplaint

As to two of the alleged misstatements onwhich Plaintiffs base this action, the court need notrevisit its discussion from the prior order. First, thecourt found that Plaintiffs allegations regardingWatchGuard's erroneous classification of early payincentive discounts fell short of creating a stronginference of scienter. Order at 9-12. The court findsno reason to revisit this finding after reviewingPlaintiffs amended complaint and their briefing.The same is true of WatchGuard's early 2004statement regarding the Firebox X product. Thecourt previously found no strong inference ofscienter as to that statement, Order at 19-20, andreiterates that finding here.12

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See Ronconi v, Larkin, 253 F.3d 423, 429 (9thCir.2001) (noting that a court must considerallegations "as a whole").

1. New Generalized Allegations

Although most of Plaintiffs ' new allegationspertain to specific WatchGuard practices , some of.them more generally address various Defendants'motive to mislead . As was the case in its priororder, Order at 6-8, the court discusses thesebroader allegations first. Most of them are based onthe knowledge of UW1 , who worked as Defendant(and former CFO) Michael McConnell's executiveassistant until she FN3 left the company in July2004. ¶ 13.FN4The court notes that Mr.McConnell ceased to serve as WatchGuard's CFOin May 2004 , and left WatchGuard in June 2004,nine months before the end of the class period.13.

FN3. Because the amended complaint doesnot reveal the gender of any UW, the courtwill use feminine pronouns to refer to eachUW.

FN2. Plaintiffs' opposition brief is silentregarding the Firebox X statement,suggesting that they have abandoned theirclaim that the statement is actionable.

The court is therefore left to examine whetherPlaintiffs' new allegations raise a strong inference ofscienter as to misstatements regardingunder-accrual of customer rebate obligations," "timing of revenue recognition," as well, asmisstatements in WatchGuard's Sarbanes-Oxleycertifications. Although the court focuses onPlaintiffs' new allegations here, it considers theirimpact in light of all of Plaintiffs' allegations,including those the court reviewed in its prior order.

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FN4. All citations using the bare "¶ "symbol are to Plaintiffs ' amendedcomplaint.

*3 Some of UWI's allegations are sogeneralized as to be of trivial value in strengtheningthe inference that Mr. McConnell acted withscienter. Although she' describes Mr. McConnell as "very controlling" and "involved in everything," rd.,she does not allege a single act of Mr. McConnell'sthat would illuminate his controlling nature or itsrelevance in this lawsuit. Similarly, her allegationthat Mr. McConnell was a "long-term associate[ I"of the WatchGuard controller, ¶ 55, means next tonothing without allegations explaining how hisassociation with the controller implicates Mr.McConnell.

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states that Mr. McConnell "kept two sets offinancial books for : WatchGuard, which werereferred to as the `green books,' " and that he "keptthese `green books' closely guarded." ¶ 55.Although UW 1 has no knowledge of the greenbooks' content, Plaintiffs infer that their veryexistence is probative of scienter. The courtdisagrees.

In addition, UW I asserts that, "at least duringthe period prior to the Class period," a forinerWatchGuard CEO who is not a Defendant exerted "such tremendous pressure" on Mr. McConnell thatUW 1 believes that "financial results may not havebeen legitimately derived," and that "evenWatchGuard's board of directors became suspiciousof how the results were being derived." ¶ 59. UW1 never explains which results she believes wereillegitimate. This is a curious omission for tworeasons: she admits that the alleged pressureoccurred "prior to the Class period;" and sheworked with Mr. McConnell from October 2003until July 2004, a period that includes quarterlyreports preceding the class period. Even if the courtwere to ignore UW 1's vagueness as to what timeperiod's results were not "legitimately derived," itcannot ignore that the allegations come without ashred of support. Although UW 1 allegedly "assisted in the preparation of Board of Director andAudit Committee meetings, including preparing theminutes of those meetings," ¶ 59, she offers noindication of what she observed or learned in thatrole. If UW 1 learned information to substantiateher bare allegations that the company reported "illegitimate" financial results and that the board wassuspicious of those results, the court would expectto see such allegations in the amended complaint.Without such allegations, UW 1's assertions areworth little in strengthening an inference of scienter.

The remaining generalized allegations in theamended complaint are also not compelling.Plaintiffs assert that many of the Defendants' officeswere located, along with other executive offices, inthe same comer of the same floor of WatchGuard'scorporate headquarters. ¶ 17. Several of theDefendants attended quarterly "numbers meetings"where they discussed WatchGuard's finances. ¶ 18.There is no allegation that anything nefarious

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occurred at these meetings. Indeed, there are nospecific allegations whatsoever as to what occurredat these meetings. In -addition, Defendant StevenMoore "interacted directly event' with mid tolower-level [sic] employees and took the time toknow them by name." ¶ 12. Mr. Moore invitedunspecified employees -to his home for "socialgatherings." Id. Despite these allegations, there areno allegations that any employee communicatedanything relevant to this lawsuit to Mr. Moore.Finally, Plaintiffs allege that several Defendantswere certified public accountants with advanceddegrees. Although these allegations raise aninference that various Defendants could have hadincriminating knowledge, they are silent as towhether any Defendant had incriminatingknowledge (or was deliberately reckless) . withrespect to the false statements at issue. The courtthus fords the allegations to be of marginal value instrengthening an inference of scienter.

2. Allegations Regarding Revenue Recognitionand Rebate Obligations

*4 In restating its 2004 financial results,WatchGuard admitted that unspecified errorspertaining to "under-accrual of customer rebateobligations" and "timing of revenue recognitionassociated with specific products and services"required it to reduce its revenue over the first threequarters of 2004 by a total of approximately $ I .8million, with a corresponding cumulative increasein quarterly losses.

In Plaintiffs' view, these errors arose fromWatchGuard's aggressive attempts to convincecustomers to make orders at the end of quarters, itsfailure to account for knowledge that its. customerswould return a large percentage of certain products,its failure to promptly process returned product, andits failure to properly manage accounts receivable inlight of these concerns. These assertions of

channel stuffing" FN5 and other improprieties,based largely on new information from four UWs,form the bulk of the new allegations in Plaintiffs'amended complaint. None of the UWs, however,have any information regarding any Defendant's

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role in, or awareness of, these issues.

FN5. "Channel stuffing" is the term for thepractice of flooding customers withproducts to increase revenues. "Channelstuffing" is merely good business when thecustomers want or keep the products theyreceive; it is bad business when thecustomers do not want the products andreturn them. See Makor Issues & Rights,Ltd. v. Tellabs, Inc., 437 F.3d 588, 598(7th Cir.2006) (describing channelstuffing); see also Bielski v. CabletronSys., Inc. (In Re Cabletron Sys.), 311 F.3d11, 34-35 (1st Cir.2002) ("Techniques thatresult in early booking of sales, such aschannel stuffing, might prove to be entirelylegitimate, depending on the specific facts.").

a. UW2' s allegations

UW2, a former national accounts manager atWatchGuard, was the sole UW featured inPlaintiffs' original complaint. Plaintiffs haveexpanded on UW2's allegations regardingWatchGuard's processing of returned products. Shealleges that WatchGuard had a practice of allowingreturned products to accumulate in its warehouseswithout completing the processing that would allowWatchGuard's records to reflect their return. ¶ 68.In August 2004, WatchGuard conducted a "pre-audit" of its return processing systems. Id. Afterthe pre-audit, an unnamed person or persons askedUW to assess the systems. Id. She discoveredvarious problems that delayed return processing. ¶¶. 69-70, 77. WatchGuard recorded processedreturns on an "RMA log," which existed on ashared computer system. ¶ 70. WatchGuard usedinformation from the RMA log to ensure that salesof returned products were not erroneously recordedas revenue. ¶ 71. In her assessment, UW2discovered "hundreds of thousands of dollars" ofunprocessed returns, some of which were nearly ayear old when she began her assessment in fall2004. ¶ 72. As was the case in the originalcomplaint, there are no allegations explaining when

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UW2 completed her assessment, to whom shereported the results, or the actions WatchGuardtook in response.

UW2 also provides information regardingWatchGuard's end-of-quarter sales practices. Shealleges that it was common for WatchGuard salesrepresentatives to request that customers placeend-of-quarter orders "for more than needed" and toprovide generous rights of return on the productssold. ¶ 56. She estimates that as much as 85% ofWatchGuard's end-of-quarter sales resulted inreturns. ¶ 57.

In what will become a familiar refrain, thecourt notes that UW2 does not allege that anyDefendant was culpably aware of the problems shedescribes. Although UW2 reported to a managerwho reported to a vice president who reported toCEO (and Defendant) Edward Borey, ¶ 56 n. 2,there are no allegations that reveal whether shecommunicated any information up the chain ofcommand, or whether any information traveleddown the chain of command from Mr. Borey to her.There are no allegations that UW2 communicated inany way with Mr. Borey or another Defendant, orthat UW2 has knowledge of any relevantcommunications with a Defendant. Although UW2states that WatchGuard required "seniormanagement" approval for returns of more than$10,000 in product, ¶ 70, there is no indicationthat Defendants became aware of excessive returnsvia this policy, much less that any Defendant wasaware that WatchGuard was not adequatelyaccounting for the returns.

b. UW3's allegations

*5 UW3 was a purchasing specialist atWatchGuard. According to her, WatchGuardexperienced significant problems with its "Vclass"products due to their "premature release" in 2002,two years before the class period began. ¶ 61.Those problems continued until the end of 2004. Id.She states that an unspecified WatchGuard CEO FN6

directed the premature release because hewanted to match a competitor's release of a similar

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product. Id UW3 alleges that WatchGuard'scustomers returned an "extreme" number of Vclass

products. R47 ¶ 62. She estimates that customersreturned as many as half of the Vclass products thatWatchGuard shipped, and that they were stillreturning as many as a fifth of those products in "May/June 2004." ¶ 63. UW3 had responsibility formanaging WatchGuard's system for estimatingcustomer orders. She states that as the company'sproduct offerings grew in number, the company didnot assign additional employees to assist her. ¶¶64-65. UW3 stated that WatchGuard would notaccept product returns in the final week of a quarter,and noted various problems that would delay theprocessing of product returns. ¶¶ 73-74.According to UW3, WatchGuard auditors had. longquestioned the company's returns processingpractices, and became "far more adamant about it inAugust or September 2004." ¶ 78. Like UW2,.UW3 alleges that WatchGuard returns wentunprocessed for long periods of time. ¶ .74 (notingdelays of "as long as 45 days from the time whenthe goods had been received at the warehouse").

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between Mr. Borey and UW3.. For example, UW3claims that she "asked [her supervisingvice-president] on several occasions why theCompany was not timely processing sales returns orproperly crediting customer accounts." ¶ 75. Thevice-president's response-"Sales needs to get theiracts together"-suggests that he placed the blame onWatchGuard's sales representatives. Id. Moreimportantly, the vice-president's response does notsuggest that he reported the problems to aDefendant. There are no allegations that UW3communicated directly or indirectly with Mr. Boreyor another Defendant. There are also no allegationsthat UW3 has knowledge . of any relevantcommunication involving any Defendant. Forexample, although UW3 states that "warehousepersonnel would complain about unprocessedreturns," she does not state that anyonecommunicated these complaints to a Defendant.

c. UW4' s allegations

FN6. Unique among the UWs on whichPlaintiffs rely, UW3 identifiesquestionable conduct by an executiveofficer at WatchGuard. Unfortunately, theconduct occurred two years before theclass period, and the executive officer isnot a Defendant in this action.

FN7. According to UW2, WatchGuard losta major customer during the Class Periodbecause of performance problems withVclass.products. ¶ 66.

UW3 also alleges that "end-of-quarter ` games'and `suspicious ' end-of-quarter discounts werecommonplace at WatchGuard," ¶ 73, although sheprovides no corroborating allegations.

As with the other UWs, UW3 does not allegethat any Defendant was culpably aware of theproblems she describes. UW3 reported to a to a vicepresident who reported to Mr. Borey, ¶ 61, butthere are no allegations regarding communication ofany. information up or down the chain of command

UW4 was a WatchGuard sales representative.She reported to a director who reported to a vicepresident who reported to Defendant and CEO EdBorey. ¶ 58. She alleges that she experienced "intense pressure" to ship WatchGuard products atthe ends of quarters, although she does not revealwho pressured her. Id. She also states that salesrepresentatives entered "side-agreements"extending discounts and other incentives tocustomers, and that the company began to pressurerepresentatives to document such arrangements. ¶88. Like UW2 and UW3, she identifies severaldeficiencies in Watch Guard's return processingpractices. ¶¶ 79-82. She alleges that thosedeficiencies led to difficulties in . calculatingWatchGuard's accounts receivable. ¶¶ 81-83.

*6 Like all other UWs on which Plaintiffs rely,UW4 does not allege that any Defendant was awareof the problems she describes. She does not allegethat she has any knowledge regarding anyDefendant.

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d. UW5 ' s allegations inference of scienter.

Finally, UW5, a WatchGuard credit andcollections analyst, confirms that WatchGuard haddifficulty managing its accounts receivable. ¶¶83-87. She blames WatchGuard's delayed andotherwise improper recording of product returns forthose difficulties. She alleges that WatchGuardfailed to write off uncollectible receivables. ¶ 89.Aside from the problem with returns, WatchGuard'spromotion and rebate programs made it difficult forthe company to properly record revenue. ¶ 96.Consistent with UW4's allegations, she states thatshe often discovered improper "side-agreements"that sales personnel made with customers thatviolated company policy. ¶ 87. She believed thatWatchGuard's accounts receivable were "clearlyoverstated" during the class period. ¶ 90.

Again, UW5's allegations are silent as to theknowledge or conduct of any Defendant. Forexample, she alleges that "throughout [her] tenure[she] had thought that all of WatchGuard's revenuerecognition was `crooked' and. that there `werethings [WatchGuard] shouldn't have done.' " ¶ 87.She does not allege, however, that shecommunicated her suspicions of "crooked"practices to anyone, nor that she has any basis forassigning culpability for the "crooked" practices toany Defendant. The same is true of her concernsregarding accounts receivable. UW5 reported to amanager who reported to a WatchGuard CFO FN8,

but she does not allege any relevantcommunications up or down her chain of command.¶87.

FN8. The amended complaint is silent asto which CFO UW5's manager reported to,and as to whether that CFO is a Defendant.

C. The New Allegations Do Not Create a StrongInference that Any Defendant Made a FalseStatement With Scienter.

The court must now decide whether the newallegations , considered along with the allegationsthe court reviewed in its prior order, create a strong

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The allegations from the UWs create a stronginference that WatchGuard had significant problemsin several areas. The allegations suggest thatWatchGuard's end-ofquarter scramble to makesales, including the extension. of generous rebatesand rights of returns, caused several difficulties.First, the uncertainty as to whether products wouldbe returned, or what rebates a customer mightclaim, made it difficult to properly calculate thecompany's accounts receivable. Second, whencustomers returned products, WatchGuard did notprocess the returns quickly, leading to delayedrecognition of the reduced revenue associated withproduct returns.

As Defendants note, however, it is not clearthat the problems that the UWs describe are theproblems. that led WatchGuard to restate its results.The restatement admitted three categories of error.WatchGuard's mis-classification of early payincentive discounts as interest expense is plainlyunrelated to the problems that the UWs describe.Defendants also assert that the problems are notrelated to the other two categories of error: "under-accrual of customer rebate obligations" andthe "timing of revenue recognition associated withspecific products and services."The court declinesto resolve this dispute. It suffices to note that salesrepresentatives' aggressive practices with respect torebates and other sales incentives could lead to an "under-accrual of customer rebate obligations," andthat delays in processing returns and difficultycalculating accounts receivable could lead toproblems with the "timing of revenue recognition."The court assumes for purposes of the instantmotion that the UWs have identified problems thatwere at least a partial cause of WatchGuard'srestated earnings.

*7 Plaintiffs rely on three theories to transformthe ground-level problems that they and their UWsdescribe into a strong inference that any Defendantacted with scienter. First, they argue that there is astrong inference that one or more Defendants knewabout the ground-level problems, knew that theylikely made WatchGuard's quarterly financialresults false, but announced the quarterly results



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nonetheless. Second, Plaintiffs argue. that ifDefendants did not know of the ground-levelproblems, this was due to their deliberaterecklessness in avoiding awareness of the problems.Third, Plaintiffs argue that if Defendants did notknow . about the ground-level problems, it wasbecause Watch Guard's financial controls wereinadequate. In that case, Plaintiffs necessarily focuson Defendants' certifications of those controls underthe Sarbanes-Oxley act, and argue that there isstrong inference that Defendants either knew of orwere deliberately reckless regarding the adequacyof the financial controls. The court addresses eachtheory in turn.

1. Plaintiffs Fail to Raise a Strong Inference thatAny Defendant Knew of WatchGuard'sGround-Level Problems, or that Any DefendantKnew that Those Problems Made WatchGuard'sFinancial Results False.

As the court has noted in describing the UWs'allegations, Plaintiffs raise no direct inference that aDefendant was culpably aware of the problems thatthe UWs describe. The allegations suggest that theUWs, some of WatchGuard's sales personnel, andeven WatchGuard's warehouse personnel wereaware of the problems. The amended complaint,however, is conspicuously devoid of specificallegations regarding any Defendant's knowledge.Although each of the UWs was one or two "directreports" away from a Defendant, there is noindication that any Defendant acquired any UWs'(or anyone else's) knowledge of WatchGuard's

ground-level problems.FN9It is not enough todescribe "channel stuffing" and other improprieties.Plaintiffs must establish that a Defendant isculpable in those practices. For example, in onecase on which Plaintiffs rely, the court dismissed aclaim based on "channel stuffing" as to onedefendant because plaintiffs could not establish hisculpability. Makor Issues & Rights, Ltd. v. Tellabs,Inc., 437 F.3d 588, 604 (7th Cir.2006). The courtpermitted. such allegations to proceed againstanother defendant because plaintiffs alleged that he" `worked directly with [the company's] salespersonnel' to effect the channel stuffmg."Id. at

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604-605.Such allegations are missing fromPlaiantiffs' amended complaint.

FN9. UW4 states that there was "adisconnect" even between WatchGuard'swarehouse personnel and the ' employeeswho handled customer accounts. ¶ 79.This supports an inference that theinformation necessary to identify defects inWatchGuard's returns processing did notflow freely.

At best, Plaintiffs' allegations raise an inferencethat the problems were sufficiently serious, chronic,and important to WatchGuard that the Defendantsmust have known about them. This is not a stronginference, however, for several reasons.

First, WatchGuard consistently disclosed thatproduct returns and rebates could negatively impactits revenues. In every quarterly report at issue in thisaction, WatchGuard has disclosed that its revenuestatements depend on estimated allowances forreturns and rebates. Eg., Nov. 9, 2004 Form l0-Qat 6. It warned that "[p]roduct returns, retroactiveprice adjustments and rebates could exceed ourallowances, which could adversely affect ouroperating results."Id. at 31 .The companyacknowledged that it could "experience significantreturns, price adjustments and rebate costs forwhich we may not have adequate allowances."ld. Itexplained that despite its efforts to. accuratelyforecast returns and other allowances, thoseprovisions could be inadequate. Id. WatchGuardalso disclosed that "the efforts of [its] sales, force tomeet or exceed quarterly and year-end quotas"meant that the company "received a substantialportion of a quarter's sales orders and earned asubstantial portion of a quarter's revenues during thequarter's last month and the latter half of the lastmonth."Id. at 31-32.

*8 In light of these disclosures, Plaintiffscannot argue that Defendants failed to disclose thepotential deleterious impact of its end-of-quartersales pushes and its returns and rebates practices.Plaintiffs' allegations must support a stronginference that a Defendant was aware of (or

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recklessly indifferent to) actual errors resultingfrom those practices that rendered WatchGuard'squarterly numbers inaccurate or unreliable.

To the extent Plaintiffs' allegations address thesubject at all, they reveal that WatchGuard tookcorporate-level actions to address problems itdiscovered in its ground-level practices. Plaintiffsmake much of the allegation that in August 2004,WatchGuard failed a "pre-audit" of its systems forprocessing product returns. Importantly, this "pre-audit" occurred when WatchGuard had alreadyissued two of the three quarterly reports that are thesubject of this action. Assuming that one or moreDefendants were aware of the pre-audit andinformed of its results, there is no evidence tosupport Plaintiffs' allegation that Defendants "[d]eliberately ignor[ed]" the problems. Opp'n at 3.Instead, the reasonable inference is that Defendantswere acting appropriately to identify problems.Indeed, WatchGuard's quarterly report for the thirdquarter of 2004, the first such report, after the "pre-audit" that Plaintiffs describe, included a newdisclosure relating to the auditors' activities.WatchGuard acknowledged that the Sarbanes-OxleyAct would require it, for the first time, to furnish ayear-end report regarding the effectiveness of itsinternal controls, and that the company's auditorswould have to certify the report. Nov. 9, 2004 Form10-Q at 28. It stated that the company had begun toreview its internal controls, but had not completedthat review. Id. The company .acknowledged that itcould not guarantee that the evaluation would notreveal inadequate controls. Id. Disclosing itsauditors' activities to the investing public andadmitting that the auditors might discover materialinadequacies in WatchGuard's financial controls, ishardly consistent with an intent to mislead investors.

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after the August pre-audit, the court would expect tosee allegations that one or more Defendantsperpetuated the faulty practices despite the auditors'adamance. Such allegations are missing from thecomplaint. Instead, the allegation is thatWatchGuard assigned auditors and employees toinvestigate its returns processing systems. Theseallegations are far more consistent with an attemptto remedy problems than with an intent to misleadinvestors.

*9 In addition to efforts to reform its returnprocessing systems,. UW4's allegations show thatWatchGuard attempted to address problems arisingfrom "side-agreements" with customers. She statesthat beginning in 2005, the company required salespersonnel to document all discounts in eachtransaction's purchase order . and invoice. ¶ 88.This provides strong support for the inference thatWatchGuard attempted to redress the problems thatUW4 identifies. It provides little to no support forthe inference that a Defendant acted with intent tomislead investors.

The inference that the court takes from thePlaintiffs' allegations and the timing ofWatchGuard's public disclosures is thatWatchGuard discovered problems and actedappropriately to remedy them. When a pre-auditrevealed problems, it acted to investigate thoseproblems. When the investigation of those problemsrevealed errors in its previous financial . reporting, itrestated its financial results. These same inferencesmake the inference that Defendants weredeliberately misstating financial results too weak tomeet Plaintiffs' burden to establish a stronginference of scienter.

Moreover, after discovering problems in thepre-audit, WatchGuard took other correctivemeasures. Someone . assigned UW2 to assessWatchGuard's processing of returned products. IfUW2- discovered problems, reported them directlyor indirectly to a Defendant, and WatchGuard tookno corrective action, the court would expect to seesuch allegations in the amended complaint. If, asUW3 alleges, auditors became "far more adamant"about WatchGuard's returns processing systems

2. Plaintiffs Fail to Raise a Strong Inference thatAny Defendant Was Deliberately Reckless WithRespect to the Problems Underlying theInaccurate Quarterly Reports.

Even if Defendants did not know of theground-level problems that made WatchGuard'squarterly financial results inaccurate, Plaintiffscould succeed by raising a strong inference of

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deliberate recklessness. As the court discussed inthe previous section, however, this inference isweak in light of allegations that show thatWatchGuard investigated its problems and acted toremedy them.

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new allegations, .however, the court must considerwhether the existence of the problems that the UWsidentify raises a strong inference that at least oneDefendant made a culpably false" statement aboutWatchGuard's financial controls.

Unable to offer specific allegations of recklessconduct, Plaintiffs - fall back to unsupportedaccusations. They assert, for example, thatWatchGuard's accounting irregularities were soobvious and widely known within the 300-employeeCompany, [sic] that even the most cursory review ofthe books would have led to the discovery of the

false information."Opp'n at B.FNI° This allegationis inconsistent with the accounts of Plaintiffs' ownwitnesses, who do not allege any problem thatwould have been apparent from a "cursory reviewof the books." The books, for example, would notreveal unprocessed product returns. The books.would not reveal the extent to which apparentlycomplete sales were subject to rights of return,rebates, or other revenue-reducing incentives.Instead, according to the UWs, those problemswould become apparent upon an investigation ofWatchGuard's ground-level sales and returnsprocessing practices. According to the UWs,WatchGuard undertook such an investigation.

FN10. Plaintiffs follow this sweepingstatement with a decidedly unhelpfulcitation . to 101 of the 187 paragraphs of theamended complaint. Opp'n at 8 (citing IT47-147).

3. Plaintiffs Fail to Raise a Strong Inference thatDefendants Had Knowledge of or WereRecklessly Indifferent to the Adequacy ofWatchGuard's Financial Controls.

Unable to raise a strong inference that anyDefendant acted culpably in misstatingWatchGuard's quarterly financial results, Plaintiffs,must show that the Sarbanes-Oxley certificationsaccompanying those results were culpably false.The court's discussion of the certifications in itsprior order is equally applicable - to Plaintiffs'amended complaint. Order at 15-18. In light of the

*10 The court assumes for present purposesthat better "controls" would have revealed theground-level problems at issue. This assumption isnot without controversy. Although WatchGuardadmitted to material weaknesses in its controlswhen it issued the March 2005 restatement, it didnot reveal which controls were inadequate. Underthese circumstances, t is not obvious what "controls"would have ameliorated the problems that Plaintiffsidentify. It appears that Defendants should have hadbetter awareness of the sales practices and returnsprocessing practices at issue, but there is noindication that "controls" would have provided thatawareness. The court shelves those concerns,however, and assumes that better controls wouldhave, at the very least, led WatchGuard to discoverthese problems sooner.

Even under the assumption that WatchGuard'smisstated earnings are the result of shoddy controls,the court finds no strong inference of scienter as toDefendants' inaccurate Sarbanes-Oxleycertifications. For many of the reasons that the courthas already discussed, there are no allegations thatcreate a strong inference that Defendants knewWatchGuard's controls were inadequate, or weredeliberately reckless regarding those controls.Plaintiffs' allegations suggest that WatchGuard tooksteps to assess its controls during the class period,and acted to improve its controls when it discoveredthose problems. They do not raise a stronginference that any Defendant acted culpably indesigning those controls, assessing them, orcertifying them under the Sarbanes-Oxley Act. Thatthe controls were inadequate is perhaps anindication of incompetence, but incompetence, evengross incompetence, is no basis for a securitiesfraud claim.

III. CONCLUSION

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Slip Copy


For the reasons stated above, the courtGRANTS Defendants' motion to dismiss withprejudice (Dkt.# 60). Plaintiffs have failed to createthe strong inference of scienter necessary to salvagetheir principal claim for securities fraud, and theirclaim for control person liability fails as a result. SeeOrder at 21. In deciding the instant motion, thecourt has relied solely on the amended complaintand documents incorporated in the amendedcomplaint by reference. The court thereforeDENIES Defendants' request for judicial notice(Dkt.# 61).

Plaintiffs' briefing concludes with a pro formarequest for leave to amend their complaint, Opp'n at24, but Plaintiffs provide no reason for the court togrant the request. The court must grant leave toamend if it finds that an amendment to thecomplaint could cure the deficiencies that led to itsdismissal. See Eminence Capital, LLC v. Aspeon,Inc., 316 F.3d 1048, 1052 (9th Cir.2003) ("Dismissal with prejudice and without leave toamend is not appropriate unless it is clear on denovo review that the complaint could not be savedby amendment."). In this case, the court isconvinced that Plaintiffs cannot salvage theircomplaint with an amendment. In its prior order, thecourt acknowledged the apparent problems atWatchGuard, and directed Plaintiffs to provideevidence that would culpably link a Defendant tothose problems. Plaintiffs responded with newallegations that provided more detail about theproblems, but provided virtually no new allegationsabout the culpable conduct of any Defendant.Plaintiffs give the court no reason to believe thatthey could cure this deficiency if granted leave toamend. See Gompper v. VISX Inc., 298 F.3d 893,898 (9th Cir.2002).

W.D. Wash.,2006.In re Watchguard Securities LitigationSlip Copy, 2006 WL 2927663 (W.D.Wash.)

END OF DOCUMENT

Page bf,tPf 12

Page 11

Q 2008 Thomson/West-No Claim to Orig. U.S. Govt. Works.

Case 5:06-cv-06286-RMW Document 200-2 Filed 01/22/2008 Page 13 of 31

EXHIBIT 4


--- F.Supp.2d ----

--- F.Supp.2d ----, 2007 WL 2808224 (D.Ariz.)(Cite as: --- F.Supp .2d ----)

CWeiss v. Amkor Technology, Inc.D.Ariz .,2007.Only the Westlaw citation is currently available.

United States District Court ,D. Arizona.Nathan WEISS , individually and on behalf of all

others similarly situated, Plaintiff,V.

AMKOR TECHNOLOGY, INC., et al., DefendantsNo. CV 07-0278-PHX-PGR.

Page I

Existence of Injury. Most Cited CasesSecurities fraud complaint was deficient for failureto plead loss causation ; purchasers failed to linktheir losses to the alleged misrepresentations byshowing that the stock price dropped uponrevelation of the true state of the facts. SecuritiesExchange Act of 1934, § 10(b), 15 U.S.C.A. §78j (b).

[2] Securities Regulation 349B 16=60.47

Sept. 25, 2007.

Background: Company and former andcurrent officers and directors moved to dismisssecurities fraud claims brought against them.

Holdings: The District Court, Paul GRosenblatt, J., held that:

(1) securities fraud complaint was deficient forfailure to plead loss causation;

(2) investors failed to adequately plead scienter;

(3) forward-looking statements in companypress releases were immune from securities fraudliability under Private Securities Litigation ReformAct's (PSLRA) safe harbor provisions.

Motion granted.

[1] Securities Regulation 349B €60.47

349B Securities Regulation349BI Federal Regulation

349BI(C) Trading and Markets349BI(C)7 Fraud and Manipulation

349Bk60.43 Grounds of and Defensesto Liability

349Bk60.47 k. Causation;




349Bk60.47 k. Causation;Existence of Injury. Most Cited CasesSecurities fraud plaintiffs are required to plead losscausation by alleging that the stock price fell afterthe truth of a misrepresentation about the stock wasrevealed. Securities Exchange Act of 1934, § 10(b),15 U.S.C.A. § 78j(b).


349B Securities Regulation349B1 Federal Regulation

349B1(C) Trading and Markets349B1(C)7 Fraud and Manipulation


349Bk60.47 k. Causation;Existence of Injury. Most Cited CasesIn material misstatement and omission cases, asecurities fraud plaintiff must allege that the .subjectof the fraudulent. statement or omission was thecause of the actual loss suffered, i.e., that themisstatement or omission concealed somethingfrom the market that , when disclosed, negativelyaffected the value of the security. SecuritiesExchange Act of 1934, § 10(b), 15 U.S.C.A. §78j(b).

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--- F.Supp.2d ----

--- F.Supp.2d ----, 2007 WL 2808224 (D.Ariz.)(Cite as: -- F.Supp.2d ----)

14] Securities Regulation 349B'60.53



349Bk60 . 50 Pleading34913k60.53 k. Misrepresentation.

Most Cited CasesInvestors , who alleged that defendant officers anddirectors, by virtue of their receipt of informationreflecting the truth regarding company, their controlover, . and/or receipt and/or modification ofcompany's allegedly materially misleadingmisstatements and/or their associations with thecompany which made them privy to confidentialproprietary information concerning company,participated in fraudulent scheme alleged , and thattheir motive was to manipulate the exercise of price..options that they awarded to themselves , failed to,adequately plead scienter under Private SecuritiesLitigation Reform Act (PSLRA); investors plead nofacts to indicate that defendants knew of orparticipated in any such actions or that theyrecklessly disregarded wrongdoing by someoneelse, and did not allege that any individualdefendant realized any direct economic gain fromthe stock options. Private Securities LitigationReform Act of 1995 , § 101(b)(2), 15 U.S.C.A. §78u-4(b)(2).




349Bk60.50 Pleading349Bk60.53 k. Misrepresentation.

Most Cited CasesA securities fraud plaintiff cannot allege scientersimply because company restated its financialstatements; instead, a complaint must allege specificfacts that each individual defendant knew that theaccounting for the subject transactions wasincorrect at the time it was determined, andalthough allegations of accounting violations mayprovide some support for scienter allegations, theymust be underpinned by other particularized

Page 2

allegations that defendants possessed the requisitemental state . Private Securities Litigation ReformAct of 1995, § 101(b)(2), 15 U.S.C.A. § 78u-4(b)(2)



349BI(C) Trading and Markets349B1(C)7 Fraud and Manipulation

349Bk60.50 Pleading349Bk60.51 k. In General. Most

Cited CasesScienter can be established under Private SecuritiesLitigation Reform Act (PSLRA) if a complaintadequately sets forth corroborating details and factssupporting allegations of each defendant'sknowledge of problems adversely affectingcorporate finances. Private Securities LitigationReform Act of 1995, § 101(b)(2), 15 U.S.C.A. §78u-4(b)(2).

]7]. Securities Regulation 349B €60.53


349BI(C) Trading and Markets349B1(C)7 Fraud and Manipulation

349Bk60 . 50 Pleading349Bk60 . 53 k. Misrepresentation.

Most Cited CasesSarbanes-Oxley Act (SOX) certifications mayprovide evidence of scienter if a securities fraudplaintiff alleges that not only were the certificationsfalse and misleading , but also that the defendantshad actual knowledge of their false or misleadingnature or were deliberately reckless in issuing suchstatements at the time . Private Securities LitigationReform Act of 1995, § 10l(b)(2), 15 U.S.C.A. §78u-4(b)(2); 15 U.S.C. § 7262.

181 Securities Regulation 349B €60.51



349Bk60.50 Pleading

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--- F.Supp .2d ----

--- F.Supp.2d ----, 2007 WL 2808224 (D.Ariz.)(Cite as: -- F.Supp .2d ---)

349Bk60.51 k. In General. MostCited CasesAllegations of a defendants' motive to engage infraud alone are insufficient to plead scienter underPrivate Securities Litigation Reform Act (PSLRA).Private Securities Litigation Reform Act of 1995, §101(b)(2), 15 U.S.C.A. § 78u-4(b)(2).

[91 Securities Regulation 349B €60.51


349BI (C) Trading and Markets349BI(C)7 Fraud and Manipulation

349Bk60 . 50 Pleading349Bk60.51 k. In General. Most

Cited CasesWhen using an unnamed confidential source tosupport allegation of securities fraud , plaintiffs arerequired to describe the witness with sufficientparticularity to support a probability that a person inthe position occupied by the confidential witnesswould possess the information alleged . SecuritiesExchange Act of 1934, § 10(b), 15 U.S.C.A. §78j(b).

[10] Securities Regulation 349B X60.51




Cited CasesAn allegation that a defendant knew or_ -wasdeliberately reckless in not knowing the falsity of astatement by virtue of his or her position within acompany is insufficient to allege scienter underPrivate Securities Litigation Reform Act (PSLRA).Private Securities Litigation Reform Act of 1995, §101(b)(2), 15 U.S.C.A. § 78u-4(b)(2).

[11] Securities Regulation 349B €60.4.5(1)

Page 3

349Bk60 .43 Grounds of and Defensesto Liability'

349Bk60.45 Scienter , Intent,Knowledge , Negligence or Recklessness

349Bk60 .45(l) k. In General.Most Cited CasesA defendant corporation is deemed to have therequisite scienter for securities fraud only if theindividual corporate officer making the statementhas the requisite level of scienter. Private SecuritiesLitigation Reform Act of 1995 , § 101(b)(2), 15U.S.C.A. § 78u-4(b)(2).



349BI (C) Trading and Markets349BI(C)7 Fraud and Manipulation

349Bk60 . 50 Pleading349Bk60 . 51 k. In General. Most

Cited CasesIn order to contribute meaningfully toward a stronginference . of scienter in securities fraud case,allegations attributed to confidential witnesses(CWs) must be accompanied by sufficientparticularized detail to support a reasonableconviction in the informant ' s basis of knowledge;plaintiffs must plead with substantial specificityhow the CWs came to. learn of the information theyprovide in the complaint . Private SecuritiesLitigation Reform Act of 1995, § 101(b)(2), 15U.S.C.A. § 78u-4(b)(2).





Cited CasesSecurities fraud plaintiffs are not required to nameconfidential witnesses.

349B Securities Regulation349BI Federal Regulation , [ 14] Securities Regulation 349B €60.53

349BI(C) Trading and Markets349BI(C)7 Fraud and Manipulation 349B Securities Regulation


Filed 01/22/2008 Page f O 19


--- F.Supp.2d ----

--- F.Supp.2d ----, 2007 WL 2808224 (D.Ariz.)(Cite as: --- F.Supp .2d ---)

349BI Federal Regulation349BI(C) Trading and Markets

349BI(C)7 Fraud and Manipulation349Bk60.50 Pleading

349Bk60.53 k. Misrepresentation.Most Cited CasesAllegations of scienter with respect to companyforecasts, which were based on informationprovided by confidential witnesses (CWs), wereinsufficient under Private Securities LitigationReform Act (PSLRA); while complaint generallydescribed the. CWs job titles, complaint failed toallege facts showing how the. CWs possessed theinformation attributed to them, that the CWs wereinvolved in company's forecasting process or thatthe CWs were in a position to possess knowledgeabout the forecasting process. Private SecuritiesLitigation Reform Act of 1995, § 101(b)(2), 15U.S.C.A. § 78u-4(b)(2).

[15] Securities Regulation 349B X60.27(5)


349131(C) Trading and Markets349BI(C)7 Fraud and Manipulation

349Bk60.17 Manipulative, Deceptiveor Fraudulent Conduct

349Bk60.27 Misrepresentation349Bk60.27(5) k. Forecasts,

Estimates, Predictions or Projections. Most CitedCasesForward-looking statements in company pressreleases were immune from securities fraud liabilityunder Private Securities Litigation Reform Act's(PSLRA) safe harbor provisions due to themeaningful cautionary language contained in eachstatement; such cautionary language includedstatements that forward-looking statements involved"a number of risks and uncertainties" such as the "highly unpredictable nature of the semiconductorindustry," and "volatility of consumer demand."Securities Exchange Act of 1934, § 21E(c), 15U.S.C.A. § 78u-5(c).

Page 4

349BI (C) Trading and Markets349B1(C)7 Fraud and Manipulation

349Bk60 . 17 Manipulative , Deceptiveor Fraudulent Conduct

349Bk60 .27 Misrepresentation349Bk60.27(5) k. Forecasts,

Estimates , Predictions or Projections . Most CitedCasesVague , generalized and unspecific assertions" ofcorporate optimism or statements of mere . puff"mgcannot state actionable material misstatements offact under the federal securities laws. SecuritiesExchange Act of 1934, § 10(b), 15 U.S.C.A. §78j(b).

David S. Steuer, Karen Thomas Stefano, Keith E.Eggleton, Wilson Sonsini Goodrich & Rosati,. PaloAlto, CA, David B. Rosenbaum, Maureen Beyers,Osborn Maledon PA, Phoenix, AZ, for Defendants.

ORDER

PAUL G. ROSENBLATT, United States DistrictJudge.

I. INTRODUCTION

*1 This is a securities class action brought onbehalf of persons who purchased common stock ofDefendant Amkor Technology, Inc. ("Amkor")from July 26, 2001 through July 26, 2006. TheLead Plaintiffs allege two distinct claims forviolation of the federal securities laws. First, LeadPlaintiffs assert that Amkor and all the IndividualDefendants . (certain former and current Amkorofficers and directors) made misrepresentationsconcerning Amkor's stock option grants during theClass Period. Second, the Plaintiffs assert that, forpart .of the Class Period-October 2003 through July2004-Amkor and some of the Individual Defendantsmade several misrepresentations about demand forAmkor's products and forecasts about financialresults.

[161 Securities Regulation 349B €60.27(5)

349B Securities Regulation349BI Federal . Regulation II. PLAINTIFFS' SUMMARY OF

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--- F.Supp.2d ----

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Page 5

--- F.Supp.2d ----, 2007 WL 2808224 (D.Ariz.)(Cite as: -- F.Supp .2d ----)

ALLEGATIONS

A. Amkor' s Fraudulent Stock Option Practices

Amkor's publicly disclosed stock option planspecifically identified the Compensation Committeeas the administrator of Amkor's. stock optionprogram. During the Class Period, Churchill(Chairman of the Committee) and George (member)were the administrators of Amkor's stock options.Among other responsibilities, Churchill and Georgedetermined the exercise price and grant date of eachstock option and made recommendations to theBoard regarding any and all compensation issues.Pursuant to Accounting Principles Board OpinionNo. 25 ("APB 25") and Amkor's stated accountingpolicies, Amkor was required to record acompensation expense whenever the Boardapproved an option grant with an exercise pricelower than the market price on the date of the grant.Throughout the Class Period, Amkor issued tens ofmillions of dollars in stock options to its officersand directors, purportedly in compliance with APB25 and Arnkor's own stated accounting policies.Each of the Company's proxy statements and annualreports represented that the "compensation cost forstock-based plans is generally measured as theexcess, if any, of the quoted market price of ourcompany's stock at the date of the grant over theamount an employee must pay to acquire the stock."

The Plaintiff alleges that these statements werematerially false and misleading, and the Defendantswere engaged in a long-term, opportunistic schemeto (i) backdate their stock option grants to days. onwhich Amkor's stock had reached its lowest price inweeks if not months; and (ii) award stock optionsshortly before positive earnings announcements.Consequentially, each financial statement thatAmkor filed 'during the Class Period overstated theCompany's net income and understated itscompensation costs.

Beginning in the spring of 2006, corporationsthroughout the United States began to reveal thatthey were under investigation for various stockoption improprieties. Indeed, Amkor announced on

July 26, 2006 that it formed a Special Committeeand hired outside counsel to voluntarily investigateAmkor's historical stock option practices . Followingthe July 26 announcement, Amkor' s stock price fell17% from $7.51 per share to $6.25 per share. OnAugust 16, 2006 , Amkor admitted that the SpecialCommittee identified numerous occasions on which.Amkor failed to comply with APB 25 and GAAP,and advised investors that Amkor' s previouslyissued financials . should no longer be relied upon.Shortly thereafter , following Amkor's failure totimely file its 10-Q for the quarter-ended June 30,2006 , Amkor issued a series of press releasesannouncing that (i) it received a written StaffDetermination by NASDAQ threatening to delist it,(ii) it was on the cusp of defaulting on its noteindentures and (iii) it might need to file for Chapter11 bankruptcy protection . The Plaintiffs maintainsthat as a result of these disclosures , Amkor's stockprice closed at $5.05 per share on October 6, 2006,or nearly 20% lower than its closing price on July2.7, 2006.

*2 On October 6, 2006, after the close of themarket, Amkor issued its June 30, 2006 quarterlyreport, as well as its 2005 10-K/A and IQ 10-Q/A,which restated Amkor' s previously issued financialstatements for every quarter for the period January1, 1998 through June 30, 2006 (the "Restatement"),and resulted in a $106 million aggregate . restatementof net income. Amkor also disclosed that theSpecial Committee completed its investigation andidentified evidence demonstrating that theRestatement and GAAP violations resulted from anintentional fraud:

• In connection with its annual stock optiongrants to employees in 1999 , 2000 , 2001,2002 and2004, the number of shares that an individualemployee was entitled to receive was notdetermined until after the original grant date, andtherefore incorrect measurement' dates were used forfinancial accounting and reporting purposes;

• At least one former executive intentionallymanipulated Amkor's stock option pricing, and thatat least two other former executives may have beenaware of, or participated in, this misconduct;

• At least one former executive intentionallymanipulated Amkor 's Compensation Committeeminutes, which misrepresented the actions taken at



--- F.Supp.2d ----

--- F.Supp.2d ----, 2007 WL 2808224 (D.Ariz.)(Cite as, -- F.Supp.2d ----)

certain Compensation Committee meetings withrespect to certain of the Company's stock optiongrants; and

• Amkor lacked proper processes andprocedures for stock option grants, whichconstituted a material weakness in internal controlsover financial reporting.

While the named Individual Defendants are notspecifically identified by the Restatement, thePlaintiffs plead that Amkor's stock options wereintentionally manipulated on numerous occasionsby at least one executive. According to thePlaintiffs, each named Defendant personallyadministered, reviewed and/or approved thefraudulent stock option grants, and receivedbackdated stock options during those periods oftransgression.

Page 6

Amkor was experiencing weakness in demand forits cell phone products and (ii) customer forecastsdid not materialize. In an effort to offset the effectof this news, the Plaintiffs contend that Defendantsissued positive guidance for the second quarter of2004 based on allegedly strong customer forecasts.Following the April 27 disclosure, Amkor's stockprice fell from $13.43 per share to $9.16 per share,marking a decline of nearly 32%. Thereafter,Amkor continued to reveal additional factsregarding its poor demand and lagging profitability,until it ultimately announced its dismal results forthe second quarter of 2004; as a result of thesedisclosures, Amkor's stock price fell 29% on July 1,2004 and over 12% on July 27, 2004.

C. The SEC' s Formal Investigation

B. Amkor' s Purported Return to Profitability

The Complaint also alleges that, beginning inthe third quarter of 2003, Defendants issued a seriesof materially false and misleading statementsregarding Amkor's profitability, growth andcustomer demand, which inflated Amkor's stockprice. These statements were purportedly based oncertain third-party forecasts prepared by Amkor'scustomers. For instance, on October 27, 2003,Defendants Kim, Baruch and Joyce boasted thatAmkor had achieved a "return to profitability" duelargely to "accelerating demand" and "strengthenedbusiness." According to the Plaintiffs, theDefendants either knew or recklessly disregardedthat Amkor's customers were allegedly "front-loading" their forecasts to compensate forAmkor's inability to meet demand in a timelymanner, and that Amkor was suffering from risingmaterial costs due to a "supplier backlash." As aresult of these material misrepresentations, Amkor'sstock price increased from $16.19 per share onOctober 27, 2003 to a high of $21.40 per share onDecember 2, 2003.

*3 On April 27, 2004, Amkor announced itsfinancial results for the first. quarter of 2004, whichwere significantly lower than expected because (i)

On October 12, 2004, Amkor disclosed that theU.S. Securities and Exchange Commission (the "SEC") commenced an informal inquiry into certainunspecified transactions by Amkor insiders. OnAugust 22, 2005, Amkor announced that the SECelevated the inquiry to a formal investigation. Then,on September 15, 2006, Amkor revealed that theSEC expanded its formal investigation, andrequested documents relating to Amkor's stockoption practices. On April 18, 2007, the SEC filed aComplaint in the U.S. District Court for the EasternDistrict of Pennsylvania alleging that, during 2003and 2004, Amkor's former General Counsel made$290,000 from at least fifty improper insider tradesin Amkor shares and stock options, a practice hewas responsible for preventing. The SEC's formalinvestigation is still ongoing.

III. LEGAL STANDARD AND ANALYSIS

The Plaintiffs allege two distinct claims forviolation of the federal securities laws. First, thePlaintiffs assert that Amkor and all the IndividualDefendants made misrepresentations concerningAmor's stock option grants during the Class Period.Second, the Plaintiffs contend that, for part of theClass Period-October 2003 through July

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--_ F.Supp .2d ----

--- F.Supp.2d ----, 2007 WL 2808224 (D.Ariz.)(Cite as : -- F.Supp .2d ----)

2004-Amkor and some of the Individual Defendantsmade numerous misrepresentations about demandfor Amkor products and forecasts about futurefinancial results.

Section 10(b) of the Exchange Act of 1934, 15U.S.C. 78j(b), provides that it is unlawful to use oremploy "any manipulative or deceptive device orcontrivance" in contravention of the SEC rules inconnection with the purchase or sale of anyregistered security. SEC Rule lOb-5 provides that itis unlawful to (a) employ "any device, scheme, orartifice to defraud," (b) "make any untrue statementof a material fact or to omit to state a material factnecessary in order to make statements made, in lightof the circumstances under which they are made,not misleading," and (c) "engage in any act,practice or course of business which operates orwould operate as a fraud or deceit upon any person,in connection with the security."In order to plead aclaim under § 10(b)and SEC Rule lOb-5, thePlaintiffs must allege: (1) a misstatement oromission; (2) of material fact; (3) made withscienter; (4) on which the plaintiff relied; (5) whichproximately caused the plaintiffs injury. DSAMGlobal Value Fund v. Altris Software, Inc., 288F.3d 385, 399 (9th Cir.2002), accord, In re DaouSystems Inc. Sec. Litig., 411 F.3d 1006, 1014 (9thCir.2005).

*4 A § 10(b)/Rule 1Ob-5 claim must meet theexacting pleading standards of the Private SecuritiesLitigation Reform Act ("PSLRA") of 1995. TheNinth Circuit recognizes that the PSLRA "requiresa plaintiff to plead a complaint of securities fraudwith an unprecedented degree of specificity anddetail" and that the PSLRA standard "is not an easystandard to comply with-it is not intended to be-andthe plaintiffs must be held to it."Eminence Capital,LLC v. Aspen, Inc., 316 F.3d 1048, 1052 (9thCir.2003). The Ninth Circuit also recognizes,however, that there is no bright line rule as to howmuch detail is enough detail, id, and that the bar ofthe PSLRA should not be raised any higher than isrequired under its mandates so as not to foreclosethe litigation of legitimate securities fraud actions.No. 84 Employer Teamster Joint Council PensionTrust Fund v. America West Holding Corp., 320F.3d 920, 946 (9th Cir.2003).

Page 7

Under the PSLRA, when a plaintiff allegesthat a defendant "made an untrue statement ofmaterial fact" or "omitted to state a material factnecessary in order to make the statements made, inlight of the circumstances in which they were made,not misleading," the complaint must "specify eachstatement alleged to have been misleading, thereason or reasons why the statement is misleading,and if an allegation regarding the statement oromission is made on information and belief, thecomplaint shall state with particularity all facts onwhich the belief is formed."15 U.S.C. § 78u-4(b)(1).

In addition to requiring the materialmisstatements and omissions be pleaded withparticularity, the PSLRA requires that thecomplaint, "with respect to each act or omission"alleged to violate the statute, "state withparticularity facts giving rise to a strong inferencethat the defendant acted with the required state ofmind."15 U.S.C. § 78u-4(b)(2). As interpreted bythe Ninth Circuit, this scienter requirement meansthat the complaint "must plead, in great detail, factsthat constitute strong circumstantial evidence ofdeliberately reckless or conscious misconduct."In reSilicon Graphics, Inc. Sec. Litig., 183 F.3d 970,974 (9th Cir.1999). This standard requires thepleading of facts that show more than simplerecklessness or a motive and opportunity to commitfraud; it requires the pleading of facts that comecloser to demonstrating intent. Id. At 974. Indetermining whether this standard has been met, theCourt must examine not only whether eachallegation is supported "by particularized facts andcorroborating details," but also "whether the total ofthe plaintiffs' allegations, even though individuallylacking, are sufficient to create a strong inferencethat the defendants acted with deliberate orconscious recklessness."No. 84 Employer-TeamsterJoint Council Pension Trust Fund, 320 F.3d at 931.In determining whether the complaint has shown astrong inference of scienter, the Court must considerall inferences reasonably drawn from theallegations, including inferences unfavorable to theplaintiff. Id.

*5 In a very recent opinion, Tellabs, Inc. v.Makor Issues & Rights, Ltd., --- U.S. ----, ----, 127S.Ct. 2499, 2504, 168 L.Ed.2d 179 (June 21, 2007),

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--- F.Supp.2d ----


the United States Supreme Court held that todetermine whether a plaintiffs complaint satisfiesthe PSLRA's strict pleading standard; a court,considering all of the facts alleged, "must engage ina comparative evaluation; it must consider, not onlyinferences urged by the Plaintiff, ... but alsocompeting inferences rationally drawn from thefacts alleged. The Supreme Court held that aninference of scienter must be more than merely "reasonable or permissible-it must be cogent andcompelling, thus strong in light of otherexplanations. Id. at 2510.The Court concluded thata - complaint will survive "only if a reasonableperson would deem the inference of scienter cogentand at least as compelling as any opposing inferenceone could draw from the facts alleged. Id.

If a plaintiff fails to plead the allegedmisleading statements and omissions or thedefendant's scienter with the required particularity,the complaint must be dismissed pursuant toFed.R.Civ.P. 12(b)(6).Ronconi v. Larkin, 253 F.3d.423, 429 (9th Cir., 2001); § 78u-4(b)(3)(A).

A. Loss Causation

The Second Amended and ConsolidatedComplaint for Violations of the Federal SecuritiesLaws ("SAC") alleges that Amkor' s SEC filingsduring the Class Period were false when madebecause , as revealed in the October 6, 2006Restatement , the Company ' s financial resultsregarding compensation expense and net incomewere inaccurate due to incorrect accounting forstock option grants and stock option controls wereinsufficient . The Defendants maintain that the SACis deficient for failure to plead loss causation andmust be dismissed under the standard advanced inDura Pharmaceuticals v. Broudo, 544 U. S. 336,125 S.Ct. 1627, 161 L.Ed.2d 577 (2005).

In Dura Pharmaceuticals, the United StatesSupreme Court rejected the conclusion that losscausation is established by showing that "the priceon the date of purchase was inflated because of themisrepresentation."Id. at 342.Instead, the Courtconcluded that to properly plead loss causation in a

Page 8

fraud claim, a plaintiff must allege that the price fellafter the truth came to light about amisrepresentation, and that the plaintiff suffereddamages as a result. Id. at 342-43.

[1] The following are the Plaintiffs' losscausation allegations which they argue clearlyexplain the causal connection between the relevantdisclosures and Amkor's declining stock price.

• On July 26, 2006, Amkor revealed that theBoard formed a special Committee and hiredoutside counsel to investigate Amkor's stockoptionpractices. Following that announcement, theCompany's stock price declined 17% from $7.51per share to$6.25 per share, wiping out $222million in market capitalization.

• On August 16, 2006, Amkor disclosed that it "identified a number of occasions on which themeasurement date used for financial accounting andreporting purposes for option awards granted tocertain ... employees was different from the actualgrant date."Amkor also revealed that the range ofpotential adjustments would likely be material, andthat Amkor's previously issued financials for 2005and 2006 should no longer be relied upon.

*6 • Between July 27, 2006 and October 6,2006, Amkor's stock price declined nearly20% dueto investors' increasing concern that the Companywould (i) be de-listed by NASDAQ, (ii) default onits note indentures and (iii) file for • Chapter I 1bankruptcy protection.

• On October 6, 2006, Amkor filed its longdelayed June 30, 2006 quarterly report and theRestatement, which, in effect, eliminated thesesevere financial consequences. Thus, it came as nosurprise that Amkor's . stock price increasedthereafter.

According to the Plaintiff, these allegationsdirectly tie the relevant disclosures to Amkor'sdeclining stock price and thus notify the Defendantsof the required causal connection. The Plaintiffscontend that nothing more is required at this stageof the proceedings.

The Defendants, however, argue that thePlaintiffs cannot rely on the July 26 Release as adisclosure correcting the Company' s prior

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statements regarding its stock option grants and,therefore, does not plead loss causation as requiredby Dura.As pointed out by the Defendant, the onlymention of the stock option matter was two singlesentences: "The Company also announced todaythat its Board of Directors has formed a specialcommittee of independent directors to undertake avoluntary review of Amkor's historical stock optionpractices. The committee will be assisted byindependent counsel."What the. July 26 Releaseprimarily discusses are the second quarter financialresults, recent financing transactions,. and a newtesting facility. The release also forecasts a weakthird quarter for Amkor with a flat to a 2% increasein sales from the second quarter. Since this is not adisclosure correcting the Company's priorstatements regarding its stock options, theDefendants contend that it follows that the releasedoes not plead loss causation.

The Defendants maintain that the realcorrective disclosure came on August 16, 2006,when Amkor announced the initial results of theSpecial Committee investigation that the Companywould have to restate prior financial statementsbecause of incorrect measurement dates. Then onOctober 6, 2006, Amkor issued its Restatement anddisclosed that certain prior grant measurement dateswere incorrect, the Company had weak internalcontrols related to the grant process, and thenAmkor specifically corrected certain financialresults through the fiscal year 2005. The Defendantnotes that although these are corrective disclosureswhich expose the misrepresentations, the Plaintiffcannot rely on them to plead loss causation for tworeasons: (1) Amkor's stock price increased afterthese announcements; and (2) the Class Period isnot extended to include them.

[2][3] As numerous Courts have concluded,Dura indeed requires Plaintiffs to plead losscausation by alleging that the stock price fell afterthe truth of a misrepresentation about the stocks wasrevealed. See id. at 342;Glaser v. Enzo Biochem,Inc., 464 F.3d 474 (4th Cir.2006). Dura swept awayprecedent holding that it is enough to showcausation if the alleged misrepresentation "touchesupon" the economic loss. Dura, 544 U.S at 343.Furthermore, in material misstatement and omission

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cases, such as this one, a plaintiff must allege thatthe subject of the fraudulent statement or omissionwas the cause of the actual loss suffered , i.e,,. thatthe misstatement or omission concealed somethingfrom the market that, when disclosed , negativelyaffected the value of the security . Initial . PublicOffering Sec. Litig., 399 F.Supp .2d 261, 266(S.D.N.Y. 2005 ). In this case , the Plaintiffs havefailed to link their losses to the allegedmisrepresentations by showing that the Amkor stockprice dropped upon revelation of the true state ofthe facts. As noted by the Defendants, once acorrective disclosure was issued the stock priceactually increased.

*7 The Plaintiffs maintain that the Defendantsare essentially arguing that Plaintiffs must identify adisclosure that is a mirror image of the facts allegedto have been concealed, but contend that Dura doesnot impose this rigid requirement. According to thePlaintiffs, , if the Complaint alleges that investorsincurred losses once "the relevant truth [began] toleak out" then Dura's loss causation standard issatisfied. Dura, 544 U.S at 342. The Plaintiff arguesthat the July 26 Release partially disclosed the fraudat Amkor, signaling to investors that the Board hadidentified incriminating evidence given its decisionto form a Special Committee and hire outsidecounsel. Furthermore, the Plaintiff contends that thepress release followed a series of news articlesregarding improper stock option practicesuncovered at various other companies; therefore,investors were acutely aware of the implications ofthe July 26 Release.

The Court is not persuaded by the Plaintiffsarguments. The July 26 Release says nothing aboutprior alleged false statements. The only mention ofthe stock option matter is the announcement that theAmkor Board formed a Special Committee toundertake a voluntary review of Amkor's historicalstock option practices and that the Committeewould be assisted by independent counsel. As notedby the Defendants, this press release does notsignal, much less state, that any prior option grantswere incorrect, that Amkor's internal controls wereweak, that there was evidence supporting a findingthat one former executive had intentionallymanipulated stock option pricing or that prior

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financial statements were incorrect in any way.Clearly, the primary focus of the July 26 Releasewas a discussion of the company's second quarterresults, recent financing transactions, a new waferbumping and test facility, capital expenditures,financial liquidity and a forecast for a weak thirdquarter. The stock price drop following the July 26Release cannot be the proximate result of the stockoption misrepresentations and omissions alleged inthe SAC.Dura explains that a plaintiff cannot proveloss causation where an alleged loss could be theresult of changed economic circumstances, changedinvestor expectations, new industry-specific orfirm-specific facts, conditions or other events. Seealso In re Loewen Group Inc. Sec. Litig., 395F.Supp.2d 211, 218 (E.D.Pa.2005).

As persuasively argued by the Defendants, theincrease in the market of Amkor stock after theAugust 16, 2006 and October 6, 2006 publicdisclosures further undermines Plaintiffs' assertionthat the price decline after the July 26 Release wasrelated to the initiation of the voluntary internalinvestigation. If the market price increased upon thedisclosures of restatement measurement dates,restated financial results back to 1998, evidencesupporting a finding of intentional manipulation ofstock option pricing and associated stock-basedcompensation by one former executive and weakinternal controls, then the reasonable inference isthat the price decline after the July 26 Release wasnot caused by the news about the commencement ofan internal investigation, but by the weak thirdquarter outlook. Indeed, when Amkor. previouslyannounced disappointing financial results andlowered guidance, Amkor's stock. market pricedeclined.

*8 As discussed above, courts since Duraroutinely reject complaints that fail to allege factsthat , if established, demonstrate the critical linkbetween the misrepresentations or omissions andthe investor ' s loss'. See, e.g., In re Compuware Sec.Litig., 386 F . Supp.2d 913, 918 (E.D . Mich.2005)(finding complaint failed to plead loss causation andthat "[wholly absent from its pleadings, .., is anexus between the misrepresentations of which[plaintiff] complains and the losses they suffered");In re Initial Pub. Offering Sec. Litig., 399

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F.Supp .2d 298, 308 (S.D.N.Y.2005) ("plaintiffs'failure to allege a corrective disclosure of the falsityof defendants' opinions precludes any claim thatsuch falsity caused their losses"), affd,2006 WL1423785 (2d Cir. May 19, 2006); In re Gilead Scis.Sec. Litig., No. C03-4999, 2006 WL 1320466, at *7(N.D.Cal. May 12, 2006) ("[p]laintiffs' allegationsregarding loss causation are simply too attenuated"); Ray v. Citigroup Global Mkts., Inc., No. 05-4362,2007 WL 1080426, at *4 (7th Cir. Apr.12, 2007) ("plaintiffs must show both that the defendants'alleged misrepresentations artificially inflated theprice of the stock and that the value of the stockdeclined once the market learned of the deception").

The Plaintiffs have failed to adequately allegethat the July 26 Release regarding the internalinvestigation was a substantial cause of the drop instock price thus the Complaint does not meet thepleading standards set forth in Dura.

B. Scienter

In addition to the failure to adequately pleadloss causation, the Court finds .the SAC deficient foranother reason-the SAC fails to allege scienterunder the applicable legal standards.

[4] The Plaintiffs allege that the "Defendantsacted with scienter in that the Defendants knew thatthe public documents and statements issued ordisseminated in the name of the company werematerially false and misleading; knew that suchstatements or documents would be issued ordisseminated to the investing public; and knowinglyand substantially participated or acquiesced in theissuance or dissemination of such statements ordocuments as primary violations of the federalsecurities laws."The Plaintiffs plead that the "Defendants, by virtue of their receipt of informationreflecting the truth regarding Amkor, their controlover, and/or receipt and/or modification of Amkor'sallegedly materially misleading misstatementsand/or their associations with the Company whichmade them privy to confidential proprietaryinformation concerning Amkor, participated in the

fraudulent scheme alleged."FN'

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1. Restatement and Special Committee Findings

[5] The Defendants correctly argue that thePlaintiffs mistakenly rely on Amkor's October 6,2006 Restatement and Special Committee Findingsto plead scienter. A plaintiff cannot allege scientersimply because Amkor restated its financialstatements. According to numerous courts, a mereviolation of a generally accepted accountingprinciple (GAAP) or accounting rules fails to pleadscienter. Instead, a complaint must allege specificfacts that each individual defendant knew that theaccounting for the subject transactions wasincorrect at the time it was determined. Althoughallegations of accounting violations may providesome support for scienter allegations, they must beunderpinned by other particularized allegations thatdefendants possessed the requisite mental state. SeeIn re Worlds of Wonder Sec. Litig., 35 F.3d 1407,1426 (9th Cir.1994); In re U.S Aggregates, Inc.Sec. Litig., 235 F.Supp.2d 1063, 1073(N.D.Ca1.2002) ("even an obvious failure to follow .GAAP does not give rise to an inference of scienter"DSAM Global Value Fund, 288 F.3d at 390-91.

*9 Furthermore, as pointed out by theDefendants, the. accounting rules at issue,specifically APB No. 25, are complex and requireaccounting expertise and judgment. As noted by theCourt in In re Sportsline.com Securities Litigation,the misapplication of accounting rules to aparticular company's stock option grants cannot beconstrued as a glaring example of scienter becausethe measurement date criteria embodied in APB No.25 are far from obvious. 366 F.Supp.2d 1159, 1168(S.D.Fla.2004). Although "[a]llegations ofaccounting violations may provide some measure ofsupport for the Plaintiffs' ultimate allegation ofscienter," they must be "underpinned by otherparticularized allegations that the Defendantspossessed the requisite mental state."In reCornerstone Propane Partners, L.P. Sec. Litig.,355 F.Supp.2d 1069,1091(N.D.Cal.2005).

[6] As previously stated in this opinion,scienter can be established under the PSLRA if acomplaint adequately sets forth corroboratingdetails and facts supporting allegations of eachdefendant's knowledge of problems adversely

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affecting corporate finances. See also394 F.Supp.2dat 1167. However, instead of providing suchparticularized allegations as to each AmkorDefendant's scienter, the Plaintiffs' rely heavily onthe Special Committee findings in their attempt toadequately plead the required state of mind.However, the Special Committee found evidence "that supports a finding of intentional manipulationof stock-option pricing and associated stock basedcompensation by [only one] former executive,including the preparation of CompensationCommittee meeting minutes that misrepresented theactions taken at certain Compensation Committeemeetings. Additionally, the Special Committeefound "some evidence that supports a finding thattwo other former executives may have been awareof, or participated in, this conduct."As noted by theDefendant, the SAC has no factual allegationslinking that finding to any of the Amkor Defendants.

First, Defendants Kim, Joyce, and Khaykin arenot former executives as they were all currentexecutives at Amkor when the Restatement wasfiled. Second, Defendants Churchill and Georgewere never executive officers at Amkor, andDefendant Churchill was actually a current Amkordirector when the Restatement was filed. Third,Defendants Freeman and Kyahkin did not becomeexecutive officers until January 2004 thus could nothave been involved in the options issued in 2001and 2002. Furthermore, Defendant Freeman leftAmkor in August of 2004; therefore, he could nothave manipulated stock option grants through June2006.

The Plaintiffs argue that the SAC allegesparticularized facts to collectively establish that theDefendants were Amkor's gatekeepers when it cameto administering, recommending and approving theterms of stock options grants; thus the backdatingscheme could not have occurred without theirindividual knowledge and/or participation.However, in essence, the Plaintiffs have done littlemore than alleged the Individual Defendants'respective board or executive positions. To inferscienter by virtue of a position in a company "would eliminate the necessity for specially pleadingscienter, as any corporate officer could be said topossess the requisite knowledge by virtue of his or

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her position."In re Autodesk, Inc. Sec. Litig., 132F.Supp.2d 833, 844 (N.D.Cal.2000).

*10 For example, the Plaintiffs maintain thatDefendants Khaykin and Freeman "had significantcontrol over the Company's stock option practices,"but the SAC fails to cite any facts in support of thisconclusion other than the Defendants' positions asCOO. In addition, as to Defendants Churchill andGeorge, the Plaintiffs merely plead theirmembership on the Compensation Committee andtheir signatures on the annual form 10-Ks duringeach director's tenure with Amkor. There are noparticularized allegations relating to theseDefendants' notice of the stock option accounting orthe particular activity that lead to the October 6Restatement. The Special Committee'sidentification of evidence that the CompensationCommittee meeting minutes prepared by a formerexecutive misrepresented certain actions taken bythe Compensation Committee does not raise astrong inference of scienter as to Churchill andGeorge. What is missing from the SAC regardingthe outside directors' scienter are factual allegationssetting forth what information was presented to theoutside directors about any of the allegedmisrepresentations, omissions, GAAP violations,etc. that put them on actual or constructive notice offraudulent activity. See, e.g., Wojtunik v. Kealy, 394F.Supp.2d 1149, 1169 (D.Ariz.2005). Clearly, thePlaintiffs plead no facts to indicate that thesedirectors knew of or participated in any such actionsor that they recklessly disregarded wrongdoing bysomeone else.

[7] The Plaintiffs allege that Defendants Kim,as CEO and Chairman, and Defendant Joyce, asCFO, executed sworn certifications pursuant to theSarbanes-Oxley Act of 2002 ("SOX"), 15 U.S.C. §7262, which falsely attested to the accuracy ofAmkor's financial statements and the effectivenessof its internal controls for every fiscal quarter fromJune 2002 through 2006. According to thePlaintiffs, the SOX certifications may provideadditional evidence of scienter on the part of thecertifying officers. The Court, however, findsPlaintiffs assertion unpersuasive. SOX certificationsmay provide additional evidence of scienter if aplaintiff alleges that not only were the certifications

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false and misleading, but also that the defendantshad actual knowledge of their false or misleadingnature or were deliberately reckless in issuing suchstatements. at the time. Limantour v. Cray, Inc., 432F.Supp.2d 1129, 1160 (W.D.Wash.2006). ThePlaintiffs cite In re Lattice SemiconductorCorporation Securities Litigation, to support theirscienter allegations, but the Court finds suchreliance misplaced..2006 WL 538756 (D.Or. Jan.3,2006).Lattice presented a significantly greaternumber of facts concerning inference of scienterthan exists in the instant case. For example, inLattice, the plaintiffs' allegations demonstrated thatthe company's former controller "made improperjournal entries with the knowledge of at least someof the individual defendants. Id. at 32.Moreover, theLattice plaintiffs provided evidence of specificinternal reports, databases and meetings, thepurpose of which was to keep the individualdefendants informed of the company's financialsituation during the relevant time period. Id. Otherthan general assertions about the IndividualDefendants' roles and responsibilities andmotivations, the Plaintiffs. do not plead specificfacts to support their allegations of scienter.

2. Motive Allegations

*11 [8] The SAC also pleads scienter based ona motive to engage in fraud; however, the NinthCircuit has concluded that allegations of adefendants' motive to engage in fraud alone areinsufficient to plead scienter. Silicon Graphics, 183F.3d at 979. The primary motive allegation insecurities fraud cases is that the defendant wasmotivated to, and did, sell his company stock basedon nonpublic material information for a directpersonal profit. See, e.g., Wojtunik, 394 F.Supp.2dat 1165-66. In this case, there are no allegations thatany Individual Defendant sold Amkor stock forpersonal gain. Instead, the Plaintiffs assert thatDefendants' motive was to manipulate the exerciseof price options that they then awarded tothemselves. However, missing from the SAC areany allegations that any individual defendantrealized any direct economic gain from Amkorstock options. An option is the right to purchase the

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underlying security, and there are no allegations thatany named defendant exercised his Amkor optionsand sold the stock for gain.

The Plaintiffs also allege that the Defendants'motive was to grant options at opportune timeswhen the stock price was low. The SAC asserts thatthe Defendants were motivated to make suchopportune timed grants at a lower price so that ifand when the options were exercisable, the grantholders might be able to sell the underlying stockfor greater gain. Although the SAC contains severalthree-month graphs purportedly to show a fewinstances of such opportune timing, there are noparticularized facts supporting this motiveallegation. Absent are any specific factualallegations that during the Class Period any officeror director defendant was involved in or was awareof the stock option practices and pricingmanipulation discussed in the Special Committee'sfindings.FNz

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required to describe the witness with sufficientparticularity to support a probability that a person inthe position occupied by the confidential witnesswould possess the information alleged. NursingHome Pension Fund, Local 144 v. Oracle Corp.,380 F.2d 1226, 1233 (9th Cir.2004). Moreover, thePlaintiffs fail to even allege rudimentaryinformation regarding this confidential source suchas the dates of employment. See Limantour, 432F.Supp.2d at 1143 (failing to provide the dates ofemployment of a confidential source described as a "fatal flaw"). The SAC simply states thatConfidential Witness "A" is a former Senior VicePresident of Northern Asia Operations at Amkorand knew most of the company for nine years. ThePlaintiffs must plead "with substantial specificity"how Confidential Witness "A" came to learn of theinformation they provide in the complaint." See,e.g., In re North point Communications Group, Inc.Sec. Litig., 184 F.Supp.2d 991, 999-1001(N.D.Cal.2001). The SAC falls far short of therequired specificity with regard to ConfidentialWitness "A."

3. Allegations Regarding Defendant Baruch

[9] The SAC alleges that the Plaintiffsundertook an investigation to identify the formerexecutives referred to in the Special Committeereport, but that the information remains in theexclusive control of the Defendants. Specifically,the Plaintiffs plead the following:

[I]nformation obtained from a confidentialwitness and from the company's public filingssupports a strong and reasonable inference thatdefendants Baruch, John Doe # 1, John Doe # landJohn Doe # 3 knew, or were reckless in notknowing, that Amkor had improperly accounted forits stock option grants.

However, the Plaintiffs do not provide adescription of the information obtained from theconfidential source nor do they identify the publicfilings which allegedly support the strong andreasonable inference that Defendant Boruch knew,or was reckless in not knowing, that Amkor hadimproperly accounted for its stock option grants.Furthermore, when using an unnamed confidentialsource to support their allegation, the Plaintiffs are

*12 [10] The Plaintiffs allege that DefendantBoruch had significant control over Amkor's stockoption practices because of his "high level positionwith the company."As previously noted, anallegation that a defendant knew or was deliberatelyreckless in not knowing the falsity of a statement byvirtue of his or her position within a company isinsufficient. See, e.g., In re Infineon TechnologiesAG Sec. Litig., 2006 WL 2925680 *2(N.D.Cal.2006). Furthermore, the SAC does notallege that this high-level position had anything todo with stock option granting practices.

The Plaintiffs also allege that DefendantBoruch's considerable control over Amkor's stockoption granting practices arose through hisrelationship with the Senior Vice President ofHuman Resources, Catherine Loucks, who wasmarried to Boruch during the class period FN3ThePlaintiffs further assert that there is a strong basisfor the inference of Boruch's involvement in light ofthe Special Committee's finding that Amkor'sHuman Resources personnel were inappropriatelyallowed to control and administer the stock optiongrant process without adequate input or supervision.

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However, the Court declines to make such a leap inlogic. Although the Plaintiffs' allegation regardingDefendant Boruch's personal relationship with theSenior Vice President of Human Resources mightbe a conflict of interest, it does not strongly compelan inference of scienter on the part of thisIndividual Defendant.

The Plaintiffs, through their ConfidentialWitness "A" contend that Defendant Boruch greatlyfavored the use of stock option grants as a form ofemployee compensation, and that Boruch oftenpushed for issuance of stock based compensationbecause he felt that stock options were a good moralbooster for employees. Even if the Plaintiffs hadplead the required information regarding theirConfidential Witness "A", the assertion thatDefendant Boruch favored stock option grants dueto their ability to boost morale does not advancePlaintiffs' theory that Defendant Boruch engaged infraudulent activity. As noted by the Defendants, thisallegation does nothing more than demonstrate thisexecutive's interest in retaining quality employees.

3. Amkor' s Scienter

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Churchill and George and the John DoeDefendants), violated the Federal Securities lawsbetween October 2003 and July 2004. The Plaintiffscontend that several statements made during thosemonths of the Class Period concerning Amkor'sconsumer demand, material costs and its 2004 firstand second quarter forecasts of financial resultswere false when made.

The claim is based on (1) the October 27, 2003press release including the forecast for the 2003fourth quarter and the related positiveforward-looking statements; (2) the November 3,2003 Form 10-Q with alleged "substantially similarstatements concerning the Company's operationsand financial condition; (3) the ProspectusSupplement filed November 4, 2003 including priorfinancial statements and the Registration Statementby reference and stating that Amkor could "absorblarge orders and accommodate quick turn-aroundtimes," and Amkor was in a "position to obtain lowpricing on materials and manufacturing equipment,"(4) the January 28, 2004 earnings release with theforecast for the 2004 first quarter and positiveforward-looking statements and (5) the 2003 Form10-K field March 4, 2004 with allegedly "substantially similar statements" concerningAmkor's operations and financial results.

[11] Under Ninth Circuit law, "a defendantcorporation is deemed to have the requisite scienterfor fraud only if the individual corporate officermaking the statement has the requisite level ofscienter."In re Apple Computer, Inc. Sec. Litig.,243 F.Supp.2d 1012, 1023 (N. D.Cal.2002)(citingNordstrom, Inc., v. Chubb & Son, Inc., 54 F.3d1424, 1435-36 (9th Cir.1995). The Ninth Circuithas rejected the concept of "collective scienter" inattributing scienter to a corporation. Nordstrom, 54F.3d at 1435-36. Since this Court concludes that theSAC fails to adequately plead scienter as to theOfficer and Director Defendants, the SAC also failsto plead Amkor's scienter.

C. Forecasting Allegations

*13 As a separate claim, the Plaintiffs assertthat Amkor and the Officer Defendants (excluding

The Plaintiffs assert that when the October2003 through March 2004 statements were made,the Officer Defendants knew or recklesslydisregarded that demand was not accelerating ascustomers were front-loading their forecasts sent toAmkor, Amkor was experiencing rapidly risingmaterial costs due to supplier backlash, and Amkorhad weak internal controls and accounting. systemsthat prevented Amkor from efficiently managingmaterial costs and forecasting demands. As arguedby the Defendants, these conclusory assertions failto comply with the PSLRA's particularityrequirements. The Plaintiffs are required to allegefacts supporting these conclusions-such as whichcustomers were supposedly front-loading forecasts,when and by how much, how much material costswere rising, when and how that was affected by theforecasts, and . which internal controls weredeficient, how and when. See Ronconi, 253 F.3d at431. Furthermore, the Plaintiffs cannot rely on

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Amkor's April and July 2004 announcements toplead that the earlier statements were false whenmade or made with fraudulent intent as this is aclear "fraud by hindsight" pleading approachabolished by the PSLRA. See Wojtunik, 394F.Supp.2d at 1161-62:

1. Confidential Witnesses

[12] The Plaintiffs' claim is supported byinformation purportedly gathered from fiveconfidential 'witnesses. The Defendants argue thatPlaintiffs' reliance on these unidentified confidentialwitnesses ("CW") fails to satisfy the PSLRA'spleading standards as the CW allegations fail toprovide the required specific facts. The Defendantsmaintain that the CWs allegedly were lower levelemployees with vague and generalized jobresponsibilities at Amkor at various times. Indeed,the Defendants point out that CWI was not evenemployed at Amkor during the time relevant to theclaim. Furthermore, the Defendants note .that absentfrom the SAC is any claim from any CW that theallegedly false statements at issue were false whenmade. Rather than providing support for thePlaintiffs' claims, the Defendants assert that theCWs only convey routine company problems, vagueor alleged instances of customer conduct atunspecified times, or the CWs' opinions. ThePlaintiffs respond that the their confidential sourcesare reliable, corroborated and described with therequisite particularity.

*14 [13] The precise amount of detail requiredin describing CWs varies based on thecircumstances of the case; and the Plaintiffs are notrequired to name witnesses. In re Secure ComputingCorp. Sec. Litig., 184 F. Supp 2d 980, 988(N.D.Cal.2001); see also Novak v. Kayaks, 216F.3d 300, 314 (2d. Cir.2000). In order to contributemeaningfully toward a strong inference of scienter,allegations attributed to CWs must be accompaniedby sufficient particularized detail to support areasonable conviction in the informant's basis ofknowledge. The Plaintiffs must plead "withsubstantial specificity" how the CWs came to learnof the information they provide in the complaint."

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In re North point Communications Group, Inc. Sec.Litig., 184 F.Supp.2d 991, 999-1001(N.D.Cal.2001).

In Daou Systems, Inc. Securities Litigation, theNinth Circuit stated that the plaintiffs thereindescribed the CWs with a "large degree ofspecificity" where they (1) numbered each witness,(2) provided his or her job description, and (3)described his or her job responsibilities. 411 F.3d at1016. Although in most instances the Plaintiffsprovide the Court with basic information such asjob titles and dates of employment, the Plaintiffsfail to provide a detailed basis for the CWs personalknowledge. Furthermore, the Court concludes thatthe CW allegations are simply too vague to supportthe PSLRA's pleading requirements.

[14) The Plaintiffs allege that CW1, a formeraccount specialist with Amkor from June 1997 toJanuary 2003, explained that "inflated forecastsoccurred because senior management failed toimplement a centralized and effective forecastingsystem. According to CW1, "there was no strategicdirection from the top on how to fix the forecastingsystem and better manage the accountrepresentatives."However, this allegation is simplyCWI's purported opinion and offers no supportingfacts as to the identity of "senior management,"which forecasts were supposedly inflated and how,and what problems existed with management of theaccount representatives.

Next, the Plaintiffs allege that CW2, a formercustomer service and account manager with Amkorfrom January 2002 to February 2004 , stated thatAmkor was suffering from internal and externalcommunication difficulties in later 2003. However,as the Defendants note, absent are specific factssuch as which members of management , projects ormanager were involved, or when these eventssupposedly occurred . Although CW2 alleges thatupper- level . management was also ineptlycommunicating with the Company's suppliers, asevidenced by the deficient raw materials forecasts itprovided to them," there are no facts identifying theparticular , members of management and/ or thesuppliers at issue not which forecasts were made orhow they were allegedly "deficient."

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The Plaintiffs ' CW3 is - alleged to be aformer senior accounting specialist employed byAmkor between 2002 and March of 2005. CW3states that Amkor's raw . material cost managementand accounting systems were insufficient due to thefact that the Company . suffered from widespreadinternal control weaknesses . However, this is simplyan unsupported vague conclusion that does notsatisfy the PSLRA.

*15 The Plaintiffs CW4 and CW5 also fail tomeet the pleading standards mandated by thePSLRA and applicable case law as they merelyreflect matters that companies deal with on a dailybasis. Although these allegations may support aninference of negligence in the operations of theCompany, they do not show that a fraudulentscheme was undertaken by the Defendants. See,e.g., Sorkin, LLC v, Fischer Imaging Corp., 2005WL 1459735, at *9 (D .Colo. June 21, 2005);Wenger v. Lumisys, 2 F.Supp .2d 1231, 1247(N.D.Cal.1998) ("All businesses from time to timesuffer management problems and product delays,but many manage to `do very well' despite thosecommonplace business wobbles.")

The Court notes that the. SAC does generallydescribe the CWs job titles; however, the SAC failsto allege facts showing how the CWs possess theinformation attributed to them, that the CWs wereinvolved in Amkor's forecasting process or that theCWs were in a position to possess knowledge aboutthe forecasting process. See, e.g., Limantour, 432F.Supp.2d at 1142 (rejecting CW allegations forfailure to provide facts showing how CW, a seniorfinancial analyst, became aware of the company'salleged internal weaknesses). Furthermore, there isno allegation by any CW directly asserting that thestatements at issue were false.

2. Safe Harbor Provisions

[15] In addition, the forward-lookingstatements in the October 2003 through March 2004releases cannot support the Plaintiffs claim for theadditional reason that they are immune fromliability under the Reform. Act's safe harbor

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provisions. The. Safe Harbor provision immunizesfrom liability "forward looking" statements eitheraccompanied by "meaningful cautionary statements"or "immaterial." 1.5 U.S.C. § 78u-5(c). A forwardlooking statement includes: (A) a statementcontaining a projection of revenues, (B) a statementof the plans and objectives of management forfuture operations; (C) a statement of futureeconomic performance; and (b) any statement ofthe assumptions underlying or relating to anystatement described in subparagraph (A)(B) or (C).Id at 78u-5(i)(1);Employer Teamsters Local Nos.175 & 505 Pension Trust Fund v. Clorox Co., 353F.3d 1125, 1132, n. 3(9th Cir.2004); GSC PartnersCDO Fund v. Washington, 368 F.3d 228, 242-43(3d Cir.2004). Furthermore, historical orpresent-tense statements can qualify asforward-looking if the truth of the statement cannotbe discerned until some point in time after thestatement is made." In re Tibco Software, Inc. Sec.Litig,, 2006 WL 1469654,. at *26 (N.D.Cal. May25, 2006)(holding statements were forward-lookingand accompanied by meaningful cautionarylanguage)

As shown by the Defendants, the October 27and January 28 releases (and the April 27 release)are forward-looking statements . The October 27release contained the following statement : "We areencouraged that strengthening customer forecastsmay partially offset the seasonal weakness typicalof our first calendar quarter [of 2004]." The January28 release contained this statement: "We see 2004as a year of great promise for Amkor."Finally, theNovember 4, 2003 Prospectus Supplement statedthat Amkor could "absorb large orders" and was ina "position to obtain low pricing."

*16 Furthermore, all the announcements wereaccompanied by meaningful cautionary language.For example, the October 27, 2003 and the January28, 2004 press releases identify that they includeforward-looking statements which involve "anumber of risks and uncertainties" such as the "highly unpredictable nature of the semiconductorindustry; volatility of consumer demand forproducts incorporating our semiconductor packages... timing and volume of orders relative to theproduction capacity ... dependence of raw material

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and equipment suppliers."The Court concludes thateach statement has meaningful cautionary languagesufficient to satisfy the Safe Harbor provisions.

3. Non-Actionable Puffery

[16] The Defendants also argue that some ofthe statements in the aforementioned releases aremere puffery and therefore not actionable. It is truethat "vague, generalized and unspecific assertions"of corporate optimism or statements of mere puffingcannot state actionable material misstatements offact under the federal securities laws. Glen HollyEntm't, Inc. v. Tektronix, Inc., 352 F.3d 367, 379(9th Cir.2003); Cornerstone, 355 F.Supp.2d at 1087Some of the statements challenged by the SAC are,

indeed, puffery: "We are encouraged thatstrengthening customer forecasts may partiallyoffset the seasonal weakness typical of our firstcalendar quarter;""Over the past two years we havemade substantial progress enhancing theprofitability of our business;""We believe that 2004will present exceptional growth opportunities forAmkor;""We see 2004 as a year of great promisefor Amkor."See, e.g., In re Splash Tech. Holdings,Inc. Sec. Litig., 160 F.Supp.2d 1059, 1076-77(N.D.Ca1.2001) (holding as puffery: "strong"demand, "better than expected" or "robust" results,"well positioned company"); Limantour, 432F.Supp.2d at 1146 (holding as puffery: statementsabout being "very optimistic and expecting 2004 tobe good, confident with prospects for growth").Claims based on the statements will be. dismissedfor this reason as well.

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scienter. Specifically, the SAC's recitation of theSpecial Committees' findings in the Restatementfails to provide specific facts relating to the AmkorDefendants' scienter. While the Special Committeedid uncover some evidence of misconductattributable to former executives, this doesautomatically give rise to a private cause of actionunder federal securities law. Furthermore, the SAC'sclaim concerning statements made from the end .ofOctober 2003 through March 2004 were false whenmade is deficient as the Court finds said statements,as plead, immune from liability under the SafeHarbor provision of the Reform Act. Accordingly,

*17 IT IS ORDERED that the AmkorDefendants' Motion to Dismiss the SecondAmended and Consolidated Complaint forViolations of the Federal Securities Laws (Doc.105) is GRANTED. F 14The Clerk is directed toclose the' case. After filing three different versionsof their Complaint, the Plaintiffs will not be givenanother opportunity to satisfy the PSLRA's pleadingrequirements.

IT IS FURTHER ORDERED that DefendantBoruch's Motion to Dismiss the Second Amendedand Consolidated Complaint (Doc. 107) isGRANTED,

IT IS FURTHER ORDERED that the LeadPlaintiffs' Motion for Relief from the PSLRADiscovery Stay (Doc. 88) is DENIED as MOOT.

IV. CONCLUSION

Based on the above analysis, the Courtconcludes that the SAC should be dismissed in itsentirety as it falls short of the PSLRA's stringentpleading requirements. The stock optionsallegations are insufficient to state a claim of frauddue to the Plaintiffs' failure to adequately plead losscausation as well as insufficient allegations givingrise to a strong inference of the Amkor Defendants'

Filed 01/22/2008 Page gec* 3'1f 19

FN1. The Court takes issue with themanner in which the Plaintiffs drafted the "Additional Scienter Allegations." Thisparagraph, quoted directly from the SAC,is obviously vague. The Court findsPlaintiffs' use of disjunctives particularlyproblematic.

FN2. Furthermore, the SAC fails to allegethat the outside directors Churchill andGeorge received any options. The absenceof such allegations defeats an inference ofmotive to Messrs. Churchill and George.See Lipton v. Pathogenesis Corp., 284F.3d 1027, 1037 (9th Cir.2002) (no



--- F,Supp.2d ----


inference of scienter where CEO was theonly insider who allegedly sold stock);Pension Fund v. Adeccco S.A., 434 F.Supp 2d 815, 834 (S.D.Cal.2006) (holdingthe same). Although the Plaintiffs admitthat they cannot ascertain whetherChurchill and George. received stockoptions without discovery, they argue thatgiven their service to the Company since1998 and 1997 respectively, there is astrong likelihood that they both benefittedfrom these backdated option grants.However, the Plaintiffs offer no legalauthority to support this assertion, and theCourt, likewise, is aware of none.

FN3. The Plaintiffs do not allege when inthe Class Period this marriage took place.

FN4. Although the Court only providedanalysis regarding the Plaintiffs' Section10(b) and Rule 10-b5 claims, it followsthat the Plaintiffs Section 20(a) claims forcontrolling personal liability are dismissedas well.

D.Ariz.,2007.Weiss v. Amkor Technology, Inc.--- F.Supp.2d ----, 2007 WL 2808224 (D.Ariz.)

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in re: marvell technology group, ltd. securities...

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