Infineon Technologies AG Securities Litigation 04-CV-04156-Plaintiffs

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1 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 2 JOHN K. GRANT (169813) SYLVIA SUM (207511) 3 100 Pine Street, Suite 2600 San Francisco, CA 94111 4 Telephone: 415/288-4545 415/288-4534 (fax) 5 [email protected] [email protected] 6 – and – WILLIAM S. LERACH (68581) 7 655 West Broadway, Suite 1900 San Diego, CA 92101 8 Telephone: 619/231-1058 619/231-7423 (fax) 9 [email protected] 10 MURRAY, FRANK & SAILER LLP BRIAN P. MURRAY 11 ERIC J. BELFI 275 Madison Avenue, Suite 801 12 New York, NY 10016 Telephone: 212/682-1818 13 212/682-1892 (fax) 14 Co-Lead Counsel for Plaintiffs 15 [Additional counsel appear on signature page.]

16 UNITED STATES DISTRICT COURT 17 NORTHERN DISTRICT OF CALIFORNIA 18 SAN JOSE DIVISION 19 In re INFINEON TECHNOLOGIES AG ) Master File No. C-04-4156-JW SECURITIES LITIGATION ) 20 ) CLASS ACTION ) 21 This Document Relates To: ) PLAINTIFFS’ NOTICE OF SUBSEQUENT ) AUTHORITY 22 ALL ACTIONS. ) ) 23

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1 Pursuant to Local Rule 7-3(d), plaintiffs’ counsel hereby brings to the Court’s attention the 2 following judicial opinions published after the date Plaintiffs’ Opposition to Defendants’ Motions to 3 Dismiss the Consolidated Complaint was served. For the Court’s convenience, copies of the 4 opinions are attached hereto. 5 1. Brumbaugh v. Wave Sys. Corp., __ F. Supp. 2d __, 2006 WL 52751, at *10 (D. Mass. 6 Jan. 11, 2006), discussing loss causation standards after Dura Pharm., Inc. v. Broudo, U.S. __ 125 7 S. Ct. 1627 (2005) and noting that Dura does not require that a corrective disclosure precede a 8 stock’s decline. Attachment A. 9 2. In re BearingPoint, Inc. Sec. Litig., ___ F.R.D. ___, 2006 WL 141667, at *10 (E.D.

10 Va. Jan. 17, 2006), discussing loss causation after Dura and noting it is Aconceivable that the 11 inflationary effect of a misrepresentation might well diminish over time, even without a corrective 12 disclosure. . . .” Attachment B. 13 3. In re Electronic Arts Inc. Sec. Litig., 2006 WL 27201, at *2 (N.D. Cal. Jan. 5, 2006), 14 upholding allegations of loss causation. Attachment C. 15 4. In re Enron Corp. Sec. Litig., 2005 WL 3504860 at **16-17 (S.D. Tex. Dec. 22, 16 2005), discussing loss causation standards and noting that the Supreme Court did not adopt 17 defendants’ argument in Dura that a plaintiff must allege and prove a disclosure of the fraud that was 18 followed by a price drop. Attachment D. 19 5. In re Van Der Moolen Holding N.V. Sec. Litig., __ F. Supp. 2d __, 2005 WL 20 3410763, at **10-11 (S.D.N.Y. Dec. 13, 2005), discussing a duty to disclose fact that revenue was 21 generated by illegal practices. Attachment E. 22 DATED: February 14, 2006 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 23 JOHN K. GRANT SYLVIA SUM 24 25 /s/ John K. Grant 26 JOHN K .GRANT 27 100 Pine Street, Suite 2600 San Francisco, CA 94111 28 Telephone: 415/288-4545

PLAINTIFFS’ NOTICE OF SUBSEQUENT AUTHORITY - C-04-4156-JW - 1 -

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1 415/288-4534 (fax) 2 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 3 WILLIAM S. LERACH 655 West Broadway, Suite 1900 4 San Diego, CA 92101 Telephone: 619/231-1058 5 619/231-7423 (fax) 6 MURRAY, FRANK & SAILER LLP BRIAN P. MURRAY 7 ERIC J. BELFI 275 Madison Avenue, Suite 801 8 New York, NY 10016 Telephone: 212/682-1818 9 212/682-1892 (fax) 10 Co-Lead Counsel for Plaintiffs 11 TILP RECHTSANWALTE PLLC ALEXANDER REUS 12 100 SE Second Street, Suite 2610 Miami, FL 33131 13 Telephone: 786/235-5000 786/235-5005 (fax) 14 Additional Counsel for Plaintiffs 15 T:\CasesSF\Infineon Techs\MIS00028011.doc 16 17 18 19 20 21 22 23 24 25 26 27 28

PLAINTIFFS’ NOTICE OF SUBSEQUENT AUTHORITY - C-04-4156-JW - 2 -

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1 CERTIFICATE OF SERVICE 2 I hereby certify that on February 14, 2006, I electronically filed the foregoing with the Clerk 3 of the Court using the CM/ECF system which will send notification of such filing to the e-mail 4 addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have 5 mailed the foregoing document or paper via the United States Postal Service to the non-CM/ECF 6 participants indicated on the attached Manual Notice List. 7 I further certify that I caused this document to be forwarded to the following designated 8 Internet site at: http://securities.lerachlaw.com/. 9 s/ John K. Grant 10 JOHN K. GRANT

11 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 12 100 Pine Street, Suite 2600 San Francisco, CA 94111 13 Telephone: 415/288-4545 415/288-4534 (fax) 14 E-mail:[email protected]

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Mailing Information for a Case 5:04-cv-04156-JW

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The following are those who are currently on the list to receive e-mail notices for this case.

z z Patrick J. Coughlin [email protected] [email protected];[email protected]

z John K. Grant [email protected] [email protected];[email protected]

z William S. Lerach [email protected] [email protected]

z Mia A. Mazza [email protected] [email protected];[email protected];[email protected]

z Darren J. Robbins [email protected] [email protected]

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The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). You may wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for these recipients. z (No manual recipients)

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John E. Bagalay, Jr., Steven K. Sprague, Briefs and Other Related Documents Defendants . Only the Westlaw citation is currently available . John C. Martland, Maitland & Brooks LLP, United States District Court, D. Massachusetts . Saugus, for Anne Braumbaugh, Gary L . Harmon, Anne BRUMBAUGH, et al, Plaintiffs Randy K. Griffin, Plaintiffs . V. David Pastor, Gilman and Pastor, LLP, Boston, for WAVE SYSTEMS CORPORATION , et al., Candy M. Sousa, Alvin Chess, H . Martin Bohman, Defendants Jack Schulman, Jimmy Suo, Michael Vicker, Rafat No. CIV .A.04-30022-MAP. Dawod, Yosef Streicher, Anne Braumbaugh, Gary L. Harmon, Randy K. Griffin, Plaintiffs . Jan. 11, 2006. Karen Reilly, Schiffrin & Barroway, LLP, Radnor, PA, for Anne Braumbaugh, Gary L . Harmon, Randy K. Griffin, Plaintiffs . Stuart L. Berman, Schiffrin & Barroway LLP, Bala Raquel J . Webster, Bingham McCutchen LLP, Cynwyd, PA, for Alvin Chess, Candy M. Sousa, H. Boston, for Wave Systems Corporation, Gerard T . Martin Bohman, Jack Schulman, Jimmy Suo, Feeney, John E. Bagalay, Jr., Steven K. Sprague, Michael Vicker, Rafat Dawod, Yosef Streicher, Defendants . Consolidated Plaintiffs . Marc I. Willner, Schiffrin & Barroway, LLP, Michael D. Blanchard, Bingham McCutchen Radnor, PA, for Anne Braumbaugh, Gary L . LLP-Hartford, Hartford, CT, for Wave Systems Harmon, Randy K . Griffin, Plaintiffs . Corporation, Gerard T . Feeney, John E . Bagalay, Jean Marc Zimmerman, Zimmerman, Levi & Jr., Steven K. Sprague, Defendants. Korsinsky, LLP, Westfield, NJ, for Candy M . Jeffrey C Block, Berman DeValerio Pease Tabacco Sousa, Plaintiff. Burt & Pucillo, Boston, for Candy M . Sousa, Plaintiff. MEMORAND UM AND ORDER REGARDING Robert A. Buhlman, Bingham McCutchen LLP, DEFENDANTS' MOTION TO DISMISS (Docket Boston, for Wave Systems Corporation, Gerard T. No. 58) Feeney, John E . Bagalay, Jr ., Steven K . Sprague, Defendants . PONSOR, D .J. Darren Check, Schiffrin & Barroway, LLP, Bala Cynwyd, PA, for Alvin Chess, Candy M. Sousa, H. 1. INTRODUCTIO N Martin Bohman, Jack Schulman, Jimmy Suo, Michael Vicker, Rafat Dawod, Yosef Streicher, *1 This is a class action brought by Plaintiffs on Consolidated Plaintiffs . behalf of all persons who acquired the common Nancy F . Gans, Moulton & Gans, PC, Boston, for stock of Wave Systems Corporation ("Wave" or " Candy M. Sousa, Ron Rogers, Steve Alvarez, the Company") between July 31, 2003 and Plaintiffs. December 18, 2003, allegedly misled by nine Peter A . Lagorio, Gilman and Pastor, LLP, Saugus, misrepresentations that violated Sections 10(b) and for Candy M . Sousa, Alvin Chess, H. Martin 20(a) of the Securities and Exchange Act of 1934 Bohman, Jack Schulman, Jimmy Suo, Michael and Rule l0b-S . FN1 Defendants are Wave, its Vicker, Rafat Dawod, Yosef Streicher, President and Chief Executive Officer, Steven K . Consolidated Plaintiffs . Sprague, and its Senior Vice President, Chief Eunice E . Lee, Bingham McCutchen LLP, Boston, Financial Officer and Secretary, Gerard K. Feeney; for Wave Systems Corporation, Gerard T . Feeney, FN2 they have moved to dismiss the consolidate d

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amended complaint on numerous grounds . In to Class A Common Stock . Under the terms of the particular, Defendants maintain that: (1) the placement, such a conversion could only occur if allegedly misleading statements are not actionable the closing bid on Wave's stock exceeded $1 .90 for as a matter of law ; (2) the facts pled do not give rise fifteen of twenty consecutive trading days . (Id. at ¶ to a strong inference that Defendants acted with the 5.) With the stock consistently trading at under requisite scienter; and (3) the complaint fails to $1 .00 per share in the Spring of 2003, it appeared allege a causal connection between the alleged unlikely this condition would be met . misrepresentations and the stock's subsequent depreciation . For the reasons set forth below, the On May 15, 2003, the Company issued a press court will allow Defendants' Motion to Dismiss as release in which Sprague stated that "key industry to two of the statements challenged and deny the participants are finally beginning to recognize the motion as to the other seven. value Wave can add and are evaluating ways that they can work with us to benefit from our position ." (Id. at ¶ 26; see also id. ("This is an exciting time II. FACTUAL AND PROCEDURAL for us, as we begin to see our long-held vision of BACKGROUND revenue-producing trusted computing services become an expected reality .") "Where the dismissal is grounded in Rule 12(b)(6), the facts pled in the complaint are taken in the light *2 In its Form 10-K/A filed with the Securities and most favorable to the plaintiff." In re Cab!etron Exchange Commission ("SEC") on June ,30, 2003, Sys., Inc., 311 F.3d 11, 22 (1st Cir .2002). The Wave expanded on Sprague's optimistic assessment following is a summary of the facts presented in this by forecasting $5 million in sales based upon "the light. FN3 anticipation that various deals we are working on will close ." (Id. at ¶ 34 (noting the Company's Since its inception in 1988, Wave, a self-described " continuing efforts to "solidify[ ] strategic alliances development stage company," had never managed with the major personal computer manufacturers to to market any of its digital security services or force collaborative efforts to distribute its products technologies successfully . (Dkt . No. 55, to consumers") .) Consolidated Am . Compl . ¶ 2.)) By December 31, 2002, the Company found itself over $230 million On July 31, 2003, with the market primed to expect in debt and in need of $11 million in cash to a substantial revenue stream, the Company issued a continue operations in 2003 . press release, announcing an agreement with Intel Corporation that would "enable Intel to bundle With no major revenue source in sight, the Wave's software and services with a future Intel Company was forced to close a private placement of desktop motherboard ." (Id. at ¶ 36.) Although the Series H Stock on April 30, 2003 . (Id . at ¶ 4.) terms of the deal were not disclosed (id at ¶ 38 Although this private investment in the publicly (citation omitted)), Wave's stock soared and closed held Company resulted in net proceeds of that day at $2.25 per share, a gain of 168% from the $4,465,571, the placement terms, from Wave's day before (id. at ¶ 37). perspective, were quite onerous. (Id.) Not only did they restrict the Company's capacity to generate The Company's stock was still on the rise when, on additional funds through future equity offerings by August 4, 2003, Wave announced a partnership giving the Series H shareholders a right of first with IBM destined to "significantly help us in our refusal, they also required Wave to pay significant objective to deliver open and interoperable dividends to these preferred shareholders . (Id.) solutions to business customers ." (Id. at ¶ 42.) Because the Company lacked the resources to Once again, despite the fact that the deal's terms redeem the preferred stock or pay the dividends, were undisclosed (id. at ¶ 46 (citation omitted)), Wave's status as a going concern seemed to rest on the market reacted positively, and Wave's stock the automatic conversion of these preferred shares closed at $4.42 per share, up $ .77 per share fro m

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its previous closing price (id. at ¶ 44) . FN4 concessions, the Series H holders agreed to curtail significantly their right of first refusal, increasing On August 11, 2003, Wave filed the first of four the Company's capacity to generate additional funds filings with the SEC in which the Company through future equity offerings . (Id.) characterized its recent deals with Intel and IBM as "Material Changes." (Id. at ¶¶ 55, 61-63 .) Three In a press release dated November 13, 2003, days later, during a conference call with analysts, Sprague stated: "We can now clearly see the Sprague finally revealed that the Intel deal was a growing momentum for trusted computing in the non-exclusive licensing agreement with no marketplace, and we expect substantial growth in minimum licensing requirements. (Id. at ¶ 58 .) volumes over the course of the next four quarters ." ( Sprague also admitted that although the Company's Id. at ¶ 68.) Six days later, Wave announced that it products were compatible with IBM's, Wave did not had secured $7 .1 million from a private placement have a licensing agreement with the computer giant . financing. (Id. at ¶ 69.) (Id.) In December 2003, the SEC commenced an Despite these revelations, Wave's CEO stood by the investigation relating to "certain public statements Company's earlier predictions of significant revenue made by Wave during and around August 2003, as growth. (Id.) Pressed to indicate the source of his well as certain trading in Wave's securities during sanguinity, Sprague conveyed his belief that the " such time." (Id. at ¶ 70.) After Defendants relationship . .. with Intel and the business model disclosed this news in a press release dated that was articulated in the press release" would be December 18, 2003, FN5 the Company 's shares fell the primary basis for revenue Wave would see by 17%, closing at $1 .50 the following day. (Id. at ¶ the end of the fourth quarter . (Id.) When asked 72.) whether Wave could "keep the lights on until this unfolds," Sprague stated that "we've been much In February 2004, eight individual Plaintiffs filed more comfortable than perhaps our shareholders putative class actions. FN6 Based on counsel's can be because it's hard to see the data that we have . representations, this court ordered the eight cases But we're very comfortable." (Id. at ¶ 59.) consolidated on September 3, 2004 . FN7 Plaintiffs subsequently filed their two-count amended In the meantime, on August 5, 2003, Feeney sold complaint, alleging violations of. "Section 10(b) of 100,000 shares of the Company's stock for the Exchange Act and Rule lOb-5 Promulgated $500,000, reducing his overall share ownership by Thereunder" by "All Defendants" (Count I) ; and " 50%. (Id. at ¶ 49.) The next day, Sprague himself Section 20(a) of the Exchange Act" by "the sold 150,000 Wave shares for $533,841, cutting his Individual Defendants" (Count II) . overall share ownership by 20% . (Id. at ¶ 50) These sales caught the spike in Wave's stock value The crux of Plaintiffs' complaint is that Defendants' at $3.14-$5 .00 per share . (Id. at ¶ 75.) efforts to inflate the Company's stock artificially caused them harm . They allege that as Wave stood *3 On August 20, 2003, in a Form S- 3 Registration on the brink of extinction, Defendants made a series Statement, Wave characterized its "partnership" of misrepresentations that led reasonable investors with IBM as a "licensing agreement." (Id. at ¶ 62.) to believe the Company was poised to fulfill its Two days later, on August 22, 2003, the Company recent predictions of unprecedented revenue again described its relationship with IBM as a " growth. In short, Plaintiffs submit that by licensing agreement" in a prospectus filed with the concealing the true nature of the purported Intel and SEC. (Id. at ¶ 63.) IBM deals, Defendants perpetrated a fraud on the market. On September 16, 2003, Wave disclosed that it had successfully modified the conditions of the April Series H Placement . (Id at ¶ 65.) Among other III. DISCUSSION

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Section 10(b) of the Securities Exchange Act of "This last requirement alters the usual contours of a 1934 prohibits the use of " any manipulative or Rule 12(b)(6) ruling because, while a court deceptive device or contrivance" in connection with continues to give all reasonable inferences to the purchase or sale of securities . 15 U.S.C . § plaintiffs, those inferences supporting scienter must 78j(b) (2005) . Rule lOb-5, promulgated by the SEC be strong ones ." Cabletron, 311 F.3d at 28; see pursuant to Section 10(b), "forbids, among other also Aldridge v . A.T. Cross Corp., 284 F.3d 72, 78 things, the making of any `untrue statement of (1st. Cir.2002) ("Even under the PSLRA, the material fact ' or the omission of any material fact ` district court, on a motion to dismiss, must draw all necessary in order to make the statements made ... reasonable inferences from the particular allegations not misleading ." ' Dura Pharm., Inc. v. Broudo, in the plaintiffs favor, while at the same time U.S . ----, ----, 125 S .Ct. 1627, 1631, 161 L .Ed.2d requiring the plaintiff to show a strong inference of 577 (2005) (citing 17 C .F.R. § 240.10b-5 (2004)). scienter."). Although the statute does not expressly allow for private claims, Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 358, 111 A. Specific Misrepresentations and/or Omissions . S.Ct. 2773, 115 L.Ed.2d 321 (1991), superseded on other grounds by statute, Federal Deposit Insurance Cognizant of the strictures of the PSLRA and Corporation Improvement Act of 1991, Pub.L. No. Fed.R.Civ.P. 9(b), Plaintiffs allege that Defendants 102-242, § 476, 105 Stat . 2236, 2387, as made nine specific misrepresentations in press recognized in Cooperativa De Ahorro Y Credito releases, a conference call, an interview, and filings Aguada v. Kidder, Peabody & Co ., 129 F .3d 222, with the SEC. 224 (Ist Cir.1997), the private cause of action has become an "essential tool for enforcement of the 1934 Act's requirements," Basic Inc. v. Levinson, 1 . Press Release of July 31, 2003. 485 U.S. 224, 231, 108 S .Ct. 978, 99 L.Ed.2d 194 (1988) . The complaint avers that a Wave press release dated July 31, 2003, announced an agreement *4 In order to state a lob-5 claim, a plaintiff must between the Company and Intel that would "enable allege a(l) false statement or omission of material Intel to bundle Wave's software and services with a fact, (2) with scienter , (3) upon which plaintiff future Intel desktop motherboard ." (Am.Compl.J relied, and (4) which caused plaintiffs injury . See 36.) Obviously, this allegation satisfies the "who, Gross v. Summa Four Inc., 93 F.3d 987, 992 (1st what, and where" mandates of the PSLRA and Rule Cir.1996), superseded on other grounds by statute, 9(b). See Fitzer v. Sec. Dynamics Tech., Inc., 119 Private Securities Litigation Reform Act of 1995, F.Supp.2d 12, 18 (D .Mass.2000). Close analysis Pub.L. No. 104-67, 109 Stat . 737, as recognized in also reveals that a factfmder could conclude that Greebel v . FTP Software, Inc., 194 F.3d 185, 197 this allegation satisfies all four elements of 10b-5 (1st Cir.1999). claim : material omission, scienter, reliance, and causation. FN9 In addition to pleading these basic elements, a plaintiff must also comply with the standards of the Private Securities Litigation Reform Act of 1995 (" a. Omission of a Material Fact. PSLRA"), 15 U .S .C. § 78u-4 (2005). Among other things, the PSLRA requires a plaintiff to identify Plaintiffs contend that this press release was " each allegedly misleading statement and explain materially false and misleading" in light of why it is misleading. 15 U.S.C. § 78u-4(b)(1). The information it failed to disclose . (Am.Compl.¶ 41 .) PSLRA also provides that a plaintiff must allege FN'() To fulfill the materiality requirement there facts "giving rise to a strong inference that the must be "a reasonable likelihood that a reasonable defendant acted with the required state of mind ." 15 investor would consider [the information omitted] U.S.C. § 78u-4(b)(2) (emphasis added) . '8 important ." Glassman v. Computervision Corp ., 90

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F .3d 617, 632 (1st Cir . 1996) (citations omitted). expressions of corporate optimism carefully . FN11

*5 If, as Plaintiffs allege, the press release came on In re No. Nine Visual Tech. Corp . Sec. Litig., 51 the heels of previous disseminations by Defendants F.Supp .2d 1 (D .Mass.1999), adopted the following forecasting unprecedented sales-in "anticipation analytical approach to claims of puffery . First, the that various deals that we are currently pursuing court will close "-the terms of the Intel agreement "would consider[s] whether the statement is so vague, so have assumed actual significance in the general, or so loosely optimistic that a reasonable deliberations of a reasonable shareholder," TSC investor would find it unimportant to the total mix Indus ., Inc. v. Northway, Inc., 426 U.S. 438, 449, of information ; second, the court .. . ask[s] whether 96 S,Ct. 2126, 48 L .Ed,2d 757 (1976), and " the statement was also considered unimportant to significantly altered the `total mix' of information the total mix of information by the market as a made available," Basic, 485 U.S. at 231-32 (citing whole. TSC Indus., 426 U. S. at 449) . Id. at 20 (citations omitted). The argument that Defendants had no affirmative duty to disclose the terms of the Intel agreement Applying No. Nine 's test, this court finds that : (1) a lacks merit . By volunteering "relevant, material reasonable investor, cognizant of Defendants' recent information" regarding the lucrative nature of prophecy of "strategic [and profitable] alliances impending agreements, Defendants assumed an with the major personal computer manufacturers," obligation, in announcing Wave's new relationship would not have considered the announcement of with Intel, to convey "the whole truth ." Roeder v. one such alliance to be so vague, so general, or so Alpha Indus., Inc., 814 F.2d 22, 26 (1st Cir.1987); loosely optimistic as to be unimportant to the total see also Gross, 93 F.3d at 992 (While "a mix of information ; on the contrary, a reasonable corporation does not commit securities fraud merely investor would have seen an "agreement" enabling " by failing to disclose all nonpublic material Intel to bundle Wave's software and service with a information in its possession," a duty to disclose " future Intel desktop motherboard" as a major source may arise if, inter alia, a corporation has previously of Wave's previously projected revenue; and (2) the made a statement of material fact that is ... market as a whole considered the Intel incomplete . .. or misleading in light of the announcement quite important to the total mix of undisclosed information."); In re Allaire Corp. Sec. information . (See Am. Compl. ¶ 37 (noting that on Litig., 224 F.Supp.2d 319, 327 (D .Mass.2002) (" July 31, 2003, the volume for Wave's stock was " [H]aving elected to comment on financial and approximately 19 million shares traded, as product sales performance, [the company] was compared to Wave's average daily volume of only required to make full and accurate disclosures ."). 199,136 shares") .)

Equally unpersuasive is Defendants ' contention that *6 Defendants next argue that the Intel press release they cannot be held liable for statements merely of was "forward -looking" and therefore subject to the " corporate optimism. "The corporate puffery rule Safe Harbor" clause of the PSLRA. Under that applies to loose optimism about both a company's provision, a "forward-looking" statement is not current state of affairs and its future prospects." actionable if. (1) the statement is "identified as ... Fitzer, 119 F.Supp.2d at 23 . While courts continue " forward-looking .. . and is accompanied by to find immaterial as a matter of law a certain kind meaningful cautionary statements identifying of rosy affirmation commonly heard from corporate important factors that could cause actual results to managers and numbingly familiar to the differ materially .. .; or" (2) it is "immaterial ; or" (3) marketplace," Shaw v. Digital Equip. Corp., 82 "the plaintiff fails to [plead] that the F.3d 1194, 1217 (1st Cir. 1996), superseded on forward-looking statement .. . was made with actual other grounds by statute as recognized in Greebel, knowledge .. . that the statement was false or 194 F.3d at 197, the recent trend is to consider misleading." 15 U.S.C. § 78u-5(c)(1)(A)-(B) ; see

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also Greebel, 194 F .3d at 201 (recognizing that the conclude is that the cautionary language warned that statute is disjunctive, providing "safe harbor" via " Wave's agreement with Intel was not exclusive . It alternative inlets"). did not counter sufficiently the strong implication that the Intel partnership would lead to substantial There are several problems with this contention . deployment and thus, a significant revenue stream . First, "the subject matter of the alleged See Shaw 82 F.3d at 1213 (noting how the " misrepresentation [ ]"-the terms of the Intel surrounding context" failed to caution "against such agreement -"was a matter of fact rather than an implication with sufficient clarity to be thought conjecture by the time the statement [ ] w[as] made. to bespeak caution") . Thus, the statement[ ] cannot be characterized as forward-looking , and the safe harbor provision of *7 Ultimately, because "reasonable minds could . .. the PSLRA does not apply." In re Sepracor, Inc. disagree as to whether the mix of information in the Sec. Litig., 308 F.Supp.2d 20, 28 (D .Mass.2004). [allegedly actionable] document is misleading," the first prong of the statutory safe harbor provision Assuming arguendo that the statement in question cannot "provide[ ] basis for dismissal as matter of was "forward-looking," Defendants "boilerplate" law." Id at 1214 (citation omitted) . disclaimer at the close of the press release was "not sufficiently detailed to fall within the protections of As for the third prong, FN13 Defendants note that the `bespeaks caution' doctrine ." In re Focus the "actual knowledge" required is a higher level of Enhancements, Inc. Sec. Litig., 309 F.Supp.2d 134, scienter than the "recklessness" required by the 162 (D.Mass.2001). PSLRA, see Greebel, 194 F.3d at 201 ; thus, they contend that allegations that satisfy 15 U .S.C. § In their disclaimer, Defendants noted that the 78u-4(b)(2) do not, ex proprio vigore, satisfy 15 following factors could cause the Company's U.S.C. § 78u-5(c)(l)(B) . performance "to be materially different" from that " implied" by the press release : (1) "general The problem with this argument is that it fails to economic and business conditions," (2) "the ability account for the different procedural stages the to fund operations," (3) "the ability to forge respective provisions were designed to address . partnerships required for deployment," (4) "changes Whereas Section 78u-4(b)(2) specifies the in consumer and corporate buying habits," (5) "chip requirements for a "complaint," Section development and production," (6) "the rapid pace 78u-5(c)(1)(B) states what a plaintiff must "prove" of change in the technology industry," and (7) " in order for a defendant to be found "liable " other factors over which Wave Systems Corp . has little or no control ." FN12 Mindful of the First Circuit's consistent position " that the rigorous standards for pleading securities Among these factors, only the second and third-the fraud do not require a plaintiff to plead evidence," ability to "fund operations" and "forge partnerships Cabletron, 311 F.3d at 33 ; see also In re Credit required for deployment-relate even tangentially to Suisse First Boston Corp., 431 F.3d at 46 ("[A] the subject matter of the press release. While one pleading setting forth a section 10(b) claim need not could conclude that these factors put prospective ... elaborate upon every jot and tittle of evidentia ry investors on notice that the announced partnership detail ."); Maldonado v . Dominguez, 137 F.3d 1, 9 with Intel might not lead to the deployment of Wave (1st Cir. 1998) ("[W]e . .. cannot expect plaintiffs to products, this court must draw its inferences in plead `fraud with complete insight' before Plaintiffs' favor. In re Credit Suisse First Boston discovery is complete ."), the court must conclude Corp., 431 F.3d 36, 45 (1st Cir,2005) (citing In re that Plaintiffs' allegations of "actual knowledge" are Colonial Mortgage Bankers Corp ., 324 F.3d 12, 15 sufficient to preclude safe harbor access via this (1st Cir.2003)). final "alternative inlet ."

In drawing such inferences, the most the court ca n

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b. Scienter. Wave's stock artificially ; and (2) Sprague and Feeney' s insider sales . Having established that the Intel press release omitted a material fact, the court must now consider Defendants assert that Greebel established a rule in the question of scienter. "In order to prevail in a this circuit "that an alleged motive and opportunity, lOb-5 action , a plaintiff must show that defendants without more, cannot establish a strong inference of had .. . the ` intent to deceive , manipulate , or defraud. scienter ." FN14 In fact, Greebel explicitly rejected " ' Geffon v. Micrion Corp., 249 F.3d 29, 35 (1st the argument that "facts showing motive and Cir.2001) (citing Ernst & Ernst v. Hochfelder, 425 opportunity can never be enough to permit the U.S. 185 , 193 n. 12, 96 S.Ct. 1375, 47 L .Ed.2d 668 drawing of a strong inference of scienter"-a (1976)). Scienter , in this case, may be established determination recognized and reiterated by by showing that Defendants knowingly or recklessly subsequent First Circuit opinions . See, e.g., issued the materially misleading press release . See Cabletron, 311 F.3d at 39 (citing Greebel, 194 F.3d Aldrige, 284 F.3d at 82; see also Greebel, 194 F.3d at 197). at 198 (defining the recklessness required as "a highly unreasonable omission, involving . .. an While Greebel did make clear the insufficiency of " extreme departure from the standards of ordinary catch-all allegations that defendants stood to benefit care, and which presents a danger of misleading from wrongdoing and had the opportunity to buyers or sellers that is ... so obvious the actor must implement a fraudulent scheme," 194 F .3d at 197 have been aware of it") . (citation omitted), this is not a case where Defendants merely had the common motive to In making the scienter determination, a court must promote corporate success "possessed, to a certain evaluate "the totality of the circumstances ." Crowell degree, by every corporate officer," In re v. Ionics, Inc ., 343 F.Supp.2d 1, 13 (D.Mass.2004) Stratosphere Corp. Sec. Litig., I F.Supp.2d 1096, (citing Cabletron, 311 F.3d at 40). The First Circuit 1116 (D .Nev.1998). On the contrary, the complaint has "considered many different types of evidence as paints the picture of a company nearly a quarter relevant to show scienter," Greebel, 194 F .3d at 196 billion dollars in debt and so desperate for cash it (citations omitted), and has permitted plaintiffs to " would agree to private placement terms onerous combine various facts and circumstances indicating enough to bring it to the proverbial brink . (See Am . fraudulent intent," Aldridge, 284 F.3d at 82; see Compl. 113-7.) also Cabletron, 331 F.3d at 40 (noting that while " [e]ach individual fact about scienter may provide In short, Defendants had "more than the usual only a brushstroke," the "resulting portrait" can concern by executives" to increase the value of meet the "strong inference" requirement) . Wave's stock; "the executives' careers and the very survival of the company were on the line ." *8 Ultimately, "[i]nferences must be reasonable and Cabletron, F.3d at 39; see also Aldridge, 284 F.3d strong-but not irrefutable . ... Plaintiffs need not at 83 ("When financial incentives to exaggerate foreclose all other characterizations of fact, as the earnings go far beyond the usual arrangements of task of weighing contrary accounts is reserved for compensation based on the company's earnings, the fact finder ." Aldridge, 284 F.3d at 82 (citing they may be considered among other facts to show Helwig v. Vencor, Inc., 251 F .3d 540, 553 (6th scienter."); Greebel, 194 F.3d at 196 (citation Cir.200 1)). omitted) (recognizing the relevance of "the self-interested motivation of defendants in the form In light of these standards, the facts pled clearly of saving their salaries or jobs") . give rise to a strong inference that Defendants intended to perpetrate a fraud on the market when Even where dire circumstances alone might fall they issued the Intel press release . In support of this short of what the PSLRA and Rule 9(b) require, conclusion, two factors are particularly significant : allegations of insider trading "provide additional (1) Defendants ' "motive and opportunity" to in flate ballast to [Plaintiffs'] argument for scienter."

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Cabletron, 311 F3d at 40. Here, Defendants aver Feeney-80% and 50%, respectively-pale in that under Greebel, "mere pleading of insider comparison to those retained by the Advanta trading . .. is not enough ." 194 F.3d at 198 (citation insiders . See id. at 540 (noting insiders retained omitted) . They maintain that allegations of insider 95% and 93%, respectively, of their total holdings). sales by Sprague and Feeney are inconsequential in light of Plaintiffs' failure to illustrate how such sales Accordingly, this court concludes that Plaintiffs were "unusual, well beyond the normal patterns of have satisfied the PSLRA's scienter requirement. trading by those defendants ." Id.

*9 If Plaintiffs, in seeking to establish scienter, c. Reliance. relied solely upon the insider sales in question, their failure to illustrate how such sales were inconsistent As the First Circuit recently observed, "[r]equiring with past trading practices might be fatal. See Focus proof of individualized reliance ... would effectively Enhancements, 309 F.Supp .2d at 162 (citation preclude securities fraud class actions ." In re omitted). However, as previously discussed, Xcelera. com Sec. Litig., 430 F.3d 503, No . Plaintiffs' allegations of insider trading are ancillary 05-1221, 430 F .3d 503, 2005 WL 3384684, at *3 in nature. They buttress allegations concerning (1st Cir.2005). Defendants' motive and opportunity, and Plaintiffs' " To avoid this result, the Supreme Court has case becomes . .. stronger . .. when the allegations are recognized the fraud-on-the-market theory, which considered together." Crowell, 343 F.Supp.2d at 16 relieves the plaintiff of the burden of proving ("The way in which the allegedly fraudulent acts fit individualized reliance on a defendant's together and reinforce one another strongly suggests misstatement, by permitting a rebuttable a conscious course of conduct."). presumption that the plaintiff relied on the " integrity of the market price" which reflected that In Greebel, the court began by examining the misstatement . context of the alleged insider sales . Because none of the "key players" sold stock "at the high points of In re PolyMedica Corp. Sec. Litig., No. 05-1220, the stock price," but instead "waited to sell until 2005 WL 3384083, at *5 (1st Cir. Dec.13, 2005) . after .. . an announcement which caused the price of the stock to fall," the Greebel court determined that Defendants argue that the market price for Wave's the timing of the sales in question was not stock did not reflect any alleged misstatements . suspicious. 194 F .3d at 206 . They point out that when Sprague told analysts that the Intel deal was a non-exclusive licencing In contrast, Sprague and Feeney's sales occurred agreement, "the market's reaction, as reflected by after an announcement that caused the price of the Wave's stock price, was virtually non-existent ." stock to rise and came at a time when they (Dkt. No. 70, Defs.' Reply Mem . Supp. Mot. possessed material non-public information . Dismiss 1 (noting "a mere two cent (0 .6%) Consequently, the timing of such sales might be difference from the day prior to the disclosure to the viewed as quite suspicious. day after") .) Since "the concept of materiality translates into information that alters the price of Defendants maintain that the Wave stock Sprague the firm's stock," In re Burlington Coat Factory and Feeney did not sell rebuts any inference that Sec. Litig., 114 F.3d 1410, 1425 (3rd Cir .1997), they were out to capitalize on an inflated price . cited with approval in PolyMedica, 2005 WL They cite In re Advanta Corp. Sec. Litig., 180 F.3d 3384083, at * 10, Defendants maintain that the terms 525 (3rd Cir . 1999), a case where the Third Circuit of the Intel agreement were immaterial as a matter found that holdings retained by inside sellers of law. Consequently, their argument runs, Plaintiffs suggested "they had every incentive to keep [the are not entitled to the presumption of reliance the " company] profitable." Id. at 541 . Unfortunately for fraud on the market" theory affords. See Basic, 485 Defendants, the holdings retained by Sprague and U.S. at 248 n . 27 (finding that "in order to invok e

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the presumption, a plaintiff must allege" among Id. at 1630. other things, "that [Defendants'] misrepresentations were material"). Here, Plaintiffs claim that Defendants artificially inflated Wave's stock during the class period by : (1) *10 The flaw in this argument is that it focuses on failing to disclose material information about the Sprague's "disclosure" in isolation . During the Company's relationship with Intel ; and (2) making conference call with analysts, Sprague did numerous misrepresentations regarding the acknowledge that neither of the Company's new likelihood that this relationship would fulfill partners was obligated to purchase or use any Wave Defendants' earlier predictions of a significant products or services. However, Sprague revenue stream. (Am . Compl. ¶ 11-12 (alleging " subsequently predicted that Wave's relationship Defendants pumped up the value of the Company's with Intel would soon be a significant revenue stock though materially false and misleading source and indicated that Wave insiders were "very statements," which "caused Wave's stock to comfortable" about the Wave's capacity to continue skyrocket" from "$0 .84 per share" to "$4 .42 per operations until significant revenue arrived. FN15 share").)

Drawing "all reasonable inferences from the Next, Plaintiffs allege that news of an SEC particular allegations in [Plaintiffs'] favor," investigation relating to Defendants' misleading Aldridge, 284 F.3d at 78, this court must conclude statements "shocked the market, with shares falling that Sprague's "disclosure" came in the midst of 17.13%, or $0.31 per share, to close at $1 .50 per additional misrepresentations designed to maintain share ... on December 19, 2003." (Id. at ¶ 13 .) the Company's artificially inflated value . Consequently, the market's quiescence following the The complaint thus "contains the very allegations August 14th conference call does not preclude a regarding share price decrease and public exposure presumption of reliance . FN16 to the truth the Supreme Court found lacking in the Dura complaint." In re Immune Response Sec. Litig., 375 F.Supp.2d 983, 1025 (S.D.Cal.2005). d. Loss Causation. Defendants contend that Wave's disclosure of the Recently, the Supreme Court established that SEC investigation was not an admission that earlier FN defrauded investors must do more than allege that " statements were materially misleading . 17 While the price of the security on the date of purchase was this may be so, ' Dura does not require that a inflated because of [a] misrepresentation." Dura, corrective disclosure precede a stock's decline. 125 125 S .Ct. at 1629 (citation omitted) . To withstand a S.Ct. at 1631, 1632 (discussing the implications of motion to dismiss, they must also plead actual stock's initial inflation "before the relevant truth economic loss and proximate causation . begins to leak out " and "after the truth makes its way into the market place ") (emphasis added). FN1 8 Defendants contend that these plaintiffs, like those in Dura, have not done so . Once more, their argument is unavailing. *11 Ultimately, the duration of the class period may make it difficult for Plaintiffs to prove that In Dura, the Court found that the complaint alleged Defendants' misrepresentations caused their the following (and nothing significantly more than economic loss . See id at 1632 ("[T]he longer the the following) about economic losses attributable to time between purchase and sale, the more likely . .. [Defendants'] misstatement: "In reliance on the [it is] that other factors caused the loss."). However, integrity of the market, [Plaintiffs] ... paid in light of Dura 's acknowledgment that artificially inflated prices for [Defendants'] securities Fed.R.Civ.P. 8(a)(2) applies to the pleading of " and . .. suffered "damage[s]" thereby . economic loss and proximate causation, this court must conclude that Plaintiffs have furnished

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Defendants "with some indication of [their] loss and the entanglement test":the complaint alleges that an the causal connection that [they have] in mind." Id. analyst repo rt ... stated, on the basis of information at 1634 . from [an individual defendant] and other [company] executives , that the [product] would "ship in volume in the second week of April ." 2. August 4, 2003, IBM Press Release. Id. at 38. Due to the high degree of similarity In a press release issued on August 4, 2003, Wave between this allegation and the one in question, the stated that its "partnership with IBM will court concludes that statements made in the New significantly help us in our objective to deliver open York Times article are actionable. and interoperable solutions to business customers." (Am.Compl.¶ 42.) This statement is actionable for it has "an aspect that encompasses a representation 4. August 11, 2003, Form S-3/A. of present fact." Shaw, 82 F.3d at 1213; see also No. Nine, 51 F.Supp .2d at 19 (holding that when *12 Plaintiffs allege that statements in the Plaintiffs "challenge the truthfulness of a claim Company's Form S-3/A dated August 11, 2003, regarding present facts " the " `bespeaks caution' describing Wave's purported deals with Intel and defense is inapplicable"). It is also materially IBM as "material changes" were materially false misleading in that it failed to disclose facts that " and misleading . (Am.Compl.1J 56.) In response, would have been viewed by the reasonable investor Defendants point to express disclaimers that as having significantly altered the `total mix' of accompanied these statements, entitling them to safe information made available." Basic, 485 U.S. at harbor protection . (See Dkt. No. 59, Defs.' Mem. 231-32 (citing TSC Indus., 426 U. S. at 449) . Supp. Mot. Dismiss 17 ; Dkt. No. 70, Defs .' Reply Mem. 16.) The problem with this contention has already been noted : because the terms of the Intel 3. August 5, 2003, New York Times Article. and IBM deals were matters of historical fact by the time Form S-3/A was filed, the statements in On August 5, 2003, Plaintiffs allege that "a Wave question cannot be construed as forward-looking, spokesperson confirmed and furthered the market's and the PSLRA's safe harbor provision does not perception of the Company's materially misleading apply . See In re Stone & Webster, Inc., Sec. Litig., August 4th announcement" by informing the New 414 F.3d 187, 213 (1st Cir .2005), reh'g denied by York Times that "IBM computers with built-in 424 F .3d 24 ("The mere fact that a statement Wave security would be available in the fourth contains some reference to a projection of future quarter of [2003]," (Am .Compl.¶ 45.) events cannot sensibly bring the statement within the safe harbor if the allegation of falsehood relates Defendants maintain that they cannot be held liable to non-forward-looking aspects of the statement ."). for a statement made by a reporter in an Thus, the court concludes the challenged statements independent newspaper . In Cabletron, however, the are actionable . First Circuit determined that [L]iability may attach to an analyst's statements where the defendants have expressly or impliedly 5. August 14, 2003, Conference Call. adopted the statements, placed their imprimatur on the statements, or have otherwise entangled As previously discussed, the court deems actionable themselves with the analysts to a significant degree . comments made by Sprague during the conference call with analysts concerning the likelihood that 311 F.3d at 37-38 (citing Schaffer v. Timberland Wave's relationship with Intel would soon be a Co., 924 F .Supp. 1298, 1310 (D .N.H.1996)). The significant revenue source and the comfort level of Cabletron court subsequently provided the Wave insiders as to the Company's capacity to following example of an allegation that satisfied " continue operations until significant revenu e

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arrived . Cf. Sepracor, 308 F.Supp.2d at 34 (finding F.Supp.2d 46, 52 (D.Mass.2003) (citing Cabletron, statements could not be "deemed mere puffery" 311 F.3d at 34). The court thus concludes that this when allegations raised "strong inference that statement, as part of the basis for Plaintiffs' claims, Defendants were aware of, or recklessly is sufficient to survive the motion to dismiss . disregarded, undisclosed facts tending to seriously undermine the accuracy of any predictions"). 8. August 22, 2003, Prospectus.

6. August 18, 2003, Prospectus. *13 Similarly actionable is Defendants' alleged representation of the IBM compatibility as a " On August 18, 2003, Defendants again licensing agreement" in a prospectus filed by the characterized the Intel and IBM deals as "material Company on August 22, 2003 . changes" in a prospectus filed with the SEC . This characterization, Plaintiffs maintain, was materially false and misleading . (Am .Compl.¶ 64.) The court 9. November 13, 2003, Press Release. disagrees and concludes the statements in question are not actionable . By August 18, 2003, the market Finally, Plaintiffs contend that statements made by was aware that Wave's Intel agreement lacked a the Company in a press release issued November minimum licensing requirement, and its IBM deal 13, 2003, purporting to "clearly see the growing was not fee producing . Consequently, a reasonable momentum for trusted computing in the marketplace investor would not have placed any significance on " and conveying expectations of "substantial growth the allegedly "withheld or misrepresented information." Basic, 485 U.S. at 240 . were materially false and misleading at the time they were made. Defendants knew that the Company's prospects for growth were no more clear 7. August 20, 2003, Form S-3 Registration than they were at the onset of the Class Period . Statement. (Am.Compl.¶ 68.) The November press release is Plaintiffs challenge a statement in the Form S-3 a clear case of puffery . The statements in question Registration Statement filed by the Company on are "so vague [and] so lacking in specificity . .. that August 20, 2003, characterizing the IBM " no reasonable investor could find them important to partnership" as a "licensing agreement ." the total mix of information available ." Shaw, 82 (Am.Compl.¶ 62.) This allegation stands in F.3d at 1217 . Accordingly, the November 13, 2003 contrast to previous ones in that Plaintiffs claim the press release cannot provide the basis of any claim . statement is not merely incomplete but false . (Idd, at ¶ 64.) B. Pleading of Individual Defendants' Liability. At first blush, this allegation appears "more quibble than material." In re PLC Systems, Inc . Sec. Litig., Since a majority of the actionable statements were 41 F.Supp.2d 106, 119 (D.Mass.1999). It is difficult issued by Wave, Plaintiffs have clearly set forth a to discern how a reasonable investor might claim against the Company that satisfies the dictates differentiate news of a non-exclusive licensing of Rule 9(b) and the PSLRA. See Cabletron, 311 agreement with no minimum licensing requirements F.3d at 40 ("The scienter alleged against the from an announcement of product compatibility . company's agents is enough to plead scienter for the That being said, "[t]he materiality of a given company .") statement" is generally regarded in this circuit as " ` a question of fact that should . .. be left to a jury As for Sprague and Feeney, the complaint alleges rather than resolved by the court on a motion to that each "held positions that would have given dismiss." ' In re PerkinElmer, Inc. Sec. Litig., 286 them not only access to , but close familiarity with,

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the details of [Wave's] affairs ." PerkinElmer, 286 Plaintiffs' cause of action against Sprague and F .Supp.2d at 54-55 . At all relevant times, Sprague Feeney for control person liabili ty remains viable. served as the Company's President and Chief Stumpf v. Garvey, No. 03-cv-1352-PB, Executive Officer, and Feeney as Wave's Chief 02-MDL-1335-PB, 2005 WL 2127674, at *13 n. 16 Financial Officer . (Am.Compl.¶¶ 20, 21 .) (D.N.H. Sept.2, 2005).

Plaintiffs also contend that Sprague himself made several statements deemed actionable, and that both IV. CONCLUSION individuals sold significant amounts of Wave stock while in possession of material non-public For the reasons set fo rth above, Defendants' Motion information. Finally, both Sprague and Feeney to Dismiss is hereby ALLOWED as to Statements 6 signed SEC filings containing statements deemed to and 9 and DENIED as to Statements 1-5 and 7-8 . be actionable . See Cabletron, 311 F.3d at 41 . FN 19 Based on the foregoing, the court finds that the Of course, finding allegations sufficient to complaint adequately states a claim of securities withstand a motion to dismiss is far cry from fraud against the individual defendants . finding Defendants liable . See Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 365-66 (1994), superseded on other grounds by statute as C . Rule 20(a). recognized in Greebel, 194 F.3d at 197 ("Despite our conclusion that certain allegations survive Section 20(a) of the Securities Exchange Act of threshold consideration, we note that plaintiffs 1934 provides: remain a great distance from actually proving Every person who, directly or indirectly, controls securities fraud ."). This court's conclusion that any person liable under any provision of this Plaintiffs' Rule lOb-5 and Section 20(a) "claim[s] chapter or of any rule or regulation thereunder shall survive[ ] a motion to dismiss is only that . The also be liable jointly and severally with and to the defendants may yet prevail once the facts of the same extent as such controlled person to any person case are further developed ." Aldridge, 284 F.3d at to whom such controlled person is liable, unless the 84 . controlling person acted in good faith and did not directly or indirectly induce the act or acts The clerk will set the case for a Rule 16 conference constituting the violation or cause of action . to establish a schedule for completion of all pre-trial proceedings . In re Stone & Webster, Inc ., Sec. Litig., 424 F.3d 24, 26 n . 1 (1st Cir.2005) (quoting 15 U.S.C. § 78t-1(a)). Having determined that Plaintiffs have FN1 . No motion for class certification has sufficiently pled a violation of Rule lOb-5, the court yet been filed, and no class has yet been must now ask whether Sprague and Feeney " certified . When such a motion is filed, the actually exercise[d] control over the company ." parties will need to address the issues Aldridge, 284 F .3d at 85 raised in two recent First Circuit decisions : In re PolyMedica Corp. Sec. Litig., No. *14 Ordinarily, "[c]ontrol is a question of fact" not 05-1220, 2005 WL 3384083 (1st Cir . to be "resolved summarily at the pleading stage ." Dec.13, 2005), and In re Xcelera.com Sec. Cabletron, 311 F.3d at 41 (citation omitted) . The Litig., 430 F .3d 503 (2005). present case affords no reason to deviate from this standard practice as Defendants' entire Rule 20(a) FN2. Plaintiffs concede that John E. argument rests upon the premise that Plaintiffs Bagalay, Jr. was not properly named as a inadequately pled an underlying predicate violation . defendant. To make sure the record is Because Defendants' motion to dismiss the Rule clear, the court hereby dismisses all claims lOb-5 claim will be denied, at least in part, against John E. Bagalay, Jr.

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FN3 . Many of the facts will be taken (1st Cir . 1996); Serabian v. Amoskeag verbatim from Sachs v . Sprague, No. CIV. Bank Shares, Inc., 24 F.3d 357, 368 (1994) A. 04-30032-MAP, 2005 WL 3116592 ; Greenstone v. Cambex Corp., 975 F.2d (D.Mass . Nov.22, 2005). Because identical 22, 25 (1st Cir.1992); and Romani v. allegations sit at the core of the two cases, Shearson Lehman Hutton, 929 F.2d 875, there is no need to alter significantly the 878 (1st Cir . 1991)). factual recitation . FN9. Detailed discussion of the four FN4. On August 5, 2003, a Company elements as regards the July 26, 2003 press spokesperson told the New York Times that release will permit a shorter analysis of the "IBM computers with built-in Wave other eight alleged misrepresentations . security would be available in the fourth quarter of this year." (Id. at ¶ 45 (citation FN10. Defendants' preliminary argument omitted) .) that the press release was literally accurate overlooks the fact that literal accuracy " FN5 . This disclosure came after the close does not preclude liability under federal of the market. securities laws ." Lucia v. Prospect St. High Income Portfolio, Inc., 36 F.3d 170, FN6. A ninth case, Trebitsch v. Wave 175 (1st Cir.1994). As the First Circuit Systems Corp., 04-266-JCL, was originally recognized in Lucia: filed in the District of New Jersey before Some statements, although literally being transferred to this court. accurate, can become, through their context and manner of presentation, FN7. The seven other cases are : Streicher devices which mislead investors . For that v. Wave Systems Corp., C.A. reason, the disclosure required by the 04-30026-MAP ; Dawod v. Wave Systems securities laws is measured not by literal Corp., C.A. 04-30029-MAP ; Chess v. truth, but by the ability of the material to Wave Systems Corp ., C.A. accurately inform rather than mislead 04-30037-MAP ; Picker v. Wave Systems prospective buyers. Corp., C.A. 04-30040-MAP; Boham v . Id (quoting McMahan v. Wherehouse Wave Systems Corp ., C.A. Entm't, Inc., 900 F .2d 576, 579 (2nd 04-30041-MAP ; Suo v. Wave Systems Cir. 1990)). Corp., C A. 04-30042-MAP; and Schulman v. Wave Systems Corp., C.A. FN 11 . "[I]t has been said that the `puffing' 04-30043-MAP . concept in the securities context has all but gone the way of the dodo ." 69A FNS. While the First Circuit's application Am.Jur.2d Securities Regulation-Federal § of Fed.R.Civ.P. 9(b) in pre-PSLRA 1118 (2005) (citation omitted) . This securities actions was "congruent and observation may be somewhat hyperbolic . consistent" with the standards set forth in § See Orton v. Parametric Tech. Corp., 344 78u-4(b)(1), Greebel v . FTP Software, Inc., F.Supp .2d 290, 301 (D.Mass.2004) 194 F .3d 185 , 193 (1st Cir.1999), " (finding comment that company was " pre-Act case law" in this Circuit "had used position[ed] .. . for long-term growth" a " both the language of `strong' inference classic example of non-actionable and of `reasonable ' inference," id. at 197 corporate puffery"). Still, dismissals on (noting the use of "reasonable inference" this ground are increasingly rare. language in Gross v. Summa Four Inc., 93 F.3d 987 , 996 (1st Cir. 1996); Shaw v. FN12. (Dkt. No. 72, App. Supp. Defs.' Digital Equip. Corp., 82 F.3d 1194, 1224 Mot. Dismiss , Ex. 5.) Defendants hav e

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submitted copies of the relevant press FN16. Defendants may seek to rebut this releases, conference call transcript, and presumption at the class certification stage SEC filings in conjunction with their where the dictates of Polymedica and motion to dismiss. Because Plaintiffs have Xcelera.com will control . admitted the authenticity of these documents, this court may consider them FN17. (Dkt. No. 79, Defs.' Mot. in ruling on Defendants' 12(b)(6) motion . Supplemental Authority 4.) Defendants See Watterson v . Page, 987 F.2d 1, 4 (1st also submit that , during oral argument, " Cir. 1993). this court recognized the absence of any necessary casual link between any FN13 . Defendants wisely concede the allegedly misleading statements and inapplicability of the second prong-the Wave's drop in stock price following the materiality of the press release (see Dkt . announcement of the SEC investigation in No. 70, Defs .' Reply Mem . Supp. Mot. December, 2003 ." (1dd, at 3 n. I (citing Dismiss 3)-for it would strain credulity to Dkt. No. 75, Tr. Hr'g 24).) suggest that investors who flocked to It should come as no surprise that "[m]any Wave's stock in the wake of the Intel press judges use oral argument as an opportunity release did not consider the information it ... to focus the argument , or to test the conveyed significant to the total mix . extreme implications of a litigants position . A court speaks authoritatively , however, FN14. (See Dkt. No. 59, Defs.' Mem. only in its opinions, orders, and judgments . Supp. Mot. Dismiss 37 (citing Greebel, " Mgmt Inv. Funding Ltd. v. Merrill 194 F.3d at 197) ; Dkt. No. 70, Defs .' Lynch, Pierce, 2000 WL 145461, at *5 n . Reply Mem . Supp. Mot. Dismiss 20 (" 6 (S.D.N.Y.2000), rev'd on other grounds Allegations of motive and opportunity . .. by 232 F.3d 153 (2nd Cir.2000); see also are never enough by themselves to create a Graphic Arts Intern . Union, Local 97-B v. strong inference of scienter."),) Haddon, 489 F.Supp. 1088, 1094 (D.C .Pa. 1979) ( "Assuming a devil's FN15 . Defendants stress that the comfo rt advocate role is a familiar ploy of the Sprague expressed did not concern "any neutral decision-maker ."). forecast regarding revenue or Intel.... Rather, the quoted comments were simply FN18. See also Evan R . Chester & J. about whether the Company would be able Stephen Beke, Loss Causation Post-Dura, to stay in business to see any potential 1517 Practicing L . Inst. Corp. L. & Prac. benefits from recent developments in the Handbook Series 1277, 1282 (2005) (" market." (Dkt . No. 70, Defs.' Reply Mem . Dura ... did not purport to address whether Supp. Mot. Dismiss 7-8.) Defendants may plaintiffs in misrepresentation and ultimately persuade the factfinder that this omission cases ... need explicitly allege interpretation is more compelling, but a that the subject matter of the alleged finding could as easily be made that the misrepresentations or omissions was comments regarding "recent developments " revealed to the market by way of some were themselves materially misleading. corrective disclosure' .... ."). . Cf. Swack v. Credit Suisse First Boston, 383 F. Supp.2d 223, 240 (D .Mass .2004) FN19 . The complaint alleges that Sprague (refusing to dismiss in light of finding that " and Feeney signed Wave's Form 10-K/A Defendants' conduct could have tempered filed with the SEC on June 30, 2003, but a drop in price that would otherwise have does not explicitly allege that the occurred") . individual defendants signed any other SEC filings . "A court may, however, in

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evaluating ... allegations [in a complaint,] look to documents the authenticity of which are not disputed by the parties, to documents that are central to the plaintiffs claim, and to documents that are referenced in the complaint." Garvey v. Arkoosh, 354 F.Supp.2d 73, 79 (D.Mass.2005) (citing Watterson, 987 F.2d at 3). D.Mass.,2006. Brumbaugh v, Wave Systems Corp . --- F.Supp.2d ----, 2006 WL 52751 (D .Mass.)

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• 2004 WL 2194760 (Trial Motion, Memorandum and Affidavit) The Trebitsch Group's Memorandum of Points and Autorities in Opposition to Competing Lead Plaintiff Motions (Apr. 16, 2004) • 2004 WL 2194836 (Trial Motion, Memorandum and Affidavit) The Trebitsch Group's Memorandum of Points and Autorities in Opposition to Competing Lead Plaintiff Motions (Apr. 16, 2004) • 2004 WL 2194857 (Trial Motion, Memorandum and Affidavit) The Trebitsch Group's Memorandum of Points and Autorities in Opposition to Competing Lead Plaintiff Motions (Apr. 16, 2004) • 2004 WL 2194870 (Trial Motion, Memorandum and Affidavit) The Trebitsch Group's Memorandum of Points and Autorities in Opposition to Competing Lead Plaintiff Motions (Apr. 16, 2004) • 2004 WL 2194877 (Trial Motion, Memorandum and Affidavit) The Gabriele Group's Memorandum in Further Support of Their Motion for Appointment As Lead Plaintiffs and in Opposition to All Other Lead Plaintiff Motions (Apr . 16, 2004) • 2004 WL 2194890 (Trial Motion, Memorandum and Affidavit) The Trebitsch Group's Memorandum of Points and Autorities in Opposition to Competing Lead Plaintiff Motions (Apr . 16, 2004) • 2004 WL 2194904 (Trial Motion, Memorandum and Affidavit) The Trebitsch Group's Memorandum of Points and Autorities in Opposition to Competing Lead Plaintiff Motions (Apr. 16, 2004)

END OF DOCUMENT

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Only the Westlaw citation is currently available . [2] Federal Civil Procedure €164 170Ak164 Most Cited Cases Class representative must be part of class and United States District Court, possess same interest and suffer same injury as class E.D. Virginia. members . Fed.Rules Civ.Proc.Rule 23(a), 28 in re BEARINGPOINT, INC . SECURITIES U.S.C.A. LITIGATION. No. Civ.A. 1 :05CV454. [3] Federal Civil Procedure X164 170Ak164 Most Cited Case s Jan. 17, 2006. [3] Federal Civil Procedure €165 Background : Investors brought putative class 170Ak165 Most Cited C ases action against strategic consulting corporation, Commonality and typicality requirements do not alleging securities fraud under 1934 Act . Plaintiffs require that members of class have identical factual moved for class certification. and legal claims in all respects ; thus, mere existence of individualized factual questions with respect to Holdings : The District Court, Ellis, J ., held that: class representative's claim will not bar class (1) members of proposed class were so numerous certification. Fed.Rules Civ.Proc.Rule 23(a), 28 that joinder was impracticable ; U.S.C.A. (2) questions of law or fact were common to class ; (3) representative parties would fairly and [41 Federal Civil Procedure X187 adequately protect interests of class; and 170AkI87 Most Cited Case s (4) common questions of law or fact predominated Investors who brought putative class action against over questions affecting only individual members . strategic consulting corporation established that Motion granted . questions of law or fact were common to class and that claims or defenses of representative parties [1] Federal Civil Procedure X18 7 were typical of claims or defenses of class, as required to obtain class certification ; various of 170Ak187 Most Cited Cases corporation's acts and omissions constituting Investors who brought putative class action against alleged securities fraud under 1934 Act were at strategic consulting corporation, alleging securities center of action as to all members of proposed class . fraud under 1934 Act, established that members of Securities Exchange Act of 1934, § 10(b), 15 proposed class were so numerous that joinder of all U.S.C.A . § 78j(b); 17 C .F.R. § 240 .10b-5 ; members was impracticable, as required to obtain Fed.Rules Civ.Proc.Rule 23(a), 28 U.S.C.A. class certification ; since corporation had more than 194 million shares of common stock outstanding, it [5] Federal Civil Procedure X164 was reasonable to infer that there were large 170Ak164 Most Cited Case s numbers of potential class members dispersed To satisfy adequacy requirement for class throughout country . Securities Exchange Act of certification, class representative and his counsel 1934, § 10(b), 15 U .S.C.A. § 78j(b) ; 17 C.F.R. § must: ( 1) possess qualifications and ability to 240.10b-5 ; Fed.Rules Civ .Proc.Rule 23(a), 28 litigate case , and (2) be free of any interests U.S.C.A. antagonistic to those of class. Fed,Rules Civ.Proc.Rule 23(a), 28 U.S .C.A.

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amount should have been recorded as unbilled the year ended December 31, 2004 or its Form revenue . This amendment did not affect 10-Q for the quarter ended March 31, 2005 ; (iii) BearingPoint's income statement for that period or that BearingPoint's internal financial controls its net cash flow for the period. Further, the Form remained ineffective; (iv) that BearingPoint 10Q/A disclosed that : expected its independent auditors to issue an [T]he Company's disclosure controls and adverse opinion on the effectiveness of its internal procedures as of September 30, 2004 were not controls over financial reporting ; (v) that effective to ensure that information required to be BearingPoint had identified that there were items in disclosed by the Company in the reports that it previous period financial statements for the fiscal files or submits under the Securities Exchange year ending December 31, 2004 that would Act of 1934, as amended, is recorded, processed, probably require adjustments ; and (vi) that Moody's summarized and reported within the time periods Investor's Services, Inc . and Standard and Poor's specified in the SEC's rules and forms. Rating Services downgraded BearingPoint's credit *2 This statement was made in the context of the rating in December 2004 to "below investment overstatement of accounts receivable, and along grade." Paradoxically, the market reacted positively with the restatement itself was largely ignored by to this filing : The day following the filing, the market for BearingPoint's shares, which reacted BearingPoint's share price actually rose 13% from by reducing the stock price only 42 cents, from $7.55 per share to $8.53 per share on a trading $9 .42 per share to $9.00 per share on trading volume of 8,067,900 shares . volume of 3,256,700 shares. Corporate announcements that financial statements Similarly, BearingPoint's Form 8-K of December must be restated typically and quickly spawn a spate 16, 2004, which was filed in connection with an of securities fraud lawsuits . BearingPoint's April issuance of convertible debentures, repeated that 20th announcement was no exception. Within management had discovered material weaknesses in weeks several such lawsuits were filed in this its internal control components and noted that district against BearingPoint and its officers . [FN5] failure to address the internal control problems Thereafter, and pursuant to the Private Securities promptly could "materially and adversely impact Litigation Reform Act of 1995 (PSLRA), 15 U .S.C. our business, our financial condition and the market § 78u-4, and Rule 42, Fed .R.Civ.P., the various value of our securities and expose us to litigation lawsuits were consolidated . See In re BearingPoint and scrutiny from private litigants and the Securities Sec. Litig., Civil Action No . 1 :05cv454 (June 27, and Exchange Commission ." The market's reaction 2005). After consolidation, pursuant to 15 U .S.C. § was again quite modest : BearingPoint's share price 78u-4(a)(3)(B), Matrix was selected as lead plaintiff dropped on December 16, 2004 from $8 .48 to owing, in part, to Matrix's sophistication as an $7 .75 per share on a trading volume of 13,329,500 investor and its substantial financial interest at stake shares, and again the next day, on December in the litigation. See In re BearingPoint Sec. Litig., 17,2004 from $7 .75 to $7.59 per share on a trading Civil Action No . 1 :05cv454 (July 26, 2005) . This volume of 19,197,300 shares . Order also approved the appointment of Gold Bennett Cera & Sidener LLP (GBCS) as lead Finally, in its Form 8-K filing of March 18, 2005, plaintiffs counsel . Id. These decisions were in which BearingPoint announced the terms of its confirmed in an Order denying a motion for amended credit agreement with certain lenders, reconsideration of the appointment . See In re BearingPoint also revealed information pertaining BearingPoint Sec. Litig., Civil Action No . to its financial controls, namely : (i) that 1 :05ev454 (August 15, 2005) . BearingPoint expected to take a material goodwill impairment charge of potentially more than $230 *3 Matrix filed its Consolidated Complaint on million; (ii) that BearingPoint had informed the October 7, 2005 alleging various violations of the SEC that it would not timely file its Form 10-K for securities laws. Specifically, Matrix alleges that

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defendants knowingly or recklessly misrepresented that a class action is superior to other available BearingPoint's financial condition by overstating its methods for the fair and efficient adjudication of the earnings and assets by hundreds of millions of controversy ." Fed.R.Civ.P. 23(b)(3). dollars, although the precise size of the overstatement awaits BearingPoint's restated In addition to these principles, it is important to financials. See supra note 2. Accordingly, Matrix bear in mind that "[i]n light of the importance of the seeks certification of the following class : class action device in securities fraud suits," the All persons or entities who purchased or requirements of Rule 23 "are to be construed otherwise acquired the securities of BearingPoint liberally." Gary Plastic Packaging Corp. v. Merrill between August 14, 2003 and April 20, 2005 and Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176, who were damaged thereby . 179 (2d Cir.1990). Thus, any doubts about the Matrix's motion for class certification has been propriety of certification should be resolved in fully briefed and argued and is now ripe for favor of certification . See Esplin v. Hirschi, 402 disposition. F.2d 94, 101 (10th Cir.1968) (in securities cases, "any error, if there is to be one, should be II. committed in favor of allowing the class action ."). The principles governing the certification of plaintiff classes pursuant to Rule 23 are A. well-established . First, the party moving for class 1. Numerosity certification bears the burden of demonstrating that its proposed class meets the requirements found in *4 [1] The numerosity requirement, which is Rule 23 Fed .R.Civ.P. Amchem Prods., Inc. v, seldom disputed in securities fraud cases, is also Windsor, 521 U.S . 591, 614, 117 S.Ct. 2231, 138 undisputed here : BearingPoint does not dispute that L.Ed.2d 689 (1997) . Next, the statute instructs the members of the proposed class are "so courts to determine whether or not to certify a class numerous that joinder of all members is at "an early practicable time" and provides a impracticable ." Fed.R.Civ.P. 23(a). The absence of two-step procedure for analyzing the certification a dispute stems from the fact that during the class issue. See Fed.R.Civ.P. 23 ; Lutz v, Intl Assoc. of period, BearingPoint had more than 194 million Machinists and Aerospace Workers, 196 F.R.D. shares of common stock outstanding, and, while the 447, 450 (E,D.Va.2000) . In the first step, the precise number of shareholders is unknown, it is movant must satisfy the threshold requirements reasonable to infer from this fact that there are contained in Fed.R.Civ.P. 23(a), which include the hundreds,, if not thousands, of potential class following : (1) that the class is so numerous that members dispersed throughout the country . See, joinder of all members would be impracticable ; (2) e.g., Ganesh, LLC v. Computer Learning Centers, that questions of law or fact are common to the Inc., 183 F.R.D. 487, 489 (E .D.Va.1998) (5 .1 class ; (3) that the claims or defenses of the million shares actively traded on NASDAQ representative party are typical of those of the class ; Exchange satisfies numerosity requirement) ; and (4) that the representative party fairly and Garfinkel v. Memory Metals, Inc., 695 F.Supp. adequately protect the interests of the class . See 1397, 1401 (D .Conn.1988). As it would be Fed.R.Civ.P. 23(a). Should the party seeking impracticable to join such a large and certification satisfy these requirements, it must then geographically diverse group, the numerosity demonstrate that the proposed class fits one of the requirement is easily satisfied. three categories of actions identified in Fed.R.Civ.P. 23(b). See Lutz, 196 F .R.D. at 450 . 2. Commonality and Typicality Here, typical of securities fraud cases, the contention is that "questions of law or fact common [2][3] The next two Rule 23(a) requirements, (i) to the members of the class predominate over any that "there are questions of law or fact common to questions affecting only individual members, and the class," and (ii) that "the claims or defenses o f

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the representative parties are typical of the claims or prove that, in connection with the purchase or sale defenses of the class ," are complimentary and of a security, (1) the defendant made a false therefore often considered together . See General statement or omission of material fact (2) with Tel. Co. of Southwest v. Falcon, 457 U.S. 147, 157 scienter (3) upon which the plaintiff justifiably n. 13, 102 S.Ct. 2364, 72 L.Ed.2d 740 ( 1982). As relied (4) that proximately caused the plaintiffs the Supreme Court has explained: damages .' " Gariety, 368 F .3d at 362 (quoting The commonality and typicality requirements of Longman v. Food Lion, Inc., 197 F.3d 675, 682 Rule 23(a) tend to merge . Both serve as (4th Cir.1999)). Members of a proposed class in a guideposts for determining whether under the securities case are especially likely to share particular circumst ances maintenance of a class common claims and defenses . [FN7] This case is no action is economical and whether the named exception. Because various of defendants' acts and plaintiffs claim and the class claims are so omissions are at the center of this case, it follows interrelated that the interests of the class members that there are a number of questions of both law and will be fairly and adequately protected in their fact common to all members of the proposed class, absence. including: (i) whether statements made by the Id. See also Broussard v. Meineke Discount defendants to the investing public during the Muffler Shops, Inc., 155 F .3d 331, 337 (4th proposed class period omitted or misrepresented Cir.1998); Lutz, 196 F .R.D. at 451. In other words, material facts about the business, operations, " 'a class representative must be part of the class financial condition and income of BearingPoint; (ii) and possess the same interest and suffer the same whether defendants acted with knowledge or injury as the class members.' " Lienhart v. Dryvit recklessness in omitting to state and/or Sys., Inc., 255 F.3d 138, 146 (4th Cir.2001) misrepresenting material facts ; (iii) whether the (quoting General Tel. Co., 457 U.S. at 156, 102 market price of BearingPoint's stock was artificially S.Ct. 2364). But it is also true that the commonality inflated during the class period due to any material and typicality requirements do not "require that omissions or misrepresentations ; (iv) whether the members of the class have identical factual and defendants participated in and pursued the common legal claims in all respects." Broussard, 155 F.3d course of conduct described in the complaint; and 331, 344 . Thus, "the mere existence of (v) whether the individual defendants were "control individualized factual questions with respect to the persons" within the meaning of Section 20(a) of the class representative's claim will not bar class Securities Exchange Act . Given this, it is clear that certification ." Gary Plastic, 903 F.2d at 180. In Matrix's claims represent the essential claims of the sum, the premise of class certification is that due proposed plaintiff class, and therefore satisfy the process requires the interests of the party commonality and typicality requirements of Rule representing a class to be substantially similar to 23(a). those of the unrepresented parties. Broussard, 155 F.3d at 338 . This determination, in turn, necessarily Defendants resists this conclusion, contending that requires some discussion of the substantive legal Matrix is subject to a unique defense, namely that issues likely to arise in the litigation of the merits . Matrix's reliance on BearingPoint's past filings was See Gariety v. Grant Thornton, LLP, 368 F.3d 356, unreasonable given the disclosures made in 366 (4th Cir .2004) ("[W]hile an evaluation of the BearingPoint's Form 10-Q/A for the period ending merits to determine the strength of plaintiffs ' case is September 30, 2004, and its Form 8-K filing of not part of a Rule 23 analysis, the factors spelled December 16, 2004 . Defendants argue that these out in Rule 23 must be addressed through findings, filings disclosed the problems associated with its even if they overlap with issues on the merits ."). internal controls, and therefore that Matrix cannot [FN6] plead justifiable reliance on BearingPoint's alleged misstatements when it purchased 882,100 shares of *5 [4] To prevail under § 10(b) of the Securities BearingPoint stock in January of 2005 . Because this Exchange Act and Rule lOb-5, " 'a plaintiff must defense applies only to those members of th e

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proposed plaintiff class who purchased from each member of the proposed plaintiff class BearingPoint stock after these partial disclosures, effectively would have prevented respondents from and because many members of the proposed class proceeding with a class action, since individual purchased their BearingPoint shares before these issues then would have overwhelmed the common alleged disclosures, it follows, according to ones."). defendants, that claims applicable to Matrix are not typical of the class as a whole . *6 To prove that the market for BearingPoint's shares was efficient, Matrix must demonstrate (i) This argument fails because it is clear that that the security was actively traded in sufficiently BearingPoint's November and December 2004 large volumes and (ii) that the share price is disclosures did not render Matrix's reliance on followed by market professionals . Gariety, 368 BearingPoint's past financial filings unreasonable, F.3d. at 368. Because BearingPoint's shares are and therefore that Matrix is not in fact subject to a traded on the New York Stock Exchange, these unique defense that will render its claims requirements are easily met . [FN8] Trading uncommon or atypical . This is so because Matrix is volumes during the relevant periods of disclosure entitled to a "presumption of reliance, based on the were well north of 1 million shares per day ; in fact, proposition that 'an investor who buys or sells stock more than ten million shares were traded on the two at the price set by the market does so in reliance on days following the December 2004 disclosure . And the integrity of the market price .' " Gariety, 368 the day following the April 2005 disclosure, an F.3d at 367 (quoting Basic v. Levinson, 485 U.S. eye-opening 67,749,504 shares changed hands . In 224, 247, 108 S .Ct. 978, 99 L .Ed.2d 194 (1988)) . addition, BearingPoint is followed by investment This presumption is derived from what is generally analysts at more than fifteen investment banks . known as the "fraud-on-the-market theory ." This [FN9] Thus, because the market for BearingPoint's theory and the presumption derived from it are shares, by these criteria, is efficient, Matrix is premised on the notion that in an efficient market, entitled to a presumption that it relied on the the " 'prices of actively traded securities reflect integrity of the share price and that such reliance publicly available information .' " Id. (quoting was reasonable. Daniel R . Fischel, Efficient Capital Markets, the Crash and the Fraud on the Market Theory, 74 Nor do the defendants persuasively rebut this Conrell L .Rev. 907, 911 (1989)). Because the share presumption by pointing to the November and price of an actively traded security in an efficient December 2004 disclosures. The market reacted market is presumed to reflect all publicly available quite modestly to these disclosures, By contrast, the information, Matrix need not demonstrate that its sharp drop in BearingPoint's share price after the reliance on the market price of BearingPoint's April 2005 disclosure confirms the conclusion that shares in January was reasonable, but must simply the prior disclosures had not cured any of demonstrate that BearingPoint's shares trade in an BearingPoint's early misrepresentations, and further efficient market . See Id. at 367-68 . If the market for that not only Matrix, but the entire market had BearingPoint's shares is shown to qualify in this continued to rely on the erroneous financial respect, then not only is reliance presumed, but the statements until the April 2005 disclosure. Because reasonableness of that reliance is also presumed . To Matrix's reliance on the integrity of BearingPoint's hold otherwise, and to require each member of the share price during the period between the 2004 proposed class to demonstrate the reasonableness of disclosures and the April 20, 2005 disclosure was his or her reliance on the price set by the market, reasonable, Matrix is not subject to a unique would effectively foreclose the possibility of the defense. To the contrary, Matrix's claims and class action, thereby eviscerating the Supreme defenses are typical of those of the proposed class Court's teaching in Basic. See Basic v. Levinson, members, from which it follows that Rule 23(a)'s 485 U .S . 224, 242, 108 S .Ct. 978, 99 L.Ed.2d 194 requirements of commonality and typicality are met (1988) ("Requiring proof of individualized reliance here.

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3. Adequacy BearingPoint as a defendant and further, that those plaintiffs will ultimately win a sizeable judgment [5] The final Rule 23(a) requirement is that "the against BearingPoint in that case. Next, defendants representative parties will fairly and adequately suppose that they will win a sizeable judgment protect the interests of the class." Fed.R.Civ.P. 23(a) against BearingPoint in this case . And finally, . To satisfy this requirement the class representative defendants suppose that the possibility of these two and his counsel must: ( 1) possess the qualifications supposed judgments presents class counsel with a and ability to litigate the case ; and (2) be free of any conflict because, it is further supposed, interests antagonistic to those of the class. Lutz, 196 BearingPoint's assets would not be sufficient to F.R.D . at 452 . satisfy the judgment in both cases. This string of suppositions or contingencies is plainly speculative . [6] There is no dispute that both the class And courts sensibly hold that speculative conflicts representative and, more importantly, class counsel of interest do not preclude a finding that class have the ability and the resources to represent the counsel is adequate . See, e.g., Williams v. Empire class. Defendants contend, however, that class Funding Corp., 183 F .R.D. 428, 440 (E .D.Pa.1998) counsel should be disqualified because of a (holding that "merely speculative and hypothetical" purported conflict that arises from its representation conflicts . of class counsel will not bar class of a class of shareholders in another secu rities fraud certification) ; In re Olsten Corp. Sec. Litig., 3 suit in which BearingPoint was, until recently, a F.Supp.2d 286, 296 (E.D.N.Y.1998) (same). This is defendant. That case, In re Peregrine Systems, Inc. especially so, given the procedural protections Sec. Litig., Case No. 02-870 , is pending in the afforded by Rule 23's mandated judicial supervision United States District Court for the Southern of the class litigation and any proposed settlement . District of California, and involves claims that See Rule 23(d) & (e), Fed.R.Civ.P.; see also BearingPoint 's predecessor-in-interest, KPMG Sheftelman v. Jones, 667 F.Supp. 859, 865 Consulting, was involved in certain revenue (N.D.Ga.1987) (holding that any conflicts presented generating transactions recorded by Peregrine by class counsel representing two classes against the Systems, Inc. that were ultimately shown to be same defendant are speculative and can be cured by fictitious . Although originally named as a procedural safeguards) ; Anderson v. Bank of the defendant, BearingPoint was subsequently South, N.A., 118 F.R.D. 136, 149 (M .D.Fla.1987) dismissed as a party in January 2005 on the ground (same). Thus, Matrix and its counsel satisfy the that the only claim against BearingPoint was for adequacy requirements of Rule 23(a) . aiding and abetting a securities fraud, which is not actionable under the securities laws . See Central B. Bank of Denver, N.A. v. First Interstate Bank of [7] The final step in the class certification inquiry Denver, N.A., 511 U.S. 164, 191, 114 S .Ct. 1439, is to determine whether : (1) "questions of law or 128 L.Ed,2d 119 (1993) ("[A] private plaintiff may fact common to- the members of the class not maintain an aiding and abetting suit under § predominate over any questions affecting only 10(b) ."). Although plaintiffs in that case have individual members," and (2) whether "a class moved for an order of final judgment pursuant to action is superior to other available methods for the Rule 54(b), Fed.R.Civ.P., in order to appeal this fair and efficient adjudication of the controversy." decision , they have thus far been unsuccessful . Fed.R.Civ.P. 23(b)(3) . This inquiry appropriately ensures that certification occurs in "cases 'in which *7 So it appears, therefore, that defendants' attack a class action would achieve economies of time, on the adequacy of class counsel rests on a string of effort, and expense, and promote .. . uniformity of suppositions . First, defendants suppose that decision as to persons similarly situated, without plaintiffs in In re Peregrine, although unsuccessful sacrificing procedural fairness or bringing about to date, will ultimately succeed in winning a other undesirable results.' " Amchem Products, Inc. reversal of that district court's ruling dismissing v. Windsor, 521 U.S. 591, 615, 117 S .Ct. 2231, 13 8

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L.Ed.2d 689 (1997) (quoting Adv. Comm. Notes, reasonable reliance will predominate owing to 28 U.S.C .App., p. 697). BearingPoint's partial disclosures in 2004 and March 2005 again fails to appreciate the The inquiry with respect to the predominance presumption the Supreme Court recognized in Basic standard focuses on the issue of liability, and "if the v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 liability issue is common to the class, common L.Ed.2d 194 (1988), namely that the market price of questions are held to predominate over individual efficiently traded securities is presumed to reflect ones." In re Kirschner Medical Corp . Secs. Litig., all publicly available information, and therefore that 139 F.R.D. 74, 80 (D.Md.1991). Damages are less reliance on the market price is necessarily central to the predominance inquiry; courts reasonable. See Id. at 244, 108 S.Ct. 978 ("The generally hold that "differences in damages among market is acting as the unpaid agent of the investor, the potential class members do not generally defeat informing him that given all the information predominance if liability is common to the class ." available to it, the value of the stock is worth the Morris v. Wachovia Sec., Inc., 223 F.R.D. 284, 299 market price.") (quoting In re LTV Sec. Litig., 88 (E.D.Va.2004). Securities fraud cases are F.R.D. 134, 143 (N.D.Tex.1980)). In effect, particularly appropriate candidates for treatment purchasers in a well developed market, as here, may under Rule 23(b)(3) since the elements of the cause assume that the market price accurately reflects all of action generally relate to the acts or omissions of publicly available information, and that reliance on the defendants and because individual damages the market price is, therefore, plainly reasonable . might be too paltry to justify bringing individual Requiring that each member of a proposed class cases. See Amchem Products, Inc . v. Windsor, 521 individually establish the reasonableness of his or U.S . 591, 625, 117 S .Ct. 2231, 138 L.Ed.2d 689 her reliance on the market price would be as (1997) ("Predominance is a test readily met in crippling to efficient class action litigation as certain cases alleging consumer or securities fraud requiring members of a proposed class to establish or violations of the antitrust laws ."). individual reliance on specific misrepresentations . See Basic, 485 U.S . at 242, 108 S .Ct. 978 *8 Defendants contend that the predominance ("Requiring proof of individualized reliance from standard is not met here because the following each member of the proposed plaintiff class individual issues will predominate : (1) whether effectively would have prevented respondents from reliance was reasonable after the partial disclosures proceeding with a class action, since individual contained in the November 10-QA, and the issues then would have overwhelmed the common December and March 8-Ks, and (2) whether ones."). "in-and-out" purchasers of BearingPoint stock, namely those who bought and sold their shares While this presumption may be rebutted by within the class period, can prove loss causation . showing that the BearingPoint share price was not Both of these arguments fail : The first argument affected by the misrepresentations, or that the fails because of the fraud-on-the-market theory and plaintiff knew of the misrepresentations when it the evidence that the entire market had relied on purchased the shares, no such evidence has been BearingPoint's financials despite its partial adduced here, See Basic, 485 U.S. at 248-49, 108 disclosures . The second argument fails because the S.Ct. 978 ("[P]etitioners may rebut proof of the question whether in-and-out traders can prove loss elements giving rise to the presumption, or show causation does not present individual issues that that the misrepresentation in fact did not lead to a alter the clear conclusion that the common issues distortion of price or that an individual plaintiff stemming from defendants' alleged acts or traded or would have traded despite his knowing the omissions in violation of the securities laws that will statement was false."). To the contrary, the dramatic predominate in the litigation. drop in the price of BearingPoint stock after the April 20, 2005 disclosure supports the conclusion Defendants' first argument that individual issues of that the shares continued to be inflated by

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BearingPoint's alleged earlier misrepresentations avoid the need to address whether in-and-out traders despite any partial disclosures in 2004 . Thus, are in the class , nor does it satisfy Rule 23(c)' s individual issues of reasonable reliance will not clear comm and to "define the class." Fed.R.Civ.P. predominate over the common issues focusing on 23(c)(B). Thus, while the merits of the issue need defendants' alleged acts in violation of the securities not be definitively resolved at the class certification laws. stage, it is necessary to consider whether in-and-out traders could conceivably satisfy the requirement of *9 Nor will issues concerning whether in-and-out loss causation, and are therefore included in the class members can show loss causation predominate proposed class. Only then can the predomin ance over the common issues of law and fact. issue be accurately resolved. Specifically, defendants contend that in-and-out trading members of the proposed class who sold Whether in-and-out traders, i.e ., traders who buy before the April 20, 2005 disclosure cannot prove and sell during the class period, can show loss loss causation because any damage that resulted causation is a somewhat novel question . This from their purchase of BearingPoint shares at an question was not squarely addressed and decided in inflated price during the class period was cancelled Dura, nor is there any published Fourth Circuit out by their sale of the shares at a similarly inflated decision in point. And the several district courts that price later in the class period. In support, have considered this issue since Dura have not been defendants cite the Supreme Court's recent holding unanimous on whether an in-and-out trader can in Dura Pharmaceuticals, Inc. v. Broudo, --- U.S . prove loss causation . [FN12] Loss causation is an ---, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005), that element of the securities fraud cause of action, "an inflated purchase price will not itself constitute [FN13] but because causation is not at issue, but or proximately cause the relevant economic loss ." rather the existence of a loss, the loss causation Id. at 1631 . Defendants further note that in Dura the issue raised by defendants is dependent upon the Supreme Court quoted with approval the method for calculating damages . Thus, in order to Restatement of Torts for the proposition that : determine whether in-and-out traders should remain A person who "misrepresents the financial part of the proposed class, it is necessary to condition of a corporation in order to sell its demonstrate that they might be able to prove a loss, stock" becomes liable to a relying purchaser "for i.e., damages . the loss" the purchaser sustains "when the facts ... become generally known" and "as a result" share *10 In securities fraud cases "damages per share value "depreciates ." [FNIO] are calculated as the arti ficial inflation when the In effect, defendants' claim is that Dura requires shares were purchased minus the artificial inflation the dismissal of in-and-out traders, and that when the shares were sold ." Michael Barclay and including these in-and-out traders in the proposed Frank C . Torchio, A Comparison of Trading class will require individual examination of each Models Used for Calculating Aggregate Damages in-and-out trader to determine whether each such in Securities Litigation, 64 Law & Contemp. Prob . trader has satisfied the loss causation requirement . 105, 106 (2001). And although in-and-out traders often have no associated damage because they In opposition, Matrix argues that the in-and-out purchased and sold at prices with the same artificial trader issue need not be reached because the inflation, this is not always the case. In cases where, proposed class is already limited to those who have as here, there are multiple disclosures , in-and-out been damaged by defendants' acts or omissions, i .e., traders may well be able to show a loss . Id at n. 5. those who can demonstrate loss causation . [FN11] Moreover, it is also conceivable that the inflationary This argument simply begs the question whether effect of a misrepresentation might well diminish in-and-out traders are among those who can over time, even without a corrective disclosure, and demonstrate loss causation. Simply defining a class thus in-and-out traders in this circumstance would as those who can demonstrate liability will not be able to prove loss causation . See In re LTV Secs .

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Litig., 88 F.R.D. 134, 148 (N.D.Tex.1980) ("[O]ne litigation among the class . No other case, not who has both bought and sold in the 'tainted market' already consolidated with these, has been may nonetheless have suffered an injury ."); In re commenced by members of the class against these Rent-Way Securities Litigation, 218 F.R.D. 101, defendants alleging these claims . This forum is 119 (W.D.Pa.2003) ("[T]he degree of price particularly appropriate as it is closest to defendant inflation on any given day during the class period BearingPoint's corporate headquarters and therefore may well differ from the degree of inflation on a many of the witnesses. Finally, management of the different day during the same period ."). In sum, class litigation should not prove especially difficult because in-and-out traders may conceivably prove as securities cases allow for the easy identification loss causation, they are appropriately counted as of the class members . [FN14] In sum, because class members of the proposed class . actions are a particularly appropriate and desirable means to resolve claims based on alleged violations Even so, the conclusion that the proposed class of the securities laws, the plaintiffs proposed class includes in-and-out traders, does not, alter the is the superior method for adjudicating this dispute . conclusion that common issues of law and fact will predominate over individual issues . The issue of III. whether in-and-out traders can satisfy loss causation *11 For the foregoing reasons, Matrix is hereby is a single legal issue , not dependent on individual appointed as class representative and the following factual determinations, and the proper class is certified pursuant to Rule 23 (c), Fed .R.Civ.P determination of individual damages c an be determined at trial through the use of expert All persons or entities who purchased or witnesses. See In re Rent-Way Secs. Litig., 218 otherwise acquired the securities of BearingPoint F.R.D. 101, 119-20 (W.D.Pa.2003). These issues, between August 14, 2003 and April 20, 2005 and though not common to all members of the proposed who were damaged thereby. class, are common to many, an d in any event, will Finally, pursuant to Rule 23(g), and because not make class litigation unwieldy or inefficient . proposed class counsel is qualified and without any Thus, because common issues will predominate, the real conflict, BGCS is hereby appointed as class first prong of the test in Rule 23(b)(3) is satisfied . counsel . An appropriate order will issue.

Finally, it is clear that litigation through the class FN1 . During 2003, BearingPoint decided action mechanism will be "superior to other to shift from a fiscal year ending June 30 available methods for the fair and efficient to a more conventional fiscal year ending adjudication of the controversy ." Fed.R.Civ.P. December 31 . Accordingly, it filed a 10-k 23(b)(3) . The Rule identifies four factors relevant to for the year ending June 30, 2003 and for this inquiry : (A) the interest of members of the class the six mon th transition period ending in individually controlling the prosecution or December 31, 2003 . defense of separate actions; (B) the extent and nature of any litigation concerning the controversy FN2. BearingPoint has not yet provided already commenced by or against members of the these restated financial statements, nor has class; (C) the desirability or undesirability of it provided any financial statements for the concentrating the litigation of the claims in the year ended December 31, 2004 or for any particular forum ; and (D) the difficulties likely to be period during 2005. In July 2005, encountered in the management of a class action . Id. BearingPoint announced that it expected to These factors all point convincingly to the complete the restatement of its financials superiority of class litigation . Any interest by the end of September. On September 7, individual members of the class may have in 2005 BearingPoint announced that it controlling the litigation is far outweighed by the would not meet this deadline, but that it benefit of distributing the financial burden of the expected to announce its restated financials

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by the end of October 2005 . This deadline, differences in class members' positions, too, has come and gone, but BearingPoint and that the issue may be profitably tried in has not yet provided restated financials . one suit ."); In re Resource America Secs. Litig., 202 F.R.D. 177, 181-82 FN3. Also on September 7, 2005, (E.D.Pa.2001) ( "The commonality BearingPoint announced that the SEC had requirement is permissively applied in the launched a formal investigation into its context of securities fraud litigation ."). accounting and financial reporting . FN8 . See, e.g., Freeman v. Laventhol & FN4. BearingPoint's shares are traded on Horwath, 915 F.2d 193, 199 (6th Cir .1990) the New York Stock Exchange (N .Y.SE) ("it appears that securities traded in under the symbol BE . national secondary markets such as the New York Stock Exchange ... are well FN5. The defendants in the present case suited for application of the fraud on the include: (i) BearingPoint; (ii) Randolph C . market theory."); In re Laidlaw Secs. Litig., Blazer, who served as BearingPoint's 1992 WL 68341 at *10 n. 8 (E.D.Pa. President, Chief Executive Officer, and Mar.31, 1992)("the fraud on the market Chairman of the Board until November 10, theory is particularly applicable to a large 2004, and (iii) Robert S . Falcone, who national market such as the NYSE ."). served as BearingPoint's Executive Vice President and Chief Financial Officer from FN9. See BearingPoint's analyst coverage, April 2003 until November 30, 2004 . available at www. corporate-fr. net/irey FN6. While this factual inquiry may elir site.zhtml?ticker=be & script=500, overlap with issues that go to the merits of listing such organizations as Bear Stearns, Matrix's claims, it is important to note that Bernstein, Goldman, Sachs & Co., JP "[t]he findings made for resolving a class Morgan, Merrill Lynch , Morgan Stanley action certification motion serve the court Dean Witter, Smith Barney Citigroup, and only in its determination of whether the UBS. Judicial notice of this information is requirements of Rule 23 have been appropriate pursuant to Fed.R.Evid. 201 . demonstrated ." See Gariety v. Grant See, e.g., Wang v . Pataki, 396 F.Supp.2d Thornton, LLP, 368 F.3d 356, 366 (4th 446, 458 n . 2 (S .D.N.Y.2005) (taking Cir.2004) (emphasis in original). Thus, the judicial notice of the contents of a website) ultimate fact finder is free to reach a (citing Hotel Employees & Rest. conclusion contrary to the factual Employees Union, Local 100 v. New York conclusions reached at the Rule 23 stage . Dep't of Parks & Recreation, 311 F .3d Id. 534, 549 (2d Cir .2002)). It is worth noting, however, that judicial notice of websites FN7. See Blackie v . Barrack, 524 F.2d may not always be approp riate given their 891, 902 (9th Cir. 1975) ( "Confronted relatively ephemeral nature . See The Great with a class of [stock] purchasers allegedly Disappearing Act, 9 Green Bag 2d 3, 3-7 defrauded over a period of time by similar (2005) . misrepresentations , courts have taken the common sense approach that the class is FN10 . Dura Pharmaceuticals, 125 S .Ct. at united by a common interest in 1633 (quoting Restatement of Torts § determining whether a defendant's course 548A, Comment b, at 107) . See also In re of conduct is in its broad outlines PEC Solutions, Inc. Securities Litigation, actionable , which is not defeated by slight 418 F.3d 379, 387 (4th Cir.2005) ( "[T] o

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show loss causation, a securities-fraud 'unique' and, thus, 'render such plaintiff plaintiff must demonstrate that the incapable of adequately representing the 'defendant's misrepresentation was a class .' "). substantial cause of the loss by showing a direct or proximate relationship between FN13 . See Dura, 125 S.Ct. at 1631 . the loss and the misrepresentation ." ') (quoting Miller v. Asensio & Co., 364 F,3d FN14. See, e.g., In re Rent-Way Sec. Litig., 223, 232 (4th Cir.2004)) ; Semerenko v. 218 F.R.D. 101, 121 (W.D.Pa.2003) . Cendant Corp., 223 F.3d 165, 185 (3d Cir.2000) ("Where the value of the --- F.R.D. ----, 2006 WL 141667 (E .D .Va.) security does not actually decline as a result of an alleged misrepresentation, it END OF DOCUMENT cannot be said that there is in fact an economic loss attributable to that misrepresentation. In the absence of a correction in the market price, the cost of the alleged misrepresentation is still incorporated into the value of the security and may be recovered at any time simply by reselling the security at the inflated price. ").

FN 11 . This class is currently defined as : "All persons or entities who purchased or otherwise acquired the securities of BearingPoint between August 14, 2003 and April 20, 2005 and who were damaged thereby."

FN12. Compare In re Compuware Sec. Litig., 386 F.Supp.2d 913, 920 (E.D.Mich.2005) (granting summary judgment to defendants because plaintiff had sold defendant's shares before disclosure of the misrepresentation) ; In re Bally Total Fitness Sec. Litig., 2005 WL 627960, at *6 (N .D.I11.2005) (refusing to appoint an in-and-out trader as lead plaintiff because it would "have to use considerable resources to establish that even though it was an in-and-out trader, its losses nevertheless were caused by the alleged fraudulent statements .") with Montoya v. Mamma.com, Inc., 2005 WL 1278097, at *2 (S .D.N.Y.2005) (appointing in-and-out trader as lead plaintiff because "at least at this stage, 'in and out purchasers' do not appear to b e

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to the motion; defendants have filed a reply. Having Briefs and Other Related Documents considered the papers filed in support of and in Only the Westlaw citation is currently available . opposition to the motion , the Court finds the matter United States District Court,N.D. California. appropriate for decision without oral argument, see In re ELECTRONIC ARTS INC . SECURITIES Civil L.R. 7-1(b), hereby VACATES the January LITIGATION 20, 2005 hearing, an d rules as follows: No. C-05- 1219-MMC. 1 . With respect to plaintiffs' claim for violation of § Jan. 5, 2006. 10(b) of the Securities Exchange Act of 1934 :

a. Contrary to defendants' argument, plaintiffs are Robert S . Green, Green Welling LLP, San not foreclosed by 15 U .S.C. § 78u-5(c)(1) from Francisco, CA, Marc A. Topaz, Richard A . basing such claim on forward-looking statements Maniskas, Schiffrin & Barroway, LLP, Radnor, PA, accompanied by cautionary' statements . Such Christopher S. Jones, Maya Saxena, Milberg Weiss statements are actionable if knowingly false when Bershad & Schulman LLP, Boca Raton, FL, Daniel made. See No. 84 Employer-Teamster Joint Council S. Sommers, Lisa M . Mezzetti, Matthew B . Kaplan, Pension Trust Fund v. America West Holding Corp ., Cohen Milstein Hausfeld & Toll , P.L.L.C., 320 F.3d 920, 936 (9th Cir.2003) (noting, albeit in Washington, DC, Jeff S. Westerman , Kristen dicta, "[A] person may be held liable if the ` McCulloch, Milberg Weiss Bershad & Schulman forward-looking statement' is made with `actual LLP, Los Angeles, CA, for Plaintiffs . knowledge . .. that the statement is false or Michael D . Celio, Keker & Van Nest LLP, San misleading." '); see also In re SeeBeyond Francisco, CA, for Defendants . Technologies Corp. Securities Litigation, 266 F.Supp.2d 1150, 1165 (C .D.Cal.2003) (interpreting ORDER GRANTING MOTION TO DISMISS ; § 78u-5(c)(1)'s "safe harbor" to exclude VACATING HEARING forward-looking statements made with actual knowledge of falsity ; reasoning that "Congress CHESNEY, J . could not have intended to foster the dissemination of information that is known to be false or (Docket No . 58) misleading.").

*1 This Document Relates to: ALL ACTIONS b. Contrary to plaintiffs ' argument, plaintiffs have not adequately alleged facts showing defendants Before the Court is the motion, filed September 26, had actual knowledge that the financial projections 2005 by defendants Electronic Arts Inc. ("EA"), issued in EA's January 25, 2005 conference call and Warren C. Jenson ("Jenson"), and Lawrence F . press release were false or misleading when issued . Probst III ("Probst"), to dismiss the Consolidated Plaintiffs' conclusory allegations that defendants Amended Complaint in the above-titled action . had "access to daily sales data" inconsistent with Lead plaintiffs Stationary Engineers Local 39 such projections are insufficient. (See Consolidated Pension Trust Fund, City Pension Fund for Amended Complaint ("CAC") ¶¶ 21-22, 51, 67 .) Firefighters and Police Officers in the City of Plaintiffs must allege "hard numbers or other Miami Beach, Baden-Wuerttembergische specific information." See Nursing Home Pension Kapitalanlagegesellschaft mbH and Activest Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, Investmentgesellschaft mbH have filed opposition 1231 (9th Cir.2004); Lipton v. PathoGenesis Corp.,

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284 F .3d 1027, 1036 (9th Cir .2002) . Similarly, a. As plaintiffs have not adequately pleaded a claim although plaintiffs allege that defendants engaged in for violation of § 10(b), they have not pleaded a "improper sales practices," (see, e.g., CAC IN claim for violation of § 20(a). See Heliotrope 7-8, 63-69), plaintiffs fail to allege with the General Inc. v. Ford Motor Co., 189 F.3d at 978 requisite particularity how such practices precluded (noting there can be no liability under § 20(a) if EA from achieving the financial projections at primary violation of another section of Exchange issue, and how defendants had actual knowledge Act is not sufficiently pleaded) . that such practices would prevent EA from achieving its projected results. See Lipton, 284 F.3d b. Accordingly, plaintiffs' § 20(a) claim is hereby at 1036. Additionally, plaintiffs fail to adequately DISMISSED, with leave to amend . allege the basis for the knowledge asserted by their confidential witnesses. See In re Daou Systems Inc. 3 . Plaintiffs may file an amended complaint within Securities Litigation, 411 F.3d 1006, 1015 (9th 21 days of the date of this order . Cir.2005) (holding confidential witnesses must be " described with sufficient particularity to support the IT IS SO ORDERED. probability that a person in the position occupied by the source would possess the information alleged"). N.D.Cal.,2006. Finally, plaintiffs' reliance on defendants' stock In re Electronic Arts Inc . Securities Litigation sales is unavailing, as plaintiffs allege neither the Slip Copy, 2006 WL 27201 (N .D.Cal.) percentage of shares sold by each defendant during the class period nor a trading history for a period of Briefs and Other Related Documents (Back to top) time sufficient to enable the Court to determine whether defendants' sales were inconsistent with • 2005 WL 3578602 (Trial Motion, Memorandum their prior trading practices . See, e.g., Ronconi v. and Affidavit) Defendants' Reply in Support of their Larkin, 253 F .3d 423,435 (9th Cir.2001). Motion to Dismiss (Dec . 09, 2005) • 2005 WL 3279806 (Trial Motion, Memorandum *2 c. Contrary to defendants ' argument, plaintiffs and Affidavit) Plaintiffs' Memorandum of Law in have adequately alleged loss causation . Allegations Opposition to Motion to Dismiss (Nov . 23, 2005 ) of a "steep drop in [defendant's] stock price • 2005 WL 2869199 (Trial Motion, Memorandum following the revelation of [defendant's] true and Affidavit) Defendants' Motion to Dismiss (Sep . financial situation are sufficient to enable the 26, 2005 ) complaint to survive a motion to dismiss" . See • 2005 WL 2396791 (Trial Pleading) Consolidated Daou, 411 F,3d at 1027. Although defendants argue Amended Complaint for Violations of Federal the price subsequently "recovered," plaintiffs' Securities Laws (Aug. 12, 2005) allegations that they "suffered economic losses," ( • 2005 WL 2613698 (Trial Pleading) Consolidated see CAC ¶ 83), and "were damaged as a result of Amended Complaint for Violations of Federal the . .. share price decline ," (see id. ¶ 87), are Securities Laws (Aug . 12, 2005 ) sufficient. See Dura Pharmaceuticals, Inc. v. • 3 :05cv01219 (Docket) (Mar . 25, 2005) Broudo, ---U.S. ----, ----, 125 S .Ct. 1627, 1634, 161 • 2005 WL 917014 (Trial Pleading) Class Action L.Ed.2d 577 (2005) (holding heightened pleading Complaint (Mar. 24, 2005) standard not applicable to allegations of loss causation). END OF DOCUMENT

d. Accordingly, plaintiffs' § 10(b) claim is hereby DISMISSED, with leave to amend .

2. With respect to plaintiffs' claim for violation of § 20(a) of the Securities Exchange Act of 1934 :

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Coleman Slom an & Blumenthal , Dallas, TX, Anne Briefs and Other Related Documents C. Patin, Mark D . Kotwik, Michael J. McNamara, Only the Westlaw citation is currently available . Seward & Kissel , New York, NY, for Defendants . United States District Court,S.D. Texas, Houston Division . OPINION AND ORDER In re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION HARMON, J . Mark NEWBY, et al., Plaintiffs *1 The above referenced putative class action V . alleging that the Royal Bank of Canada and six of ENRON CORPORATION, et al., Defendants its subsidiaries and affiliates "engaged in or THE REGENTS OF THE UNIVERSITY OF participated in the implementation of manipulative CALIFORNIA, et al., Individually and On Behalf or deceptive devices to inflate Enron's reported of All Others Similarly Situated, Plaintiffs, profits and financial condition and participated in a V. scheme to defraud or a course of business that Kenneth L. LAY, et al ., Defendants. operated as a fraud or a deceit on purchasers of THE REGENTS OF THE UNIVERSITY OF Enron and Enron-related publicly traded securities CALIFORNIA, Individually and on behalf of all between January 9, 1999 and November 27, 2001," others similarly situated, Plaintiffs, in violation of Sections 10(b) and 20(a) of the V. Securities Exchange Act of 1934 ("the 1934 Act"), ROYAL BANK OF CANADA, Royal Bank 15 U.S.C. §§ 78j(b) and 78t(a), and Rule lOb-5, 17 Holding Inc ., Royal Bank DS Holding Inc ., RBC C.F.R. § 240.10b-5. Complaint, # I at 1 . Dominion Securities Inc ., RBC Dominion Securities Ltd ., RBC Holdings (USA) Inc., and Pending before the Court are Defendants Royal RBC Dominion Securities Corp., Defendants. Bank of Canada, Royal Bank Holding, Inc., Royal No. MDL-1446, Civ.A. H013624, Civ.A. Bank DS Holding Inc ., RBC Dominion Securities H040087 . Limited, RBC Holdings (USA) Inc ., and RBC Dominion Securities Corporation's (collectively, " Dec . 22, 2005 . RBC Defendants ' ") FN 1 motion to dismiss the complaint (instrument # 16) pursuant to Fed. Rules of Civil Procedure 8, 9(b), 11 , and 12 (b)(6) and the Roger B. Greenberg, Schwartz June11 et al ., Robin Private Securities Reform Act of 1995 ("PSLRA"), L. Harrison, Campbell Harrison et al., Houston, TX, codified at 15 U.S.C. § 78u-4(b)(3)(A). Andrew J . Mytelka, Greer Herz & Adams, Galveston, TX, Charles G . Berry, Arnold Porter LLP, New York, NY, Matthew P . Siben, William S . FNI . The complaint, # 1 at 3-4, claims that Lerach, Lerach Coughlin et al ., San Diego, CA, Defendant Royal Bank Holding Inc., Robert L. Palmer, Hennigan Bennett et al ., Los which is under the control of the Royal Angeles, CA, for Plaintiffs. Bank of Canada, J. Mark Brewer, Brewer and Pritchard, Jeremy L . conducts its business affairs through a Doyle, Robin C . Gibbs, Gibbs & Bruns, Scott series of wholly owned and controlled David Lassetter, John B. Strasburger, Weil Gotshal subsidiaries where the bank holding and Manges, Eric J . R. Nichols, Beck Redden & company directly or indirectly owns 100% Secrest, Claude Leroy Stuart, III, Phelps Dunbar, of the stock of the subsidiaries and Houston, TX, Diane M . Sumoski, Carrington completely directs and controls their

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business operations through the selection affiliates that were guaranteed by Enron and created and appointment of their officers and, significant off-balance sheet debt exposure for where necessary, directors. These Enron ; (2) State Street Bank and Trust ("State Street controlled subsidiaries are also the agents "), a $718.8 million, five-year, securitized lease of the bank holding company and include entered into around January 1996 by State Street subsidiaries rendering fin ancial advice and and CXC, Inc., a securitization company serviced services to public companies, including by Citicorp and 100% guaranteed by Enron; (3) Enron .... The bank holding company . .. Sarlux, a 1996 transaction involving the financing participated in the fraudulent scheme and of a Sardinian power plant by means of an SPE ; (4) course of business complained of, not only Brazos Office Holdings L .P. ("Brazos"), an SPE, by way of the actions of the holding that entered into a 1997 $276 million synthetic lease company itself, but also by way of the with Enron to lease Enron's headquarters building actions of numerous of its controlled and certain equipment back to an Enron affiliate, subsidiaries and agents , some of which with Enron guaranteeing $213 million of that have been named as defendants in this amount; (5) Bob West Treasure LLC (`Bob West"), action . an SPE owned by Enron and an LJM2 entity, to which RBC provided bridge financing in December The Court refers the parties to, and hereby 1999 and which funded the prepayment of a $105 incorporates, its memoranda and orders in Newby, million prepaid gas forward sales contract that was in particular the Memorandum and Order Re 100% guaranteed by Enron ; 3 and (6) E-Next Secondary Actors' Motions to dismiss (# 1194, FAS 140 transaction, structured in three phases to issued on 12/19/02), Memorandum and Order keep $582 million in funding off Enron's balance regarding Enron insiders' motions to dismiss (# sheet in the purchase of turbines and development 1299 entered on March 25, 2003), and of peaking power plants, but the third phase of Memorandum and Order relating to the Imperial which Enron never intended to occur, leaving Enron County Employees Retirement System's ("ICERS" as a guarantor of the funds . FN4 ') motion to intervene (# 1999 entered on February 24, 2004), FN2 as well as those addressing the same transactions at issue here, because the Court's FN3 . While claims arising out of these first prior rulings discuss in detail many of the facts five transactions would be time-barred, as alleged here and the relevant law and because the the Court has concluded in other orders parties base some of their arguments on those such a pattern of disguised loan decisions . transactions may be used as evidence of the alleged scheme to defraud investors in Enron and Enron-related securities and to FN2. Published as In re Enron Corp. Sec. establish RBC Defendants' scienter . Litig., 235 F .Supp.2d 549 (S.D.Tex.2002). FN4. The complaint states that Goldin Allegations in the Complaint determined that E-Next "was primarily a device to conceal loans to, or guarantees The complaint identifies the following allegedly by, Enron ." Report at 163 . intrinsically fraudulent transactions structured, funded, and executed by RBC Defendants for Enron *2 Plaintiff alleges that some of these transactions from 1995-1999, which Plaintiff the Regents of the were manipulative devices employed to University of California contends had to provide misrepresent Enron's financial statements ; others RBC with notice of Enron's methods of systematic demonstrate the pattern, course of conduct, and deception in concealing its substantial participation by RBC in the scheme to defraud off-balance-sheet debt : (1) Caribou, commenced in investors, in connection with Enron's purportedly 1995, utilized swap agreements with Enron misleading financial statements and Enron's inten t

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to create them by means of deceptive structured prior experience working with Enron purpo rtedly transactions. gave them personal knowledge about how Enron structured 'off-balance-sheet transactions to make The complaint recites that Enron North America's (" investors, analysts and rating agencies believe that ENA's") Court-Appointed Bankruptcy Examiner Enron had current cash flow from sales of assets Harrison J . Goldin, in his report to the bankruptcy when , in fact , it had only "paper profits" that had court regarding transactions with Enron-related not been realized . Moreover, after these bankers special purpose entities ("SPEs") ("the Goldin were hired, RBC structured, funded and executed a Report" at 93 n . 280), publicly issued on December number of key fraudulent transactions with Enron FN5 4, 2003, reported that a factfmder could find that constitute the heart of the current complaint, that Caribou in 1995 (demonstrating that Enron was including the following : (1) the September 2000 using prepay structure to obtain off-balance-sheet Alberta Prepay , a commodity prepay that was financing), State Street in 1996 (demonstrating that actually a disguised lo an to Enron; (2) Cerberus,7 Enron was monetizing assets by removing them a short-term financing that was actually from its balance sheet), Sarlux and Brazos in 1997, comprised of loans that allowed Enron to monetize Bob West in 1999, and JEDI and ECLN in 2000, gains in Enron Oil & Gas shares owned by Enron ; constituted "red flags" putting RBC on notice that (3) the November 2000 Hawaii 125-0 transaction, Enron had considerable exposure to involving creation of SPEs to purchase off-balance-sheet debt. Thus although the ENA nonperforming assets from Enron , structured as Examiner did not find direct evidence of RBC's sales, but actually loans; (4) JEDI, for which in knowledge until mid-September 2000, at which April 2000 RBC was the managing agent and in a time he also found that the ratings agencies were $513 .5 million loan to which RBC was a $32 confused about the extent of that exposure, Harrison million participant, and which lo an RBC knew was did conclude that a fact-finder could infer that RBC guaranteed by Enron common stock and an Enron Defendants' involvement in these earlier swap designed to repay the principal and interest ; transactions triggered inquiry notice . (5) a second , May 30, 2000 Bob West credit swap of bridge financing to shift the risk of an Enron or Bob West default to European Fin ance FN5 . A copy of the Goldin Report, entitled Reinsurance, while the transaction retained full "Report of Harrison J. Goldin, the recourse against Enron for the off-bal ance-sheet Court-Appointed Examiner in the Enron debt of Bob West; (6) Enron Credit Linked Notes (" North American Corp . Bankruptcy ECLN") or Yosemite III, which RBC fraudulently Proceeding, Respecting His Investigation funded with at least $50 million , making RBC of the Role of Certain Entities in appear to be an equity partner in Yosemite III, in Transactions Pertaining to Special Purpose August 2000, to hide Enron 's debt from $475 Vehicles," is attached to and incorporated million in prepay financing by Citigroup and Delta by reference into the complaint . Energy .

The complaint further asserts that RBC, concerned that Enron considered RBC to be a "second tier" FN6. Among these purportedly were Gary bank, strove to become one of Enron's ten "top tier" Mulgrew, who headed NatWest's banks, rewarded with more lucrative future business structured finance group and then Royal transactions and thus more fees , interest, and credit Bank's Global Structured Finance Group ; facility payments from Enron. That ambition in part Giles Darby, managing director of motivated RBC to pa rticipate in the fraudulent Nat West's structured finance group and LJM2 transaction. Goldin found that in August Enron's "relationship manager"; and David 2000, to realize that ambition RBC hired Bermingham, a director of NatWest's FN twenty -five bankers 5 from Defend ant structured finance group . The complaint NatWest's structured finance group . These bankers' states that all three have been indicted for

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their Enron-related actions and are of the vehicles is likely inflated by partnership fugitives . management fees (earned or expected?) treated as equity[.] . .. Its [sic] hard to believe this stuff, FN7. At times inconsistently spelled because it implies the "I0 top tier banks" are Cerebrus" in the pleadings . aware of whats [sic] going on. "

*3 As direct evidence of RBC's scienter, the Complaint at 10, ¶ 23 . complaint claims that in August 2000 Enron wanted off-balance sheet financing to allow Enron Canada A September 22, 2000 e-mail from one RBC banker to purchase an Alberta Power Purchase to another, also quoted in the complaint, reveals that Arrangement. RBC proposed three different RBC knew that Enron was being pressed by the fraudulent transactions (described in the complaint rating agencies to reduce its debt and increase its at 12-15, IT 29-39) with SPEs, fraudulent gas cash flow, according to Plaintiff: swaps, prepays and off-balance-sheet accounting, The rating agencies have been pressing Enron the first two of which were rejected by Enron . In vis-a-vis low level of cash flow generation to total sum, the complaint asserts, "The [final, accepted] debt for the rating class . I think John [Aitken] is Alberta prepay materially distorted Enron's referring to the transparency of the financial financial statements. Enron understated its debt and statements (the integrity of the accounting overstated its cash flow from operating activities by principals [sic] behind the financial statements). reporting its obligations as price risk management instead of debt ." Id. at 11, ¶ 24 .

The complaint further alleges that RBC knew by The complaint conclusorily alleges that in September 2000 that Enron's off-balance sheet debt September 2000, RBC knew that Andrew Fastow might be $16 billion and quotes a comment by a controlled LJM2 and that NatWest was receiving RBC banker, "[B]eing Enron's auditor would be a enormous profits from "equity" trades with Enron thankless task." Complaint at 10, ¶ 22. RBC also and LJMI . Even though it was worried about learned that rating agencies were way off the mark Fastow's conflict of interest with LJM2, RBC lent because they did know about Caribou, Bob West, LJM2 $10 million to obtain additional business and the various disguised loans that RBC had from Enron. The pleading quotes the conclusion of structured, funded and executed for Enron : ENA Examiner Goldin : Standard & Poor's calculated Enron's debt exposure *4 By early October, 2000, RBC knew that (i) there as only $3 billion, while Moody's calculated it as had been issues between Enron and its auditors for $6 .8 billion. The complaint quotes one RBC some time; (ii) Enron's auditors wanted to maintain banker's written communication to his supervisor, a the appearance that they were adhering to the vice president in risk management, after RBC's appropriate accounting conventions ; and (iii) Enron Management Group received a document relating to was a major global user of off-balance-sheet Enron around September 20, 2000 : financing. There are also indications that RBC The implications of that document for Enron are believed Enron's auditor's [sic ] were not closely absolutely enormous. If Bob [Bob Hall, senior vice examining Enron's activities and that the US$800 president of Risk Management group, and Piazza's million JEDI I refinancing RBC was looking to supervisor ("Hall") ] read it he'd cut the [credit] become involved in would not involve true equity . limit [of Enron] in half [.] . .. If the existing off RBC also thought Enron would be looking to RBC " balance sheet obligations are generally stated as to support them over their year end ." $6.2B ... I suggest that asset base of the company is spurious, and that there are other obligations Id at 11, ¶ 26. Nevertheless RBC continued to hidden in these vehicles[.] .. . [T]he deal itself is a work for tier one status with Enron . The complaint concoction that while it may "compensate a valued asserts that RBC's concern about Enron's liquidity, employee" also benefits Enron, and the equity base concentrating on the maximization of assets and

2006 Thomson/West. No Claim to Orig . U.S. Govt. Works .

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minimization of debt on its balance sheet, led RBC which will issue `A' shares (legal to plan to reduce RBC's exposure by syndication or controlling interest but little economic by underwriting more of its Enron transactions and value) to Enron Asset Holdings (EAH"), by structuring, funding, and executing more and `B' shares (non-voting but deceptive transactions to keep Enron afloat (such as substantially all of the economic value). the November 7, 2000 approval by RBC's Risk The `B' shares are subscribed for by Management group of RBC's participation in the Psyche LLC ("Psyche") which will then Hawaii 125-0 transaction), while it simultaneously sell the `B' shares to Heracles Share Trust pocketed more and more fees from the troubled [ ("Heracles") ] . Heracles will be a trust corporation. RBC also reduced Enron's credit limit owned by the Delaware registered entity, from $750 million (Canadian) to $500 million Wilmington Trust and the equity certificate (Canadian) after Enron filed its 2001 10-K . of the trust may be assigned to Gen Re if it is part of the structure. Heracles funds The complaint characterizes the Cerberus itself by way of a loan from [RBC] and transaction FNg as an "invitation to co-lead a will hold the `B' interest on behalf of the monetization of Enron's shareholding in Enron Oil lenders. EAH will enter into a total return and Gas ["EOG"]," in reward for RBC's swap .. . with Heracles via which Enron participation in the Alberta Prepay and for "progress receives dividends and any upside on the " on LJM2. Enron wanted to "sell" the shares to EOG shares and Enron pays LIBOR plus generate cash to pay down other debt until the margin in return as well as any downside convertible bond, which the EOG shares were on EOG. LIBOR plus margin is sufficient intended as the source to redeem, matured in June for Heracles to service the underlying loan 2002 . Detailed in the complaint at 15-17, ¶¶ to Heracles . The obligations of EAH under 41-47, Cerberus gave Enron off-balance-sheet the [total return swap] will be funding, secured on its EOG shares, to raise short unconditionally guaranteed by Enron term (18-20 months) funds without requiring Enron Corp. to lose control of the EOG shares ; in essence it was, According to the ENA Examiner, "the total according to an RBC memorandum, "a 19 month return swap effectively constituted a secured `loan' to Enron" instead of a sale of assets, promise by EAH to pay Heracles the as Goldin recognized . The complaint asserts that if amounts that Heracles owed Royal Bank, the Cerberus transaction had been accounted for in to the extent the proceeds from the EOG the manner that. Enron Bankruptcy Examiner Neal shares actually received by Heracles were Batson argued was proper, the EOG shares would insufficient to cover the amounts owed on have remained as assets on Enron's balance sheet the loan," and thus "[t]his arrangement was and "Enron's liability under the Original Cerberus equivalent to a secured guarantee of the Total Return Swap (equal to approximately $517 .5 Heracles loan." Complaint at 16, ¶ 43 . million) would have been recorded as debt. Cash flow from the operating activities for the year 2000 In the Hawaii 125-0 transaction in November 2000, would have been reduced by approximately $517.5 two special purpose trusts (Hawaii I Trust and million and cash flow from financing activities Hawaii II Trust) were created as one of a series of increased correspondingly. " Complaint at 17, ¶ 47. contrivances to conceal nonperforming assets from Enron's balance sheet by selling the assets to the trusts without Enron's "losing control until a FN8. The complex Cerberus transaction is legitimate third party buyer can be found": RBC described inter alia in the complaint in the described it "as a warehouse vehicle for Enron words of an RBC banker at 16, ¶ 43 : allowing Enron to better time asset sales to third The EOG shares will be transferred to the parties and to aggregate assets, achieving a critical ownership of an effectively bankruptcy mass for later refinancing into a longer term remote vehicle Aeneas LLC [ ("Aeneas") ] of balance sheet vehicle. " Complaint at 18, ¶ 49 .

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It utilized a total return swap, assuring lenders of Treasure commodity swap was created to conceal payment, like an Enron guar anty, with Enron the full guarantee of the RBC loan by Enron North retaining risks and benefits . Enron's Bankruptcy American and Enron. Examiner stated, *5 If the Hawaii Transaction were accounted for in RBC was involved as managing agent in several the manner the Examiner h as determined to be loans to JEDI, secured by Enron common stock and proper, the assets in the Hawaii transactions would utilizing a swap to create funds to repay the have remained on Enron's balance sheet as assets principal and interest, but not disclosed on Enron's and Enron 's liability under the Hawaii Total Return financial statements, during 2000 . Swaps (equal to approximately $43.6 million as of the Petition Date) would have been recorded as RBC also worked on LJM2 and in mid-November debt and the approximately $273 .7 million gain 2000 lent the partnership $10 million in order to would not have been recognized. position itself for additional lucrative transactions with Enron ; FN9 its LJM2 Transaction Request Complaint at 19, ¶ 50 . RBC participated in the stated, "We also recognize that this deal is seen as financing of the Hawaii deceptive transaction, led an entry ticket for more remunerative transactions by CIBC, which Enron's Bankruptcy Examiner, which we are already seeing coming to us . " Neal Batson, determined was fraudulent in nature Complaint at 22, ¶ 59 . RBC was verbally assured and which the Department of Justice and the SEC that the loan would not run its full term and that decided was a sham. Ex. 5 to # 21, Enron ,RBC would be repaid within two years with a return Bankruptcy Examiner's Final Report, Appendix . G, for two years of 36 .77%. Id. at 5 ; Exs. 6(SEC) and 7(DOJ) to # 21 .

In August 2001 RBC, as a purported equity FN9. RBC Defendants point out that investor, entered into a FAS 140 transaction with Plaintiff does not allege that they or their Enron involving Enron Energy Services ("EES"), employees were limited partners in LJM2 which reported as a sale of assets what was actually or that they were invited to invest in it . a loan to Enron with no risk since Enron assured Moreover the Goldin Report at 93-94 timely and full repayment. stated that "it was not clear that [the RBC loan] increased the off-balance sheet In December 1999 RBC provided bridge financing, exposure of Enron ." guaranteed by Enron, to Bob West Treasure for a $105 million fraudulent gas prepay in a sale of gas In August 2000, again with risk, RBC invested at to an Enron affiliate; ENA was to pay Bob West minimum $50 million in the Enron Credit Linked Treasure the funds required to repay RBC's loan to Notes transactions of the Yosemite III transaction, Bob West Treasure . The Goldin Report stated that a which was designed to disguise debt from $475 factfmder could determine that RBC knew under million in prepays by Citigroup and its controlled United States accounting standards that off-balance offshore SPE, Delta Energy . sheet financing should not include full recourse against Enron and thus the Bob West Treasure loan did not qualify for off-balance sheet financing . The RBC Defendants' Motion to Dismis s report further stated that RBC knew from its review of Enron's financial condition since at least 1996 *6 Specifically the RBC Defendants argue for and its involvement in Caribou, State Street, and dismissal in their memorandum of law in support of Brazos Office Holdings, that these transactions had their motion on the grounds that (1) the claims each created substantial off-balance sheet debt for against them are time-barred, since Plaintiff the Enron and that Enron's additional exposure from the Regents of the University of California, which also Bob West Treasure loan would be concealed from serves as Lead Plaintiff in Newby, had at least the investing public . Moreover, the Bob West inquiry notice of the alleged Enron-related fraud by

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October 16, 2001, when Enron publicly announced these transactions were misrepresented by Enron in one billion dollars in charges and a reduction of its financial statements, for which and in which shareholders' equity by $1 .2 billion, and when the RBC Defendants insist they had no responsibility or Newby case, of which this suit is a part, was filed a involvement . In addition, RBC Defendants contend few days later, but the Regents nevertheless failed that the transactions at issue were private to file this action until January 9, 2004 ; FN Ic (2) transactions between Enron, Enron-controlled the complaint does not comply with Federal Rules affiliates, RBC Defendants, and other financial of Civil Procedure 8(a), 9(b), and 11 and the institutions, and did not involve public disclosure or PSLRA; FN11 (3) The complaint does not shareholder solicitation, and thus the claims against differentiate among the seven RBC Defendants nor them should be dismissed . specify with particularity which wrongful acts were by which Defendant, but lumps them together, and this Court has already determined that such "group FN10. The initial limitations period for § pleading" did not survive the PSLRA; (4) the 10(b)/Rule lOb-5 securities fraud claims complaint fails to allege that the RBC Defendants was that established in Lampf, i.e., the committed a primary violation of § 10(b), but at shorter of one year after discovery of the most states a claim of aiding and abetting that is not facts constituting the violation or three actionable after Central Bank of Denver, N.A. v. years after the violation. Lampf, Pleva, First Interstate Bank, N.A., 511 U.S. 164, 114 S .Ct. Lipkind, Prupis & Petigrow v . Gilbertson, 1439, 128 L .Ed.2d 119 (1994), FN" and the 501 U.S. 350, 358, 111 S .Ct. 2773, 115 complaint fails to plead facts giving rise to a strong L.Ed.2d 321 (1991). It was amended for inference of scienter; (5) Plaintiff fails to allege loss all "proceedings" filed on or after the date causation adequately under Dura Pharmaceuticals, of its enactment by the Sarbanes-Oxley Inc. v. Broudo, --- U.S. ----, 125 S.Ct. 1627, 161 Act ("Sarbanes-Oxley"), Pub.L. 107-204, § L.Ed.2d 577 (2005) because Plaintiffs damage 804(b), 116 Stat. 745 (July 30, 2002), claim is premised exclusively on the allegation that codified at 28 U.S.C. § 1658. Under the purchase price of the securities was artificially Sarbanes-Oxley, the limitations period for inflated by RBC Defendants' wrongdoing ; and (6) all private actions under § 10(b) and Rule Plaintiffs claim for control person liability under § lOb-5 was lengthened to 20(a) fails because there is no properly pled, tw o-ye ars-from-date-of-discovery-o independent violation of § 10(b) by the controlled f-facts-constituting-the-violation or person that is not barred by limitations and because five-years-from-date-of-occurrence statute there are no specific allegations of actual control by of limitations . Claims that were stale when any of the RBC Defendants over a primary violator, Sarbanes-Oxley was enacted were not but only conclusory allegations . They maintain that revived by it . # 1999 at 25-60 . Since this the complaint merely alleges that RBC Defendants Court issued that decision a number of engaged over a seven-year period in what were appellate courts have reached the same private structured finance transactions FN 13 with conclusion. See In re ADC Enron, which were later misrepresented by Enron in Telecommunications, Inc. Sec. Litig., 409 its financial statements ; they claim that any fraud F.3d 974, 977 (8' Cir .2005); Foss v. was the result of Enron's accounting and reports, Bear, Stearns & Co., 394 F .3d 540, 541-42 which were not created, prepared, drafted, reviewed (7a' Cir.2005); Glaser v. Enzo Biochem, or advised upon by RBC Defendants. They note that Inc., 126 Fed. Appx . 593, 598 (4a' Plaintiff has not and cannot allege that they have Cir.2004) ; Enterprise Mortg. Acceptance made any public false or misleading statements that Co., LLC, Sec. Litig. v. Enterprise Mortg. affected the market for Enron securities for liability Acceptance Co., 391 F.3d 401, 405-10 (2d under § 10(b) ; nor has Plaintiff alleged that the Cir.2004); Chenault v. US. Postal Serv., transactions RBC Defendants have engaged in with 37 F.3d 535, 539 (9th Cir.1994). Enron were manipulative or deceptive, but only that This Court previously concluded that

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Newby, filed on October 22, 2001, is not Plaintiff has sued for the first time, and in governed by the Sarbanes-Oxley Act, but essence is a new "proceeding" under by the Lampf one-year/three -year statute of Sarbanes-Oxley. limitations . RBC Defend ants contend that this action FNI 1 . RBC Defendants argue that rather against them is " an integral part and an than a short, plain statement of Plaintiffs extension of the proceedings in the Newby claims, the complaint incorporates the Action ." They point to the order lengthy Goldin report in the Enron consolidating it with Newby, the fact that it bankruptcy proceeding before the is subject to the pre-trial and scheduling Honorable Arthur Gonzalez . The Goldin orders and the Deposition Protocol Order Report in turn incorporates other long in Newby, the fact that Plaintiff is Lead bankruptcy examiners' reports, including Plaintiff in Newby and calls itself "Lead those of Enron Examiner Neal Batson . Not Plaintiff' in this suit , the allegations that only is the complaint prolix, but it lacks RBC Defendants participated in a " the factual specificity necessary for a fraudulent scheme to misrepresent Enron's securities fraud claim . These bankruptcy financial conditions [as] detailed in the examinations were not conducted to Regents' First Amended Consolidated determine if there was securities fraud Complaint [at ¶ 3] filed May 14, 2003" in involving Enron and thus they lack the Newby, and the fact that the causes of requisite particularity to state securities action against RBC Defend ants are the law violations. Moreover, charge RBC same Section 10 (b) and Section 20(a) Defendants, the complaint is not based on claims that are asserted against other Plaintiffs independent, personal financial institution defendants in Newby investigation of the facts that form the that exhibited the same course of conduct basis of the suit, but "piggyback[s] on in the same or similar tr ansactions . # 17 at contested hearsay allegations by a third 9. RBC Defendants also highlight the fact party," circumventing Rule 11 . that the Regents filed a Consolidated The Court observes that under the PSLRA, Complaint in Newby on April 8, 2002, a plaintiff need not plead from personal adding financial institutions as defend ants knowledge, but may plead based on " and alleging violations of federal securities information and belief' as long as the laws. They argue Plaintiff could and plaintiff "state[s] with particularity all facts should have sued, but chose not to sue, on which that belief is formed ." 15 U .S.C . RBC Defendants by amending the § 78u-4(b)(1). See also ABC Arbitrage complaint in Newby. They also point out Plaintiffs Group v. Tchuruk, 291 F.3d 336, that on December 2, 2003, the Regents 351 (5th Cir.2002)(An allegation is "made filed a separate suit against on information and belief" when it is not Toronto-Dominion Bank and Royal Bank based on personal knowledge). In ABC of Scotland, H-03-5528, as participants in Arbitrage, 291 F.3d at 351, the Fifth the alleged Newby Ponzi scheme . Yet the Circuit adopted the standard of the Second Regents still did not sue RBC Defendants Circuit as set forth in Novak v. Kasaks, for the same cause of action for almost 216 F.3d 300, 312-14 (2d Cir .2000)(where another two years . complaint is based on information and Plaintiff responds that this action, belief, plaintiff "need only plead with H-04-0087, is governed by the particularity sufficient facts to support Sarbanes-Oxley statute of limitations those beliefs"), cert denied, 531 U.S. because the suit was filed after its July 30, 1012, 121 S.Ct. 567, 148 L.Ed.2d 486 2002 enactment , alleges different claims (2000). In Novak the plaintiffs relied on against a new financial institution that confidential sources. The Second Circuit

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concluded that the sources need not be 1995 on, known as Caribou, State Street, named and found the complaint was Sarlux, Brazos Holdings, Bob West sufficient because it identified with Treasure, and E-Nest-1999, and Alberta, particularity several documentary sources Cerberus, a refinancing of Bob West that supported their belief that serious Treasure, and debt participations in Hawaii inventory problems existed during the 125-0, JEDI, and LJM2. class period . It stated, "a complaint can RBC Defendants point out that Goldin meet the new pleading requirement concluded that there was an insufficient imposed by paragraph (b)(1) by providing basis to find that RBC Defendants' documentary evidence and/or sufficient participation in the transactions, except for general description of the personal sources the three that closed after September 2000 of the plaintiffs' beliefs ." Id. at 314. Here (i.e., the Alberta prepay, Cerberus and the sources (bankruptcy examiners' Hawaii), contributed to the alleged Ponzi reports) are not confidential but were scheme. Goldin found that in Hawaii, documents publicly filed in the bankruptcy which was structured by another financial court by independent examiners, required institution, RBC was a minor debt by statute to be disinterested, and the participant . RBC Defendants contend that reports are attached as exhibits to there are no facts alleged demonstrating pleadings in the file . that RBC Defendants knew that Enron was improperly accounting for Alberta and FN12 . RBC Defendants argue that Cerberus, in which RBC did participate in Goldin's report found the evidence only the structuring. They emphasize that supported an inference that RBC aided and Arthur Andersen was a highly regarded, abetted Enron's officers in breaching their independent accounting firm that was fiduciary duty to shareholders, which is reviewing such transactions and imply they insufficient to state a § 10(b) claim under were justified in relying on its work Central Bank. Defendants do concede that product. Goldin found that they were aware by mid-September 2000 of the extent of *7 With regard to the statute of limitations, RBC Enron's off-balance-sheet accounting and Defendants concede that the Royal B ank of Canada that the rating agencies were confused and the RBC Dominion Securities Corporation about the amount of Enron's debt (collectively the "Tolled RBC Defendants") entered exposure, but RBC Defendants insist that into separate, one-year tolling agreements X14 Plaintiff has not shown a primary violation with Plaintiff on September 18, 2002, but of the securities laws . emphasize that the other five ("Untolled RBC Plaintiff again points out that the purpose Defendants") did not. Thus RBC Defendants argue of the Examiner's report was not to find that claims against the Untolled RBC Defendants violations of federal securities law and thus are barred if Plaintiff discovered or should have its use of "aiding and abetting" language is discovered in the exercise of reasonable diligence being taken out of context . The Court the alleged fraud before January 9, 2003 or if the agrees and, as will be discussed, even if alleged fraud occurred before J anuary 9, 2001, the purpose of the report had been to find while Plaintiffs claims against Tolled RBC securities fraud, in bringing suit Plaintiff is Defendants are time-barred if they were discovered not restricted to or bound by the or should have been discovered in the exercise of Examiner's findings and conclusions, reasonable diligence prior to January 9, 2002 or if which were made in a different context for the alleged fraud occurred prior to J anuary 9, 2000. a different purpose . RBC Defendants insist that Plaintiff has admi tted that it had at least inquiry notice of the facts FN 13 . These included transactions, from forming the basis of the fraud claim before January

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9, 2002 and thus the claims against all of them are on notice of the alleged fraud before January 9, time-barred. They point to the following "storm 2002, the claims against the Untolled RBC warnings" : Enron's shocking revelation on October Defendants are time-barred under both statutes of 16, 2001 of $1 billion in charges and a reduction of limitations because Plaintiff had actual notice of its shareholders' equity by $1 .2 billion; a few days later claims against them not later than September 18, The Wall Street Journal's expose of Enron, the SEC 2002, the date of the letter . Alternatively, the claims investigation, and Fastow's resignation; the filing of are barred by the three-year statute of repose under the Newby complaint on October 22, 2001, Lampf. Plaintiffs complaint identifies a number of followed by more than fifty other lawsuits before transactions by the RBC Defendants that took place the Consolidated Complaint was filed in Newby on from 1995 on, with only one, E-Next, taking place April 8, 2002 ; the downgrading by 11/28/01 of after January 9, 2001 . Regarding that transaction, Enron's publicly traded debt to "junk" status by the the ENA Examiner found there was insufficient rating agencies; Enron's filing for bankruptcy on evidence to decide that Enron's accounting for the December 2, 2001 ; and an article in the December E-Next transaction was improper or that RBC aided 24, 2001 Fortune Magazine charging that Enron's and abetted a breach of fiduciary duty by an Enron fraud was a combination of arrogance, greed, deceit officer. FN1 6 and financial chicanery . They further insist that Plaintiffs counsel's letter to Royal Bank of Canada's counsel on September 18, 2002, seeking a tolling FN16. Plaintiff objects to RBC agreement, mentioned in Plaintiffs own pleadings, Defendants' suggestion that the Goldin showed that it had notice of potential claims against report absolved RBC Defendants of the Bank, which began to accrue no later than liability for the E-Next work. Noting again October 16, 2001, even though Plaintiff argues that that the report was not done to determine it only received notice of its claims against RBC whether there was securities fraud, Defendants when the Goldin Report was released Plaintiff points out that the ENA Examiner on December 4, 2003 . FN 1 5 concluded, Goldin Report at 163, that " RBC knew Enron's exposure in E-Next would not be disclosed properly on Enron's FN14 . Copies of the Tolling Agreements, Financial Statements." tolling limitations from September 18, 2002 until September 18, 2003, are Plaintiffs Opposition attached as Exs . 1 and 2 to the Declaration of Claude L. Stewart III(# 18). *8 Plaintiff argues that the extended statute of limitations of Sarbanes-Oxley applies to this action FN 15 . That letter, Ex . 3 to # 18, states, because unlike Newby, it was filed after enactment While we believe that the Sarbanes Oxley of the Act, and because at the time of that legislation extends the statute of enactment Plaintiffs claims were not time-barred by limitations to two years from the date of the Lampf one-year statute of limitations/three-year actual knowledge of a claim, there exists statute of repose. The complaint is not an amended the possibility that a defendant could argue complaint, the claims against RBC are not " that the statute of limitations expires in substantially the same" as those against the mid-October of this year . Thus in an defendants originally sued in Newby, but instead abundance of caution, absent a tolling based on RBC Defendants' distinct conduct, agreement signed by Royal Bank of Plaintiff does not rely on the Newby complaint even Canada, we will have to name Royal Bank though this suit delineates RBC Defendants' of Canada as a defendant on or before purportedly illicit roles in the overall Ponzi scheme October 16, 2002 . to defraud investors that was described in Newby, FN 17 and the Royal Bank of Canada has not RBC Defendants argue that even if Plaintiff was not previously been sued by Plaintiff for its role in th e

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Enron fraud; thus the case is a "new proceeding" also referred to the RBC entities together. Plaintiff governed by Sarbanes-Oxley's two-year/five-year points to this Court's March 31, 2004 order (# 2044 limitations periods . at 8-9, 13-15) relating to Credit Suisse First Boston and its subsidiaries, and urges the Court to follow its determinations there that the particularity rule for FNI7. Because the Newby complaint " pleading fraud may be relaxed where factual provides a context for measuring specific information is peculiarly within the defendant's allegations" against the RBC Defendants knowledge or control, that the complexity of the and for judicial efficiency to avoid alleged scheme and the thousands of affiliates reiterating many relevant facts, Plaintiff involved support eschewing hyper-technical now states that it incorporates the Newby application of the pleading-with-particularity complaint by reference for context only . # requirement, and that the group pleading rule 21 at 32 . applied to individuals, i .e., officers and directors in securities fraud cases, not to entities of a financial Plaintiff insists that it first learned of RBC's organization. For the reasons indicated in # 2044, participation in Enron fraud on December 4, 2003, the Court finds that under the circumstances here, after Goldin 's Report was released, and filed this Plaintiff has -adequately stated a claim against the suit one month later, less th an one year (Lampf ) RBC Defendants . FNls and less than two years (Sarbanes-Oxley) after the discovery of facts constituting the securities law violation. Because it was not on notice of its claims FN18. The Court notes that the Fifth until December 4, 2003 , Plaintiff filed suit in less Circuit's discussion of its rejection of the than one year of discovery of the facts and the group pleading doctrine under the PSLRA claims are not time-barred under either statute of in Southland Securities Corp. v. INSpire limitations. Ins. Solutions, Inc., 365 F.3d 353, 364-65 (5u' Cir.2004), talks about the doctrine in Moreover, Plaintiff insists it has charged RBC with terms of individual corporate officers and primary violations . In furtherance of Enron's alleged directors. fraudulent scheme to defraud investors, as observed by Goldin, RBC played a substantial role in *9 As for scienter, Plaintiff maintains that it has creating, structuring, and implementing the financial demonstrated RBC Defendants' intent to defraud by transactions discussed supra, which RBC knew pleading facts showing that they knew from would fundamentally distort Enron's reported personal involvement that Enron was concealing the financial status . nature of transactions designed to disguise its exposure to debt in repeated transactions since In response to the group pleading challenge, Lead 1995, as recognized in Goldin's Report at 93, and to Plaintiff points out that it has pled that RBC manipulate its financial statements, and that Defendants, under the control of the Royal Bank of Defendants were motivated to participate in order to Canada, not only represent themselves to the world become a "top tier" Enron bank to make huge fees. as a unified entity, but operated as a single entity in It points to specific findings in Goldin's Report that furtherance of the alleged fraudulent scheme, demonstrate the requisite scienter on the part of making the requirement of pleading against RBC to commit securities fraud : (1) RBC knew that individual participants inapplicable, and it has Enron manipulated its financial results as evidenced identified the sham transactions in which by a message from one RBC banker to his Defendants participated, if not which transactions supervisor in risk management, "I suggest the asset were performed by which RBC Defendant. base of the company is spurious, and that there are Complaint at ¶¶ 11-20. RBC Defendants also other obligations hidden in these vehicles ."-Report hold themselves out to the public as the Royal Bank at 101, 158 ; (2) Goldin concluded, "RBC believed of Canada. Plaintiff underlines the fact that Goldin Enron's auditor's [sic ] were not closely examining

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Enron's activities" and he found direct evidence of released until long after Enron's bankruptcy does RBC's knowledge of Enron's accounting not relieve them of responsibility. practices-Report at 102, 96-97; (3) Goldin found " evidence indicating that RBC knew in *10 Plaintiff maintains that it has adequately mid-September, 2000 that Enron had substantial asserted a control person claim under § 20(a) exposure to off-balance sheet-debt that was not against Royal Bank of Canada, a bank holding disclosed in its financial statements and that the company, for its control of its subsidiaries, ratings agencies were confused about the amount of divisions, and affiliates, the Royal Bank of Canada such exposure ."-Report at 93, n. 280, and 100-01 (" entities named as defendants, based on underlying RBC had information that Enron's off-balance-sheet primary violations by these entities . obligations could be as much as US$16 billion" and that RBC knew that Standard & Poor's and Moody's calculated Enron's debt exposure as US$3billion Court's Decision and US$6 .8 billion, respectively) ; and (4) Goldin found that RBC had "detailed knowledge about how Role of a Bankruptcy Examiner Enron structured off-balance-sheet transactions to make it appear to investors, analysts and rating agencies that Enron had current cash flow from Because Goldin's report is such a central part of the sales of assets, when, in fact, the profits were only complaint, the Court provides some general on paper and had not been realized"-Report at 98 . background information about the legal significance of a bankruptcy examiner's report . Under the In its brief in opposition, Plaintiff argues that to Bankruptcy Code, as an alternative to appointing a plead loss causation adequately, it need only plead trustee in a Chapter 11 reorganization case, a " that RBC's actions "touched upon" or somehow disinterested" bankruptcy examiner may be contributed to plaintiffs' damages . The complaint appointed by the Bankruptcy Court to perform two has alleged that RBC falsified Enron's financial tasks in return for reasonable compensation for the results by illicit structured financings that caused examiner's services and expenses : (1) to " Enron's publicly traded securities to be sold at investigate the acts, conduct, assets, liabilities, and inflated prices. It also asserts that although " financial condition of the debtor, the operation of plaintiffs' damages were caused by an assortment of the debtor's business and the desirability of the conduct that violated § 10(b)[,] Royal Bank of continuance of such business, and any other matter Canada played a significant role in that conduct, for relevant to the case or to the formulation of the plan, Royal Bank of Canada was a primary participant in " and any other tasks ordered by the Bankruptcy the fraudulent scheme that caused plaintiffs' Court; and (2) then to file a report or statement damages ." # 21 at 41 . Plaintiff states, "By acting to regarding the investigation that includes "any fact falsify Enron's financial results, Royal Bank of ascertained pertaining to fraud, dishonesty, Canada caused Enron's publicly traded securities to incompetence, misconduct, mismanagement, or be sold at artificially high prices . This caused irregularity in the management of the affairs of the plaintiffs to be damaged ." Id. at 44. According to debtor, or to a cause of action available to the estate . Plaintiff, that Ponzi scheme placed Enron on the " See, e.g., In re Big Rivers Electric Corp. v. course of destruction years before Enron had Schilling, 355 F .3d 415, 422, 429 (6t' become so highly leveraged that it had to collapse, Cir.2004)(citing and quoting 11 U .S.C. § 1104(c) with the "final straw" perhaps being Enron's and § 1106(a,b)) . Big Rivers contains an extensive November 2001 restatement. Thus RBC's discussion of the role of the Chapter 11 examiner . participation in the scheme, combined with The requirement that the examiner be, and remain, " plaintiffs' reliance on the integrity of the market disinterested" means that the examiner may "not price for securities, satisfies the element of have an interest materially adverse to the interest of causation. That the information about RBC the estate or of any class of creditors of equity Defendants' particular role may not have been security holders, by reason of any direct or indirec t

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relationship to, connection with, or interest in the irregularity in the management of the debtor or an investment banker specified in affairs of the debtor, or to a cause of action subparagraph (B) or (C), or for any other reason ." available to the estate," its content may be Id. at 431, quoting 11 U .S .C. § 101(14)(E) . The highly relevant to securities law violations . examiner also owes a fiduciary duty of complete 11 U.S.C. § 1104(c) and § 1106(a,b) . loyalty to the creditors and shareholders. Id. at 434. Although " `the benefits of his investigative efforts *11 "Any record compiled by the examiner is not a flow solely to the debtor and to its creditors and judicial record, but simply a source of information shareholders, [as a court fiduciary] he answers designed for the purpose of identifying the assets of solely to the court .' " Id. at 432, quoting In re the estate for the eventual benefit of the debtor and Baldwin United Corp ., 46 B.R. 314, 316 (S .D.Ohio its creditors . That some of the parties to the 1985). proceedings will assert substantive rights to the assets, once collected, does not make the The purpose of the examiner's investigation is to identification of these assets an adjudicatory discover what assets may exist for the debtor's determination of `substantive rights .' " Ionosphere, estate . FN 19 The Air Line Pilots Assoc., Intl v. 156 B .R. at 432. The Examiner's findings are not American National Bank and Trust Co. ofChicago ( binding on the Court or the parties. FN21 Baldwin, In re Ionosphere Clubs, Inc.), 156 B .R. 414, 432 46 B.R. at 316; Ionosphere, 156 B.R. at 432 . The (S .D.N.Y.1993), affil, 17 F.3d 600 (2d Cir. 1994). Examiner is not an arm of the Cou rt, and, indeed, is An examiner's investigative authority under Fed. R. appointed by the Court to assist not it, but to assist Bankr .P.2004 is broader than the scope of civil other parties. Ionosphere, 156 B .R. at 432, 433 . discove ry. "The investigation of an examiner in Until the Examiner files his report with the court or bankruptcy , unlike civil discovery under Rule 26(c), until and unless the documents he compiles are is supposed to be a ` fishing expedition,' as made judicial documents in some other way, there is exploratory and groping as appears proper to the no public right of access to them . Id. at 433 . Under Examiner." Id., citing In re Vantage Petroleum 11 U.S.C. § 107, the Examiner's report, like other Corp., 34 B.R. 650, 651 (E.D.N.Y.1983), citing papers , once filed with the Bankruptcy Court Sachs v. Hadden, 173 F.3d 929, 931 (2d Cir . 1949). become public records unless the bankruptcy judge Pursuant to court order, he may examine any entity orders the information sealed for commercial, with knowledge of the debtor's acts, proper ty, confidential or defamatory reasons. Id. Any liabilities, and financial affairs relating to the documents underlying the report, on which the bankruptcy proceedings or who has had a report is based, if not filed , are not part of the court relationship with the debtor, and his examinee does record and are not subject to public access . Id. not enjoy the protections usually provided by the Federal Rules of Civil Procedure . In Baldwin, the bankruptcy judge analogized the function of the FN20. Generally Federal Rule of Civil examiner to that of a "civil grand jury" seeking to Procedure 10(c) allows a party to uncover areas of and appropriate targets for incorporate "any written instrument which recovery. 46 B.R. at 317 ; Ionosphere, 156 B.R. at is an exhibit" to a pleading, thereby 432. making the attached document an integral part of the pleading for all purposes . 5A Charles Alan Wright and Arthur Miller, FN19. Nevertheless, because, as noted, the Federal Practice and Procedure § 1327 at statute provides that the court-appointed 434 (3d ed. West 2004). As has been bankruptcy examiner is to perform an noted, because the Examiner's report was investigation and to file a report that prepared for a different purpose and its includes "any fact ascertained pertaining to language chosen for a particular context, fraud, dishonesty, incompetence, e.g., aiding and abetting allegations, the misconduct, mismanagement, or meanings of words cannot automatically b e

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transferred, but must be evaluated in terms statute of limitations applies to actions filed on or of the underlying factual allegations in after July 30, 2002 "based on underlying conduct determining whether Plaintiff has stated a that occurred before the enactment of the claim for securities violations under the Sarbanes-Oxley Act as long as such claims were not 1934 Act. Id. at 450 & n. 19 ("The district time-barred by the Lampf statute of limitations court . .. can independently examine the and/or repose controlling before July 30, 2002 . This document and form its own conclusions as Court agrees with Plaintiff that at this stage of the to the proper construction and meaning to litigation it appears that the Sarb anes-Oxley 's statute be given the attached material as long as of limitations applies to the instant action , filed on the justice seeking objectives of the federal January 9, 2004. rules are kept in mind ."), quoting In re Rickel & Associates, Inc., 272 B.R. 74, First, the Court finds the suit is a new "proceeding" 91-92 (Bankr..D.C.N.Y.2002)(Rule 10(c) " filed after enactment of Sarbanes-Oxley, based on does not mean that the plaintiff adopts as the alleged wrongdoing that is not the same conduct true every statement in the exhibit . Instead, FN21 charged against other previously sued an appended document will be read to financial institution defendants in MDL 1446, on evidence what it incontestably shows once four, substantial, Enron-related transactions by RBC one assumes that it is what the complaint Defendants, which are being sued for the first time says it is (or, in the absence of a by Plaintiff, and which claims were not time-barred descriptive allegation, that it is what it at the time of Sarbanes-Oxley's enactment: appears to be").). Because Plaintiff has September 2000 Alberta Prepay; November 2000 submitted the entire po rtion of Goldin's Cerberus ; November 2000 Hawaii 125-0; and the report related to RBC Defendants, the 2001 E-Next, While Plaintiff could have included Court can view any statement selectively these claims in the Newby suit had it known of the quoted or referenced in the context from facts on which they are based, because it claims it which it was drawn to protect against any did not, because Defendants have not shown that misrepresentation or misinterpretation . Lead Plaintiff knew these facts or had inquiry notice before the release of the Goldin report, and because Rule 12(b)(6) Motion to Dismis s the suit targets distinct conduct by distinct Defendants in an action that can stand alone, there A motion to dismiss should be granted only where " is no mandate that it had to be . To require otherwise it appears beyond doubt that the plaintiff can prove would deny plaintiffs with viable causes of action no set of facts in support of his claim that would that are not time-barred the right to bring them entitle him to relief." Conley v . Gibson, 355 U.S . and/or to burden the courts by filing prematurely 41, 45-46, 78 S .Ct. 99, 2 L.Ed.2d 80 (1957) . The potential claims about which plaintiffs lack court must take all well pleaded facts as true and sufficient information . construe them in favor of the plaintiff. Calhoun v. Hargrove, 312 F.3d 730, 733 (50' Cir.2002). Therefore Defendants' disagreements with the FN21 . Insisting this action is merely an factual allegations in the complaint are not relevant extension of Newby, RBC Defendants in this review . object that Sarbanes-Oxley applies only to new proceedings, not to new claims or new parties, as this Court stated in its order (# Statute of Limitations 1999 at 55) allowing ICERS to intervene in Newby. This Court refused to allow In In re Enron Corp.Securities, Derivative & " Plaintiff to file a new, second suit or a new ERIS.4') Litig., No. MDL 1446 , Civ. A. H-01-3624, claim or add a new party to circumvent a 2004 WL 405886, *12 (S.D.Tex. Feb.25, 2004), time bar. Id. at 52 n. 42. this Court concluded that the Sarbanes-Oxley

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*12 Relying on the ICERS intervention order (# facts leading to its claims . This Court has 1999), RBC argues that this suit is an extension of previously ruled that the issue of whether a plaintiff Newby and should not be allowed to circumvent the was aware of sufficient facts to put it on inquiry Lampf time bar by waiting to file it after the notice is frequently not proper for determination on enactment of the Sarbanes-Oxley Act . This Court a Rule 12(b)(6) motion . The Court has also found notes that the situation regarding ICERS is factually that the complexity of the alleged schemes distinguishable from that in the instant action . involving Enron took substantial time to unravel, ICERS not only adopted the Newby complaint, but especially with respect to alleged wrongdoing by its claims were based on the same alleged material persons and entities outside of the corporation . misrepresentations and omissions by the same Plaintiff insists that its September 18, 2002 letter entities as those of other plaintiffs in the class seeking a tolling agreement and stating that "there action, which were known by the Regents when it exists the possibility that a defendant could argue filed the first Newby complaint. Enron, 2004 WL that the statute of limitations expires in mid-October 405886 at 13 . The claims against RBC Defendants of this year," was insufficient to constitute inquiry are not for public misrepresentations and omissions . notice. The court agrees. The The factual allegations of specific wrongdoing pleading-with-particularity requirement under the against RBC Defendants, though falling under the PSLRA requires that inquiry notice must be same statute and relating to the same Ponzi scheme, demonstrated by showing that the triggering facts are not identical to those asserted against other relate directly to the particular alleged fraud by the financial institution defendants in Newby and the particular defendant . Lentell v. Merrill Lynch & Co., claims are not time-barred . Moreover, Plaintiff 396 F.3d 161, 171 (2d Cir.2005), cert. denied, --- asserts that it did not learn of RBC Defendants' U.S. ----, 126 S .Ct. 421, --- L .Ed.2d ---- (2005), alleged illicit conduct until December 2003, while citing La Grasta v. First Union Sec., Inc., 358 F .3d Lead Plaintiff knew about the alleged 840, 846 (11a' Cir .2004); Newman v. Warnaco misrepresentations and omissions on which ICERS' Group, Inc., 335 F.3d 187, 193 (2d Cir .2003) (" ` claim rested when it first filed Newby. Although The triggering financial data must be such that it RBC Defendants argue that this suit has been relates directly to the misrepresentations and consolidated with Newby and is subject to the same omission the Plaintiffs later allege in their action scheduling and discovery orders, that "consolidation against the defendants .' "). RBC Defendants' cited " is merely a pre-trial procedural mechanism to storm warnings (such as Enron's fall 2001 control multidistrict litigation and is not related to announcement of reduction in shareholder's equity, substantive allegations of any suit in MDL 1446 . its bankruptcy, or articles generally discussing The fact that Plaintiff here calls itself "Lead Enron but not mentioning RBC Defendants) are too Plaintiff," since it is the same entity that serves as general to meet this requirement for Plaintiffs Lead Plaintiff in Newby, is not a persuasive reason specific claims against RBC Defendants . FN22 to view the instant suit as part of Newby because it Moreover, as pointed out by Plaintiff, the Fifth does not appear to have followed the PSLRA's Circuit has held that a statute of limitations bar is an procedures to become a Lead Plaintiff in this affirmative defense, which defendants bear the individual class action . burden of pleading and proving . United States v. Ret. Servs. Group, 302 F.3d 425, 430 (5u' The Court finds that the claims here were not Cir.2002)(citing Fed.R.Civ.P. 8(c)) . Nor does the time-barred under Lampfwhen Sarbanes-Oxley was letter, as argued by RBC Defendants, demonstrate enacted nor are they time barred under that Lead Plaintiff "originally intended to sue the Sarbanes-Oxley, for the following reasons. Plaintiff RBC Defendants in the Newby proceeding ." # 25 at has pled that it first discovered the facts regarding 7. Thus dismissal on the pleadings under Rule RBC's alleged role in the Enron matter on 12(b)(6) is not appropriate. December 4, 2003 and filed this suit on January 9, 2004, clearly after the enactment of Sarbanes-Oxley and less than one year after the discovery of the FN22. See also Livid Holdings, Ltd. v.

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Salomon Smith Barney, Inc., 416 F .3d scheme does not involve the type of fraud that is ` 940, 951 (2d Cir.2005) (Because " usually associated with the sale or purchase of financial problems alone are generally securities, whether the artifices employed involve a insufficient to suggest fraud . .. the filing of garden type variety of fraud, or present a unique the bankruptcy petition alone seems form of deception ."); SEC v. Zandford, 535 U.S. unlikely to satisfy the inquiry-plus-due 813, 820-21, 122 S .Ct. 1899, 153 L.Ed.2d 1 (2002) diligence standard."). (broker's continuous series of unauthorized sales of securities and personal retention of the proceeds *13 Furthermore , on July 30, 2002 , the enactment without his client's knowledge to further his date of Sarb anes-Oxley , the three-year period of fraudulent scheme "are properly viewed as a " ` repose under Lampf, which would allow a plaintiff course of business' that operated as a fraud or deceit to reach conduct back to July 20 , 1999, had not on a stockbroker's customer" in connection with the expired as to claims arising out of the September sale of securities) ; Santa Fe Industries, Inc. v. 2000 Alberta Prepay, November 2000 Cerberus, Green, 430 U.S. 462, 475-76 and n . 15, 97 S.Ct. November 2000 Hawaii 125-0 (each of which 1292, 51 L .Ed.2d 480 (Section 10(b) covers closed after September 2000), and the E-Next deceptive "practices" and "conduct") . Here Plaintiff transactions . Thus Plaintiff was not "playing games" alleges that RBC Defendants actively participating by delaying filing suit in order to circumvent the in a material course of business, comprised of a statute of limitations . Nor are claims arising out of number of key transactions employing repeated those transactions barred by the five -year period of fraudulent mechanisms, all part of a larger Ponzi repose under Sarbanes-Oxley. scheme, that operated as a fraud or deceit relating to the sale or purchase of securities ; with scienter RBC Defendants purportedly engaged in series of Primary Violation of § 10(b) and Rule I Ob- 5 deceptive transactions (disguised loans), in and central to a scheme and course of business RBC Defendants have argued that Plaintiff fails to operating to manipulate Enron's financial statements allege any relationship between RBC Defendants' and paint a falsely inflated picture of Enron's actions and Enron's securities and shareholders . financial condition to the investing public . Zandford, They did not issue or underwrite Enron securities, 535 U.S. at 821 ("It is enough that the scheme to made no statements to Enron investors, were not defraud and the sale of securities coincide ."). It also involved in the accounting treatment of the invested heavily in Enron-related entities . Goldin's transactions in which they participated. Report at 138-40 summarizes , *14 RBC argues that its status as one of Enron's In # 1194 at 29-39 in Newby, this Court discussed at second tier" banks is evidence that it did not length that a primary violation of § 10(b) and Rule provide substantial assistance to Enron. While the lOb-5 need not be in the form of a public ENA Examiner agrees that RBC was not one of misrepresentation or omission . Rule lOb-5(a) and Enron's ten top tier banks, the evidence indicates (c) allow suit, based on conduct, against defendants that RBC was trying to become a tier one bank ..., who, acting with scienter, employed a material that Enron began to treat RBC like a tier one bank, device, contrivance, scheme or artifice or and that in August and September, 2000 RBC had participated in a course of business that operated as the same information about Enron as did its top tier a fraud on sellers and purchasers of stock even if banks. Even before this time, RBC possessed the those defendants did not make a materially false or necessary information for it to know that Enron had misleading statement or omission . Affiliated Ute substantial amounts of off-balance-sheet debt, that Citizens v. United States, 406, U . S. 128, 152-53 Enron had effectively guaranteed a substantial (1972), See also Superintendent of Ins. v. Bankers portion of this off-balance-sheet debt, that Enron Life & Cas. Co., 404 U.S. 6, 11 n . 7, 92 S.Ct. 165, was not disclosing its exposure to this 30 L.Ed.2d 128 ( 1971) ("[I]t [is not ] sound to off-balance-sheet debt in its published financial dismiss a complaint merely because the alleged statements, and that the transactions RBC was

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arranging, structuring and/or funding were adding *15 As for the control person claims, the Court to Enron's undisclosed off-balance-sheet debt .... finds that Plaintiff has adequately asserted a claim RBC .. . [engaged] in repeated transactions with under § 20(a) against Royal Bank of Canada, a bank Enron . ... [M]any RBC transactions had common holding company, for its control of its subsidiaries, elements, such as the swaps that were effectively divisions, and affiliates named as defendants here, Enron Corp. guarantees in the December, 1999 Bob based on underlying primary violations by these West Treasure loan, the April, 2000 JEDI loan, the entities . As this Court has recognized, the Fifth May, 2000 Bob West Treasure credit wrap, the Circuit requires only that the plaintiff plead that the September, 2000 Alberta transaction, November, control person has the power to direct or cause the 2000 Hawaii transaction and the November, 2000 direction of the management and policies of the Cerberus transaction .... The evidence . .. suggests controlled person, not actual exercise of that power. that RBC provided structures for the Alberta transaction and helped structure the Cerberus transaction . .. . RBC argues that it was only a minor Loss Causation under Dura Pharmaceuticals debt participant in most of the relevant transactions . RBC, however, was the only lender in the Plaintiffs contention that it need only plead that December, 1999 Bob West Treasure transaction, RBC's actions "touch upon" or somehow the arranger and participant in the May, 2000 Bob contributed to plaintiffs ' damages to satisfy the loss West Treasure transaction, the equity participant in causation element for a claim under § 10(b) is no the August, 2000 ECLN transaction, the arranger longer correct under the Supreme Court's ruling in and participant in the September 2000 Alberta Dura Pharmaceuticals, Inc. v. Broudo, --- U.S. ----, transaction, and the sole lead lender in the Cerberus 125 S.Ct. 1627, 161 L .Ed.2d 577 (2005). transaction . .. . The evidence ... indicates that the circle of swaps utilized in Alberta effectively In Dura Pharmaceuticals, purchasers of stock in constituted a loan and that RBC considered the the pharmaceutical company that had submitted a transaction a loan .... The evidence .. . indicates that new asthmatic spray device for approval from the RBC knew a great deal about the relevant Food and Drug Administration, alleged in a accounting standards, Enron's accounting practices securities fraud class action suit that some of the for off-balance-sheet financings, Enron's exposure company's managers and directors misrepresented to off-balance-sheet debt, which elements and the company expected its drug sales to be profitable details Enron's auditors were likely to focus on, and and that it expected FDA approval of the spray other relevant matters . device shortly . On the final day of the purchase period the defendants disclosed that the earnings would be less than expected largely because of slow RBC Defendants urge the Court to find their role in sales, and eight months later announced that the structuring the transactions at issue was similar to FDA would not approve the device . The complaint that of Kirkland & Ellis, which the Court dismissed . asserted only, " 'In reliance on the integrity of the The defendants are distinguishable : this Court has market, [the plaintiffs] . .. paid artificially inflated recognized an exception to liability based on prices for Dura securities' and the plaintiffs substantial conduct in the representation of clients suffered 'damage[sJ' thereby." 125 S.Ct. at 1630 by law firms, which are shielded by the (emphasis in the original) . attorney-client privilege and a lawyer's duty to zealously represent his client, unless the attorney Justice Stephen Breyer, writing for a un animous speaks out to third-parties with the intent that the Supreme Court, reversed a Ninth Circuit ruling that third-parties would rely on the lawyer's statements . a plaintiff pleading secu rities fraud under § 10(b) and Rule lob-5 need only establish that the price of a security was artificially inflated on the date he Control Person Claims Under § 20(a) purchased it to plead economic loss and loss causation under the 1934 Act. FN23 The United

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States Supreme Court opined that in a fraud on the price and a subsequent economic loss after news of market case, where a plaintiff alleges that he the deception is leaked: suffered losses because he paid an artificially If the purchaser sells later after the truth makes its inflated price for a security, generally "as a matter way into the market place, an initially inflated of pure logic, at the moment that a transaction takes purchase price might mean a later loss . But that is place, the plaintiff [who has purchased securities at far from inevitably so . When the purchaser an inflated price] has suffered no loss ; the inflated subsequently resells such shares, even at a lower purchase payment is offset by ownership of a share price, that lower price may reflect not the earlier that at the instant possesses equivalent value." 125 misrepresentation, but changed circumstances, S.Ct. at 1631 . In other words, at the time the changed investor expectations, new purchase of a security occurs, the alleged inflated industry-specific or firm-specific facts, conditions, price, alone, logically cannot constitute "economic or other related events which, taken separately or loss" because the plaintiff acquires a security of " together, account for all of that lower price .... Other equivalent value" and the "misrepresentation will things being equal, the longer the time between not have led to any loss" if the plaintiff sells the purchase and sale, the more likely that is so, i.e., the shares "quickly before the truth begins to leak out." more likely that other factors caused the loss . Id. Furthermore, the Supreme Court pointed out that an implied private action for securities fraud under Id. at 1631-32. Thus the high court addressed a the Securities Exchange Act is similar in many ways narrow issue: it held that in a fraud on the market to common-law causes of action for deceit and case, a plaintiff must plead, and ultimately prove, fraudulent misrepresentation, which require a more than simply that the defendant's plaintiff to show (1) that if he had known the truth misrepresentation caused the stock price to be he would not have acted as he did; (2) that he inflated; an artificial high purchase price "is not suffered actual, substantial damage ; and (3) that the itself a relevant economic loss," but merely " defendant's deception was the proximate cause of touches upon" the subsequent loss of value and the plaintiffs injuries . FN24 does not necessarily cause the plaintiff economic loss, especially in light of the "tangle of factors affecting price." Id. at 1634, 1632 . FN25 FN23 . The Eighth Circuit had also concluded that to plead loss causation a plaintiff need only allege that defendant's FN25. Justice Breyer noted that the Ninth fraud had artificially inflated the price of Circuit's standard would not serve the the securities purchased by the plaintiff. public policy goals of the federal securities Gebhardt v. ConAgra Foods, Inc., 335 laws, i .e., maintenance of public F.3d 824, 831 (8a' Cir .2003). confidence in the market by making available private securities fraud actions ; FN24. In 1995 Congress codified the loss these statutes do not aim to "provide causation element in the PSLRA: investors with broad insurance against In any private action arising under this market losses, but to protect them against chapter, the plaintiff shall have the burden those economic losses that of proving that the act or omission of the misrepresentations actually cause." 125 defendant alleged to violate this chapter S.Ct. at 1633. The PSLRA "makes clear caused the loss for which the plaintiff Congress' intent to permit private securities seeks to recover damages . fraud actions for recovery where, but only 15 U.S.C. § 78u-4(b)(4) . where, plaintiffs adequately allege and prove the traditional elements of causation *16 Even when the purchaser later sells his shares and loss." Id. at a lower price, the Supreme Court questioned any automatic assumption of a link between an inflated Although the high court did clearly indicate more

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must be pled to establish loss causation than a FN26. In Dura Pharmaceuticals the simple allegation of inflated stock price, it avoided Supreme Court found that although the identifying what: "We need not, and do not, complaint alleged that the plaintiffs paid consider other proximate cause or loss related artificially inflated prices for Dura questions." Id. at 1633-34. It is notable that the Pharmaceutical's securities, it failed to Supreme Court did not affirmatively adopt Dura allege that the share price of the stock at Pharmaceuticals' argument that a plaintiff must issue fell substantially after the truth was allege and ultimately prove that the defendant made disclosed. 125 S .Ct. at 1634 . Instead the a corrective disclosure of the fraud that was only allegation was that the purchase price followed by a related price drop, nor did it specify was inflated and "the complaint nowhere what must be pled to establish that "the truth else provides the defendants with notice of became known" ; instead, the Supreme Court stated what the relevant economic loss might be generally that a complaint must "provide defendants or of what the causal connection might be with notice of what the relevant economic loss between the loss and the misrepresentation might be or what the cause connections might be concerning Dura's `spray device .' " Id between that loss and the misrepresentation" (i .e., " some indication of the loss and the causal *17 The Supreme Court, "assum[ing], at least for connection that the plaintiff has in mind," a argument's sake, that neither the Rules nor the subjective standard), the pleading of which "should securities statutes impose any special further not prove burdensome" for a plaintiff. FN26 Id. at requirement in respect to the pleading of proximate 1634. Thus besides a formal corrective disclosure causation or economic loss," appeared to suggest by a defendant followed by a steep drop in the price that Federal Rule of Civil Procedure 8(a)(2)'s of stock, the market may learn of possible fraud a standard ("a short plain statement of the claim number of sources: e.g., from whistleblowers, showing that the pleader is entitled to relief') analysts' questioning financial results, resignations applies to the pleading of economic loss and of CFOs or auditors, announcements by the proximate causation and that plaintiff must merely company of changes in accounting treatment going give fair notice of his claim and the grounds on forward, newspapers and journals, etc . See Alan which it is based , a "simple test." Id. at 1634 ("We Schulman and Nicki Mendoza, Dura Pharm ., Inc. concede that ordinary pleading rules are not meant v. Broudo-The least of All Evils, 1505 PLUCorp. to impose a great burden upon a plaintiff. 272, 274 (Sept.2005). Plaintiffs economic loss may Swierkiewicz v. Sorema N.A., 534 U.S . 508, 513-15 . occur as "relevant truth begins to leak out" or "after .. (2002). But it should not prove burdensome for a the truth makes its way into the market place," and plaintiff who has suffered an economic loss to the plaintiff need only give "some indication" of the provide a defendant with some indication of the loss causal link between that leaked truth and his and the causal connection that the plaintiff has in economic loss . 125 S.Ct. at 1631, 1632, 1634 . mind."). FN27 Thus , as noted supra, under Dura Moreover, the plaintiffs loss need not be caused Pharmaceuticals, one acceptable, but not the only, exclusively by the defendant's fraud. Id at 276, way to plead proximate cause and economic loss citing Sosa v. Alvarez-Machain, 542 U.S. 692, 124 (the difference between the price the purchaser paid S .Ct. 2739, 2750, 159 L .Ed.2d 718 (2004) (" and the subsequent price to which the stock Proximate case is causation substantial enough and dropped) in fraud on the market cases is to allege close enough to the harm to be recognized by the that the price a plaintiff paid for a security "fell law, but a given proximate cause need not be, and significantly after the truth [of the material frequently is not, the exclusive proximate cause of misrepresentation or omission] becomes known" harm."); Caremark Inc. v. Coram Healthcare Corp., and that the disclosure of the misrepresentation or 113 F .3d 645, 649 (7u' Cir .1997) (Loss causation " omission had a signi ficant effect on the market does not require . .. that the plaintiff plead that all of price. In sum the high court found that the plaintiffs its loss can be attributed to the false statement of the in Dura Pharmaceuticals failed to state a claim defendant ."). because they did not provide the defendants wit h

0 2006 Thomson/West . No Claim to Orig. U.S . Govt. Works.

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fair notice of their claim and the grounds on which something from the market that, when disclosed, it rested, did not assert that Dura Pharmaceuticals' negatively affected the value of the security . share price dropped substantially after the falsity of Otherwise the loss in question was not foreseeable . .. their alleged misrepresentations became known " The complaint must also assert "that the subject of (suggesting "that plaintiffs considered the allegation the fraudulent statement or omission was the cause of purchase price inflation alone sufficient"), did of the actual loss suffered." Lentell, 396 F.3d at not identify their relevant economic loss, and did 172-73, 175 . X30 If the relationship between the not describe the causal connection between their plaintiffs investment loss and the information economic loss and the alleged misrepresentation . Id misstated or concealed by the defendant is at 1634 . sufficiently direct, the element of loss causation for pleading, which requires a fact-specific inquiry at trial stage, is satisfied . Id at 174 . The pleading FN27. Not all courts agree. See, e .g., burden will vary with the circumstances . A disparity toffee v. Lehman Brothers, Inc., No. 04 between the purchase price and the "true investment Civ. 3507 RWS, 2005 WL 1492101, *14 quality" at the time of purchase, by itself, is not (S.D.N .Y. June 23, 2005), in which Judge sufficient; if there is a market-wide drop in prices, Sweet concluded that the heightened the plaintiff must plead facts that show that the pleading standard under Federal Rule of plaintiffs loss was caused by the alleged Civil Procedure 9(b) for common law misstatements and not by any intervening factor . Id. fraud applied to the pleading of loss at 174. If there was an intervening event, like a fall causation for a § 10(b), Rule IOb-5 claim. in the price of gasoline stock, the issue becomes "a matter of proof at trial and not to be decided on a While the Supreme Court rejected the Ninth Rule 12(b)(6) motion to dismiss ." Id. Thus it Circuit's lenient test for economic loss and loss appears Lentell provides different modes of causation as inadequate pleading in fraud on the pleading for different problems . market cases, it did not address, and thus left intact, more stringent requirements that had been established by other Circuit Courts of Appeals, FN28. Other Circuit Courts of Appeals, including the Second, Third, Seventh, and Eleventh . like the Supreme Court have concluded FN28 125 F.3d at 1630. For example, in Lentell v. that the plaintiff must allege and prove that Merrill Lynch & Co., 396 F.3d 161 (2d Cir.2005), he suffered an economic loss and that it cert. denied, --- U.S. ----, 126 S.Ct. 421, --- L.Ed.2d was proximately caused by defendant's ---- (2005), FN29 the Second Circuit indicated that fraudulent conduct ; it is insufficient merely a plaintiff must allege that his loss was "foreseeable" to allege the difference between the and that it was caused by the "materialization of the purchase price and the true value of the concealed risk." 396 F .3d at 173 . In Emergent security at the time of the purchase . See, Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., e.g., Semerenko v. Cedant Corp., 223 F.3d 343 F .3d 189, 197 (2d Cir.2003), the Second 165, 185 (3d Cir .2000)("Where the value Circuit described loss causation in terms of the of the security does not actually decline as tort-law concept of proximate cause, i .e., "that a result of an alleged misrepresentation, it damages suffered by plaintiff must be a foreseeable cannot be said that there is in fact an consequence of any misrepresentation ." Stated economic loss attributable to that another way, "a misstatement or omission is the misrepresentation. In the absence of a proximate cause of an investor's loss if the risk correction in the market price, the cost of caused by the loss was within the zone of risk the alleged misrepresentation is still concealed by the misrepresentations and omissions incorporated into the value of the security alleged by the disappointed investor" ; thus to and may be recovered at any time simply demonstrate loss causation the complaint must by reselling the security at an inflated price . allege "that the misstatement or omission concealed "), cert. denied, 531 U.S . 1149, 121 S .Ct.

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1091, 148 L .Ed.2d 965 (2001); Robbins v. disclosure of the intentional falsity of a Koger Properties, Inc., 116 F.3d 1441, statement, not merely that the statement 1447-48 (111' Cir .1997)("Our decisions was wrong, and tie that disclosure to the explicitly require proof of a causal economic loss . Thus "plaintiffs' failure to connection between the misrepresentation allege a corrective disclosure of the falsi ty and the investment' s subsequent decline in of defendants' opinions precludes any value,"); Bastian v. Petren Res. Corp., 892 claim that such falsity caused their losses ." F.2d 680, 685 (7 th Cir.1990)(plaintiff Initial Public, 2005 WL 1529659 at *6 . must prove causation). In re Initial Public Offering Securities Litig. v. FN29. The Court notes that Lentell issued Credit Suisse First Boston Corp„ No. MDL on January 20, 2005, about three months 1554(SAS), 21 MC 92(SAS), 2005 WL 1529659, before Dura Pharmaceuticals, and that the *6 (S.D.N.Y. June 28, 2005) . Supreme Cou rt denied certiorari, but did not reverse it, after Dura Pharmaceuticals . In the aftermath of Dura Pharmaceuticals two appellate courts have ruled on the pleading of loss FN30. Thus if the complaint asserts that a causation and economic loss . In an unpublished broker initially rated a stock as "buy" and opinion in a securities fraud class action suit subsequently downgraded it to "neutral," alleging that senior Kmart officers and Price water that fact does not constitute a "corrective house Coopers made misrepresentations about disclosure" because it does not disclose to Kmart's financial condition before the corporation the market the falsity of the earlier filed for bankruptcy and restated some interim recommendation nor allege that the financial reports, the Sixth Circuit affirmed the recommendation is the cause of the decline lower cou rt's dismissal of the complaint for failure in stock value that plaintiffs claim is their to plead loss causation for the same reasons as the loss . Id. at 175 & n. 4. Supreme Court, i.e., because in conclusory boilerplate l anguage the complaint alleged only that *18 A district court in New York has commented, plaintiffs paid artificially inflated prices for Kmart's Where the alleged misstatement conceals a securities and it "did not plead that the alleged fraud condition or event which then occurs and causes the became known to the market on any particular day, plaintiffs loss, it is the materialization of the did not estimate the damages that the alleged fraud undisclosed condition or event that causes the loss . caused, and did not connect the alleged fraud with the ultimate disclosure D FN31 By contrast, where the alleged misstatement and loss." .E. & J.L.P. v. is an intentionally false opinion, the market will not Conaway, No. 02-2334, 2005 WL 1386448 , *5 (611' respond to the truth until the falsity is revealed-i .e., Cir. June 10 , 2005). Nor did plaintiffs allege that the b kruptcy filing disclosed the a corrective disclosure. FN32 an fraud behind the prior misrepresentation; "of course , the filing of a bankruptcy petition by itself does not a security fraud allegation make ." Id. at *6. Thus the FN31 . As examples, the district court cites complaint did not give fair "notice of what the relevant economic loss might be or of what the concealed incompetence that led to the causal connection might be between the loss and the corporation's collapse, and concealment of misrepresentation ." Id. at *6 ("Here, D.E. & J. has a company's intent to recapitalize that led done nothing more than note that a stock price the plaintiff to sell his stock because he dropped after a bankruptcy announcement, never was unaware that a recapitalization will alleging that the market's acknowledgment of prior greatly increase his stock's value. Initial misrepresentations [defendants' fraud] caused that Public, 2005 WL 1529659, *6 n . 55. drop."). FN32. The complaint must plead

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In In re Daou Systems, Inc., 411 F.3d 1006 (9u' *19 The Fifth Circuit has not addressed loss Cir.2005), the Ninth Circuit found the pleading of causation since Dura Pharmaceuticals was issued, loss causation adequate where the complaint alleged nor had it examined the question in detail a steep drop in the price of the company's stock previously. FN33 Therefore this Court applies the after revelation of accounting figures that showed Second Circuit's standard under Lentell, and, its true financial condition . Specifically the pursuant to the Supreme Court's discussion in Dura complaint stated that on August 13, 1998, Daou's Pharmaceuticals, does not impose heightened or stock was priced at $18 .50 per share. Subsequently onerous pleading requirements . at the beginning of August 1998, and not before, the defendants disclosed that "Daou's operating expenses and margins were deteriorating ." Id. at FN33. Before the Supreme Court decision, 1026. On October 28, 1998 they announced that the the Fifth Circuit used the same language as Company had substantially missed its projected the Ninth Circuit in discussing pleading 3Q98 earnings and would report a loss of $0 .17 per loss causation, but it is clear from the share, and " `that the Company's rapidly escalating context that the l anguage was defined work in progress account represented over $10 differently and required a showing of million in unbilled receivables-the direct result of proximate cause : Huddleston v. Herman & prematurely recognizing revenue. ' " According to MacLean, 640 F.2d 534, 549 (5t' the complaint, before August 13, 1998 the Cir.1981 ) (the plaintiff must prove loss defendants did not reveal the actual figures to causation by demonstrating that "the analysts in order to hide the deterioration of untruth was in some reasonably direct, or operating earnings and margins resulting from proximate, way responsible for his loss. premature and improper recognition of revenue . Id. The causation requirement is satisfied in a at 1026 . The disclosure of this practice of premature Rule IOb-5 case only if the recognition of revenue before it was earned misrepresentation touches upon the allegedly resulted in a "dramatic negative effect on reasons for the investment's decline in the market, causing Daou's stock to decline to $3 .25 value. If the investment decision is induced per share, a staggering 90% drop from the Class by misstatements or omissions that are Period High of $34.375 and a $17 per share drop material and that were relied upon by the from early August 1998.' " Id. Plaintiffs' purported claimant, but are not the proximate reason economic loss was not their purchase of their stock for his pecuniary loss, recovery under the at inflated prices, but the decline in the value of Rule is not permi tted. [emphasis added by their stock directly resulting from disclosure of the Court]"), affd in part and rev'd in part Dauo's true financial condition and its earlier on other grounds, 459 U.S. 375, 103 S.Ct. misrepresentations . Id. at 1027. The Ninth Circuit, 683, 74 L.Ed.2d 548 ( 1983). taking Plaintiffs' allegations as true, found they were adequate to provide Daou with the requisite Plaintiffs suit was filed on January 9, 2004, more indication that the drop in its stock price from its than fifteen months before the Supreme Court August 13 1998 high of $18 .50, following its issued its ruling in Dura Pharmaceuticals on April disclosures beginning in August 1998, was causally 19, 2005. Dismissal based on a complaint's failure related to its practice of prematurely recognizing to comply with a Supreme Court's subsequent revenue before it was earned . Id. Plaintiffs' ruling, without allowing the plaintiff an opportunity economic loss was not the inflated price they paid to cure pleading deficiencies if it can, would be for their stock initially, but the decline in their stock unjust . Although Plaintiff has employed the value as a direct result of exposure of Daou's language rejected by the Supreme Court, from the misrepresentations following Daou's disclosures of allegations made in this complaint and in Newby, its true financial situation beginning in August which it has adopted, it is obvious from facts 1998. Id. at 1027 . already pled that Plaintiff can easily and adequately plead loss causation here . Although Plaintiffs

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proposed class purchased Enron securities at a FN34. See, e.g., Brashears v. 1717 Capital highly inflated price because of Enron's alleged Management, No. Civ. A. 02-1534KAJ, fraudulent financial statements , both complaints 2005 WL 2585247, *2 & n. 4 (D.Del. make clear that key corrective disclosures in the Oct.13, 2005); In re Bristol-Myers Squibb latter part of 2001 exposing material misstatements Sec. Litig., No. Civ. A. 00-1990(SRC), and omissions in earlier years of Enron's financial 2005 WL 2007004, *10 (D .N,J. Aug. 17, reports caused the sharp drop in price and the 2005)("The Third Circuit has made clear, investors' damage. The relatively small time gap that in actions filed under the PSLRA, between the five transactions at issue and Jeff leave to amend should not be granted in a Skilling's August 2001 resignation, Enron 's October fashion that would frustrate the heightened 2001 corrective disclosures to the world , followed pleading requirements of the statute."), by SEC's investigation , is short, just over a year, citing Cal. Public Employees' Ret. Sys. v. thus tightening the causation link . The price of the Chubb Corp ., No. 03-3755, 2004 WL stock plunged following Enron's revelation and its 3015578, *27 (3d Cir. Dec.30, 2004) . swift descent into bankruptcy. The putative class's economic loss was not the disparity in the inflated *20 Accordingly, for the reasons stated above, the purchase price and the actual quality of the Court investment, but the significant decline in the price of the securities with the startling revelation in the ORDERS that RBC Defendants' motion to dismiss fall of 2001 of Enron 's previously concealed debt is DENIED . The Court further obligations, financial exposure, and vulnerability to bankruptcy, which it allegedly had deliberately ORDERS Plaintiff to file within twenty days a hidden from investors . concise supplemental statement pleading the basis for its allegations of loss causation . Dismissal for failure to state a claim is not proper " unless it appears beyond doubt that the plaintiff can S .D.Tex.,2005. prove no set of facts in support of his claim which In re Enron Corp. Securities, Derivative & "Erisa" would entitle him to relief." Conley v. Gibson, 355 Litigatio n U.S. 41, 45-46, 78 S .Ct. 99, 2 L .Ed.2d 80 (1957), Slip Copy, 2005 WL 3504860 (S.D.Tex.) quoted in Cates v. Intl Tel. and Tel. Corp., 756 F.2d 1161, 1180 (5th Cir .1985); Livid Holdings Briefs and Other Related Documents (Back to top) Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 946 (9th Cir.2005) (dismissal "is improper unless it • 2006 WL 287154 (Trial Motion, Memorandum is clear that the complaint could not be saved by and Affidavit) Reply in Support of Third-Party any amendment") . Under Federal Rule of Civil Bank Defendants' Motion to Dismiss the Claims of Procedure 15, this Court has the discretion to allow Plaintiffs Patrick Carney, Greg Carr, Clive Runnells amendment of a pleading in the absence of undue and Nancy Runnells (Ahlich Instr. # 54 ; Deleado delay, bad faith or dilatory motive on the part of the Instr. # 52) (Jan. 04, 2006) movant, when an intervening court decision changes • 2005 WL 3740508 (Trial Motion, Memorandum the law and where repleading will not be futile nor and Affidavit) Plaintiffs' Patrick Carney, Greg Carr, prejudice the defendant. While some courts have Clive Runnells and Nancy Runnells Response to refused to grant leave to amend where there are Third-Party Bank Defendants' Motion to Dismiss heightened pleading requirements such as under the the Claims of Plaintiffs Patrick Carney, Greg Can, PSLRA because allowing such would undermine Clive Runnells and Nancy Runnells (Relating to that standard, FN34 the Supreme Court in Dura Instrument No . 4278 in Newby, 51 in Ahlich, and Pharmaceuticals reviewed the pleading of loss 49 in Delgado) (Dec . 27, 2005) causation under Rule 8's short plain statement • 2005 WL 3740506 (Trial Motion, Memorandum sufficient to provide notice of the claim to the and Affidavit) Third-Party Bank Defendants' defendant. Motion to Dismiss the Claims of Plaintiffs Patrick

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Carney, Greg Carr, Clive Runnells and Nancy Runnells (Dec. 07, 2005) • 2004 WL 2724790 (Trial Motion, Memorandum and Affidavit) Fitch, Inc .'s Reply Memorandum of Law in Support of Motion to Dismiss (Oct . 12, 2004) • 2004 WL 2724796 (Trial Motion, Memorandum and Affidavit) Reply Memorandum of Law of Standard & Poor's Credit Market Services, a Division of the McGraw-Hill Companies, Inc . in Support of its Motion to Dismiss the Claims Asserted Against it in the Complaint of Plaintiff Aric, BV (Oct . 12, 2004) • 2004 WL 2724786 (Trial Motion, Memorandum and Affidavit) Plaintiff's Consolidated Memorandum in Opposition to Fitch, Inc ., Standard & Poor's Credit Market Services, and Moody's Investors Service, Inc.'s Motion to Dismiss (Sep . 16, 2004) • 2002 WL 32912970 (Trial Motion, Memorandum and Affidavit) Defendant Joseph W . Sutton's Reply in Support of his Motion to Dismiss (Jun . 24, 2002) • 2002 WL 32946288 (Trial Motion, Memorandum and Affidavit) Rebecca Mark-Jusbasche's Memorandum in Support of Her Motion to Dismiss (May. 08, 2002) • 2002 WL 32912837 (Trial Motion, Memorandum and Affidavit) Memorandum in Support of Motion to Remand (Apr . 12, 2002) • 2002 WL 32912813 (Trial Motion, Memorandum and Affidavit) Memorandum in Support of Motion to Remand (Mar . 21, 2002) • 2002 WL 32912817 (Trial Motion, Memorandum and Affidavit) Plaintiffs' Reply to Kopper's Response to Motion to Remand (Mar. 13, 2002) • 2002 WL 32912812 (Trial Motion, Memorandum and Affidavit) Motion to Remand (Mar. 12, 2002) • 2002 WL 32912814 (Trial Motion, Memorandum and Affidavit) Plaintiffs' Motion to Remand (Mar . 12, 2002) • 2002 WL 32912815 (Trial Motion, Memorandum and Affidavit) Memorandum In Support of Plaintiffs' Motion to Remand (Mar. 12, 2002) • 2002 WL 32912816 (Trial Motion, Memorandum and Affidavit) Objection to Consolidation and Motion for Oral Argument . (Mar. 08, 2002)

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H [1] Securities Regulation 349B €60 .51 Briefs and Other Related Document s Only the Westlaw citation is currently available . 349B Securities Regulation United States District Court,S.D. New York . 349BI Federal Regulation In re VAN DER MOOLEN HOLDING N .V. 349BI(C) Trading and Markets SECURITIES LITIGATION 349BI(C)7 Fraud and Manipulation No. 03 Civ. 8284(RWS). 349Bk60 .50 Pleading 349Bk60.51 k. In General . Most Dec. 13, 2005. Cited Case s In stating their § 10(b) claim, even after enactment Background : In action for alleged § 10(b) and of the Private Securities Litigation Reform Act's other securities violations arising from illegal forms (PSLRA) particularity requirements, securities of proprietary trading by New York Stock fraud plaintiffs properly relied on "group pleading," Exchange (NYSE) specialist firm, the firm, its which provided for a presumption that statements in parent, and various individual defendants moved to prospectuses, registration statements, annual dismiss the complaint. reports, press releases or other group-published information were the collective work of those individuals with direct involvement in the everyday Holdings : The District Court, Sweet, J ., held that: business of the company ; the individual defendants were clearly cognizable corporate insiders with 1(1) plaintiffs properly relied on "group pleading" ; active daily roles in the company . Securities Exchange Act of 1934, § 10(b), 15 U .S.C.A. § 3(2) plaintiffs sufficiently pled false and misleading 78j(b); Private Securities Litigation Reform Act of character of parent company's cautionary statements 1995, § 101(b), 15 U.S.C.A. § 78u-4(b)(1, 2) ; 17 to investors ; C.F.R. § 240.10b-5; Fed.Rules Civ .Proc.Rule 9(b), 28 U.S .C.A. 5(3) plaintiffs sufficiently pled grounds for attributing to subsidiary specialist firm statements [2] Securities Regulation 349B X60.53 made by parent; 349B Securities Regulation 7(4) plaintiffs adequately pled scienter through 349BI Federal Regulation recklessness on part of certain defendants who had 349BI(C) Trading and Markets access to "red flag" information concerning 349BI(C)7 Fraud and Manipulation subsidiary's improper conduct; 349Bk60.50 Pleading 349Bk60 .53 k. Misrepresentation. 9(5) plaintiffs sufficiently pled motive element of Most Cited Case s scienter ; and To plead a § 10(b) claim, a complaint must describe with particularity each allegedly fraudulent 10(6) control person liability was sufficiently pled. statement and explain why it is fraudulent . Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b) ; Private Securities Litigation Reform Act of 1995, § 101(b), 15 U .S.C.A. § Motion granted in part and denied in part . 78u-4(b)(1, 2).

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[3] Securities Regulation 349B X60.27(5) [5] Securities Regulation 349B X60.40

349B Securities Regulation 349B Securities Regulation 349BI Federal Regulation 349BI Federal Regulation 349BI(C) Trading and Market s 349BI(C) Trading and Markets 349BI(C)7 Fraud and Manipulation 349BI(C)7 Fraud and Manipulation 349Bk60 .17 Manipulative, Deceptive 349Bk60.39 Persons Liabl e or Fraudulent Conduct 349Bk60.40 k. In General; Control 349Bk60 .27 Misrepresentation Persons. Most Cited Cases 349Bk60 .27(5) k. Forecasts, Securities fraud plaintiffs adequately alleged Estimates, Predictions or Projections . Most Cited grounds for attributing misstatements made by Cases parent corporation, regarding earnings and revenues Parent company's cautionary statements to investors of its specialist operations , to subsidiary through about regulatory risk, if they were, as alleged, made which the parent conducted those equity specialist at a time when parent knew or was recklessly operations , so as to state a § 10(b) primary violation ignorant of fact that employees of its subsidiary claim against the subsidiary ; the financial specialist firm were violating New York Stock information disseminated by the parent as Exchange (NYSE) rules, were actionable under § essentially a conduit could only have been provided 10(b) . Securities Exchange Act of 1934, § 10(b), 15 by the subsidiary specialist firm. Securities U.S.C.A. § 78j(b) ; 17 C .F .R. § 240.10b-5. Exchange Act of 1934, § 10(b), 15 U .S.C.A. § 78j(b); Private Securities Litigation Reform Act of [4] Securities Regulation 349B €60 .28(13) 1995, § 101(b), 15 U.S.C .A . § 78u-4(b)(1, 2); 17 C.F.R. § 240. 10b-5 ; Fed.Rules Civ .Proc.Rule 9(b), 349B Securities Regulation 28 U.S.C.A. 349BI Federal Regulation 349B1(C) Trading and Markets [6] Securities Regulation 349B €60.37 349B1(C)7 Fraud and Manipulation 349Bk60 .17 Manipulative, Deceptive 349B Securities Regulation or Fraudulent Conduct 349BI Federal Regulation 349Bk60 .28 Nondisclosure ; Insider 349BI(C) Trading and Markets Trading 349BI(C)7 Fraud and Manipulation 349Bk60 .28(10) Matters to Be 349Bk60 .35 Persons Entitled to Sue or Disclosed Recover 349Bk60.28(13) k. Particular 349Bk60.37 k. Buyers or Sellers. Matters. Most Cited Case s Most Cited Cases Securities fraud plaintiffs adequately alleged false Shareholders in parent corporation lacked standing and misleading character of parent company's to assert private § 10(b) manipulative scheme claim statements, which failed to reveal that its subsidiary against subsidiary through which parent conducted specialist firm's revenues had been generated, at equity specialist operations, since the alleged least in part, by illegal forms of proprietary trading, deceptive scheme, involving improper proprietary since the defendants' statements put at issue the trading, was not carried out with respect to the sources of the subsidiary's revenues, which imposed common stock of the parent, though it allegedly had obligation to disclose as well information an effect on market price of that stock. Securities concerning the source of its success . Securities Exchange Act of 1934, §§ 10(b), 15 U .S.C.A. §§ Exchange Act of 1934, § 10(b), 15 U.S .C.A. § 78j(b); 17 C .F.R. § 240.1 Ob-5 . 78j(b) ; Private Securities Litigation Reform Act of 1995, § 101(b), 15 U .S .C .A. § 78u-4(b)(1, 2); 17 [7] Securities Regulation 349B €60.45(1) C .F.R. § 240.10b-5 ; Fed.Rules Civ .Proc.Rule 9(b), 28 U.S.C.A. 349B Securities Regulation

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349BI Federal Regulation Civ.Proc.Rule 9(b), 28 U.S.C.A. 349BI(C) Trading and Market s 349BI(C)7 Fraud and Manipulation [9] Securities Regulation 349B €60.45(1) 349Bk60 .43 Grounds of and Defenses to Liability 349B Securities Regulation 349Bk60 .45 Scienter, Intent, 349BI Federal Regulation Knowledge, Negligence or Recklessness 349BI(C) Trading and Markets 349Bk60 .45(1) k . In General . 349BI(C)7 Fraud and Manipulation Most Cited Case s 349Bk6O .43 Grounds of and Defenses Securities fraud plaintiffs adequately alleged to Liability scienter through conscious misbehavior or 349Bk60 .45 Scienter, Intent, recklessness on part of parent and subsidiary Knowledge, Negligence or Recklessness corporations and certain of those individual 349Bk60 .45(1) k. In General . defendants who were members of the corporations' Most Cited Cases management boards and committees and therefore Securities fraud plaintiffs adequately pled scienter would inferably have had access to bed flagm to support § 10(b) claims against corporation, based information provided by NYSE examination reports on motive to artificially inflate value of stock, and newspaper accounts about prospective through failure to reveal regulatory investigations of disciplinary actions involving the subsidiary and its subsidiary specialist firm, in order to permit other specialist firms . Securities Exchange Act of company to use that stock to fund strategic 1934, § 10(b), 15 U.S.C.A. § 78j(b) ; Private acquisitions of other specialist firms in Securities Litigation Reform Act of 1995, § 101(b), highly-competitive, consolidating market . Securities 15 U.S .C.A. § 78u-4(b)(1, 2) ; 17 C .F.R. § 240.10b-5 Exchange Act of 1934, § 10(b), 15 U .S.C.A. § ; Fed.Rules Civ .Proc.Rule 9(b), 28 U .S.C.A. 78j(b); Private Securities Litigation Reform Act of 1995, § 101(b), 15 U.S.C.A. § 78u-4(b)(1, 2) ; 17 [8] Securities Regulation 349B €60.45(1) C.F.R. § 240.10b-5; Fed.Rules Civ.Proc.Rule 9(b), 28 U.S .C.A . 349B Securities Regulation 349BI Federal Regulation [10] Securities Regulation 349B X60.40 349BI(C) Trading and Markets 349Bi (C)7 Fraud and M anipulation 349B Securities Regulation 349Bk60.43 Grounds of and Defenses 349BI Federal Regulation to Liability 349BI(C) Trading and Market s 349Bk60.45 Scienter , Intent, 349BI(C)7 Fraud and Manipulation Knowledge , Negligence or Recklessness 349Bk60.39 Persons Liable 349Bk60.45(1) k. In General . 349Bk60 .40 k. In General; Control Most Cited Cases Persons . Most Cited Cases Securities fraud plaintiffs' allegations about alleged In order to state a claim based on control person importance of subsidiary specialist firm's revenues liability under joint and several liability provision of to parent corporation's revenue growth , or alleged the Exchange Act, a plaintiff must allege a primary § pressures brought to bear by parent on subsidia ry to 10(b) violation by a person controlled by the produce profits, did not sufficiently plead motive defendant and culpable participation by the element of scienter on the part of parent or various defendant in the perpetration of the fraud. Securities individual defendants to support § 10(b) claim Exchange Act of 1934, § 10(b), 15 U.S.C.A. § arising from subsidiary's illegal forms of proprietary 78j(b); Private Securities Litigation Reform Act of trading. Securities Exchange Act of 1934, § 10(b), 1995, § 101(b), 15 U .S.C.A. § 78u-4(b)(l, 2) ; 17 15 U .S.C.A. § 78j(b); Private Securities Litigation C.F.R. § 240.10b-5; Fed.Rules Civ.Proc.Rule 9(b), Reform Act of 1995 , § 101(b), 15 U .S.C.A. § 28 U.S .C.A. 78u-4(b)(1, 2); 17 C.F.R. § 240. 10b-5; Fed.Rules

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[11] Securities Regulation 349B €60.40 Louis Gottlieb, of counsel), Schiffrin & Barroway, Bala Cynwyd, PA (David Kessler, Marc I . Willner, 349B Securities Regulation Eric Lechtzin, of counsel), for Plaintiffs . 349BI Federal Regulation Friedman Kaplan Seiler & Adelman, New York, 349B1(C) Trading and Market s NY (Robert S . Loigman, Katherine L . Pringle, 349BI(C)7 Fraud and Manipulation Melissa E . London, of counsel), Sullivan & 349Bk6O.39 Persons Liable Cromwell, New York, NY (Robert J. Giuffra, Jr., 349Bk60 .40 k. In General; Control Stacey R. Friedman, Keith Levenberg, of counsel), Persons. Most Cited Case s for Defendants . In stating a claim based on control person liability under joint and several liability provision of the OPINION Exchange Act, securities fraud plaintiffs could logically allege that same individuals were both " SWEET , District Judge . primary violators" and "control persons," at least in *1 Defendants Van der Moolen Holding, N.V. (" case where multiple misrepresentations by various VDM Holding"), Friedrich M .J. Bottcher ("Bottcher defendants had been alleged . Securities Exchange "), Frank F . Dorjee ("Dorjee"), James P . Cleaver (" Act of 1934, §§ 10(b), 20(a), 15 U .S.C.A. §§ 78j(b) Cleaver"), and Casper F . Rondeltap ("Rondeltap") , 78t(a); Private Securities Litigation Reform Act of FNI have moved pursuant to Rules 9(b) and 1995, § 101(b), 15 U.S.C.A. § 78u-4(b)(1, 2) ; 17 12(b)(6) to dismiss the amended consolidated class C.F.R. § 240.10b-5; Fed.Rules Civ .Proc.Rule 9(b), action complaint ("the Complaint") filed by co-lead 28 U.S.C.A . plaintiffs Elizabeth Rick and Linda Greene (the " Plaintiffs"). Defendant Van der Moolen Specialists [12] Securities Regulation 349B €60 .40 USA, LLC ("VDM Specialists ") FN2 has moved separately to dismiss the Complaint pursuant to 349B Securities Regulation Rules 9(b) and 12(b)(6). 349BI Federal Regulation 349B1(C) Trading and Markets For the reasons set forth below, the motions of 349BI(C)7 Fraud and Manipulation VDM Holding and VDM Specialists are denied . 349Bk60.39 Persons Liable The motions of the Individual defendants are 349Bk60.40 k. In General; Control granted in part and denied in part. Plaintiffs are Persons . Most Cited Cases granted leave to replead within thirty (30) days of To state a claim based on control person liability entry of this opinion. under joint and several liabili ty provision of the Exchange Act, allegations of particularized facts showing culpable participation in underlying § Prior Proceedings 10(b) fraud were not required; it was sufficient that individual defendants were alleged to have This action was commenced on October 20, 2003, exercised direct day -to-day m anagement of with the filing of a class action complaint against defendant corporations and that they had VDM Holding, VDM Specialists, Boucher, responsibility for their statements to the public . Cleaver, Dorjee, and Rondeltap . By opinion and Securities Exchange Act of 1934, §§ 10(b), 20(a), order dated April 14, 2004, co-lead plaintiffs were 15 U.S.C.A. §§ 78j (b), 78t(a); Private Securities appointed and co-lead plaintiffs' requests with Litigation Reform Act of 1995, § 101(b), 15 regard to the appointment of counsel were granted . U.S.C.A. § 78u-4(b)(1, 2); 17 C .F.R. § 240. 10b-5; See Rozenboom v. Van Der Moolen Holding, N. V., Fed.Rules Civ .Proc.Rule 9(b), 28 U.S.C.A. No. 03 Civ. 8284(RWS), 2004 WL 816440, at *7 (S.D.N.Y. Apr.14, 2004). The Complaint was filed on September 14, 2004. On November 22, 2004, Goodkind Labaton Rudoff & Sucharow, New York, VDM Holding, Bottcher, Dorjee, Cleaver, and NY (Jonathan M. Plasse, Lisa Buckser-Schulz, Rondeltap moved to dismiss the Complaint . Also on

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November 22, 2004, VDM Specialists moved misleading statements published by VDM Holding separately to dismiss the Complaint. Both motions during the Class Period . were heard and marked as fully submitted on March 30, 2005 . . Dorjee has been the Chief Financial Officer ("CFO" ) of VDM Holding since January 1, 2001 . He has been a member of the VDM Board since April 11, The Parties 2001 . Dorjee is alleged to have signed certain false and misleading statements published by VDM Plaintiffs purchased publicly traded shares of VDM Holding during the Class Period . Holding ADRs between October 18, 2001 and October 15, 2003 (the "Class Period"). Cleaver has been a member of the VDM Holding Board since April 10, 2002 . He has been Chairman VDM Holding is a limited liability company of the VDM Specialists Board since 1998 . Prior to organized and existing under the laws of the joining VDM Specialists, Cleaver was the managing Netherlands . Its principal place of business in the partner of an NYSE specialist firm acquired by United States is located at 45 Broadway, New York, VDM Holding in 1998 . Cleaver is alleged to have New York . signed certain false and misleading statements published by VDM Holding during the Class Period . VDM Specialists, a limited liability company organized and existing under the laws of the United Rondeltap has been a member of the VDM States, is a majority-owned subsidiary of VDM Specialists management committee since 2000, and Holding . It was established on or about July 1999, he serves as VDM Specialists' spokesman . when VDM Holding acquired majority interests in, Rondeltap has been a member of VDM Holding's and integrated the operations of, three previously Board since April 9, 2003 . Rondeltap is alleged to separate NYSE specialist firms . VDM Specialists is have signed certain false and misleading statements a broker-dealer registered with the SEC pursuant to published by VDM Holding during the Class Period. Section 15(b) of the Exchange Act. As of August 31, 2003, VDM Specialists acted as the registered specialist for approximately 377 NYSE-listed The Action securities, which then accounted for approximately 11% of the dollar volume and 12% of the share This action is brought on behalf of all persons who volume traded on the NYSE. According to VDM purchased American Depository Receipt shares (" Holding's 2002 Annual Report, which is referenced ADRs") FN3 in VDM Holding during the Class in the complaint, VDM Specialists was at that time Period and who were damaged thereby . VDM the fourth largest specialist firm on the NYSE . Holding ADRS are alleged to have been traded actively on the NYSE throughout the proposed class VDM Holding owns 75% of VDM Specialists. The period. VDM Holding, through one of its four other 25% of VDM Specialists is owned by its operational segments known as VDM Specialists, senior managers, senior traders and other individual acts as a specialist firm on the New York Stock members of VDM Specialists . These individual Exchange ("NYSE"). Specialist firms are members of VDM Specialists are all employees of responsible for maintaining a fair and orderly VDM Holding . market in one or more specific securities and must adhere to NYSE rules that require specialist firms to *2 Bottcher has been Chief Executive Officer (" refrain from trading on the specialist firm's own CEO") and Chairman of the Management Board (" account when enough public investor orders exist to Chairman") of VDM Holding since January 2000 . pair up naturally, without undue intervention . He has been a member of the VDM Holding Management Board (the "Board") since 1997 . It is alleged that during the Class Period, VDM Bottcher is alleged to have signed certain false and Holding materially overstated and artificially

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inflated its earnings, net income, and earnings per . selling stock shares on its own account, thereby The Complaint alleges that VDM Holding failed to capturing any profits that these trades generate . disclose that throughout the Class Period, VDM During the Class Period, VDM Holding derived a Specialists derived a substantial share of its revenue substantial majority of its revenue from VDM from illegal trading practices and that subsequent Specialists . For example, in 2000, 63 .4% of VDM declines in VDM Holding's revenue were Holding's revenue was generated by VDM attributable to the apparent cessation of such Specialists, and in the first six months of 2001, 72% practices. of VDM Holding's revenue was so generated . During the Class Period, VDM Holding stated : "We Count One of the Complaint asserts that the depend heavily on our New York Stock Exchange Defendants violated Section 10(b) of the Securities specialist activities, and if they fail to grow as Exchange Act of 1934 ("the Exchange Act") and anticipated, it would hamper our revenue growth ." Rule lOb-5 promulgated thereunder. Count Two (Compl.¶J 42, 43 .) asserts that VDM Holding and the Individual Defendants violated Section 20(a) of the Exchange It is alleged that from the start of the Class Period Act. until at least January 2003, VDM Specialists breached its obligations and duties as an NYSE specialist by: (1) causing and allowing its traders to Facts trade ahead of its customers; (2) interpositioning itself between matching public buy and sell orders ; The following facts are drawn from the Complaint (3) failing to properly execute limit orders ; and (4) and do not constitute findings of the Court. freezing the Display Book (which reflects incoming orders to the NYSE) so that VDM Specialists could *3 It should be noted that the Complaint's complete proprietary trades before completing allegations concerning the general duties and orders entered by public investors. obligations of a specialist, the improper trading allegedly engaged in by members of VDM VDM Holdings made statements during the Class Specialists and others, and the NYSE and SEC Period concerning its revenue and the financial investigations into such trading practices are performance of VDM Specialists, which are alleged substantially similar to those contained in the to be false and misleading because they failed to Consolidated Complaint filed in In re NYSE disclose that VDM Specialists was engaged in Specialists Securities Litigation, No. 03 Civ . illegal forms of proprietary trading. These alleged 8264(RWS). Those allegations are described in misstatements fall into two categories : (1) risk significant detail in a companion opinion issued disclosures by VDM Holdings that implied that the today in connection with the In re NYSE Specialists Defendants were in compliance with NYSE rules, action. See In re NYSE Specialists Securities and (2) financial reports that failed to disclose that Litigation, No. 03 Civ. 8264(RWS), slip op . at the revenue figures for VDM Specialists and VDM 11-29 (S .D.N.Y. Nov. 9, 2005). Familiarity with Holding were materially inflated as a result of VDM this companion opinion is assumed . Specialists' reliance on illegal trading strategies. A description of all such statements is provided in the VDM Holding principally engages in the trading of appendix to this opinion. Those statements relating securities on exchanges in the United States and to the revenue of VDM Specialists and VDM Europe. Its NYSE specialist operations are Holding are summarized below. conducted exclusively through VDM Specialists .

VDM Specialists' revenue is derived from two categories of activities: (1) executing trades as an agent, thereby earning a share of the commission on each trade that it facilitates , and (2) buying and

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Quarter VDM VDM VDM VDM Holding Specialists Specialists Specialists Total Revenue Total Net Gain on Participation (Millions of Revenue Principal 4 Rate (%) Euros) Transactions

(Millions of Dollars)

Q1 '01 65.4 53 .4 31 .5 100.7 Q2'01 51 .7 41 .6 32.1 81 .2 Q3 '01 57.6 48.0 31 .4 73 .9 Q4 '01 61 .8 51 .6 30.7 89.3 QI '02 56.9 47.7 34.9 77.9 Q2 '02 66.4 55.8 34.5 86.3 Q3 '02 69 .1 58.1 34.7 86.0 Q4 '02 59 .7 49.1 34.4 77.2

(Improper trading alleged to have been curtailed by VDM Specialists in January 2003 .)

QI '03 40.7 31 .6 31 .7 48 .4 Q2'03 39.6 28 .9 27.7 47.5 Q3 '03 37 .3 27 .4 27.7 43 .3 Specialists' conduct in connection with individual *4 It is alleged that VDM Holding's financial specialists' activities on the floor of the NYSE . As statements during the Class Period violated SEC summarized in the chart below, it is alleged that regulations and Generally Accepted Accounting once VDM Specialists learned of the NYSE Principles ("GAAP") in that they failed to : (1) investigation into its specialist trading activities (in disclose facts necessary to present a fair and truthful or around January 2003), it was forced to curtail its representation of VDM Specialists' trading illegal trading practices , which had a material activities; (2) provide required disclosures ; and (3) adverse effect on VDM Specialists' revenue and identify and address those variables that were participation rates and also on VDM Holding's necessary for an overall understanding and revenue. However, it is alleged that instead of evaluation of the company . informing investors about the NYSE investigation on its profitability, VDM Holding told investors On or about January 13, 2003, the NYSE notified that the decline in income from VDM Specialists VDM Holding that its Division of Market was the result of a challenging trading environment Surveillance had opened an investigation of VDM and modest increases in trading volume .

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On March 20, 2003, compli ance officers of six of Of Trading Firms-Move Comes as Big Board the seven NYSE specialists first met to discuss Names Reed Interim Chief Regulatory Role concerns about improper trading that had been Questioned, Wall St. J., Sep. 22, 2003, at Al . That raised in the NYSE's then-confidential investigation . day, VDM Holding ADRs closed at $13.35 per share. The prior trading day, September 19, 2003, On March 31, 2003, NYSE investigators began VDM Holding ADRs closed at $13.97 per share . taking depositions in connection with the specialist investigation. VDM Holding did not disclose this On October 16, 2003, NYSE issued a press release information to its investors . stating that it was bringing disciplinary action and seeking fines from five specialist firms that had On April 16, 2003, VDM Holding ADRs dropped allegedly engaged in improper trading practices . 3 .5% from $11 . 10 per share to close at $10.71 per That day, VDM Holding ADRs closed at $9 .05 . share . The day before, VDM Holding ADRs had closed at $10.61 per share. On April 17, 2003, an article on the front page of The Wall Street Journal, stated that the NYSE was On March 30, 2004, VDM Specialists entered into a probing "whether at least two of [its] largest consent decree with the SEC and a substantially [specialist] firms may have engaged in ` similar stipulation with the NYSE . These front-running,' or trading ahead of clients . ..." See settlements state that between 1999 and 2003, Kate Kelly & Susanne Craig, Big Board Is Probing VDMS Specialists engaged in interpositioning, 5 Specialists For Possible "Front-Running", Wall St. trading ahead, and failing to execute marketable J., Apr. 17, 2003, at Al. That same day, the NYSE limit orders. The settlements state that this conduct, issued a one paragraph statement in which it which is estimated to have resulted in disclosed that it had begun an investigation of approximately $34 .9 million of customer several NYSE specialist firms for trading abuses . disadvantage between 1999 and 2003, violated The closing price for VDM Holding ADRs on April VDM Specialists' duty to serve public customer 17, 2003 was $10 .19 per share . orders over its own proprietary interests. Under the terms of these settlements, VDM Specialists neither On April 18, 2003 , The Wall Street Journal admitted or denied these findings . Nonetheless, it identified VDM Specialists as a target of the NYSE agreed to pay $34.9 million in restitution and $22 .7 investigation , indicated that the investigation was million in civil fines to a fund benefitting customers focused on allegations that specialists had allegedly disadvantaged from 1999 to 2003 . On the intentionally provided inferior stock-execution day that the SEC and NYSE settlements were prices to certain of their customers , and stated that executed, VDM Holding ADRs closed at $9 .29 per the SEC had launched an investigation of trading share. The previous day VDM Holding ADRs had practices at VDM Specialists and other specialist closed at $8 .91 per share . firms. See Kate Kelly & Susanne Craig, NYSE Probe Reaches 5 of 7 Specialist Firms-" Based on the SEC and NYSE orders, Plaintiffs Front-Running" Investigation Involves Biggest allege that Cleaver and Rondeltap (who were each Companies, Wall St . J., Apr. 18, 2003, at Cl . The members of VDM Specialists' management following trading day , April 21, 2003, VDM committee during some portion of the Class Period) Holding ADRs closed at $9 .71 per share . and the other defendants had knowledge of the illegal trading practices engaged in by certain of *5 On September 22, 2003, The Wall Street Journal VDM Specialists' traders . The SEC order stated, in reported that the SEC investigation had been pertinent part, that: expanded to examine whether specialist firms, [c]ertain members of [VDM Specialists'] including VDM Specialists, had traded ahead of management committee engaged in interpositioning customer orders . See Kate Kelly, Susanne Craig & in one or more of the six stocks listed above [ (i .e., Deborah Solomon, SEC Intensifies Inquiry at NYSE Nortel Networks Corporation, PFE ,

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Hewlett-Packard Company, Time Warner Inc ., The (2d Cir.2002) (citing Gregory v . Daly, 243 F.3d Walt Disney Company, and Eli Lilly & Co .) ], and 687, 691 (2d Cir .2001)). these members of the management committee had the supervisory responsibility for [VDM However, "mere conclusions of law or unwarranted Specialists'] trading operations on the NYSE floor, deductions" need not be accepted . First Nationwide including supervising a floor captain who himself Bank v. Gelt Funding Corp ., 27 F.3d 763, 771 (2d engaged in such interpositioning in one or more of Cir.1994). Furthermore, the truth of factual the six stocks . allegations that are contradicted by documents The NYSE provided VDMS with an examination properly considered on a motion to dismiss need not report, dated December 26, 2001, showing that the be accepted . See e.g., Rapoport v. Asia Elecs. firm had traded ahead and disadvantaged fourteen Holding Co., 88 F.Supp.2d 179, 184 orders, including ten orders in Norte] Networks . (S.D.N.Y.2000) . The following materials may be The NYSE also provided VDMS with an considered on a Rule 12(b)(6) motion: examination report, dated December 30, 2002, (1) facts alleged in the complaint and documents which identified nineteen instances of trading ahead attached to it or incorporated in it by reference, (2) violations in Hewlett-Packard . Senior management documents "integral" to the complaint and relied at VDMS received these reports and reviewed them upon in it, even if not attached or incorporated by with NYSE staff. reference, (3) documents or information contained in defendant's motion papers if plaintiff has *6 See In the Matter of Van der Moolen Specialists knowledge or possession of the material and relied USA, LLC, Corrected Order Instituting on it in framing the complaint, (4) public disclosure Administrative And Cease-And-Desist Proceedings documents required by law to be, and that have (the "SEC Order"), Exchange Act Release No . been, filed with the Securities and Exchange 49,502, 83 SEC Docket 2366, 2004 WL 2093996, Commission, and (5) facts of which judicial notice at ¶¶ 15-16 (Mar. 30, 2004). may properly be taken under Rule 201 of the Federal Rules of Evidence . In April 2005, a grand jury in this district handed down criminal indictments against certain current In re Merrill Lynch & Co., Inc., 273 F.Supp.2d 351, and former individual specialists at the NYSE 356-57 (S .D.N.Y.2003) (footnotes omitted). alleging violations of 15 U.S.C. §§ 78j(b) and 78ff and 17 C .F.R. § 240.10b-5 . Since the information "The issue is not whether a plaintiff will ultimately contained in these indictments can be judicially prevail but whether the claimant is entitled to offer noticed by this Court, see Ives Labs ., Inc. v. Darby evidence to support the claims ." Villager Pond, Inc. Drug Co., 638 F.2d 53.8, 544 n . 8 (2d Cir.1981), v. Town of Darien, 56 F.3d 375, 378 (2d Cir .1995) these materials will be considered in connection (quoting Scheuer v. Rhodes, 416 U.S. 232, 236, 94 with this motion . See Kramer v . Time Warner Inc., S.Ct. 1683, 40 L.Ed.2d 90 (1974)) . In other words, " 937 F .2d 767, 773 (2d Cir .1991). `the office of a motion to dismiss is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be Standards offered in support thereof.' " Eternity Global Master Fund Ltd v. Morgan Guar . Trust Co . of Defendants have moved for dismissal of the New York, 375 F.3d 168, 176 (2d Cir.2004) Complaint pursuant to Fed .R.Civ.P. 12(b)(6), 9(b), (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 and the PSLRA . In considering a motion to dismiss (2d Cir.1980)). Dismissal is only appropriate when " pursuant to Rule 12(b)(6), the Court construes the it appears beyond doubt that the plaintiff can prove complaint liberally, "accepting all factual no set of facts which would entitle him or her to allegations in the complaint as true, and drawing all relief." Sweet v. Sheahan, 235 F.3d 80, 83 (2d reasonable inferences in the plaintiffs favor ." Cir.2000); accord Eternity Global Master Fund, Chambers v. Time Warner, Inc., 282 F.3d 147, 152 375 F.3d at 176-77 .

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*7 A claim under section 10 (b) sounds in fraud and See Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d must therefore meet the pleading requirements of Cir.1990) (stating that "Rule 9(b) ... must be read Rule 9 (b), Fed.R.Civ.P. See, e.g., In re Scholastic together with Rule 8(a) which requires only a `short Corp. Sec . Litig., 252 F .3d 63, 69-70 (2d Cir .2001). and plain statement' of the claims for relief") ; Such a claim must also satisfy ce rtain requirements Credit & Fin. Corp. v. Warner & Swasey Co., 638 of the Private Securities Litigation Reform Act of F.2d 563, 566 (2d Cir .1981) (same); In re Initial 1995 ("the PSLRA"). See 15 U.S.C. §§ 78u-4(b)(1) Pub. Offering Sec. Litig. ("IPO'), 241 F.Supp.2d & 78u-4(b)(2); see generally Novak v. Kasaks, 216 281, 327 (S.D.N.Y.2003). These two rules have F.3d 300, 306-07 (2d Cir .2000) (setting forth the been read together to mean that a plaintiff need not heightened pleading standards of the PSLRA that plead evidentiary details . See, e.g., id. The Second must be met by a plaintiff who alleges securities Circuit has stated that it does "not require the fraud under Section 10(b) and Rule lOb-5 ); Shields pleading of detailed evidentiary matter in securities v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d litigation." Scholastic, 252 F.3d 63, 72. FN6 Cir.1994) ( stating that "[s ]ecurities fraud allegations Courts of this district have stated that "the under § 10(b) and Rule lOb-5 are subject to the application of Rule 9(b) .. . must not abrogate the pleading requirements of Rule 9(b)") . concept of notice pleading." 1P0, 241 F.Supp.2d at 327 n. 46. Rule 9(b) provides that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, DISCUSSION intent, knowledge, and other condition of mind of a person may be averred generally ." Fed.R.Civ.P. 9(b) 1. Plaintiffs Have Stated A Section 10(b) Claim As . The Second Circuit "has read Rule 9(b) to require To VDM Specialists, VDM Holding, And Th e that a complaint [alleging fraud] `(1) specify the Individual Defendants statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain *8 Count I of the Complaint asserts that VDM why the statements were fraudulent.' " Rombach v . Holding, VDM Specialists, and the Individual Chang, 355 F.3d 164, 170 (2d Cir .2004) (quoting Defendants violated Section 10(b) of the Exchange Mills v. Polar Molecular Corp ., 12 F.3d 1170, 1175 Act and Rule lob-5 . Section 10(b) provides in (2d Cir.1993)). pertinent part as follows : It shall be unlawful for any person, directly or In particular, the plaintiff must allege facts that " indirectly, by the use of any means or give rise to a strong inference of fraudulent intent ." instrumentality of interstate commerce or of the Novak, 216 F.3d 300, 307 (2d Cir.2000). The mails, or of any facility of any national securities Second Circuit has stated that this scienter exchange- requirement can be satisfied : " `either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute (b) To use or employ, in connection with the strong circumstantial evidence of conscious purchase or sale of any security registered on a misbehavior or recklessness .' " national securities exchange or any security not so registered, or any securities-based swap agreement Acito v . IMCER4 Group, Inc., 47 F.3d 47, 52 (2d (as defined in section 206B of the Cir.1995) (quoting Shields v. Citytrust Bancorp, Gramm-Leach-Bliley Act), any manipulative or Inc., 25 F.3d 1124, 1128 (2d Cir .1994)). deceptive device or contrivance in contravention of such rules and regulations as the Commission may Rule 8's general pleading requirement and Rule 9(b) prescribe as necessary or appropriate in the public 's particularity requirement must be read together . interest or for the protection of investors .

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15 U.S.C . § 78j. [1] The group pleading doctrine "allows plaintiffs to `rely on a presumption that statements in Rule 10b-5 provides in pertinent part as follows : prospectuses, registration statements, annual It shall be unlawful for any person, directly or reports, press releases, or other group-published indirectly, by the use of any means or information, are the collective work of those instrumentality of interstate commerce, or of the individuals with direct involvement in the everyday mails or of any facility of any national securities business of the company .' " Polar Intl Brokerage exchange, Corp. v. Reeve, 108 F.Supp.2d 225, 237 (a) To employ any device, scheme, or artifice to (S.D.N.Y.2000) . However, the doctrine "is defraud, extremely limited in scope . Courts in the Second (b) To make any untrue statement of a material fact Circuit and elsewhere have construed the doctrine or to omit to state a material fact necessary in order as applying only to clearly cognizable corporate to make the statements made, in the light of the insiders with active daily roles in the relevant circumstances under which they were made, not companies or transactions." Id. (citing Ouaknine, misleading, or 897 F.2d at 80; DiVittorio v. Equidyne Extractive (c) To engage in any act, practice, or course of Indus ., Inc., 822 F.2d 1242, 1249 (2d Cir .1987); business which operates or would operate as a fraud Powers v. Eichen, 977 F.Supp. 1031, 1041 or deceit upon any person, in connection with the (S.D.Cal.1997)); see also In re Indep. Energy purchase or sale of any security. Holdings PLC Sec. Litig., 154 F.Supp.2d 741, 767-68 (S .D.N.Y.2001). 17 C.F.R. § 240.10b-5 . *9 It has been argued that the group pleading "The language of Section 10(b) and Rule lOb-5 doctrine has not survived the particularity does not explicitly create a private right of action . requirements imposed by the PSLRA . See, e.g., In fact, the legislative history fails to indicate Southland Sec. Corp. v. Inspire Ins . Solutions, Inc ., whether Congress even contemplated creating such 365 F.3d 353, 364-65 (5th Cir.2004) (stating that a right ... . Nevertheless, courts long have held that a the group pleading doctrine "cannot withstand the private right of action was indeed created." Ontario PSLRA's specific requirement that the Public Service Employees Union Pension Trust [misstatements] be set forth with particularity as to ` Fund v. Norte] Networks Corp ., 369 F .3d 27, 31 (2d the defendant' and that scienter be pleaded with Cir.2004). regard to `each act or omission' sufficient to give ` rise to a strong inference that the defendant acted To state a claim under Section 10(b) and Rule with the required state of mind.' ") (quoting 15 10b-5 a plaintiff must plead that the defendant "(1) U.S.C. § 78u-4(b)) ; In re Cross Media Marketing made misstatements or omissions of material fact; Corporation Securities Litigation, 314 F.Supp.2d (2) with scienter; (3) in connection with the 256, 262 (S.D.N.Y.2004) (stating that the PSLRA purchase or sale of securities ; (4) upon which pleading requirements "counsel[ ] against group plaintiff[ ] relied; and (5) that plaintiff['s] reliance pleading in actions arising in securities fraud cases. .. was the proximate cause of [the] injury." In re ."); Bond Opportunity Fund v. Unilab Corp ., No. Livent, Inc. Sec. Litig., 78 F.Supp.2d 194, 213 99 Civ. 11074(JSM), 2003 WL 21058251, at *4 (S .D .N.Y. 1999) . (S.D.N.Y. May 9, 2003) ( stating that the PSLRA has eliminated the group pleading doctrine with respect to corporate directors) . A. Plaintiffs Properly Relied on Group Pleading The majority rule in this district is that the group As an initial matter, it is determined that Plaintiffs' pleading doctrine has su rvived the PSLRA. See, e.g., Section 10(b) claim properly relied on group In re AOL Time Warner, Inc. Securities and "Erisa pleading . " Litigation, No. 02 Civ. 5575(SWK), 2004 WL 992991, at *17 (S.D.N.Y. May 5, 2004) (holdin g

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that "[w]ith respect to group-published documents warnings concerning the potential legal and such as prospectuses, plaintiffs may rely on a regulatory risks confronting VDM Specialists that presumption that the group-information is the allegedly failed to disclose the actual occurrence of collective works of those individuals" directly such risks, and (2) statements concerning the involved in the day-to-day affairs of the financial performance of VDM Holding and VDM corporation); In re Emex Corp. Sec. Litig., No. 01 Specialists that allegedly failed to disclose that Civ. 4886(SWK), 2002 WL 31093612, at *7 n. 3 VDM Specialists' revenue had been generated, at (S .D .N.Y.2002) (stating that "[n]othing in the least in part, by trading practices that violated PSLRA has altered the group pleading doctrine"); NYSE rules . In re American Bank Note Holographics, Inc . Sec. Litig., 93 F.Supp .2d 424, 442 (S .D.N.Y.2000) *10 [3] Defendants argue that the first category of (stating that "[i]t is well settled that plaintiffs may alleged misstatements -i.e., VDM Holding's engage in . .. group-pleading under 10(b) and Rule warnings concerning the potential legal and lOb-5 ; nothing in the PSLRA has altered that regulato ry risks confronting VDM Specialists-are doctrine") ; In re Oxford Health Plans, Inc. Sec. non-actionable as a matter of law . Although the Litig., 187 F .R.D. 133, 142 (S .D.N.Y.1999) (stating Second Circuit previously has held that cautiona ry that "[t]he PSLRA has not altered the group statements concerning forward-looking statements pleading doctrine") . cannot insulate a defendant from potential liability for failure to disclose known material , adverse facts, This Court has previously taken the position that the see Rombach, 355 F.3d at 173, it has not had group pleading doctrine remains viable even after occasion to consider whether cautionary statements the enactment of the PSLRA . See Jordan are themselves actionable under Section 10(b) . (Bermuda) Inv. Co., Ltd v. Hunter Green There is a split in authority among those courts that Investments Ltd., 205 F.Supp.2d 243, 253 have considered the issue . Compare Voit v. (S.D.N.Y.2002); In re Livent, Inc. Sec. Litig., 78 Wonderware Corp., 977 F.Supp. 363, 371 F.Supp .2d 194 , 219 (S.D.N.Y.1999) (quoting In re (D.Pa.1997) (holding that under proper Oxford Health Plans, 187 F.R.D . at 142). Since circumstances, cautionary statements are actionable there is no dispute that the Individual pursu ant to Section 10(b)), with Zeid v. Kimberley, Defendants-all of whom were officers and/or 930 F.Supp. 431, 437 (N.D.Cal. 1996) (holding that members of the VDM Holding management board warnings in a 10-Q report concerning adverse during the Class Period-were clearly cognizable factors that could effect comp any earnings are not corporate insiders with active daily roles in the actionable as a matter of law) . company, the group pleading doctrine is applicable in this case . The better rule is the one adopted by the Volt court, which reasoned that " `to warn that the untoward may occur when the event is contingent is prudent ; B. The Complaint Properly Alleges That The to caution that it is only possible for the unfavorable Statements At Issue Were False and Misleadin g events to happen when they have already occurred is deceit .' " Voit, 977 F .Supp. at 371 (quoting In re [2] To plead a Section 10(b) claim , a complaint Westinghouse Sec. Litig., 90 F.3d 696, 710 (3d must describe with particularity each allegedly Cir.1996)). The Second Circuit has expressed a fraudulent statement and explain why it is similar view . See Rombach, 355 F .3d at 173 (stating fraudulent. See Acito v. IMCERA Group, Inc., 47 that that "[c]autionary words about future risk F.3d 47, 51 (2d Cir . 1995) (quoting Mills v. Polar cannot insulate from liability the failure to disclose Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.1993) that the risk has transpired") . ). Defendants argue that Plaintiffs have failed to allege any such misstatements with requisite Based on the foregoing, it is determined that under particularity. As described above, the alleged certain circumstances, cautionary statements can misstatements generally fall into two categories: (1) give rise to Section 10(b) liability . Here it is alleged

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that at the time that VDM Holding was warning Release, VDM Holding, "Van der Moolen earns investors about regulatory risk, it knew or was second quarter, 2002 net income of $16 .9 million" recklessly ignorant of the fact that VDM Specialists' (Aug. 1, 2002), reprinted in the 08/08/02 Form 6-K, employees were violating NYSE rules, Therefore, at 2.) Statements such as these put the sources of VDM Holding's cautionary statements concerning VDM Specialists revenue at issue. Under the the risks associated with the misconduct of its circumstances, the alleged failure to disclose the employees are actionable pursuant to Section 10(b) . true sources of such revenue could give rise to liability under Section 10(b) . [4] Defendants argue that the second category of alleged misstatements-i.e., that VDM Holding's Based on the foregoing, it is determined that financial statements failed to disclose that VDM Plaintiffs have adequately alleged that the Specialists' revenue had been generated, at least in statements at issue were false and misleading. part, by trading practices that violated NYSE rules-are non-actionable because federal securities laws do not require a company to accuse itself of C. The AllegedMisstatements Are Publicly wrongdoing. In support of this argument, Attributed to VDM Specialists Defendants cite In re Citigroup, Inc. Sec. Litig., 330 F.Supp.2d 367 (S.D.N.Y.2004) (holding that [5] VDM Specialists asserts that pursuant to the defendant was not subject to Section 10(b) liability Supreme Court's holding in Central Bank of for incurring and not disclosing litigation risks Denver, N.A. v. First Interstate Bank of Denver, associated with its securities analyst and investment N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d banking businesses) . However, the better view is the 119 (1994), it cannot be subject to Section 10(b) one expressed by the court in In re Providian Fin. liability for statements made by VDM Holding, its Corp. Sec. Litig., 152 F .Supp.2d 814 (E.D.Pa.2001) corporate parent. As stated by the Second Circuit, . The Providian court held that although a [i]n Central Bank, the Supreme Court held that defendant does not have a Rule lOb-5 duty to private civil liability under § 10(b) applies only to speculate about the risk of future investigation or those who "engage in the manipulative or deceptive litigation, if it puts the topic of the cause of its practice," but not to those "who aid and abet the financial success at issue, then it is "obligated to violation." [511 U .S. at 167, 114 S .Ct. 1439]. The disclose information concerning the source of its Court observed that "[a]iding and abetting is a success, since reasonable investors would find that method by which courts create secondary liability in such information would significantly alter the mix persons other than the violator [or violators] of the of available information," Id at 824-25 (citing statute." [Id at 184, 114 S.Ct. 1439] (quotation Shapiro v. UJB Fin. Corp., 964 F.2d 272, 281-82 marks omitted) (emphasis added). (3d Cir.1992) ; United Paperworkers Inter'l Union v. Intl Paper Co ., 801 F.Supp. 1134, 1143 SEC v. U.S. Envtl. Inc., 155 F .3d 107, 110-111 (2d (S .D.N.Y.1992)). Cir.1998).

*11 Here, the Complaint alleges that the Defendants In the wake of Central Bank, the Second Circuit made numerous statements during the Class Period adopted a bright-line rule that in order to state a concerning the sources and significance of the Section 10(b) cause of action based on an alleged revenue generated by VDM Specialists . For misstatement, the plaintiff must allege that the example, in August 2002, Boucher stated, "[i]n defendant made a false or misleading statement . See exceedingly turbulent market circumstances we Wright v. Ernst & Young LLP, 152 F.3d 169, 175 were able to maintain our second quarter result at (2d Cir.1998) (affirming dismissal of lob-5 claim almost the level we achieved in the first quarter. against company's auditor for approving false and The development of our NYSE business showed misleading financial figures that were subsequently once again that trading volumes and price volatility disseminated by the company) (quoting Shapiro v. determine our opportunities to trade ." (Press Cantor, 123 F.3d 717, 720 (2d Cir .1997)). The

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Wright court stated that while the plaintiff need not [A] plaintiff may state a claim for primary liability allege that the defendant directly communicated the under section 10(b) for a false statement (or misrepresentation to investors , it is necessary that " omission), even where the statement is not publicly the misrepresentation . .. be attributed to [the attributed to the defendant, where the defendant's defendant ] at the time of public dissemination, that participation is substantial enough that s/he may be is, in advance of the [plaintiffs ] investment decision. deemed to have made the statement, and where " Id. investors are sufficiently aware of defendant's participation that they may be found to have relied This bright-line public attribution rule on it as if the statement had been attributed to the notwithstanding , a subsequent Second Circuit p anel defendant. held that under proper circumstances , a defendant can be held liable pursuant to Section 10(b) for a Id at 332 (citing In re Lernout & Hauspie Sec. false and misleading statement even if the statement Litig. v. Lernout, 230 F.Supp.2d 152 (D.Mass.2002) at issue was not attributed to the defendant at the ). time of its public dissemination . See In re Scholastic Corp. Sec. Litig., 252 F.3d 63 , 75-76 (2d Pursuant to Wright, Scholastic, and Global Cir.2001) (holding that a complaint properly pled Crossing, dismissal of Plaintiffs' Section 10(b) primary violation of Section 10(b) by company's misrepresentation claim against VDM Specialists is vice president where facts were alleged not warranted. Plaintiffs have specifically alleged demonstrating that : ( 1) the company had that VDM Holding's SEC filings and press releases, disseminated false and misleading statements to its in some instances, clearly identified VDM investors; (2) the defendant had primary Specialists as the source of the information responsibility for the comp any's communications concerning revenue and earnings attributable to its with investors and securities analysts; and (3) the NYSE specialist operations at the time of their defendant was "involved in the drafting , producing, public dissemination. Defendants are correct in their reviewing and/or disseminating of false and assertion that Plaintiffs have not alleged any facts misleading statements"). demonstrating that VDM Specialists participated in any way in the drafting, producing, reviewing *12 The Scholastic decision does not refer to and/or disseminating of the alleged misstatements . Wright, and no subsequent Second Circuit panel has However, the defendant need not directly attempted to synthesize the two decisions . Some communicate the misrepresentation to plaintiffs in district courts have taken the position that Scholastic order to be held liable under section 10(b). See did not significantly alter the public attribution rule Shapiro, 123 F.3d at 720. In these instances, the articulated in Wright. See, e.g., In re Parmalat Sec . public was made aware that the misstatements were Litig., 376 F.Supp.2d 472 (S .D.N.Y.2005) (stating attributable to VDM Specialists, and VDM that the Scholastic court "did not question, let alone Specialists knew or should have known that the purpo rt to set aside, the attribution rule set forth in investing public would rely upon them. Therefore, Wright . .. "). Other courts have adopted the view under Wright, to the extent that plaintiffs' claims that Scholastic relaxed Wright's public attribution allege that the misrepresentations were publicly requirement. See, e.g., SEC v. Pimco Advisors Fund attributed to VDM Specialists, they have adequately Mgmt. LLC, 341 F .Supp.2d 454, 466 stated a lOb-5 claim against VDM Specialists . (S,D.N.Y.2004). Plaintiffs also contend that even where VDM A particularly useful synthesis of the two cases can Holdings did not clearly attribute the alleged be found in In re Global Crossing, Ltd. Sec. Litig., misstatements to VDM Specialists, VDM 322 F.Supp.2d 319, 330-32 (S .D.N.Y.2004). Based Specialists may be held primarily liable for the on a close reading of Wright and Scholastic, the statements disseminated by VDM Holding where it Global Crossing court provided the following is shown that it was "the original and knowing restatement of Wright's public attribution rule : source of a misrepresentation and that [it] knew or

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should have known that the misrepresentation may be found to have relied on it as if the would be communicated to investors ." In re Kidder statement[s] had been publicly attributed to [it]." Peabody Sec. Litig., 10 F.Supp .2d 398, 407 Global Crossing, 322 F .Supp.2d at 332 . (S.D.N.Y.1998) (holding that a corporate subsidiary could be held primarily liable under Section 10(b) Under these facts, it is reasonable to infer that VDM for statements made by the corporate parent where Specialists' financial data were incorporated directly it was alleged that the subsidiary was the "original into VDM Holding's public statements regarding and knowing source" of the misstatements) . The the earnings of its specialist operations . Therefore, facts at issue here closely mirror those the Kidder even where VDM Holding failed to explicitly Peabody court confronted. As in Kidder Peabody, " identify VDM Specialists as the source of the there is no dispute that [VDM Specialists] provided information concerning revenue and earnings of its [VDM Holding] with financial data on a quarterly specialist operations, the misrepresentations may be basis and that the data was incorporated in [VDM constructively attributed to VDM Specialists . See id. Holding's] financial statements and quarterly and at 333 n . 14 (noting that a rule of constructive annual reports ." Id. at 407. When VDM Holding attribution comports with the Second Circuit's reported VDM Specialists principal trading emphasis on reliance) . To hold otherwise would revenues, it was the "mere" conduit through which enable parent companies to create subsidiaries the information was disseminated. Id. under which all of its business would be conducted and then to shield the subsidiaries from section *13 It should be noted that Kidder Peabody was 10(b) liability by disseminating the subsidiary's decided prior to Wright and Scholastic, and as such, false information. See id at 333 (holding that the " its continued viability has been called into question . strict requirement of public attribution would allow It is determined, however, that regardless of the those primarily responsible for making false weight that should be accorded Kidder Peabody, statements to avoid liability by remaining Plaintiffs have adequately pled a Section 10(b) anonymous and thus would place a premium on claim against VDM Specialists in accordance with concealment and subterfuge rather than on Central Bank, Wright, an d Scholastic. VDM compliance with the federal securities laws ." Specialists made material misstatements attributable (internal quotations and citations omitted)). to it at the time of dissemination upon "which a purchaser or seller of securities relied." Central [6] In the alternative, Plaintiffs argue that VDM Bank, 511 U.S. at 191, 114 S .Ct. 1439 . Specialists can be found primarily liable pursuant to Section 10(b) for engaging in a scheme to defraud It is noteworthy that VDM Specialists is the investors. Plaintiffs argue that they have properly subsidiary through which VDM Holdings conducts alleged that VDM Specialists' traders engaged in a all of its specialist operations on the NYSE. (See scheme to defraud certain of their customers and Compl. ¶ 3). Under the circumstances, the that the holders of VDM Holding's ADRs were misstatements-namely quarterly and annual thereby indirectly harmed . The underlying scheme reporting of principal trading revenues and profits has been summarized as follows : for VDM Holding's specialist activity-could have *14 [C]ertain specialists at [VDM Specialists] come only from VDM Specialists . In other words, engaged in .. . unlawful proprietary trades with when VDM Holding disseminated financial scienter, violating their implied representations to information to the public regarding its specialist public customers that they were limiting dealer operations, it related only to the activity of VDM transactions to those reasonably necessary to Specialists and could have been provided only by maintain a fair and orderly market . In those VDM Specialists. Additionally, because VDM instances, individual specialists at [VDM Holding referred only to the activity of VDM Specialists] violated Section 10(b) of the Exchange Specialists in reporting its specialist earnings, Act and Rule lOb-5 thereunder . Under Section investors may be deemed to have been "sufficiently 15(b)(4)(E) of the Exchange Act, VDMS failed aware of [VDM Specialists'] participation that they reasonably to supervise those individual specialists

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with a view to preventing their violations of Section or knowing sale of company stock at an 10(b) of the Exchange Act and Rule lOb-5 unwarranted discount . Novak, 216 F.3d at 308 . In thereunder. VDMS also violated NYSE Rules 92, the context of securities fraud claims, the Second 104, 12313, 342, 401 and 476 . Circuit has defined "recklessness" as an "egregious refusal to see the obvious, or to investigate the (SEC Order at ¶ 2.) Such allegations may well be doubtful" Chill, 101 F .3d at 269 (quoting Goldman adequate to state a 10(b) fraudulent scheme claim v. McMahan, Brafman, Morgan & Co ., 706 F.Supp. against VDM Specialists . However, these plaintiffs 256, 259 (S .D.N.Y.1989) (internal quotations lack standing to assert that claim . It is axiomatic omitted)) . The Second Circuit has "found that in order to have standing, "a IOb-5 plaintiff in a allegations of recklessness to be sufficient where private damages action must have been either a plaintiffs alleged facts demonstrating that purchaser or seller of the securities that form the defendants failed to review or check information basis of the ... deceptive conduct ." 2 Thomas Lee that they had a duty to monitor, or ignored obvious Hazen, The Law of Securities Regulation § 12 .7[1] signs of fraud ." Novak, 216 F.3d at 308-09 (citing, (5th ed .2005); see also Dabit v. Merrill Lynch, inter alia, SEC v. McNulty, 137 F .3d 732, 741 (2d Pierce, Fenner & Smith, Inc ., 395 F.3d 25, 37 (2d Cir.1998) (holding that the pleading standard was Cir.2005) (citing Blue Chip Stamps v. Manor Drug met where the defendant allegedly included false Stores, 421 U.S. 723, 754-55, 95 S .Ct. 1917, 44 statements in SEC filings that were so obviously L.Ed.2d 539 (1975) ; Birnbaum v. Newport Steel suspicious that outside counsel had recommended Corp., 193 F .2d 461, 463-64 (2d Cir.1952)) . Here, against their inclusion)) ; see also In re WorldCom, Plaintiffs allege only that they were buyers of VDM Inc. Sec. Litig., 346 F.Supp .2d 628, 672 Holding ADRs . They have not, and cannot, allege (S .D.N.Y.2004) (stating that "in an attempt to that they were customers defrauded by VDM demonstrate recklessness, plaintiffs in Section 10(b) Specialists' improper proprietary trading . Therefore, cases often assert that a defendant ignored `red Plaintiffs fraudulent scheme claim asserted against warning flags' of another actor's wrongdoing") VDM Specialists fails as a matter of law. (citing Chill, 101 F.3d at 269; 7 In re Philip Servs. Corp. Sec. Litig., No. 98 Civ. 0835(MBM), 2004 WL 1152501, at *9 (S .D.N.Y. May 24, 2004) ; D. The Complaint Properly Alleges Scienter In re Complete Mgmt. Inc. Sec. Litig., 153 F.Supp.2d 314, 334 (S .D,N.Y.2001)). As noted above, in the context of Section 10(b), Plaintiffs may satisfy the scienter requirement by *15 In order to establish scienter on the part of alleging facts showing that the defendant had the VDM Specialists, Plaintiffs allege that VDM motive and the opportunity to commit the fraud or Specialists engaged in "deliberate illegal behavior" facts constituting strong circumstantial evidence of of which VDM Specialists was aware early in the conscious misbehavior or recklessness . See Acito, Class Period . According to Plaintiffs, VDM 47 F.3d at 52. Specialists' "deliberate illegal behavior" is demonstrated by the SEC Order, which recounts thousands of instances throughout the Class Period 1. Plaintiffs Properly Allege Recklessness On The in which VDM Specialists engaged in Part Of VDM Holding, VDM Specialists, And The front-running, trading ahead, inter-positioning, and Individual Defendants other forms of manipulative and deceptive trading practices. These allegations are buttressed by [7] Plaintiffs contend that the Complaint properly Plaintiffs' allegations that VDM Specialists was alleges conscious misbehavior and recklessness on alerted early in the Class Period that its specialists the part of VDM Holding, VDM Specialists, and were engaging in fraudulent specialist trading . the Individual Defendants. The Second Circuit has Specifically, Plaintiffs allege : stated that "conscious misbehavior" encompasses " [t]he NYSE provided VDM [Specialists] with an deliberate illegal behavior" such as insider trading examination report, dated December 26, 2001 ,

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showing that the firm had traded ahead and them with NYSE staff. Fourth, it is alleged that disadvantaged fourteen orders, including ten orders VDMS Specialists operations accounted for the vast in Nortel Networks . The NYSE also provided VDM majority of VDM Holding' s revenue . [Specialists] with an examination report, dated December 30, 2002, which identified nineteen *16 Drawing all reasonable inferences in favor of instances of trading ahead violations in Hewlett the Plaintiffs, the Complaint adequately alleges that Packard. each of the two NYSE examination reports constituted red flags suggesting the possibility that a SEC Order at ¶ 16. The allegation that VDM significant portion of VDM Specialists' revenue Specialists was specifically put on notice of the very from principal transactions might be derived from conduct that resulted in the fraudulent trades that violated NYSE rules . FN9 The overstatement of VDM Specialists'-and therefore Complaint also adequately alleges that Cleaver and VDM Holdings-revenues and earnings is sufficient Rondeltap, who sat on VDM Specialists' six-person to satisfy recklessness on the part of VDM management committee throughout the Class Specialists . Period, had been made aware of (or had access to) the information contained in the examination In order to establish scienter on the part of VDM reports, Finally, recklessness can be inferred from Holding and the Individual Defendants, Plaintiffs the Complaint's allegations that upon joining the argue, in essence, that the Complaint properly VDM Holding management board, Cleaver and alleges that the VDM Holding Defendants ignored Rondeltap each acquired the authority to raise red flags concerning NYSE rule violations by its questions and voice doubts concerning the validity subsidiary . First, it is alleged that Cleaver, who is of VDM Holding's financial statements . alleged to have signed certain of the VDM Holding's false and misleading statements during Defendants argue that the NYSE examination the Class Period, was chairman of the VDM reports were legally insufficient to serve as red flags Specialists' management committee and that he of the securities fraud alleged in the Complaint-i.e., became a member of VDM Holding's six-member FNg a scheme to defraud holders of VDM Holding's management board on April 10, 2002. Second, ADRS. The law, at least in this circuit, imposes no it is alleged that Rondeltap, who is alleged to have such requirement that a red flag reveal to a signed certain of VDM Holding's false and defendant all aspects of a given fraud . Rather, the misleading statements during the Class Period, was sine qua non of red flags are "facts which come to a a member of VDM Specialists' management defendant's attention that would place a reasonable committee since 2000, and that he became a party in defendant's position `on notice that the member of VDM Holding's management board on audited company was engaged in wrongdoing to the April 9, 2003, Third, it is alleged that the SEC detriment of its investors .' " In re WorldCom, Inc. determined: (1) that certain members of the VDMS Sec. Litig., 346 F.Supp .2d 628, 672 (S .D.N.Y.2004) Specialists' management committee had engaged in (quoting In re Sunterra Corp. Sec. Litig., 199 interpositioning; (2) that on December 26, 2001, the F.Supp.2d 1308, 1333 (M .D.Fl.2002)). Here, it has NYSE provided VDM Specialists with an been adequately alleged that the NYSE examination examination report documenting instances in which reports provided reasonable notice that the revenue VDM Specialists traders had traded ahead of orders figures disseminated by VDM Holding to its involving shares of Nortel Networks Corporation ; investors included some non-negligible quantity of (3) that on December 30, 2002, the NYSE provided revenue generated through trades that violated VDM Specialists with an examination report NYSE rules . documenting instances in which VDM Specialists traders had trading ahead of orders involving shares Relying on two cases from this district , see In re of common stock of Hewlett-Packard Company ; Philip Servs. Corp., 383 F.Supp.2d 463 and (4) that VDM Specialists' senior management (S.D.N.Y.2004) and In re Leslie Fay Companies, received these examination reports and reviewed Inc., 871 F.Supp . 686, 698-99 (S .D.N.Y.1995),

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modified on other grounds, 918 F.Supp . 749 that could be considered red flags, recklessness had (S.D.N.Y.1996), Defendants argue that the been properly pled based on their general examination repo rts could not have constituted red allegations that the defendants' senior positions in flags because they constituted mere warning signs the company gave them access to "adverse that VDM Specialists were engaged in illegal undisclosed information ." Aegon stands for the trading . As an initial matter, it should be noted that proposition that recklessness cannot be alleged the Complaint does not allege that the examination merely by stating that based on a defendant's reports merely warned that employees of VDM position in a company it is likely that he or she had Specialists might be engaged in trading practices access to unspecified nonpublic adverse that violated NYSE rules. Rather, they are alleged information. Id. (citing In re Interpublic Sec. Litig., to have documented numerous specific instances in No. 02 Civ. 6527(DLC), 2003 WL 21250682, at which such rules were violated . Furthermore, * 14 (S.D.N.Y. May 29, 2003)) ; see also In re neither the Philip Services court nor the Leslie Fay Health Mgmt. Sys., Inc. Sec. Litig., No. 97 Civ. court articulated any rigid distinction between " 1865(HB), 1998 WL 283286, at *6 (S .D.N.Y.1998) warning signs" and "red flags ." Rather , each court (rejecting plaintiffs theory that based solely on evaluated the complaint to determine whether the defendants' membership on certain boards of plaintiff had properly alleged that the defendant directors, they "must have known the true ignored obvious signs of fraud. Here, Plaintiffs have seriousness of [a company's] problems") . Neither adequately alleged that Cleaver and Rondeltap Aegon nor any of the other cases described above ignored obvious signs that VDM Holding' s financial provide support for the proposition that in order to statements were false and misleading to the extent allege adequately that a defendant has ignored red that they failed to disclose that some po rtion of flags, plaintiff must allege with particularity that the VDM Specialists' revenue generated by trades that defendant engaged in the physical act of reading a violated NYSE rules . report . In contrast to Aegon, the fact that there were reports concerning illegal trading and that these *17 Defendants also argue that Plaintiffs have failed reports were available to certain members of the to adequately allege that the information contained VDM Specialists' management committee support a in the examination reports was known to Cleaver reasonable inference that Cleaver and Rondeltap and Rondeltap. Defendants point out that the either were aware of or had access to the NYSE Complaint contains no allegations that such examination reports and the information contained information was ever directly communicated to therein. Cleaver and Rondeltap . Rather, it must be inferred from the facts alleged (particularly the fact that However, the above-described allegations NYSE officials discussed each of the examination concerning the examination reports fail to allege report with individual members of the VDM recklessness on the part of Bottcher and Dorjee. Specialists' management committee) that the Even though the group pleading doctrine applies in information contained in the examination reports this case, allegations of Rondeltap's and Cleaver's was brought to their attention or made available to reckless disregard of red flags cannot be imputed to them . Defendants argue this court's decision in In re Bottcher and Dorjee . See, e.g., In re Bayer AG Sec. Aegon N. V. Sec. Litig., No. 03 Civ. 603(RWS), Litig., No. 03 Civ . 1$46(WHP), 2004 WL 2190357, 2004 WL 1415973, at *17 (S.D.N.Y. June 23, 2004) at *15 (S.D.N.Y. Sept.30, 2004) (stating that even renders that seemingly reasonable inference where statements are imputed to all defendants impermissible . In Aegon, the Plaintiffs failed to pursuant to the group pleading doctrine, "plaintiffs identify any specific documents or any specific must still establish scienter as to each defendant") pieces of information that would have given (citing Steed Fin. LDC v. Nomura Sec. Intern., Inc., defendants' notice that the company's public No. 00 Civ . 8058(NRB), 2004 WL 2072536, at *5 statements were false and misleading . The Aegon (S.D.N.Y. Sept.14, 2004)); see also In re plaintiffs argued unsuccessfully that despite their Regeneron Pharm., Inc. Sec. Litig., No. 03 Civ. failure to identify any specific documents or reports 3111(RWS), 2005 WL 225288, at *11 (S .D.N .Y.

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Feb.1, 2005). argue that these allegations are conclusory and do not properly allege that Bottcher and Dorjee acted *18 Defendants also argue that Plaintiffs have not with fraudulent intent. adequately pled recklessness, arguing that " plaintiffs' conclusion that VDM Holding or the Here, it is undisputed that on April 17, 2003, the Individual Defendants should have detected an NYSE issued a one-paragraph statement disclosing improper source of revenue alleged to average such that it had launched an investigation of several a small portion of VDM Holding's revenues-less NYSE specialist firms . It is similarly undisputed than 0.56 percent-is legally untenable ." Indeed, the that on April 18, 2003, The Wall Street Journal Second Circuit has recognized that the magnitude of reported that VDMS and other specialist firms were fraud is relevant in weighing an alleged inference of the subject of an investigation by the NYSE into recklessness . See, e.g., Novak, 216 F.3d at 309 illegal trading practices on the floor of the NYSE . (holding that "the failure of a parent company to Given VDM Holding's reliance on revenue interpret extraordinarily positive performance by its generated by its Wall Street-based specialists firm, subsidiary-even the `unprecedented and it is reasonable to infer that Bottcher and Dorjee dramatically increasing profitability' of a particular kept abreast of company news that appears in The form of trading-as a sign of problems and thus to Wall Street Journal. Therefore, the Complaint investigate further does not amount to recklessness properly alleges that on April 18, 2003, Bottcher under the securities laws ." (quoting Chill, 101 F .3d and Dorjee became aware of red flags that should at 269-70)). This argument fails. Defendants' have alerted them to the real reason for the steep argument improperly assumes that the fraudulent decline in VDM Specialists' and VDM Holding's activity cited by the SEC and the NYSE constitutes revenues . the full scope of the improper trading activities engaged in the VDMS during the Class Period. *19 Based on the foregoing, it is determined that Plaintiffs have not alleged that the trades cited by the Complaint adequately alleges that from the SEC and the NYSE comprise the entirety of December 26, 2001 to the end of the Class Period, Defendants' wrongdoing . Accordingly, Defendants' VDM Specialists knew of or recklessly disregarded argument that the minimal magnitude of fraudulent trading practices and resulting wrongdoing negates an adequate allegation of misleading revenue figures . The Complaint also recklessness fails. adequately alleges that from April 10, 2002 to the end of the Class Period, VDM Holding recklessly Finally, the Complaint alleges that on January 13, disregarded red flags as to the likely false and 2003, VDM Specialists received written notice that misleading nature of VDM Specialists' revenue the NYSE Division of Market Surveillance had figures. With respect to Cleaver, recklessness has opened an investigation into its specialist activities been adequately alleged for the period from April on the floor of the NYSE . It is alleged that as soon 10, 2002 until the end of the Class Period . With as the Defendants were notified about the respect to Rondeltap, recklessness has been investigation, they were forced to curtail the abusive adequately alleged for the period from April 9, trading practices that had been taking place at VDM 2003 until the end of the Class Period . With respect Specialists, and as a result, VDM Specialists' to Bottcher and Dorjee, recklessness has been revenue production fell off precipitously. It is adequately alleged for the period from April 18, alleged that instead of disclosing the real reason for 2003 to the end of the Class Period. the decline in VDM Specialists' revenue, Bottcher and Dorjee falsely represented that such declines were temporary and due to poor market conditions . 2. The Complaint Adequately Alleges That VDM Plaintiffs urge the Court to assume that Bottcher Holding and the Individual Defendants Ha d and Dorjee, who are based in the Netherlands, Motive To Commit Fraud would have been informed of the NYSE investigation on January 13, 2003 . Defendants Plaintiffs also argue that with respect to VDM

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Holding and the Individual Defendants, the *20 Plaintiffs also argue that courts have found Complaint establishes scienter by properly alleging motive properly plead where it was alleged that a that they had motive and opportunity to commit parent company pressured a subsidiary to produce fraud. It is undisputed that VDM Holding and the profits . See Kidder Peabody, 1995 WL 590624, at Individual Defendants had opportunity to commit *5. The Kidder Peabody court held that plaintiffs' fraud. What is disputed is whether the Complaint allegations that a corporate subsidiary "wanted to properly alleges that they had motive to commit show [its parent] that [it] was capable of being fraud. The Second Circuit has stated that : profitable" were adequate to allege motive to [s]ufficient motive allegations " `entail concrete commit fraud on the part of the subsidiary . Id. In a benefits that could be realized by one or more of the later decision in the same case, the Court restated its false statements and wrongful nondisclosures earlier holding somewhat, explaining that it had alleged.' " Novak, 216 F.3d at 307 (quoting Shields, previously found that motive is properly pled where 25 F.3d at 1130) . Motives that are generally it is alleged that a parent exerted pressure on its possessed by most corporate directors and officers subsidiary to produce profits . In re Kidder Peabody do not suffice ; instead, plaintiffs must assert a Sec. Litig., 10 F.Supp.2d 398, 417 (S .D.N.Y.1998) . concrete and personal benefit to the individual defendants resulting from the fraud . Novak, 216 Here, Plaintiffs have alleged no facts to demonstrate F.3d at 307-08 . Insufficient motives, we have held, that VDM Holding exerted pressure of any sort on can include (1) the desire for the corporation to VDM Specialists or on Cleaver or Rondeltap. appear profitable and (2) the desire to keep stock Rather, Plaintiffs merely reiterate the unremarkable prices high to increase officer compensation . Id. fact that proprietary trading was the most profitable (citing cases) . On the other hand, we have held aspect of VDM Specialists' operation . Such motive sufficiently pleaded where plaintiff alleged allegations, without more, do not amount to that defendants misrepresented corporate evidence of parent pressure, and as such, are not performance to inflate stock prices while they sold sufficient to plead that VDM Holding or the their own shares . Id. (citing cases). Individual Defendants bad a motive to commit fraud. Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir .2001). [9] Finally, Plaintiffs have alleged that, since the [8] Here Plaintiffs have put forward three motive mid-1990s, the specialist industry has gone through allegations : (1) the importance of VDM Specialists' a period of consolidation, which has reduced the revenues to VDM Holding's revenue growth, (2) number of firms serving as NYSE specialists from VDM Holding's pressure on Cleaver and Rondeltap thirty-eight in 1997 to approximately nine at the to increase VDM Specialists' revenue ; and (3) time that VDM Holdings first listed ADRs on the artificially inflating stock prices to fulfill VDM NYSE. In its registration statement, VDM Holding Holding's plan to grow by acquisition . warned that as a result of this consolidation, its future profitability would rely on its ability to With respect to the first allegation of motive, it is acquire additional specialist firms in a market well established that allegations concerning a populated with competitors that had greater access defendant's desire to " `sustain the appearance of to capital. Specifically, VDM Holding stated : corporate profitability' " are not legally sufficient [O]ur current and potential competitors have to plead motive to commit securities fraud. See established or may establish other co-operative Novak, 216 F.3d at 307 (quoting Chill v. General relationships or may consolidate to enhance their Elec. Co., 101 F.3d 263, 268 (2d Cir .1996)). services. This trend is evidenced in particular by the Therefore, allegations concerning the importance of rapid consolidation of [NYSE] specialists, the VDM Specialists' revenue to VDM Holdings number of which has fallen from 37 as of December revenue growth, without more, are inadequate to 31, 1996 to nine as of September 30, 2001, properly plead motive to commit fraud. assuming all publicly announced acquisitions are completed . Three of the top five of these specialists

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are owned or affiliated with banking groups which Holding was under acute pressure to maintain the have significantly greater financial resources than value of its shares in order to maximize its ability to we do and three of the top five are affiliated with acquire other specialist firms . investment banks which act as underwriters on the initial public offerings of companies seeking to list Such allegations adequately allege that VDM on the [NYSE]. As a result of this consolidation, Holding was motivated to artificially inflate the there are now fewer potential acquisition targets value of its shares in order to maximize the use of among the remaining specialist firms , which could those shares as currency for acquisitions . See hinder our growth. Rothman, 220 F.3d at 93-94 (stating that "[w]hether sufficient motive could be shown solely by an See 10/15/01 20-F Registration Statement, at 17 allegation of a high stock price artificially (stating that "there are now fewer potential maintained in the context [of an] impending acquisition targets among the remaining specialist acquisition might well depend on the particular firms, which could hinder our growth") . circumstances of the case, and . .. is not the issue Furthermore, in VDM Holding's press release before us") ; In re Interpublic Securities Litigation, announcing the listing of its ADRs on the NYSE, No. 02 Civ . 6527(DLC), 2003 WL 21250682, at Bottcher stated it was VDM Holding's intention to * 10 (S.D.N.Y. May 29, 2003) (stating that "[w]hile use its shares for the acquisition of additional the simple purchase of one company by another specialist firms: *21 Today 's listing on the New may not ordinarily provide a sufficient allegation of York Stock Exchange affirms our strong a motive to commit fraud, a sustained and extensive commitment to Wall Street and to the U .S . financial plan to grow by acquisition, particularly through markets, which account for some 70% of Van der scores of acquisitions paid for with a company's Moolen's revenues. We will use our higher U .S. stock, as alleged here, may") . market visibility to increase investor appreciation of the company's clear value attractions and as a The Interpublic court held that "the complaint potential currency for future acquisitions. sufficiently allege[d] that [the company's] decision to grow by acquisition motivated [it] to inflate its Press Release, VDM Holding, "Van der Moolen reported earnings over the same period in order to ADRs begin trading on New York Stock Exchange" have a higher stock price than it would otherwise (Oct. 18, 2001). Finally, VDM Holding's 2003 20-F have had." FNla Id. at * 12 . In so holding, the report states that between June 2000 and March Interpublic court noted that the complaint contained 2002, it acquired four specialist firms, one of allegations that the defendants had engaged in a " which-Lyden, Dolan, Nick & Co ., LLC-was sustained multi-year program of acquisition," and it acquired during the Class Period . See 06/27/03 20-F alleged that the misstatements of financial results Annual Report, at 42 . were made over the course of the same years .

Drawing all reasonable inferences in Plaintiffs' *22 Similarly, here it is alleged that VDM Holding favor, these statements properly allege that: (1) began a program of acquisition in 2000 that during the Class Period, VDM Holding was continued on throughout the Class Period, and it is engaged in a program of strategic acquisitions alleged that the misstatements concerning the designed to maintain its position in a market earnings of VDM Holding and VDM Specialists undergoing unprecedented consolidation ; (2) VDM were made during this same time period. Holding intended to use its shares to finance some or all of these acquisitions ; (3) VDM Holding's Based on the foregoing, it is determined that competitors were also engaged in programs of Plaintiffs have adequately alleged that VDM strategic acquisitions during the Class Period; (4) at Holding had motive and opportunity to commit least some of these competitors had access to fraud. substantially greater capital than VDM Holding ; and (5) in light of its lesser resources, VDM

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II. The Complaint States A Section 20(a) Claim VDM Specialists, VDM Holding and the Individual Against VDM Holding and The Individual defendants argue that no control person liability can Defendants arise because no claim for a primary violation of Section 10(b) has been stated against VDM Count Two of the Complaint asserts that VDM Specialists . Since it has been determined that the Holding and the Individual Defendants violated Plaintiffs have stated a Section 10(b) claim against Section 20(a) of the Exchange Act . Section 20(a) VDM Specialists, this argument fails. imposes joint and several liability on any person who "controls any person liable under any provision [11] With respect to whether they are liable as of this title or of any rule or regulation thereunder." controlling VDM Holding and VDM Specialists, 15 U.S.C. § 78t(a). In order to state a claim based the Individual Defend ants have argued, relying on on control person liability under Section 20(a), a Kalnit v. Eichler, 85 F.Supp.2d 232 (S.D.N.Y.1999) plaintiff must allege "(1) a primary violation by a , affd 264 F.3d 131 (2d Cir.2001), that a person is controlled person ; (2) control of the primary either a "control person " or a "primary violator" violator by the defendant ; and (3) `that the under section 20(a), but cannot be bo th. In Kalnit, controlling person was in some meaningful sense a the plaintiff sought to hold the individual directors culpable participant' in the primary violation ." of the corporate defendant liable as control persons Boguslavsky v . Kaplan, 159 F.3d 715, 720 (2d for misrepresentations and omissions that they Cir.1998) (quoting SEC v. First Jersey Sec ., Inc., themselves were alleged to have made . See Kalnit, 101 F.3d 1450, 1472 (2d Cir.1996)); Deutsche 85 F.Supp .2d at 245 . In order to establish liability Telekom AG Sec. Litig., No. 00 Civ. 9475(SHS), under section 20(a) as to the individual defendants 2002 WL 244597, at *7 (S .D.N.Y. Feb.20, 2002) in that case, the plaintiff necessarily would have had (applying "culpable participation" requirement at to establish those very defendants' liability as pleading stage) ; In re Emex Corp. Sec. Litig., No. primary violators. See td The court concluded, 01 civ. 4886(SWK), 2002 WL 31093612, at *9 therefore, that, "under plaintiffs own theory, the (S .D.N.Y. Sept. 18, 2002) (same). Directors could not be control persons and section 20(a) does not apply ." Id. [10] In order to plead control person liability under Section 20(a), a plaintiff must "allege a primary § *23 Although Kalnit casts doubt on Plaintiffs' 10(b) violation by a person controlled by the argument that a defendant could ultimately be held defendant and culpable participation by the liable as both a primary violator under Section defendant in the perpetration of the fraud" . Suez 10(b) and as a control person of another primary Equity Investors, L.P. v. Toronto-Dominion Bank, violator pursuant to Section 20(a) with regard to the 250 F .3d 87, 101 (2d Cir.2001) (holding that same underlying conduct, the logical inconsistency plaintiffs had stated a Section 20(a) claim against that required dismissal of the Section 20(a) claim in defendant bank where it was alleged that: (1) the Kalnit is not present here, where multiple person who had committed the alleged violation of misrepresentations and omissions by various of the Section 10(b) was an officer of the bank, and (2) the Defendants have been alleged, and it is conceivable officer was responsible for the bank's relationship that one defendant ultimately might be found to be a with a venture whose securities were the subject of primary violator while another defendant might be the alleged Section 10(b) violation). found to be a control person under Section 20(a) . As the Federal Rules of Civil Procedure permit the Here, it is alleged that the Individual Defendants pleading of claims in the alternative, see acted as controlling persons of VDM Holding and Fed.R.Civ.P. 8(e)(2), Plaintiffs are not precluded VDM Specialists, and it is alleged that VDM from pleading that the Defendants are both primary Holding acted as a controlling person of VDM violators and control persons . Specialists . [12] Finally, Defendants argue that Plaintiffs have With respect to acting as controlling persons of failed to carry their burden of alleging

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particularized facts showing culpable participation Leave to replead within thirty (30) days of entry of in an underlying Section 10(b) fraud . In order to this opinion is granted. state a Section 20(a) claim, no such particularized allegations are required . See In re WorldCom, Inc. *24 It is so ordered . Sec. Litig., 294 F.Supp.2d 392, 415 (S .D.N.Y.2003) (stating that "[t]he concept of culpable participation describes that degree of control which is sufficient APPENDIX to render a person liable under Section 20(a) . At the pleading stage, the extent to which the control must Alleged False And Misleading Statements Made be alleged will be governed by Rule 8's pleading During The Class Perio d standard.") Here, it is alleged that the Individual Defendants exercised direct day-to-day 1. The October 15, 2001 Registration Statement management of VDM Holding and VDM Specialists, and that they had responsibility for their statements to the public . Pursuant to the Second Circuit's holding in Suez, such allegations are On October 15, 2001, VDM Holding filed with the adequate to state a Section 20(a) claim. SEC a Form 20-F registration statement pursuant to Section 12(b) of the Exchange Act . On October 18, Based on the foregoing, it his determined that 2001, VDM Holding announced that it would list its Plaintiffs have stated a Section 20(a) claim against ADRs on the NYSE . More specifically, the Form the Individual Defendants and VDM Holding . 20-F registration statement, which was signed by Bottcher and Dorjee, stated that shares of VDM Holding common stock would trade in the form of Conclusion ADRs under the ticker symbol VDM, with one ADR representing one VDM Holding ordinary Plaintiffs have adequately alleged a Section 10(b) share trading on Euronext Amersterdam . claim against VDM Specialists, and their motion to dismiss the Complaint is denied . The October 15, 2001 registration statement contained the following statements, which are Plaintiffs have adequately alleged a Section 10(b) alleged to be false and misleading: claim and a Section 20(a) claim against VDM Our revenues from specialist activities consist Holding, and their to dismiss the Complaint is primarily of net gains from principal transactions in denied in its entirety . securities for which our subsidiaries, principally Van der Moolen Specialists USA and Van der As to Count I, the Individual Defendants' motion to Moolen Effecten, act as specialist . Net gain on dismiss is granted in part and denied in part. With principal transactions represents trading gains net of respect to Bottcher and Dorjee, the Complaint states trading losses and transaction fees, and are earned a Section 10(b) claim only as to those statements by these subsidiaries when they act as principal made on or after April 18, 2003 . With respect to buying and selling their specialist stocks . Cleaver, the Complaint states a Section 10(b) claim only as to those statements made on or after April 10, 2002. With respect to Rondeltap, the Complaint states a Section 10(b) claim only as to those Van der Moolen Specialists USA, in which we hold statements made on or after April 9, 2003 . a 75% interest, is our largest subsidiary in terms of contribution to our revenues . It is one of the leading As to Count II, VDM Holding and the Individual specialist firms on the New York Stock Exchange in Defendants' motion to dismiss the Complaint is terms of profitability, capital devoted to specialist denied. services, revenue and number of specialist assignments, according to data provided by the Ne w

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York Stock Exchange. For the year ended December 31, 2000 and the six months ended June 30, 2001, Van der Moolen Specialists USA accounted for EUR289.9 million and EUR128 .9 million, or 64.3% and 72 .1%, respectively, of our total revenues .

Revenues for the Years Ended December 31, 1999 and 2000 (EUR millions , except percentages)

Year Year Year Ended % Total Ended % Total on Year Company 12/31/99 Revenue 12/31/99 Revenue Change Van der 143 .1 63 .7% 289.9 64.3% 103% Moole n Specialists USA, LL C Van der 28.2 12.5 73 .9 16.4 162 Moolen Trading GmbH Van der 34.0 15. 1 54.8 12.2 6 1 Moolen Effecten Specialist B.V. Tague Van 8 .8 3 .9 16 .0 3 .5 82 der Moolen, LLC Van der 6.0 2.7 4.5 1 .0 (25) Moolen Opties Amsterdam B .V . Van der 1 .2 0.5 6.7 1 .5 458 Moolen U.K., Ltd. Van der 3 .7 1 .6 5.0 1 .1 35 Moolen Obligaties B.V.

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Total 225.0 100.0% 450.8 100.0% 100% account, even when doing so may adversely affect the specialist's profitability . In addition, under some Our businesses are exposed to substantial risks of circumstances, the specialist is prohibited from liability under federal and state securities laws, making trades as principal in its specialist stocks. other federal and state laws and court decisions, as As part of the price discovery mechanism well as rules and regulations promulgated by the implemented by the New York Stock Exchange, Securities and Exchange Commission, the New every specialist transaction is published York Stock Exchange and similar regulatory immediately on the tape and is broadcast to the authorities and self-regulatory organizations in the general public . The New York Stock Exchange's United States and Europe, as well as national and Market Surveillance Division examines specialists' local legislation in various European jurisdictions . trading in all stocks, every trading day, including specialists' decisions to trade or to not trade as principal. The specialist's obligations are briefly described below. *25 Our businesses and the securities industries in Requirement to trade as principal. A specialist which they operate are subject to an extensive range must buy and sell securities as principal when of laws, rules and regulation in the United States necessary to minimize an actual or reasonably and Europe that are promulgated by various anticipated short-term imbalance between supply governmental agencies and self-regulatory and demand in the auction market . The specialist organizations . The laws, rules and regulations with must effect these transactions when their absence which our businesses must comply include those could result in an unreasonable lack of continuity relating to financial reporting requirements, trade and/or depth in their specialist stocks, The specialist practices, capital structure requirements, and record is not expected to act as a barrier in a rising market retention requirements governing the conduct of our or a support in a falling market, but must use its directors, officers and employees . Failure to comply own judgment to try to keep such price increases with any of these laws, rules or regulations could and declines equitable and consistent with market result in censure, fine, the issuance of conditions. cease-and-desist orders or the suspension or A specialist must make firm and continuous disqualification of our directors, officers or two-sided quotations that accurately reflect market employees, and other adverse consequences, which conditions. In making these quotations, the could have an adverse effect on our business . It specialist's transactions are calculated to contribute could also result in the suspension or to the maintenance of price continuity with disqualification of whichever of our subsidiaries reasonable depth . commits the violation by the SEC or other relevant regulatory authority or in that subsidiary's suspension or disqualification as a member of the securities exchange on which it operates . If this *26 Trading restrictions . In trading for its own occurred, we would be unable to operate a portion account, the specialist must avoid initiating a of our business which could potentially be market-destabilizing transaction. All purchases and significant. sales must be reasonably necessary to permit the specialist to maintain, as far as practicable, a fair and orderly market in its specialist stocks . In addition, the specialist must comply with the Under the New York Stock Exchange rules, a following trading requirements : specialist has a duty to maintain, as far as • A specialist must first satisfy a customer's market practicable, a fair and orderly market in its buy order (an order to buy at the prevailing market specialist stocks . In order to fulfill its obligations, price) before buying any stock for its own account . the specialist must at times trade for its own Similarly, a specialist must first satisfy a customer' s

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market sell order (an order to sell at the prevailing VDM Holding on October 18, 2001 contained the market price) before selling any stock for its own following false and misleading statement by account . Bottcher: • A specialist must first satisfy a customer's limit Today's listing on the New York Stock Exchange order held by it before buying or selling at the same affirms our strong commitment to Wall Street and price for its own account. A limit order is an order to the U.S. financial markets, which account for either to buy only at or below a specified price, or some 70% of Van der Moolen's revenues. We will to sell only at or above a specified price . use our higher U .S. market visibility to increase • If a public buyer wants to buy at a particular price investor appreciation of the company's clear value and a seller wants to sell at the same price, the attractions and as a potential currency for future buyer and seller trade directly with each other, and acquisitions. the specialist should not interfere in the transaction . • The specialist does not charge commissions for *27 (Press Release, VDM Holding, "Van der trades that are matched by the Automated Order Mooien ADRs begin trading on New York Stock Routing System within five minutes from the time Exchange" (Oct. 18, 2001).) 1 the order is taken. • Except in some circumstances in less active markets, the specialist may not, without permission 3. The Third Quarter 2001 Earnings Releas e from a New York Stock Exchange official, initiate " destabilizing trades" as defined in the New York Plaintiffs allege that the following statements, Stock Exchange Rules for its own account which contained in the VDM Holdings earnings release cause the stock price to rise or fall . issued October 31, 2001, were false and misleading : • Any transactions by the specialist for its own Van der Moolen (N .Y.SE: VDM), a specialist and account must be effected in a reasonable and market maker on the major U .S. and European orderly manner in relation to the condition of the equity, options and bond markets, today announced general market, the market in the particular stock that its net income from ordinary activities for the and the adequacy of the specialist's position to the first nine months of 2001 was Euro 73 .1 million, immediate and reasonably anticipated needs of the 27% lower than in the same period of 2000 . market. Income from ordinary activities per common share • The specialist cannot be in a control relationship in the first nine months of 2001 was Euro 1 .90, 30% with any of its listed companies . This means a lower than the Euro 2 .72 earned in the first nine specialist may not generally acquire more than 10% months of 2000 . Ninety percent of trading days in of any equity security in which the specialist is the first nine months of 2001 were closed with a registered . Further, a specialist must report holdings positive trading result . of such securities of 5% or more of the outstanding In the third quarter of 2001, net income from issue, and the New York Stock Exchange may ordinary activities was Euro 19 .2 million, 34% require the firm to divest itself of such holdings . A lower than in the same quarter of the previous year . specialist may not hold any position as an officer or Earnings per common share from ordinary activities director or receive payments or loans or engage in declined by 37%, from Euro 0 .78 in 2000 to Euro business transactions with any of the listed 0.49 in the current year. Eighty-five percent of companies in respect of which it acts as specialist. trading days closed profitably during the third quarter. (10/15/01 20-F Registration Statement, at 49, 27, 58, 16, 21 , 37, 37-49.) (Press Release, VDM Holding, "Van der Moolen : Net Income of Euro 73 .1 Million for the First Nine Months of2001" (Oct . 31, 2001).) 2. The October 18, 2001 Press Release Plaintiffs also allege that the following statement by Plaintiffs allege that the press release issued by Bottcher in the October 31, 2001 press release was

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false and misleading : US, and our European equity and bond trading The third quarter was clearly not the easiest one we activities are developing favorably. have seen, given the tragic events of September 11 and the unusually slow summer months preceding (Id.) them. In particular, our options activities came under pressure. Nevertheless, it is worth stressing in these difficult times that we are achieving healthy 5. The FY2001 Annual Report results and we are satisfied with the more than Euro 19 million we were able to earn in these The Plaintiffs allege that Van der Moolen Holding's circumstances . The revenue picture in October 2001 annual report, which was signed by Bottcher, gives us confidence that we will reach our indicated Dorjee, and Cleaver, contained false and misleading net income from ordinary activities of statements . First, the 2001 annual report reaffirmed approximately Euro 100 million for the full year, the financial results previously announced in the which would make 2001 Van der Moolen's March 7, 2002 earnings release . second-best year ever . Furthermore, Plaintiffs allege that the following (Id.) statement by PricewaterhouseCoopers N .V., VDM Holding's independent auditor, was false and misleading : 4. The March 7, 2002 Earnings Release In our opinion, the accompanying consolidated statements of financial condition and the related Plaintiffs allege that the following statements, consolidated statements of income, comprehensive contained in the VDM Holdings earnings release income, shareholders' equity and cash flows present issued March 7, 2002, were false and misleading : fairly, in all material respects, the financial position Van der Moolen (N .Y.SE: VDM), .. . a specialist of Van der Moolen Holding N .V . and its and market making firm active on the important subsidiaries at December 31, 2001 and 2000, and U.S. and European equity, option and bond the results of their operations and their cash flows exchanges, achieved net income from ordinary for each of the three years in the period ended activities (before extraordinary items) of EUR December 31, 2001, in conformity with accounting 100.7 million in 2001, a 27% decrease from 2000. principles generally accepted in the United States of Net income from ordinary activities per common America. share declined by 30% from EUR 3 .74 in 2000 to EUR 2.62 in 2001 . Of its 258 trading days in 2001, (05/18/02 Form 20-F Annual Report, at F-1 .) Van der Moolen was able to close 226 of them with a positive trading result. Plaintiffs have also identified the following allegedly false and misleading statements : (Press Release, VDM Holding, "Van der Moolen: We derive a substantial majority of our revenues Net Income of EUR 100 .7 Million in 2001" (Mar . 63.6%, 63.4% and 78.5% of total revenues in 1999, 7, 2002) (footnotes omitted) .) 2000 and 2001, respectively from our New York Stock Exchange specialist subsidiary, Van der *28 Plaintiffs also allege that the following Moolen Specialists USA . If demand for its statement by Boucher in the March 7, 2002 press specialist services fails to grow or declines, our release was false and misleading : potential revenue growth would be adversely 2001 was an eventful year for us . Despite difficult affected. market conditions, but also the sharp deterioration of our option activities, we achieved our second best earnings on record, with net income a little above EUR .100 million, We strengthened the firm The majority of our specialist and market making further during 2001 with three acquisitions in the revenues are derived from trading by our

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subsidiaries as principal . Our subsidiaries may incur Bottcher in the May 1, 2002 press release was false trading losses relating to these activities, since each and misleading: primarily involves the purchase, sale or short sale of There has been no recovery in equity markets to securities for its own account . In any period, our date. Weak turnover and restricted volatility limit subsidiaries may incur trading losses in a significant trading opportunities for a firm such as ours . With number of securities for a variety of reasons, limited exceptions, our trading revenues are down including as a result of the required performance of across the board, most notably in European equity some of our subsidiaries' specialist obligations . markets . Given current uncertainties in the market, it is not possible at this stage to provide a forecast (Id at 14, 15 .) In addition, Plaintiffs identified for the full year . statements concerning regulatory and litigation liability and the duties and obligations of an (1d) specialist that were substantially similar to previously described statements contained in the October 15, 2001 Registration Statement . 7. Form 6-K For May 3, 2002

Plaintiffs argue that the following statement from 6. First Quarter 2002 Earnings Releas e Defendants' May 3, 2002 Form 6-K disclosure was false and misleading : Plaintiffs allege that the following statements, contained in the VDM Holdings earnings release issued May 1, 2002, were false and misleading : *29 Van der Moolen . .., a specialist and market maker in leading U .S . and European equity, option and fixed income markets, realized net income from ordinary activities of Euro 17 .7 million in the first quarter of 2002, a decline of 43% compared with the first quarter of 2001 . Net income from ordinary activities per common share was Euro 0 .45, a decrease of 44% from the first quarter of 2001 . Of the 62 trading days in the quarter, Van der Moolen closed 60(97%) of them with a positive trading result.

Net income per common share from ordinary activities, calculated on the basis of weighted average common shares outstanding and after deduction of dividends on preferred shares, came to Euro 0.45, a decrease of 44% below the Euro 0.81 earned in the first quarter of 2001 .

(Press Release, Van der Moolen Holding, "Van der Moolen Reports Net Income From Ordinary Activities Of Euro 17 .7 Million in the First Quarter of 2002" (May 1, 2002))

Plaintiffs also allege that the following statement by

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VDM Specialists Revenue ($ Million)

Q 1 2002 Q1 2001

Total Revenue 56 .9 65 .4 Net Gain On Principa l Transactions 47 .7 53 .4 Commissions 7 . 1 7 .2 Other 2 .1 4 .8

Participation Rate 2 34 .9% 31 .5% *30 (Press Release, VDM Holding, "Van der (05/03/02 Form 6-K, at 5 .) Moolen earns second quarter, 2002 net income of $16.9 million" (Aug. 1, 2002), reprinted in the 08/08/02 Form 6-K, at 1 .) 8. Second Quarter 2002 Earnings Release Plaintiffs also allege that the following statement by Plaintiffs allege that the following statements, Boucher in the August 1, 2002 press release was contained in the VDM Holdings earnings release false and misleading : issued August 1, 2002 were false and misleading : In exceedingly turbulent market circumstances we Van der Moolen, a specialist and market maker on were able to maintain our second quarter result at the leading U .S. and European equity, option and almost the level we achieved in the first quarter . fixed income markets, realized net income from The development of our NYSE business showed ordinary activities of $16 .9 million in the second once again that trading volumes and price volatility quarter of 2002, a 27% decrease compared to the determine our opportunities to trade. Given the same period of the previous year and a 5% decrease current uncertainties as to the outlook for financial relative to the first quarter of 2002 . Net income markets in the second half of 2002, we think it from ordinary activities per common share was would be premature to make any forecast of our $0 .42, which was 29% less than in the second earnings for the full year . quarter of 2001 and 5% lower than in the first quarter of the current year. (Id. at 2.) Of the 65 trading days in the second quarter, Van der Moolen closed 62 of them, or 95%, with a positive trading result . 9. August 8, 2002 Form 6-K

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Plaintiffs argue that the following statement from Defendants' May 3, 2002 Form 6-K financial disclosure was false and misleading :

VDM Specialists Revenue ($ Million)

Q2 Q2 Q1 2002 2001 2002

Total 66 .4 51 .7 56 .9 Revenu e Net Gain On Principal 55 .8 41 .6 47 .7 Transactions Commissions 8 .3 6 .1 7 .1 Other 2 .3 4 .0 2 .1

Participation Rate (%) 34 .5 32 .1 34 .9 10. October 16, 2002 Earnings Release

Van der Moolen Specialists USA's revenues rose Plaintiffs allege that the following statements 22% compared to the second quarter of 2001, as a contained in VDM Holding's October 16, 2002 result of the acquisitions of Stem & Kennedy and press release were false and misleading : Scavone, McKenna, Cloud in July, 2001 and the Van der Moolen .. . announces that it expects net acquisition of Lyden, Dolan, Nick in March, 2002 . income from ordinary activities under Dutch GAAP By comparison to the first quarter of 2002, its for the third quarter of 2002 to be approximately revenues were up by 11%, as a result of organic EUR 17 .2 million . growth, as well as a full three months' consolidation This compares to EUR 16 .9 million in the second of Lyden, Dolan, Nick (compared to only one quarter of this year and to EUR 19 .2 million in the month included in the earlier period). Van der third quarter of 2001 . On November 7, 2002, we Moolen Specialists USA closed every trading day will issue detailed Dutch GAAP financial of the second quarter with a positive trading result. information regarding our results for the quarter as well as selected U .S. GAAP figures . (05/03/02 6-K, at 6, 2.) Total revenues in the third quarter were roughly at the same level as in the second quarter of the current year. The earnings of our American option s

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trading activities improved relative to the second quarter of 2002, but revenues remained slightly negative. [ ] Bottcher ... remarked : "Our specialist and market making operations on the NYSE and on the European equity exchanges developed in line with volume and volatility in those markets, with July in particular producing outstanding results . Despite the measures we have already taken to improve our U.S. option activities, they did not yet make a positive revenue contribution in the third quarter ."

*31 (Press Release , VDM Holding, "Van der Moolen Expects Third Quarter Net Income of Approximately EUR 17 .2 Million" (Aug . 1, 2002) .)

11. Third Quarter 2002 Earnings Release

Plaintiffs allege that the following statements, contained in the VDM Holdings earnings release issued November 7, 2002 were false and misleading : In the third quarter[,] 81% of revenues were generated in the U.S ., compared with 82% in the third quarter of 2001 and 79% in the second quarter of 2002 . The revenues of [VDM Specialists] rose 9% compared with the prior year, largely as a result of the acquisitions of Stem Kennedy and Scavone in 2001 and the acquisition of Lyden in 2002. Compared with the second quarter of 2002, they declined by 3%, entirely as a result of translation into Van der Moolen's reporting currency: in constant currency they would have risen 4% . With one loss-making day in July, Van der Moolen Specialists USA closed 98% of its trading days with a positive trading result in the third quarter of 2002 .

VDM Specialists Revenue ($ Million) 3

Q3 Q3 Q2 2002 2001 2002

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Total 69 .0 57 .6 66 .4 Revenue Net Gain O n Principal 58 . 1 48 .0 55 .8 Transaction s Commissions 8 .4 6 .9 8 .3 Other 2 .5 2 ,7 2 .3

Participation Rate (%) 34 .7 31 .4 34 .5 contained in VDM Holding's February 19, 2003 press release were false and misleading: Van der Moolen, specialist and market maker on the (Press Release, VDM Holding, "Van der Moolen : most important American and European equity, Net Income of EUR 17 .2 Million in the Third option and fixed income platforms, announced that Quarter of 2002" (Nov . 7, 2002).) Plaintiffs also it expects to earn net income for the fourth quarter allege that the following statement by Bottcher in of 2002 of approximately (EUR) 16 .8 million, the November 7, 2002 press release was false and before an impairment charge of (EUR) 10 .1 million misleading: in relation to our options activities . Our equity trading teams again showed outstanding *32 Net income for the full year 2002 before performance. On the NYSE we achieved an impairment charges is expected to be (EUR) 68 .6 improvement in revenues and margins under million. turbulent market conditions, in line with the If market conditions experienced this year to date development of exchange volumes and the persist, first quarter 2003 net income is expected to development of intra-day price volatility during the be lower than net income before impairment quarter. Underlying U.S. growth was to some charges in the fourth quarter 2002 . degree offset in our reported results by the depreciation of the U .S. dollar versus the euro . All (Press Release, VDM Holding, "Van der Moolen of our European equity trading units were Pre-Announcement of Fourth Quarter 2002 Results" profitable. Trading results from our U .S. option (Feb. 19, 2003).) Plaintiffs also allege that the units were still negative, but showed an following statement by Boucher in the February 19, improvement over the previous quarter . Given the 2003 press release was false and misleading :Market current uncertainties about market developments in volume and volatility limited the trading a year that has seen a break from the normal opportunities available to us in the fourth quarter, seasonal trading patterns, we will give no forecast resulting in lower results from principal activities . for the full year. The weakening of the dollar against the euro also had a negative translation effect on our reported (1d.) results. Although we achieved a further improvement in the earnings of our U .S. option activities, given the change in market structures, we 12. February 19, 2003 Press Release have taken an impairment charge on these two firms .

Plaintiffs allege that the following statements (Id. )

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13. FY 2002 Earnings Releas e

Plaintiffs allege that the following statements contained in the VDM Holding earnings release issued March 5, 2003 were false and misleading : [VDM Holding] ... earned net income from ordinary activities (before impairment charges) of EUR 68 .6 million in 2002, a decrease of 32% compared with 2001 . The write-down taken in the final quarter of the year concerns an impairment loss on the intangible fixed assets of Cohen, Duffy, McGowan, and amounted to EUR 10.1 million after tax . This brought net income for the full year to EUR 58 .5 million. Net income from ordinary operations before impairment charges per common share declined by 33% from EUR 2 .56 in 2001 to EUR 1.71 in 2002 . Of [the] 255 trading days in 2002, [VDM Holding] closed 245 or 96% of them with a positive trading result.

VDM Specialists Revenue ($ Million) 4

Q4 Q4 Q3 2002 2001 2002

Total 59 .7 61 .8 69 .0 Revenue Net Gain On Principal 49 .0 51 .6 58 .1 Transactions Commissions 7 .8 7 .5 8 .4 Other 2 .9 2 .7 2 .5

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Participation Rate (%) 34 .4 30 .7 34 .7 Within the 90-day period prior to the filling of this (Press Release, VDM Holding, "Van der Moolen : Annual Report, an evaluation was carried out under net income of EUR 58 .5 million in 2002, after a net the supervision and with the participation of our impairment charge of EUR 10 .1 million" (Mar. 5, management, including our Chief Executive Officer 2003).) Plaintiffs also allege that the following and Chief Financial Officer, of the effectiveness of statement by Bottcher in the March 5, 2003 press the design and operation of our disclosure controls release was false and misleading: and procedures (as defined in Rule 13a-14(c) under "The new year has presented us with notable the Securities Exchange Act of 1934). Based upon challenges. In the current market climate, that evaluation, the Chief Executive Officer and characterized by further equity price declines, Chief Financial Officer concluded that the design continued weakness in investor confidence and the and operation of these disclosure controls and threat of war, we are confronted by declining procedures were effective . No significant changes market turnover and margin erosion, which have were made in our internal controls or in other significantly affected our revenues . As a factors that could significantly affect these controls consequence, we have embarked on a further subsequent to the date of their most recent program of cost reductions. Given the uncertainty in evaluation. the markets where we are active, we decline to offer a forecast for the first quarter as well as for the full (06/27/03 Form 20-F Annual Report, at 3, 108 .) In ,„ year addition, Plaintiffs have identified alleged misstatements concerning regulatory and litigation *33 (Id.) liability and the duties and obligations of a specialist that were substantially similar to previously described statements contained in the 14. FY 2002 Annual Report October 15, 2001 Registration Statement. Finally, the 2002 Annual Report contained certifications Plaintiffs allege that VDM Holding's 2002 annual signed by Bottcher and Dorjee that represented that report, which was signed by Bottcher, Dorjee, the 2002 annual report did not contain any false or Cleaver, and Rondeltap, contained false and misleading statements . misleading statements . First, the 2001 annual report reaffirmed the financial results previously announced in the March 6, 2003 earnings release. 15. The April 9, 2003 Press Release

Furthermore , Plaintiffs allege that the following Plaintiffs allege that the following statements statements were false and misleading : contained in VDM Holding's April 9, 2003 press We prepare our financial statements on a release were false and misleading : consolidated basis in accord ance with accounting [VDM Holding] ... announced that in the first principles generally accepted in the United States of quarter of 2003 it realized net income from ordinary America ("U.S.GAAP"). U.S. GAAP selected activities of about EUR 7 .9 million, including a net consolidated financial information as of and for the gain of EUR 1 .9 million on the sale of its equity years ended December 31, 2000 , 2001 and 2002, interest in Tullett Plc. together with our U .S. GAAP financial statements In the first quarter of 2003, [VDM Holding] was and the notes thereto as of and for the years ended able to close 62, or 98%, of its 63 trading days with December 31, 2000 , 2001 and 2002 , are set forth a positive trading result. On the NYSE, VDM elsewhere in this annual report. Specialists achieved a trading profit on every trading day of the quarter .

(Press Release , VDM Holding, "Van der Moolen

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Expects Net Income of Approximately EUR 7 .9 Million in the First Quarter of 2003" (Apr. 9, 2003).) Plaintiffs also allege that the following statement by Bottcher in the April 9, 2003 press release was false and misleading :*34 Increased activity in equity markets led to a slightly better development of results in March, but this was not yet accompanied by an improvement in VDM Specialists' trading margins. Against this background, cost reduction is receiving our full attention. Our ability to close 98% of our trading days with a trading profit indicates that, even in these market conditions, we have been able to maintain our trading disciplines.

(Id)

16. First Quarter 2003 Earnings Release

Plaintiffs allege that the VDM Holding earnings release issued May 7, 2003, which reaffirmed the financial results reported in the April 9, 2003 press release, contained the following additional false and misleading statements: [VDM Holding] ... realized net income from ordinary activities in the first quarter of 2003 of EUR 7.9 million, 55% less than in the first quarter of 2002 and 53% less than in the fourth quarter of 2002 (before the fourth quarter charge for impairment of intangible fixed assets) . Included in net income is a net book profit of EUR 1 .9 million resulting from the sale of our interest in Tullett Plc . Net income per common share from ordinary business activities amounted to EUR 0.19, a 58% decrease compared to the first quarter of 2002 and a 55% decrease compared to the fourth quarter of 2002 (before the fourth quarter charge for impairment of intangible fixed assets) . Of the 63 trading days in the first quarter of 2003, [VDM Holding] was able to close 62(98%) with a positive trading result .

VDM Specialists Revenue ($ Million)

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Q1 Q1 Q4 2003 2002 2002

Total 40 .7 56 .9 59 .7 Revenue Net Gain On Principal 31 .6 47 .7 49 .0 Transactions Commissions 7 .5 7 .1 7 .8 Other 1 .6 2 .1 2 .9

Participation Rate (%) 31 .7 34 .9 34 .4 business activities was EUR 0.16, a 62% decrease (Press Release, VDM Holding, "Van der Moolen : compared to the second quarter of 2002 and a 14% Net Income of EUR 7 .9 Million in the First Quarter decrease compared to the first quarter of 2003 . of 2003" (May 7, 2003).) Plaintiffs also allege that *35 [VDM Holding] was able to close every trading the following statement by Bottcher in the March 5, day (100%) of the second quarter of 2003 with a 2003 press release was false and misleading : positive trading result. Despite the increase in share prices in April, we have seen no material improvement in the market environment for our trading operations . Our efforts remain concentrated on risk management and cost reduction. Given current market conditions, we have no comment to make about the outlook for the full year 2003 . (Id.)

17. Second Quarter 2003 Earnings Release

Plaintiffs allege that the VDM Holding earnings release issued August 6, 2003 contained the following additional false and misleading statements: [VDM Holding] .. . realized net income from ordinary activities of EUR 6 .9 million in the second quarter of 2003, 59% less than in the second quarter of 2002 and 13% less than in the first quarter of 2003 . Net income per common share from ordinary

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VDM Specialists Revenue ($ Million)

Q2 Q2 Q1 2003 2002 2003

Total 39 .6 66 .4 40 .7 Revenu e Net Gain On Principal 28 .9 55 .8 31 .6 Transaction s Commissions 8 .0 8 .3 7 .5 Other 2 .7 2 .3 1 .6

Participation Rate (%) 27 .7 34 .4 31 .7 (Id.) (Press Release, VDM Holding, "Van der Moolen : Net Income of Eur 6 .9 Million in the Second Quarter of 2003" (Aug . 6, 2003).) Plaintiffs also 18. August 7, 2003 Earnings Conference Call allege that the following statement by Bottcher in the August 6, 2003 press release was false and Plaintiffs allege that representatives of VDM misleading : Holdings made the following false and misleading Despite poor market conditions and charges for statements during the course of a August 7, 2003 reorganization and severance that we took in the call with securities analysts . second quarter of 2003, we showed a 15% improvement in our operating income compared Bottcher stated: with the first quarter . We believe that the decline in It should come at no surprise when I say that our income from our NYSE specialist unit is temporary, trading environment was once again extremely while the small improvements we saw in European challenging this quarter. Equity markets recovered and option trading should be sustainable . However, noticeably, with strong price increases that drove we continue to look to improved market conditions exchange turnover . The increase in share volume, to drive a full recovery in our earnings . July however, was much more modest. We have not seen witnessed no clear improvement in these conditions any significant improvement in dollar values traded compared with the second quarter, but benefits from so far this quarter. The quality of order flow also the cost reductions we have made will be evident in affected second quarter results, with the share of our results for the rest of 2003 . trading due to inter-professional activity remaining

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at high levels . As we found in first quarter, this type in looking at pretty much everything, I mean, the of activity doesn't offer us the same margins as dollar volumes of your listings went up. Certainly, so-called natural orders from traditional investors, you know, it was the best quarter the U.S . markets probably because much of the arbitrage trading, have seen since the fourth quarter of '01, and to see which exploits the same kind of price activity that your revenues from principal trading in dollars goes we seek to benefit from. A large share of trading down, LaBranch or no LaBranch, it puts-it makes activity continues to cluster around the market the idea of trying to forecast growth, it makes it opening, which presents few opportunities for our extremely precarious, because if you're-if specialists to participate . everything can be positive, small, but positive, and Whether due entirely due to inter-professional your revenues go down, you kind of think, "well, activity or not, the very low levels of volatility we gee, if they got positive and big, would they go saw during the quarter meant that we didn't receive down again?" much benefit from the increase in market turnover, BOTTCHER : You know, we have said in the and both our ability to participate and our rewards analyst presentation also something about the for participation were reduced in the second quarter . quality of order flow and the fact that the order flow on the NYSE, but not only on the NYSE, globally is (Q2 2003 Van der Moolen N .V. Earnings strongly influenced with elements of program Conference Call, Final FD (Fair Disclosure) Wire, trading. And-which is maybe more important, is the at 1 (August 7, 2003) .) absence of end investors, like retail customers, and to a certain extent, a number of the bigger pension *36 Plaintiffs have also alleged that Boucher and funds and insurance companies, which were Dorjee made false and misleading statements during normally very active traders . the course of this exchange with securities analyst CHANDOWAY: But that simply isn't true . That Charlotte Chandoway ("Chandoway") . simply isn't true. If you look at Ameritrade and CHANDOWAY : OK, OK, and then the more E-Trade, the two biggest retail online companies, vexing issue of the revenues ? and Schwab, throughout the June quarter, they DORJEE : Yeah, you still can't understand when I reported big, huge increases in retail trading . Also, refer to your question in the right way, why, let's if you look at the U .S. inflows into stock mutual say, LaBranch showed quarter to quarter an funds from retail, they were also very, very large, improvement in the realization rate, and our very positive, and ended the quarter with realization rate was still falling further . It's, in our contributions to U .S. stock mutual funds up over opinion, also a reflection of the trading style . You last year, so it's not the absence of retail . know that our trading style, in a certain way, differs BOTTCHER : But when you look, Charlotte, to the from what LaBranch is doing, that can fit maybe volume increase, also in our stocks, and we gave better into an environment of, let's stay, a strong figures in the presentation, you'll see that over that recovery in most of the markets in which we quarter, in which we saw significant increase in the operate, and particularly also in the U .S. But in our level of the indexes, that the volume in number of trading style, with our focus on playing our role stocks traded was up just 9%, and of those, let's say intensively within the trading hours, and with the higher figures, the increase was 9% . A larger share risk appetite we express in that, we think that the was program trading than in the previous quarter, outcome of the second quarter is in line with the and that is what we refer to in quote of the order way we played it in the first quarter, and there was flow, which-pro rata part, the program trading is still some improvement in terms of operating results more dominant than before, and it's a less favorable and maybe you have to translate it also back into environment for the way we make markets . dollars to get the right picture . *37 (Id. at 6.) CHANDOWAY: Well, the dollar picture is the same. I mean, the revenues from principle trading went down, and what's vexing for analysts, or at least this analyst, in trying to project forward, is that FN1 . Boucher, Dorjee, Cleaver, an d

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Rondeltap are referred collectively herein Specialists' customer disadvantage from as the "Individual Defendants ." interpositioning between 1999 to 2003 .

FN2. VDM Holding, the Individual FN6. See also Shaw v. Digital Equip. Defendants, and VDM Specialists are Corp., 82 F.3d 1194, 1225 (Ist Cir.1996) referred to collectively as "the Defendants . (stating that "in determining the adequacy 11 of a complaint under [Rule 9 (b) ], we cannot hold plaintiffs to a standard that FN3. The Third Circuit has provided the would effectively require them, following description of an ADR's pre-discovery , to plead evidence") . structure and function : An ADR "is a receipt ... issued by a FN7 . It should be noted that the Novak depository bank that represents a specified court held that the mere failure of a "parent amount of a foreign security that has been comp any to interpret extraordinarily deposited with a foreign branch or agent of positive performance by its subsidiary . .. as the depository. ... ADRs are tradeable in the a sign of problems and thus to investigate same manner as any other registered further does not amount to recklessness American security, may be listed on any of under the securities laws." Novak, 216 the major exchanges in the United States F.3d at 309 (citing Chill, 101 F.3d at or traded over the counter , and are subject 269-70) . to the Securities Act and the Exchange Act 11 FN8. The size and structure of the VDM Pinker v. Roche Holdings, Ltd., 292 F.3d Specialists management committee is 361, 367 (3d Cir.2002). ADRs have " described in the Form 20-F registration become one of the preferred methods for statement. (See 10/15/01 Form 20-F trading foreign securities in the United Registration Statement, at 45 .) States, with the value of ADRs bought and sold annually in the hundreds of billions ." FN9. As stated by the SEC : Id. at 367 . [t]he reports from the NYSE were indications of misconduct and should have prompted the firm to inquire into whether FN4. The Complaint defines "participation the improper trading was more widespread rate" as the percentage of transactions in and serious . In large organizations such as which VDM Specialist acted as a [VDM Specialists], it is especially counterparty . imperative that those in authority exercise particular vigilance when indications of FN5 . According to the SEC and NYSE, irregularity reach their attention . VDM Specialists ' interpositioning (03/30/04 SEC Order at ¶ 36 .) transactions were heavily concentrated in a few stocks traded by a small number of FN 10 . It should be noted that the specialists . It is alleged that from 1999 Interpublic court held that the allegations through 2003, 79.73% of VDM Specialists' concerning the comp any's program of customer disadvantage from acquisitions were sufficient to plead interpositioning occurred in six stocks motive to commit fraud on the part of both Nortel Network Corporation, PFE, the company and also on the part of the Hewlet-Packard Company , Time Warner individual defendants . Inc., The Walt Disney Company, and Eli Lilly & Co . Nortel Networks alone FN1 . Unless otherwise noted, the VDM accounted for about 29% of VDM Holding press releases referenced herein,

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which were disseminated by Business Wire, are available on the LEXIS. These new releases can be found in the file " Wire Service Stories" File, which is located in the "News" Library .

FN2. The Complaint defines "participation rate" as the percentage of transactions in which VDM Specialist acted as a counterparty .

FN3 . Paragraph 112 of the Complaint is inaccurate. The figures stated in that paragraph should have been expressed in Euros and not U .S. Dollars.

FN4. Paragraph 112 of the Complaint is inaccurate . The figures stated in that paragraph should have been expressed in Euros and not U .S. Dollars. S.D.N .Y.,2005. In re Van Der Moolen Holding N.V. Securities Litigation --- F.Supp.2d ----, 2005 WL 3410763 (S .D.N.Y.)

Briefs and Other Related Documents (Back to top)

• I :03cv08284 (Docket) (Oct . 20, 2003 )

END OF DOCUMENT

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