UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

Transcription

1 DAVID M. FURBUSH (SBN ) BRENT W. WILNER (SBN 00) O'MELVENY & MYERS LLP Sand Hill Road Menlo Park, CA 0 Telephone: (0) -00 Facsimile: (0) -0 Attorneys for Defendants Ellen M. Hancock, R. Marshall Case, Dick Stoltz, Herbert A. Dollahite, Adam W. Wegner, Beverly Brown, Sam S. Mohamad, William Yeack 0 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA 0 In re EXODUS COMMUNICATIONS, INC. SECURITIES LITIGATION This Document Relates To : ALL ACTIONS. Master File No. C-0--MMC INDIVIDUAL DEFENDANTS' SUPPLEMENTAL BRIEF IN SUPPORT OF MOTION TO DISMISS PLAINTIFFS' CORRECTED THIRD AMENDED CONSOLIDATED COMPLAIN T Hon. Maxine M. Chesney Hearing Date: Not Set INDIVIDUAL DEFDTS ' SUPPL] Master File No. C-O --MMC AL BRIEF ISO MOTION TO DISMISS CORRECTED THIRD COMPLAINT

2 0. INTRODUCTION Plaintiffs' Corrected Third Amended Consolidated Class Action Complaint (the "CTAC") is still insufficient to satisfy the pleading standards of Federal Rule of Civil Procedure (b) ("F.R.C.P.") and the Private Securities Litigation Reform Act (the "PSLRA"), as fully articulated in Individual Defendants" Motion to Dismiss Plaintiffs' Third Amended Consolidated Class Action Complaint (the "TAC"). The Declaration of Patrick Rueckert ("Rueckert Dec."), the only addition to the CTAC, ascribes an earlier date to an `aging' report plaintiffs rely on for claims that Exodus Communications, Inc. ("Exodus") inflated its customer numbers and creditworthiness, reported revenue, and accounts receivables. This modification is meaningless as plaintiffs do not allege sufficient background facts about the report. Plaintiffs also continue not to indicate how this report relates to Exodus' publicly reported figures or otherwise demonstrates the falsity of Exodus' public statements. Finally, plaintiffs still cannot show that their claim against Ms. Hancock for violation of of the Securities Act of ( ) complies with the statute of limitations. II. PROCEDURAL BACKGROUN D On August, 00, the Court dismissed plaintiffs' First Amended Consolidated Clas s 0 Action Complaint (the "FAC"). The Court found plaintiffs' allegations insufficient to state a claim against Individual Defendants for violations of 0(b) of the Securities Exchange Act of or against Ms. Hancock for violation of. See Order Granting Defendants' Motion to Dismiss the First Amended Complaint (the "Order"). The Court also found that plaintiffs "failed to adequately plead facts demonstrating conformity with the statute of limitations as to plaintiffs' claim against Hancock." Order at :-. Plaintiffs amended the complaint twice more following the Order, filing the TAC on November, 00. On March, 00, Individual Defendants, as well as Underwriter Defendants, moved t o dismiss the TAC. The Court afforded plaintiffs the opportunity to clarify the TAC, by includin g ' Defendants Ellen M. Hancock, R. Marshall Case, Dick Stoltz, Herbert A. Dollahite, Adam W. Wegner, Beverly Brown, Sam S. Mohamad, William Yeack are referred to herein as the "Individual Defendants." Defendants Goldman, Sachs & Co., Merrill Lynch & Co., Morgan Stanley Dean Witter, and J.P. Morgan and are referred to herein as the "Underwriter Defendants." -- INDIV IDUAL DEFDTS' SUPPLEMENTAL BRIEF ISO MOTION TO DISMISS CORRECTED THIRD AMENDED COMPLAINT MASTER FILE NO. C-O- MMC

3 Mr. Rueckert's Declaration, as well as adding one sentence of text describing the declaration. Order Granting Plaintiffs' Motion to Amend, filed on April, 00, at :-. The Court further indicated that the motions to dismiss the TAC would be applicable to the CTAC, allowing the parties to submit supplemental briefs discussing any impact of the corrections. Id. at :-:. III. THE CTAC CANNOT SURVIVE MOTION TO DISMISS A. Failure To Demonstrate Stront Inference Of Falsity Or Scienter.. Plaintiffs Allege Insufficient Corroborating Details About The Report. Even with Mr. Rueckert's declaration, plaintiffs have not provided adequate foundationa l 0 0 facts about the `aging' report to justify plaintiffs' reliance upon it in the CTAC. See Individual Defendants' Reply Brief in Support of Motion to Dismiss Plaintiffs' TAC (the "Reply"), filed June, 00, at :- :. To establish scienter with internal reports : "[plaintiff] must `include adequate corroborating details,' such as the sources of [plaintiff's] information with respect to the reports, how [plaintiff] learned of the reports, who drafted them... which officers received them,' and `an adequate description of their contents." Order at :- (quoting In re Vantive Corp. Secs. Litig., F.d 0, 0 (th Cir. 00)). Mr. Rueckert merely indicates that he used the document not that he authored its contents or knew who did. CTAC at ; Rueckert Dec. at. As a "manager" in Exodus' "Texas Sales Project Management," Mr. Rueckert presumably only had insight into a subset of customers in his region, itself a small portion of Exodus customers. Rueckert Dec. at. Mr. Rueckert, therefore, lacks knowledge to state which, if any Exodus officials received copies of the report. Rueckert Dec. at ; CTAC at. Such a regional employee likely could not explain the report's import across Exodus.. Plaintiffs Do Not Connect The Report To Falsity Or Scienter. In any event, the sole impact of Mr. Rueckert's Declaration is to show that the repor t "reflects the accounts receivable status as of August, 00," not August 0, 00 as plaintiff s previously alleged. TAC at ; CTAC at. The report allegedly lists delinquent Exodus customer accounts, but major deficiencies remain in plaintiffs' allegations about the report. One, plaintiffs pled no facts in the TAC that suggest Exodus recognized the amounts billed to accounts on the report as revenue, a problem previously identified by the Court. Order at -- INDIVIDUAL DEFDTS' SUPPLEMENTAL BRIEF MASTER FILE NO. C-0- MMC THIRD

4 0 :-:. Mr. Rueckert confirms that he merely used the internal report "as a tool to monitor customer payments and financial status." Rueckert Dec. at. He also does not state that the amounts on the report were recognized, but rather admits the figures reflect invoice totals only. Id. at. See, e.g., Druskin v. Answerthink, Inc., F. Supp. d 0, 0- (S.D. Fla. 00) (rejecting claims based on aging reports). Two, plaintiffs pled no facts creating an inference that Exodus included the amounts o r customers in the report on Exodus' public reports. See Reply at :-:; Order at :-0. Again, Mr. Rueckert only ascribes an internal invoicing and monitoring function to the document. Rueckert Dec. at -. He does not, and as a regional manager cannot, claim that the numbers on the report translated into figures on Exodus' public filings. See, e.g., In re Foundry Networks, Inc. Secs. Litig., No. C 00- MMC, 00 WL 0, at * (N.D. Cal. Aug., 00) (citation omitted) ("In light of the fact that plaintiffs fail to include allegations as to the manner in which Foundry's public forecast was derived, the fact that internal shipment reports showed that shipments per week for the first few weeks of October were lower than `shipments for the months in the prior quarter,' is insufficient to show that either the revenue or profit forecasts were false or misleading when made"). Three, plaintiffs fail to substantiate the claim that Exodus' alleged practice of continuin g to bill purportedly delinquent customers suggests any impropriety. See Reply at :-. For 0 example, if a customer has a non-cancelable contract to pay monthly fees for a fixed time period, Exodus' continuing to invoice that customer is not only proper, but possibly necessary to preserve Exodus' legal rights to payment, even if the customer is delinquent. Also, just because a customer does not pay invoices promptly does not mean the receivables automatically should be deemed uncollectible. A customer may be experiencing temporary financial difficulties or may have questions regarding bills. Legal action even may be necessary to collect unpaid amounts. "There is nothing suspicious about the existence of Aging Reports, nor do the Aging Reports on their face sufficiently raise any inference that the Defendants knew at the time they issued an invoice that it was uncollectible as to the customers identified." Druskin, F. Supp. d at 0 (S.D. Fla. 00). See also Coates v. Heartland Wireless Communications, Inc., F. Supp. d -- INDIVIDUAL DEFDTS' SUPPLEMENTAL BRIEF ISO MOTION TO DISMISS CORRECTED THIRD MASTER FILE NO. C-O- MMC

5 0, 0 (N.D. Tex. ) (citing San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., F.d 0, (d Cir. )) (finding claims about "internal accounts 0 receivable aging reports" insufficient to survive dismissal). Four, the more reasonable inference is that the report is consistent with Exodus ' statements regarding customer numbers in Exodus' February, 00 Prospectus Supplement (the "Supplement"), the basis of plaintiffs' claim against Ms. Hancock. See Individual Defendants' Request for Judicial Notice in Support of Motion to Dismiss TAC, filed March, 00, (the "RJN"), Exh., at S-. Plaintiffs allege that the number of customers in the "Over 0 Days" column ("Column J") of the report shows Exodus' statement in the Supplement that it had "approximately,00 customers" was false. Plaintiffs' Motion to Amend TAC (the "Motion to Amend"), filed March, 00, at :-; RJN, Exh. at S-. This is a non-sequitur in at least five ways. First, there is no reason to assume that the customers shown on an August `aging' report constituted the total number of customers at that time. The report appears limited to customers as to whom a collection issue existed, since each customer appears to be assigned to a "Collector" (column C) and almost all appear to have past due balances. Such a report might omit customers who were current on payments or otherwise not deemed to require assignment to a collector. Second, plaintiffs do not indicate whether the report includes the customers Exodus inherited via their acquisition of GlobalCenter or only pre-acquisition customers, a notable failure given Exodus provided the customer totals for the "combined company" in the Supplement. RJN, 0 Exh. at S-. Third, even if the report listed all of Exodus' customers as of August, it is doubtful that the total number as of February was the same-more likely the number of customers changed during that time, although whether that number went up or down is not determinable from anything in plaintiffs' complaint. Fourth, if the report were implausibly assumed to be an exact representation of Exodus' customer base as of February, the report lists,0 accounts, suggesting Exodus excluded a substantial number of these accounts when calculating the,00 customers in the Supplement. TAC, Exh. B. at. Fifth, many accounts in Column J likely would not have appeared past due on reports prior to the Supplement. According to Mr. Rueckert, accounts invoiced on December 0, 000 for services provided from January 0, -- INDIV IDUAL DEFDTS' SUPPLEMENTAL BRIEF ISO MOTION TO DISMISS CORRECTED THIRD AMENDED COMPLAIN T MASTER FILE NO. C-0- MMC

6 00 and February, 00, would not appear past due until a February report-after the Supplement. Rueckert Dec. at. Mr. Rueckert cannot derive how many accounts, if any, listed on Column J of the August report, bearing data from over 0 days after the Supplement, were invoiced on November 0 or earlier so as to appear past due on any pre-supplement report. B. Section Claim Against Ms. Hancock Barred By Statute Of Limitations. Plaintiffs also fail to include facts in the CTAC demonstrating compli ance of their claim with the one-year statute of limitations provided for in the Securities Act of. See 0 Order at :-0; U.S.C.A. m. The Court held plaintiffs were on inquiry notice by at least June 0, 00, yet plaintiffs did not include the claim until they filed the FAC. Order at :-0. Plaintiffs still do not allege when they discovered the purported fraud, why they took so long to discover it, or what diligence they used to make such discovery. Order at :-0 (citing Kroungold v. Triester, 0 F. Supp., (E.D. Pa. )); Reply at :- :, :-. Mr. Rueckert offers no insight as to any of these factors. Plaintiffs even admit they did no further research about the report until after Individual Defendants' Motion Seeking Sanctions Pursuant to Federal Rule of Civil Procedure on July, 00. See Motion to Amend at :-. Such 0 delay indicates plaintiffs failed to perform the investigation required of a reasonable investor. See, e.g., In re USEC Secs. Litig., 0 F. Supp. d 0, (D. Md. 00) ("At the very least, plaintiffs should have undertaken an investigation") (emphasis added) ; In re Infonet Servs. Corp. Secs. Litig., 0 F. Supp. d 0, (C.D. Cal. 00). IV. CONCLUSION For the foregoing reasons and the reasons stated in Individual Defendants' Motion t o Dismiss the TAC, the CTAC should be DISMISSED WITH PREJUDICE. DAVID M. FURBUSH BRENT W. WILNER O'MELVENY & MYERS LLP Dated: May, 00 By : Brent W. Wilner Attorneys for Individual Defendants Ellen M. Hancock, R. Marshall Case, Dick Stoltz, Herbert A. Dollahite, Adam W. Wegner, Beverly Brown, Sam S. Mohamad, and William Yeack -- INDIVIDUAL DEFDTS' SUPPLEMENTAL BRIEF ISO MOTION TO DISMISS CORRECTED THIRD AMENDED COMPLAINT MASTER FILE NO. C-O- MMC