UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

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1 BORIS FELDMAN, State Bar No. 1 KEITH E. EGGLETON, State Bar No. IGNACIO E. SALCEDA, State Bar No. 0 CAMERON P. HOFFMAN, State Bar No. WILSON SONSINI GOODRICH & ROSATI Professional Corporation 0 Page Mill Road Palo Alto, CA 0-0 Telephone: (0-00 Facsimile: (0-0 choffman@wsgr.com Attorneys for Defendants NETFLIX, INC., REED HASTINGS, BARRY McCARTHY, and LESLIE J. KILGORE UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION In re Netflix, Inc. Securities Litigation This document relates to: All Actions. CASE NO.: C-0- FMS DEFENDANTS REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF MOTION TO DISMISS CONSOLIDATED COMPLAINT C:\NrPortbl\PALIB1\MSTI\_.DOC

2 Defendants hereby request that the Court take judicial notice pursuant to Rule 1 of the Federal Rules of Evidence of certain documents attached to the accompanying Declaration of Cameron P. Hoffman, submitted in support of Defendants Motion to Dismiss the Consolidated Complaint ( Complaint or CC, for the reasons set forth below. 1. Analyst Reports: Documents Referenced In Complaint, Integral to Plaintiffs Claims, Part of the Public Record, and Part of the Total Mix of Available Information. Analyst reports regarding Netflix are a matter of public record and were part of the total mix of information available to the market. As the Complaint alleges: Netflix regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits of major newswire services and through other wide-ranging public disclosure, such as communications with the financial press and other similar reporting services. CC 1(c (emphasis added. Specifically, the Complaint alleged that: Netflix was followed by several securities analysts employed by major brokerage firms who wrote reports.... Each of these reports was publicly available and entered the public marketplace. Id. (d (emphasis added. Plaintiffs allege that, as a result of these reports, the market for Netflix securities promptly digested current information regarding Netflix from all publicly available sources and reflected such information about the Company s share price. Id. 1. Not only do plaintiffs allege that the market aware of and reliant on the reports published by analysts, such information was also integral to plaintiffs Complaint. The Complaint asserts that the basis of plaintiffs allegation is the investigation of plaintiffs counsel : which included a review of SEC filings by Netflix, as well as regulatory filings and reports, securities analysts reports and advisories about the Company, press releases and other public statements issued by the Company, and media reports about the Company. CC 1 (emphasis added. Indeed, the Complaint repeatedly alleges the significance of information provided to the market through securities analysts and their reports. 1 1 See, e.g., CC ( Defendants assured analysts and investors that these metrics... ; (as evidence of defendants alleged misleading statements having their intended effect...after (continued C:\NrPortbl\PALIB1\MSTI\_.DOC

3 The Complaint also highlights communications between Netflix and financial analysts. For example, plaintiffs allege defendants Hastings and McCarthy hosted a conference call for investors and analysts during which they also boasted of record-low subscriber churn (id. ; that statements made during the call had the effect of propelling the Company share prices upward (id. ; and, that the market, which presumably would include analysts, was mislead by Netflix s churn calculation because there would have been no way [to do an alternative calculation] in the absence of disclosure of the number of subscriber cancellations during the quarter. Id. (b. Plaintiffs use these allegations to support their theory that while being well aware that the issue of churn rate and subscriber cancellations was a key factor in analyzing the Company s future prospects, as well as a key focus of investors and analysts, defendants deceived the investing public by making statements emphasizing subscriber additions, stating an artificially-low churn rate, and omitting to disclose actual subscriber cancellations. CC. As such, the Complaint is centered on the allegation that information regarding the Netflix s churn calculation and the number of subscriber cancellations never reached the marketplace. * * * The Court may take judicial notice of information and documents that are not subject to reasonable dispute. Fed. R. Evid. 1(b. Specifically, an analysts report may be proper subject matter for judicial notice, even where the complaint does not cite to or quote from the (...continued from previous page meeting with defendants at the Company s primary fulfillment and distribution center analysts at Pacific Growth Equities issued a report on Neflix, encouraging investors ; (defendants were motivated to manipulate disclosures in order to meet the expectations and allay the concerns of Wall Street ; (as evidence of that defendants alleged misleading statements continued to have their intended effect... shares of the Company rallied... after analyst Richard Ingrassia of Roth Capital Partners wrote a note to investors ; (quoting a dialogue between defendants and Yusef Squally Jefferies & Co. Analyst during a conference call as a purportedly false and misleading statement; 1 (noting defendants appeared at and made statements at several well attended analysts conferences in 0, including conferences hosted by Thomas Weisel Partners, Smith Barney Citigroup, Piper Jaffray and Deutsche Bank. See also, e.g., CC ( one-on-one analyst interviews ; ( conference call for investors and analysts ; ( defendants hosted an analyst day ; ( conference call for investors and analysts. -- C:\NrPortbl\PALIB1\MSTI\_.DOC

4 analyst report. Plevy v. Haggerty, F. Supp. d, (C.D. Cal. (finding analyst reports not relevant in that case. Further, the Court may take judicial notice of the analyst reports as matters of public record. MGIC Indem. Corp. v. Weisman, 0 F.d 00, 0 (th Cir. ( On a motion to dismiss, we may take judicial notice of matters of public record outside the pleadings.. Courts have taken judicial notice of certain analyst reports in circumstances very similar to those found in this case. As in this case, in Padnes v. Scios Nova Inc., No. C -, WL (N.D. Cal. Sept.,, plaintiffs made sweeping allegations that analysts were not aware of and did not apprise the market of certain information regarding a pharmaceutical trial study. Id. at *. In support of their motion to dismiss, defendants asked the court to take judicial notice of analyst reports not referred to in the complaint that demonstrate that some analysts were aware of aspects of the Colorado study that plaintiffs complain were not disclosed and that reveal precisely the skepticism about the predictive value of the Colorado findings which plaintiffs allege defendants prevented the market from forming. Id. at *-. Judge Patel granted defendants request and took judicial notice of the analyst reports on that grounds that plaintiffs cannot make a broad assertion of the absence of information which is contrary to known facts in order to resist a motion to dismiss and that information in the analyst reports was available to plaintiffs as public information. Id. at *. This court holds that in a securities fraud action based on fraud-on the-market, plaintiffs cannot prevail on a motion to dismiss where they have alleged selective misrepresentations or omissions and have failed to explain how theses misstatements are misleading in light of known contemporaneous countervailing statements generally recognized by the market. Id. Similarly, in Keeney v. Larkin, the court considered on a motion to dismiss a number of documents, including securities analyst reports, that were offered to show that the market was aware of the exact information that plaintiffs alleged was not sufficiently disclosed. 0 F. Supp. d, (D. Md. 0 (noting with respect to the incorporation of documents integral to plaintiff s claims: This case shows the wisdom of this rule., aff d, Fed. Appx. (th Cir. 0. Specifically, the Keeney plaintiffs alleged that defendants issued press releases and -- C:\NrPortbl\PALIB1\MSTI\_.DOC

5 other public statements which falsely represented that the Company had successfully integrated the operations of its many acquired companies. Id. at. The defendants offered numerous public documents directly to the contrary in support of their motion to dismiss. Id. at -. The Court held that it could consider documents not attached to the complaint if they were incorporated by reference or otherwise integral to the complaint, and relied upon the documents offered by defendants in holding that the market was aware that [the Company] may not be integrated. Id. at. In so holding, the court stated that securities analysts reports made reference to the risks associated with the acquisitions, and such reports are part of the total mix of information available to the market. Id. at. Ultimately, the court granted defendants motion to dismiss with prejudice. As in Padnes and Keeney, plaintiffs here allege that securities analysts reports regarding Netflix are matters of public record and integral to the allegations of the Complaint. Netflix was followed by several securities analysts employed by major brokerage firms who wrote reports.... Each of these reports was publicly available and entered the public marketplace. CC (d (emphasis added; see also, e.g. id. 1 ( the market for Netflix securities promptly digested current information regarding Netflix from all publicly available sources and reflected such information about the Company s share price. As such, the reports are appropriate for judicial notice under Rule 1, like newspapers and similar publications. The Ninth Circuit has held that a district court ruling on a motion to dismiss may consider a document the authenticity of which is not contested, and upon which the plaintiffs complaint necessarily relies. Parrino v. FHP, Inc., F.d, 0 (th Cir. ; see also In re Silicon Graphics, Inc. Sec. Litig., F.d 0, (th Cir. (affirming propriety of See Ritter v. Hughes Aircraft Co., F.d, - (th Cir. (upholding judicial notice of widespread layoffs from a newspaper article and common local knowledge; Dockray v. Phelps Dodge Corp., 01 F.d 1, n. (th Cir. (in the absence of evidence from plaintiff, the court performed its own search of major newspapers for articles regarding the dispute and then took judicial notice of five relevant newspaper articles; United States v. Alisal Water Corp., F. Supp. d, n. (N.D. Cal. 0 (taking judicial notice of newspaper articles and articles and publications downloaded from public website for context regarding the totality of the circumstances under which Defendants violations occurred. -- C:\NrPortbl\PALIB1\MSTI\_.DOC

6 judicial notice; plaintiff states that her allegations are based in part on a review of SGI s SEC filings ; In re Silicon Graphics, Inc. Sec. Litig., 0 F. Supp., (N.D. Cal. (noting that plaintiffs challenge to the Court s review of certain forms was disingenuous because plaintiffs rely on the information contained in these [documents] in pleading their allegations. This is true even if the document is not explicitly incorporated in [the] complaint. Parrino, F.d at 0. The rule is intended to prevent plaintiffs from surviving a motion to dismiss by deliberately omitting references to documents that go to the heart of their claims. Id.; see also Wietschner v. Monterey Pasta Co., F. Supp. d 0, 0 (N.D. Cal. 0 ( On a Motion to Dismiss, documents crucial to the plaintiff s claims but not explicitly incorporated in a complaint can be noticed in order to prevent a plaintiff from surviving a Rule (b( motion by deliberately omitting references to documents upon which their claims are based. ; Silicon Graphics, 0 F. Supp. at ( Plaintiffs cannot preclude consideration of defendants SEC forms [on which their allegations are based] by artful pleading.. As discussed in the Defendants motion to dismiss, the Court can grant the motion to dismiss without consideration of the analyst reports because plaintiffs claims fail as a matter of law. Nevertheless, as in Padnes and Keeney, the Court may want to consider the analysts reports. As shown above, the Court may take judicial notice of such these reports without converting the motion to dismiss into a motion for summary judgment. Accordingly, defendants request that the Court take judicial notice of the following: 1. Roth Capital Partner report Net Net, Flix By Mail Has Arrived dated March, 0. Ex. A.. Excerpts from Thomas Weisel reports between June, 0 and October, 0. Ex. B.. Delafield Hambrecht report Morning Note: Q0 Earnings Call dated October, 0. Ex. C. References to Ex. are to the exhibits attached to the Declaration of Cameron P. Hoffman, filed herewith. -- C:\NrPortbl\PALIB1\MSTI\_.DOC

7 . Delafield Hambrecht report Intraday Note: Q0 Earnings Call dated January, 0. Ex. D.. Vintage Research report The model works! But what is it worth? dated February, 0. Ex. E.. Vintage Research report Analyst Day Saw Slightly More Aggressive Guidance dated February, 0. Ex. F.. Vintage Research report Netflix Model Starting to Show Weaknesses dated April, 0. Ex. G.. Vintage Research report Q Preview: Q Guidance Likely the Focal Point, Not Q Results dated June, 0. Ex. H.. Vintage Research report As Expected, Price Hike Slows Q Sub Growth dated July, 0. Ex. I.. First Albany report Initiating Coverage with a Buy Rating and $ Target dated May, 0. Ex. J.. First Albany report Blockbuster Announcement a Non-Event dated May, 0. Ex. K.. First Albany report Subscriber Data in Line with Expectations dated July, 0. Ex. L.. SEC Filings: Incorporated by Reference, Integral to the Complaint and Filed With the SEC. Netflix s SEC filings are also properly considered on a motion to dismiss. These documents are filed with the SEC and their authenticity is not questioned. The SEC requires public companies, such as Netflix, to file -Ks, -Qs, Proxy Statements and certain press releases. See U.S.C. m(a; SEC Rule a-. Well-established Ninth Circuit precedent holds that courts may take judicial notice of the contents of relevant public disclosure documents required to be filed with the SEC as facts capable of accurate and ready determination. Silicon Graphics, 0 F. Supp. at (quoting Kramer v. Time Warner, Inc., F.d, (d Cir. 1; Fed. R. Evid. 1. SEC filings are generally recognized as -- C:\NrPortbl\PALIB1\MSTI\_.DOC

8 the most accurate and authoritative source of public information about a company. Bryant v. Avado Brands, Inc., F.d, 1 (th Cir. ; see also Rubin v. Trimble, No. C--, WL, at * (N.D. Cal. Apr., ( The Court may also review public disclosure documents required by law to be and which actually have been filed with the SEC. (citation omitted. Further, Netflix s Form -K has been incorporated by reference into the Complaint and is therefore properly subject to judicial notice. See Silicon Graphics, F.d at ; Branch v. Tunnell, F.d, (th Cir. ; see also Copper Mountain, F. Supp. d, (N.D. Cal. 0 ( courts are specifically authorized, in connection with a motion to dismiss a securities fraud complaint, to consider documents and filings described in the complaint under the incorporation by reference. Additionally, the Court may also consider the SEC filings as documents integral to the allegations of the complaint, even if they were not cited therein. See, e.g., In re Veritas Software Corp. Sec. Litig., No. C-0-0, slip op. at - (N.D. Cal. May, 0 (taking judicial notice of SEC filings not mentioned in, or attached to, the complaint (Hoffman Decl., Ex. Y; see also In re Ramp Networks, Inc. Sec. Litig., 1 F. Supp. d 1, n.1 (N.D. Cal. 0 (granting defendants request for judicial notice of, inter alia, -Qs and -Ks because they were public disclosure documents that were filed with the SEC. Further, this Court may take judicial notice of summaries of and calculations derived from information contained in SEC filings, even where such summaries or calculations are not cited in the Complaint. See, e.g., Wietschner, F. Supp. d at n. (taking judicial notice of the percentages of total stock holdings sold by defendants as calculated by defendants from SEC filing, where the percentages were not alleged in the complaint; In re Northpoint Communications Group, Inc., Sec. Litig., F. Supp. d 1, 0 n. (N.D. Cal. 01 (taking judicial notice of the percentages of shares sold from SEC filings. -- C:\NrPortbl\PALIB1\MSTI\_.DOC

9 Accordingly, defendants request that the Court take judicial notice of the following:. Excerpts from Netflix s Form -K for the fiscal year ended December 1, 0 (cited in CC, 0, which was filed with the Securities and Exchange Commission ( SEC on or about February, 0. Ex. M.. Forms filed with the SEC for Defendant Reed Hastings reflecting transactions in Netflix securities between Netflix s IPO in May 0 and October, 0. Ex. N.. Forms filed with the SEC for Defendant Barry McCarthy reflecting transactions in Netflix securities between Netflix s IPO in May 0 and October, 0. Ex. O.. Forms filed with the SEC for Defendant Leslie Kilgore reflecting transactions in Netflix securities between Netflix s IPO in May 0 and October, 0. Ex. P.. Excerpts from Netflix s Definitive Proxy Statement filed with the Securities and Exchange Commission ( SEC on or about March, 0. Ex. Q. Defendants calculations of the percentages of shares sold during the class period derived from the above-listed Forms and Definitive Proxy Statement.. Netflix Press Releases and News Article: Incorporated by Reference, Integral to the Complaint and Filed With the SEC. Netflix s press releases are also properly subject to judicial notice. First, the press releases have been incorporated by reference into the Complaint (see CC -, 0-1, (e, -,,,, -, and are therefore incorporated by reference into the Complaint and properly subject to judicial notice. See supra. In addition, the press releases were filed with the SEC. Id. Further, all of the press releases are properly subject to judicial notice in that they are capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned. Fed. R. Evid. 1(b(; see also supra 1. Accordingly, defendants request that the Court take judicial notice of the following:. Netflix press release Netflix Reports Third Quarter GAAP Net Income of $. Million and Non-GAAP Net Income of $.1 Million dated October, 0 (cited and quoted in CC 0-1, (e, a copy of which was attached as Exhibit.1 to Netflix s Form -K filed with the SEC on October, 0. Ex. R. -- C:\NrPortbl\PALIB1\MSTI\_.DOC

10 . Netflix press release Netflix Announces Q Revenue Growth of 0% Year Over Year and a -for-1 Stock Split dated January, 0 (cited and quoted in CC -, a copy of which was attached as Exhibit.1 to Netflix s Form -K filed with the SEC on January, 0. Ex. S.. Netflix press release Netflix Announces $0 Million in Revenue, Record Low Churn and Raises Guidance for 0 dated April, 0 (cited and quoted in CC, a copy of which was attached as Exhibit.1 to Netflix s Form -K filed with the SEC on April, 0. Ex. T.. Netflix press release Netflix Announces GAAP Net Income of $. million and Non- GAAP Net Income of $.0 million for Q 0 dated July, 0 (cited and quoted in CC,,, a copy of which was attached as Exhibit.1 to Netflix s Form -K filed with the SEC on July, 0. Ex. U.. Newsweek/msnbc.com article I Want a Movie! Now! dated September, 0 (cited and quoted in CC. Ex. V. Netflix press release Netflix and TIVO Announce A Joint Development Agreement dated September 0, 0 (cited in CC -. Ex. W.. Netflix press release Netflix Announces GAAP Net Income of $. million for Q 0 dated October, 0 (cited and quoted in CC,, a copy of which was attached as Exhibit.1 to Netflix s Form -K filed with the SEC on October, 0. Ex. X. Accordingly, Defendants respectfully request that the Court take judicial notice of the above listed documents in connection with the defendants motion to dismiss. Dated: April, 0 WILSON SONSINI GOODRICH & ROSATI Professional Corporation By:/s/ Cameron P. Hoffman Cameron P. Hoffman Attorneys for Defendants NETFLIX, INC., REED HASTINGS, BARRY McCARTHY and LESLIE J. KILGORE -- C:\NrPortbl\PALIB1\MSTI\_.DOC