In Re Redback Networks, Inc. Securities Litigation 03-CV-05642

Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 1 of 4

1 Stuart M. Grant (pro hac vice) John C. Kairis (pro hac vice) 2 Kimberly L. Wierzel (pro hac vice) GRANT & EISENHOFER P.A. 3 Chase Manhattan Centre 1201 North Market Street 4 Wilmington, DE 19801 Tel: (302) 622-7000 5 Fax: (302) 622-7100 [email protected] 6 Merrill Glen Emerick (State Bar No. 117248) 7 Anderlini, Finkelstein, Emerick & Smoot 400 S. El Camino Real – Suite 700 8 San Mateo, CA 94402

9 Attorneys for Lead Plaintiff The Connecticut Retirement Plan and Trust Funds 10

11 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA 12 SAN JOSE

13 : : 14 IN RE REDBACK NETWORKS, INC. : Case Number C 03-05642 JF SECURITIES LITIGATION : 15 : : DECLARATION OF JOHN C. 16 : KAIRIS IN SUPPORT OF : PLAINTIFF’S OMNIBUS BRIEF IN 17 This Document Relates to: All Actions : OPPOSITION TO DEFENDANTS’ : MOTIONS TO DISMISS THE 18 : FOURTH AMENDED : CONSOLIDATED COMPLAINT 19 : : CLASS ACTION 20 : : Date: September 15, 2006 21 : : Time: 10:30 a.m. 22 : : Ctrm: 3 23 : : Judge: Honorable Jeremy Fogel 24

28 DECLARATION OF JOHN C. KAIRIS IN SUPPORT OF PLAINTIFF’S OMNIBUS BRIEF IN OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE FOURTH AMENDED CONSOLIDATED COMPLAINT, CASE NO. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 2 of 4

1 I, John C. Kairis, declare as follows: 2 I am a director at the law firm of Grant & Eisenhofer P.A., lead counsel in this action. I 3 am admitted Pro Hac Vice to practice law before this Court. I have personal knowledge of the 4 facts set forth herein and, if called as a witness, I would testify competently thereto. 5

6 1. Attached hereto as Exhibit A is a true and correct copy of Plaintiffs’ Omnibus

7 Brief in Opposition to Defendants’ Motions to Dismiss the First Amended Consolidated 8 Complaint dated July 19, 2005. 9 2. Attached hereto as Exhibit B is a true and correct copy of the Common Stock 10 Warrant of Siara Systems, Inc. dated November 1999. 11

12 3. Attached hereto as Exhibit C is a true and correct copy of the redline version of

13 the Plaintiffs’ Fourth Amended Consolidated Complaint highlighting the new allegations.

14 4. Attached hereto as Exhibit D is a true and correct copy of the Memorandum of

15 Opinion filed in State of Wisconsin Investment Board v. Ruttenberg, Nos. 99-BU-3097-S/99- 16 BU-3129-S (N.D. Cal. July 3, 2001). 17 I declare under penalty of perjury under the laws of the State of California and the laws 18 of the United States of America that the foregoing is true and correct. 19 th 20 Executed at Wilmington, Delaware on this 4 day of August 2006.

21 /s/ John C. Kairis John C. Kairis 22 GRANT & EISENHOFER P.A. Chase Manhattan Centre 23 1201 North Market Street Wilmington, DE 19801 24 Tel: (302) 622-7000 Fax: (302) 622-7100 25 Attorneys for Lead Plaintiff 26 The Connecticut Retirement Plan and Trust Funds 27

CERTIFICATE OF SERVICE

1 I hereby certify that the foregoing was served by the method noted upon the following counsel of

2 record on August 4, 2006: 3

4 Via U.S. Mail Via U.S. Mail Robert A. Jigarjian, Esquire Rowan D. Wilson , Esquire 5 Robert S. Green, Esquire Thomas G. Rafferty, Esquire GREEN & JIGARJIAN LLP LaShann M. DeArcy, Esquire th 6 235 Pine Street, 15 Floor CRAVATH, SWAINE & MOORE LLP San Francisco, CA 94104 Worldwide Plaza 7 Counsel for Plaintiffs Robert W. Baker, Jr. and 825 Eighth Avenue Richard Wimble New York, NY 10019 8 Counsel for Defendant Pricewaterhousecoopers LLP

9 Via U.S. Mail Via CM/ECF Luke O. Brooks, Esquire Frederick Sexton Fields, Esquire 10 LERACH, COUGHLIN, STOIA, GELLER, COBLENTZ PATCH DUFFY & BASS, LLP RUDMAN & ROBBINS, LLP One Ferry Building, Suite 200 11 100 Pine Street, Suite 2600 San Francisco, CA 94111-4213 San Francisco, CA 94111 [email protected] 12 [email protected] Counsel for Defendant Pricewaterhousecoopers LLP Counsel for Plaintiffs Robert W. Baker, Jr. and 13 Central States, Southeast and Southwest Areas 14 Pension Fund

15 Via U.S. Mail Via CM/ECF Mark C. Gardy, Esquire Terry T. Johnson, Esquire 16 Charles H. Dufresne, Esquire John P. Stigi III, Esquire ABBEY GARDY, LLP Laura R. Smith, Esquire 17 212 East 39th Street Cameron P. Hoffman, Esquire New York, NY 10016 Kristin Anne Dillehay, Esquire 18 Counsel for Plaintiff Robert W. Baker, Jr. WILSON SONSINI GOODRICH & ROSATI 650 Page Mill Road 19 Palo Alto, CA 94304-1050 [email protected] 20 Counsel for Defendants Thomas L. Cronan III, Kevin A. Denuccio, Pierre R. Lamond, Vinod Khosla, Vivek 21 Ragavan, Dennis P. Wolf, Dennis Barsema, Guarav Garg, Craig Genter, Promod Haque, William Kurtz 22

28 CERTIFICATE OF SERVICE TO DECLARATION OF JOHN C. KAIRIS IN SUPPORT OF PLAINITFFS’ OMNIBUS BRIEF IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS PLAINTIFFS’ FOURTH AMENDED CONSOLIDATED COMPLAINT CASE NO. C03-05642 JF

Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 4 of 4

Via CM/ECF Via CM/ECF 1 Darren J. Robbins, Esquire Francis M. Gregorek, Esquire LERACH, COUGHLIN, STOIA, GELLER, Betsy C. Manifold, Esquire 2 RUDMAN & ROBBINS LLP Rachele R. Rickert, Esquire 401 B Street, Suite 1700 WOLF, HALDENSTEIN, ADLER, 3 San Diego, CA 92101 FREEMAN & HERZ LLP 4 [email protected] Symphony Tower – Suite 2770 Counsel for Plaintiff Central States, Southeast 750 B Street 5 and Southwest Areas Pension Fund San Diego, CA 92101 [email protected] 6 [email protected] Counsel for Plaintiff Bartnik Group 7

10 /s/ Stuart M. Grant Stuart M. Grant 11

Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 1 of 40

EXHIBIT A (PART 1) TO JOHN C. KAIRIS DECLARATION IN SUPPORT OF PLAINTIFFS’ OMNIBUS BRIEF IN OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE FOURTH AMENDED CONSOLIDATED COMPLAINT

Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 2 of 40

Stuart M. Grant (pro hac vice) fohn C. Kairis (pro hac vice) Lauren E. Wagner (pro hac vice) Kimberly L. Wierzel (pro hac vice) Grant & Eisenhofer P.A. Chase Manhattan Centre 1201 North Market Street Wilmington, DE 19801 Tel: 302.622.7000 Fax: 302.622.7100 [email protected] Merrill Glen Emerick (State Bar No. 117248) Anderlini, Finkelstein, Emerick & Smoot $00 S. El Camino Real - Suite 700 San Mateo, CA 94402 Attorneys for Lead Plaintiff The Connecticut Retirement Plans and Trust Funds IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

Case Number C 03-05642 JF IN RE REDBACK NETWORKS, INC. SECURITIES LITIGATION PLAINTIFF'S OMNIBUS BRIEF IN OPPOSITION TO DEFENDANTS' MOTIONS TO DISMISS THE FIRST AMENDED CONSOLIDATED COMPLAINT

CLASS ACTION

This Document Relates to: All Actions Date: August 10, 2005 Time: 9:00 a.m. Ctrm: 3 Judge: Honorable Jeremy Fogel

- PLAINTIFFS' OMMBUS BmINOPPOSllION TO DEFENDANTS' MOTIONS TO DISMISS THE FIRST AMENDED CONSOLIDATED COMPLNNT Caw No C03-05642 JE Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 3 of 40

TABLE OF CONTENTS STATEMENT OF ISSUES TO BE DECIDED ...... 1 [NTRODUCTION ...... 2 STATEMENT OF FACTS ...... 5 I. STANDARDS ON A MOTION TO DISMISS ...... 13 [I. PLAINTIFFS ADEQUATELY ALLEGE LOSS CAUSATION ...... 14 A. Defendants May Not Defeat Plaintiffs' Claims Through Insertion Of Purported Facts Not Properly Before The Court, Or Resolution Of Any Factual Issues...... 14 B. Plaintiffs. . Adequately Allege Loss Causation Based On Material Misstatements And Omissions ...... 16 C. Plaintiffs Adequately Allege Economic Losses Proximately Caused By A Deceptive Scheme...... 23 111. PLAINTIFFS ADEQUATELY ALLEGE CLAIMS UNDER SECTION AND RULE lob-5 ...... 25 Plaintiffs Allege New Facts Which, In Addition To Other Facts, Show That Defendants' Statements Were Materially False And Misleading...... 25 1. The Representations Regarding Key Sales Agreements With Qwest, UUNET, Broadband, Williams And Other Customers Were False And Misleading ...... 25 2. The Representations About Redback's Products Were False And Misleading ...... 34 3. Plaintiffs Have Addressed the Court's Concerns Over the Use of Anonymous Sources ...... 38 The Misstatements Can Be Attributed to the Purported "Outside Directors" Under the Group Pleading Presumption ...... 41 Plaintiffs Allegations Against Kruep Support Liability Under Central Bank and the " .. . Substantial Participation" Test ...... 43 Plaintiffs Have Adequately Alleged That The Defendants Participated In A Fraudulent Scheme ...... 46 Plaintiffs Allege New Facts Which, In Addition To Other Facts, Show That Plaintiffs Have Stated A Claim For Accounting Fraud ...... 47 1. The Standard for Alleging Accounting Fraud With Particularity ...... 47 2. Improper Purchase Accounting And Abuse of Goodwill ...... 48 3. The Undisclosed Stock Payments ...... 49

'LAmTlFFS' OMNIBUS BRIEF 3N OPPOSITIONTO DEFENDANTS'MOTIONSTO USMISSTHE PLRSTMENDED CONSOLmrlTED COMYTAINT 3x1 No. C03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 4 of 40

4. Redback's Other Quid Pro Quo Transactions With Qwest Fraudulently Inflated Revenue ...... 53 5. The Redback Defendants' Deliberate Sales of Defective Products Overstated Redback's Revenues ...... 54 6. Redback's Overstated Revenues and Earnings Were Material ...... 56 F. Plaintiffs Have Alleged New Facts That Support A Strong Inference Of The Scienter of Each of the Defendants ...... 57 1. Plaintiffs Allege New Facts Which, In Addition To Other Facts, Support A Strong lnference Of Scienter Of Each Of The Redback Defendants ...... 59 2. Plaintiffs Allege New Facts Which, In Addition To Other Facts, Support A Strong lnference of PWC's Scienter ...... 67 IV. PLAINTIFFS ADEQUATELY ALLEGE A SECTION 20(a) CLAIM ...... 73 V. PLAlNTIFFS ADEQUATELY ALLEGE INSIDER TRADING IN VIOLATION OF SECTION 10(b) AND SECTION 20(A) ...... 74 A. Contemporaneous Trading Is Satisfied With Respect to Plaintiffs' Purchases ...... 74 B. Contemporaneous Trading Has No Price Requirement ...... 75 C. The Connecticut Funds Have Standing to Represent the Class ...... 77 D. The FAC Adequately Alleges That The Redback Defendants Engaged in Unlawful Insider Trading ...... 78 1. The Standard Of Liability For Insider Trading ...... 78 2. The FAC Pleads Insider Trading With Particularity ...... 80 VI. PLAINTIFFS ADEQUATELY ALLEGE A SECTION 18 CLAIM ...... 81 VII. PLAINTIFFS' CLAIMS ARE NOT BARRED BY ANY STATUTE OF LIMITATIONS ...... 84 1. Facts Relevant To Statute Of Limitations Analysis ...... 84 2. The Section 10(b) Claim of the Additional Class Members Is Timely ...... 85 3. The Section 10(b) Claims Of The Additional Class Members Relate Back To The Allegations In The Prior Complaint ...... 86 4. Plaintiffs' Section 18(a) Claim Is Timely ...... 90 VIII. The Court's Lead Plaintiff Appointment Need Not Be Upset ...... 92 A. The Time Established By the PSLRA to Appoint Lead Plaintiff Or Challenge The Adequacy of A Lead Plaintiff Has Long Expired ...... 92 B. Defendants. .Have No Standing or Any Meritorious Basis to Challenge the Adequacy of Lead Plamtiff ...... 93 .. 11 PLAINTLPPS' OMNIBUS BRIEF M OPWS~IONTO DERENDANTS' MOTLONS TO DISMISS THE FIRST AMENDED CONSOLIDATED COMPLAlNT

CaaeNo. C 03OS64Z Jli Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 5 of 40

CONCLUSION...... 96

2 1 22 23 24 25 26 27 28 .. . 111 PLAEVTIFi7S' OMNIBUS BRlLr LN OPPOSLTION TO DEFENDANTS' MOTIONS TO DlSMlSS TmFmT AMENDED CONSOLmATED COMPLAThl. Cssr No. C m-05642IF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 6 of 40

TABLE OF AUTHORITIES

Cases In re 2Thf:Mart. com. Litig., 1 14 F. Supp. 2d 955 (C.D. Cal. 2000) ...... 3 Adams v. Kinder-Morgan, Inc., 340 F.3d 1083 (10' Clr. 2003) ...... 6 In re Adaptive Broadband Sec. Litig., No. 01-1092, 2002 WL 989478 (N.D. Cal. 2002) ...... 41, 60, 6 Aldridge v. A. T. Cross Corp., 284 F.3d 72 (1st Cir. 2002) ...... 5 In re AgriBioTech See. Litig., No. CV-S-99-144 WL 1277603 @. Nev. Mar. 2, 2000) ...... 4 Allison v. Brooktree Corp., No. 97-CV-0852, 1998 WL 34074832 (S.D. Cal. Nov. 27, 1998) ...... 3 In re American Bank Note Holographies Sec. Litig., 93 F. Supp. 2d 424 (S.D.N.Y. 2000) ...... 6

In re American Cont'l Corp./Lincoln Sav. & Loan Sec. Litig., 794 F. Supp. 1424 @. Ariz. 1992) ...... 8 In re Ancor Communications, Znc., 22 F. Supp. 2d 999 (D. Minn. 1998) ...... 6

In re AOL Time Warner, Inc. Sec. & "ERISA" Litig., No. 02-5575, 2004 WL 992991 (S.D.N.Y. May 5, 2004) ...... 5,28, 29, 5 In re Apple Computer Sec. Litig., 886 F.2d 1109, 1116 (9th Cir. 1989) ...... 3 In re Applied Micro Circuits Corp. Sec. Litig., No. 01CV0649, 2003 U.S. Dist. LEXIS 14492 (S.D. Cal. July 10, 2003) ...... 7 In re Ashanti GoldJelds Sec. Litig., 184 F. Supp. 2d 247 (S.D.N.Y. 2002) ...... 6 Basic, Inc. v. Levinson, 485 U.S. 224 (1988) ...... 3 Beebe v. Pacljk Realty Trust, 578 F. Supp. 1128 (D. Or. 1984) ...... 8 Berry v. Valence Tech., Znc., 175 F.3d 699 (9th Cir. 1999) ...... 4 Blanchard v. Edgemark Fin. Corp., No. 94 C 1890, 2000 WL 33223385 (N.D. 111. May 22, 2000) ...... 8

iv PLNNTLFFS' OWNIBUS BRTEF M OPPOSlTlON TO DBFENDmTS' MOTIONS TO DISMISS THE FIRST llMENDED CONSOLDATED COMPLAINT

Crso No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 7 of 40

Bradley v. Chiron Corp., No. 94-043421996 WL 441022 (N.D. Cal. July 16,1996) afd, 136 ! F.3d 1317 (Fed. Cir. 1998) ...... Briggs v. Sterner, 529 F. Supp. 1155 (S.D. Iowa 1981) ......

Brody V. Transitional Hosps. Corp., 280 F.3d 997 (9th Cir. 2002) ...... 2 58, 59, In re Burlington Coat Factoiy Sec. Litig., 114 F.3d 1410 (3d Cir. 1997)...... 'II I I Buban v. O'Brien. No. 94-033 1, 1994 WL 324093 (N.D. Cal. June 22, 1994)...... b In re Cabletron Sys., 3 1 1 F.3d 1 1 (I st Cir. 2002) ...... I Capital Group v. Deloitte & Touche, LLP, 27 F. Supp. 2d 1324 (N.D. Ga. 1998) ......

Carley Capital Group v. Deloitte & Touche, LLP, 27 F. Supp. 2d 1324 (N.D.Ga. 1998) ...... 52, 57, Carol Gamble Trust 86 v. E-Rex, Inc., 84 Fed. Appx. 975 (9th Cir. 2004) ...... In re CBT Group PLC Sec. Group Litig., I I No. 98-21014, 2001 WL 1822729 (N.D. Cal. Dec. 28, 2001) ...... Cherednichenko v. Quarterdeck Corp., Civ. No. 97-4320 (GHK), 1997 WL 809750 (C.D. Cal. Nov 26, 1997) ...... City of Philadelphia v. Fleming Cos., 264 F.3d 1245 (10th Cir. 2001) ...... In re Citisource, Inc. Sec. Litig., 694 F. Supp. 1069 (S.D.N.Y. 1988)...... Chffv. Payco Gen. Amer. Credits Inc., 363 F.3d 1113 (11th Cir. 2004)...... In re Commtouch Software Ltd. Sec. Litig., i No. C 01-00719 WHA, 2002 WL 3147998 (N.D. Cal. July 24, 2002) ...... 40, 59, 87, i I Conley v Gibson, 335 U.S. 41 (1957) ...... In re Convergent Tech. Sec. Litig., 948 F.2d 507 (9th Cir. 1991) ......

I Cox v. Viacom Int'l, Inc., No. 02-01598 (KI), 2004 WL 1763906 (9th Cir. 2004) ......

PLWNTIFTS' OMNIBUS BRIEF IN OPPOSITION TO DEPENDANTS' MOTIONS TO DISMISS THE PIRST AMENDED CONSOLTDATBD COMPLAINT Cnse No. C 0j-056413 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 8 of 40

Cooper v. Pickett, 137 F.3d 616 (9th Cir. 1997) ...... 5 In re CV Therapeutics, Inc., I No. 03-03709, 2004 WL1753251 (N.D. Cal. Aug. 5, 2004) ...... 7 In re Cylink Sec. Litig,, 178 F. Supp. 2d 1077 (N.D. Cal. 2001) ...... 45 In re DaimlerChrysler AG Sec. Litig., 269 F. Supp. 2d 508 (D. Del. 2003) ...... 1 Danis v. USN Communications, Inc., 73 F. Supp. 2d 923 (N.D. 111. 1999) ...... 2 In re Daou Systems, Inc., Nos. 02-56989, 02-57018, 2005 WL 1431833 (9th Clr.. June 21, 2005) ...... passi Datastorm Tech., Inc. v. Excalibur, 888F. Supp. 112rn.D. Cal. 1995) ...... 1 DSAM Global Value Fund v. Altris Software Inc., 288 F.3d 385 (9th Cir.. 2002) ...... 73 Dura Pharm., Inc. v. Broudo, 125 S.Ct. 1627 (2005) ...... p ass Dura Pharm., Inc. v. Broudo, 339 F.3d 933 (9th Cir. 2003) ...... 1 In re D VI Sec. Litig., No. 03-5336, 2005 WL 1307959 (E.D. Pa May 31, 2005) ...... 7 In re Dynegy, Inc. Sec. Litig , 226 F.R.D. 263 (S.D. Tex 2005) ...... 2 22, 8 Elliot Graphics, Inc. v. Stein, 660 F. Supp. 378 (N.D. Ill. 1987) ...... 7 In re Emulex Corp. Sec. Litig., 210 F.R.D. 714 (C.D. Cal. 2002) ...... 14, 3 In re Enron Corp. Sec., Deriv. & ERISA Litig., 235 F. Supp. 2d 549 (S.D. Tex. 2002) ...... p ass

In re Enron Corp. Sec., Deriv. & ERISA Litig., 258 F. Supp. 2d 576 (S.D. Tex. 2003) ...... 75 Epstein v. Itron, Inc., 993 F. Supp. 1314 (D. Wash. 1998) ...... 6 Fecht v. The Price Co., 70 F.3d 1078 (9th Cir. 1995) ...... 3 35, 3

Feiner V.SS & C Tech., 11 F. Supp. 2d 204 (D. Conn. 1998)...... 53 vi PLAINTIFkS' OMNUUS BRLEr iN OPPOSITIONTO DERENDANTS'MOTIONSTO DlSMlSSTHE FlRSTAMENDEDCONSDLmATED COMPLAINT Cnse No. C03-05642 .W I Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 9 of 40

Forsyth v. Humana, Inc., 114F.3d 1467(9thCir. 1997) ...... 1 Fraternity Fund Ltd. v. Beacon Hill Asset Mgt. LLC, No. 03 CV 2387, 2005 WL 1631144 (S.D.N.Y. July 5, 2005) ...... 1 1 In re FVC.com Inc., No. 00-15555, 32 Fed. Appx. 338 (9th Cir. July 11, 2001) ...... 6 Garbini v. Protection One, Inc., No. 99-03755, 2002 WL 31395954 (9th Cir. Oct. 23, 2002) ...... 7 In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994) ...... 25, 41

hi re Global Crossing Sec. & ERISA Litig., 225 F.R.D. 436 (S.D.N.Y. 2004) ...... In re Global Crossing See. Litig., 322 F. Supp. 2d 319 (S.D.N.Y. 2001) ...... 128,6 Gluck v. Cellstar Corp., 976 F. Supp. 542 (N.D. Tex. 1997) ...... 9 Gompper v. VISX Inc., 298 F.3d 893 (9th Cir. 2002) ...... 5 Greater Pa. Carpenters Pension Fund v. Whitehall Jewelers, Inc., No. 04-C-1107, 2005 WL 1563206 (N.D. Ill. Jun. 30, 2005) ...... 17, 2 Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999) ...... 53 In re Gupta Corp. Sec. Litig., 900 F. Supp. 1217 (N.D. Cal. 1994) ...... 7 In re Harmonic, Inc. Sec. Litig., 163 F. Supp. 2d 1079 (N.D. Cal. 2001) ...... 31, 4 In re Hqes Lemmerz Int 7, Inc., 271 F. Supp. 2d 1007 (E.D. Mich. 2003) ...... 7 8 Helfand v. Cenco, Inc., 80 F.R.D. 1 (N.D. Ill. 1977) ...... 8 In re Heritage Bond Litig., 289 F. Supp. 2d 1132 (C.D. Cal. 2003) ...... 9 In re HUFNInc. Sec. Litig., No. 99-4531 (SI), 2000 WL 33775286 (N.D. Ca1. Aug. 9, 2000) ...... 13 Hockey v. Medhekar, 30 F. Supp. 2d 1209 (N.D. Cal. 1998) ...... 53 In re Homestore.com, Inc. Sec. Litig., 252 F. Supp. 2d 1018 (C.D. Cal. 2003) ...... passi 4 vii PUWIFTS' OMNIBUS BRIEF M OPPOSITION TO DEFENDANTS' MOTIONS TO DISMISS 11II MRST MZENDED CONSOLmATED COMP- CaneNo. C 03-05641 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 10 of 40

In re Homestore.com Sec. Litig., 347 F. Supp. 2d 790 (C.D. Cal. 2004) ...... Houbigant, Inc. v. Deloitte & Touche LLP, 303 A.D.2d 92 (N.Y. App. Div. 2003) ...... Howard v. Everex Sys., 228 F.3d 1057 (9th Cir. 2000) ...... Howard v. Hui, No. C 92-3742-CRB, 2001 WL 1159780 (N.D. Cal. Sept. 24, 2001), ...... In re ICNPharm., Inc. Sec. Litig., 299 F. Supp. 2d 1055 (C.D. Cal. 2004) ...... Immigrant Assistance Project Of The Los Angeles County Federation Of Labor (AFL-CIO v. INS), 306 F.3d 842 (9th Cir. 2002) ...... In re Immune Response Sec. Litig., No. 01CV1237, 2005 WL 1579484 (S.D. Ca1 June 7, 2005) ...... 5, In re Initial Public Offering Sec. Litig., 297 F. Supp. 2d 668 (S.D.N.Y. 2003) ...... 23, Int'l Bhd. of Teamsters v. Am. West Airlines, Inc., No. CIV-95-2924-PHX- RGS, 1997 WL 809760 @. Ariz. Sept. 25, 1997)...... Johnson v. Tellabs, 262 F. Supp. 2d 937 (N.D. 111. 2003) ...... KapIan v. Rose, 49 F.3d 1363 (9th Cir. 1994) ...... 28, In re Keyspan Corp. Sec. Litig., No. 01-5852, 2003 WL 21981806 (E.D.N.Y. July 30, 2003) ...... Lindelow v. Hill, NO. 00-C-3727, 2001 WL 830956 (N.D. Ill. July 20, 2001) ......

In re Lernout & Hauspie Sec. Litig., 208 F. Supp. 2d 74 @. Mass. 2002) ...... 29,

Lindner Dividend Fund, Inc. v. Ernst & Young, 880 F. Supp. 49 @. Mass. 1995) ...... In re Livent, Inc. Sec. Litig., 78 F. Supp. 2d 194 (S.D.N.Y. 1999)...... Lorillard, Div. of Loew 's Theatres, Inc. v. Pons, 434 U.S. 575 (1978) ...... Lorn v. Rhay, 375 F.2d 55 (9th Cir. 1967) ......

... Vlll PWPliS' OMNIBUS BRIEr IN OPPOSlTlONTO DEFENDANTS' MOTIONS TO DISMISSTHE FIRSTMIENDODCONSOLIDATED COMPLAW

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In re Lucent Tech., Inc. Sec. Litig., 217 F. Supp. 2d 529 (D.N.J. 2002) ...... 15, 21, 5 Marksman Partners L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297 (C.D. Cal. 1996) ...... 50, 52, 58, t In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248 (N.D. Cal. 2000) ...... passi In re MDC Holdings Sec. Litig., 754 F. Supp. 785 (S.D. Cal. 1990)...... t In re MicroStrategy Inc. Sec. Litig., 115 F. Supp. 2d 620 (E.D. Va. 2000) ...... 7 Miller v. Thane Int'l, Inc., No. 03-1031, 2005 WL 1364531 (C.D. Cal. June 2, 2005) ...... 2 Mitzner v. Hustings, No. 04-3310, 2005 WL 88966 (N.D. Cal. Jan. 14, 2005) ...... 4

Monroe v. Hugesm , 31 F.3d 772 (9 Clr. 1994) ...... 7 In re NetworkAssoc., Inc. Sec. Litig., 76 F. Supp. 2d 1017 (N.D. Cal. 1999) ...... 6 S Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993) ...... 14, 75, 76, i No. 84 Employer-Teamster Joint Counsel Pension Trust Fund v. America West Holding Corp., 320 F.3d 920 (9th Cir. 2003) ...... passi In re Nortel Network Corp. Sec. Litig., 238 F. Supp. 2d 613 (S.D.N.Y. 2003) ...... I In re Northpoint Communications Group Inc. Sec. Litig., 221 F. Supp. 2d 1090 (N.D. Cal. 2000) ...... 28, 6 In re NUI See. Litig., 314 F. Supp. 2d 388 (D.N.J. 2004) ...... 1 In re Nuko Info. Sys. Sec. Litig., 199 F.R.D. 338 (N.D. Cal. 2000) ...... 6 Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226 (9th Cir. 2004) ...... passjl O'Connor & Assoc. v. Dean WithReynolds, Inc., 559 F. Supp. 800 (S.D.N.Y. 1983)...... 7

Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000) ...... 1

ix PLMNTlFFS' OmUSBRIEF OYYOSlTlON TO DEFENDAWE' MOTIONS TO DlSMlSS Ilfi: FIRST AMENDED CONSOLLDATED COMPULNT Cn~eNa.C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 12 of 40

Osher v. JNl Corp., 256 F. Supp. 2d 1144 (S. D. Cal. 2003) ...... 53 In re Oxford Health Plans, Inc., 191 F.R.D. 369 (S.D.N.Y. 2000) ...... 2 22, 41, 6 In re Pacrjic Gateway Exch., Inc. Sec. Litig., 169 F. Supp. 2d 1160 (N.D. Cal. 2000) ...... 53 In re Peerless Sys. Corp. Sec. Litig., 182 F. Supp. 2d 982 (S.D. Cal. 2002) ...... 53 Pensioenjmds ABP v. @vest Communications Int '1, Inc., Civil Case No. 04-RB-0238 (CBS) @. Colo. Mar. 29, 2005) ...... 8 In re PeopleSoji, Inc. Sec. Litig., No. 99-00472, 2000 WL 1737936 (N.D. Cal. May 25, 2000) ...... 6 Picard Chemical Inc. Projit Sharing Plan v. Pernogo Co., 940 F. Supp. 1101 (W.D. Mich. 1996) ...... 1

Plumbers & Pipejitters Local 572 Pension Fund v. Cisco Sys., Inc., No. 01-20418, 2004 U.S. Dist. LEXIS 27008 (N.D. Cal. May 27, 2004) ...... 7

Ponce v. SEC, th , 345 F.3d 722 (9 Cir. 2003) ...... 71 Powers v. Eichen, 977 F. Supp. 1031 (S.D. Cal. 1997)...... 3 PR Diamonds Inc. v. Chandler, 364 F.3d 671 (6th Cir. 2004) ...... 65 Pratt v. Rowland, 769 F. Supp. 1128 (N.D. Cal. 1991) ...... 1 In re Ramp Networks Inc., Sec. Litig., 201 F. Supp. 2d 1051 (N.D. Cal. 2002) ...... 6 Randall v. Loftgaarden, 478 US. 647 (1986) ...... 9 Raynor Bros. v. Am. Cyanimid Co., 695 F.2d 382 (9th Cir. 1982) ...... 88, 8 In re Raytheon Sec. Litig., 157F. Supp. 2d 131 (D. Mass. 2001) ...... 41 In re Read-Rite Cojp,. 335 F.3d 843 (9 Cir. 2003) ...... 58, 6 In re Read-Rite Corp. Sec. Litig., No. C-97-20059 RMW (N.D. Cal. May 27, 1997) ...... 9 Reddy v. Litton Indus., Inc., 912 F.2d 291 (9th Cir. 1990) ...... 1 X PIAWIPFS' OMNIBUS BWFIN OPWSLTION TO DEPENDmS' MOTJONSTO DISMISS THE FIRSTMZENDEDMNSDLmATED COMPMT Cars No. CO3-05612 Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 13 of 40

In re Rent- Wq Sec. Litig., 218 F.R.D. 101 (W.D. Pa. 2003) ...... 21 Rieger v. Altris Sofmare, Inc., No. 98-CV-528 TW JFS, 1999 WL 540893 (S.D. Cal. Apr. 30, 1999) ...... 7: Rieger v. PricewaterhouseCoopers LLP, 117 F. Supp. 2d 1003 (S.D. Cal. 2000) ...... 7. Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) ...... 3 61 Ross v. A. H. Robins Co., Inc., 607 F.2d 545 (2d Cir. 1979)...... 8 8 Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000) ...... 6 In re Rhythms Sec. Litig., 300 F. Supp. 2d 1081 (D. Colo. 2004) ...... 3 Schaffer v. Evolving Sup., Inc., 29 F. Supp. 2d 1213 (D. Colo. 1998)...... 4

Schlagal v. Learning Tree Int '1, No. 98-6384, 1998 WL 1144581 (C.D. Cal. 1998) ...... 2 SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998) ...... 7 SEC v. Savoy Indus., Inc., 587 F.2d 1149 (D.C. Cir. 1978) ...... 7 SEC v. Zandford, 535 US. 813 (2002) ...... 8 In re Secure Computing Corp. Sec. Litig., 120 F. Supp. 2d 810 (N.D. Cal. 2000) ...... 4 5 In re SeeBeyond Tech. Corp. Sec. Litig., 266 F. Supp. 2d 1150 (C.D. Cal. 2003) ...... 2 5 Shapiro v. Merrill Lynch Pierce, Fenner & Smith, lnc., 495 F.2d 228 (2d Cir. 1974)...... 7 In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999) ...... passir Simpson v. Specialty Retail Concepts, 149 F.R.D. 94 (M.D.N.C. 1993) ...... 8 In re SmarTalk Teleservices, Inc. Sec. Litig., 124 F. Supp. 2d 527 (S.D. Ohio 2000) ...... 6 Smith v. Circuit City Stores, Inc., 286 F. Supp. 2d 707 (E.D. Va. 2003) ...... 5 xi PUMTIFW OMNIBUS BRIEF IN OPPOSlnON TO DEFENDANTS' MOnONS TO DlSMlSS TIIE WTAMENDED CONSOLLDATED COMPLAINT

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ln re Software Toolworks Inc. Sec. Litig., 50 F.3d 615 (9th Cir. 1994) ...... 4 In re Southern PaciJic Funding Corp. Sec. Litig., 83 F. Supp. 2d 1 172 (D. Or. 1999) ...... 6 Stanley v. Safeskin Corp., No. 99CV454, 2000 WL 33115908 (S.D. Cal. Sept. 15, 2000) ...... 4 42, 7 %ate of Wisc. Inv. Bd. v. Ruttenberg, Nos. CV-99-BE-3097 & CV-99-BE-3129 (N.D. Ala. July 3, 2001) ...... 8, In re Stratosphere Corp., 66 F. Supp. 2d 1 182 (D. Nev. 1999) ...... 3 Stichting Pensioenfunds ABP v. @vest Communications Int 'I, Inc., No. 04-RB-0238 (CBS) (D. Colo. Mar. 29, 2005) ...... 1 21, 8, Strauss v. Holiday Inns, Inc., 460 F. Supp. 729 (S.D.N.Y. 1978)...... 7: Svack v. Credit Suisse First Boston, No. 02-1 1943, 2004 WL 2203482 @.Mass. Sept. 21, 2004) ...... 3 In re Syntex Corp. Sec. Litig., 95 F.3d 922 (9th Cir. 1996) ...... passir In re Telxon Corp. Sec. Litig., 67 F. Supp. 2d 803 (N.D. Ohio 1999) ...... 19 In Re Terayon Comm. Sys., Inc. Sec. Litig., No. C 00-01967 MHP, 2002 WL 989480 (N.D. Cal. Mar. 29, 2002) ...... passir Tello v. Dean Witter Reynolds, Inc., 410 F.3d 1275 (1 lth Cir. 2005) ...... 8 In re Tyco Intern., Ltd., No. MDL 02-1335, 2004 WL 2348315 (D.N.H. Oct. 14, 2004) ...... 5 United States v. Smith, 155 F.3d 1051 (9th Cir. 1998) ...... 7 United States v. Teicher, 987 F.2d 112 (2d Cir. 1993) ...... 7 In re Vantive Corp. Sec. Litig., 283 F.3d 1079 (9th Cir. 2002) ...... 6 Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) ...... 2 31, 5

Wachovia Bank & Trust Co. v. Nut '1 Student Mktg. Corp., 650 F.2d 342 (D.C. Cir. 1980) ...... 8 Warshaw v. Xoma Corp., 74 F.3d 955 (9th Cir. 1996) ...... 3 35, 3 xii PLA-FTS' OMiWBUS BRIEF M OPPOSlTlON TO DEPENDMS' MOI-IONSTO DUIWSS THE FLRST *MENDED CONSOLKh47ZD COMPLAINT

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Washer v. Bullitt Co., llOU.S. 558 (1994) ...... 1 Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998) ...... : In re Williams Sec. Litig., 339 F. Supp. 2d 1206 (N.D. Okla. 2003) ...... 5 f In re Wireless Telephone Federal Cost Recovery Fees Litig., 396 F.3d 922 (8th Cir. 2005) ...... I

WM High Yield Fund v. 0 'Hanlon, No. 04-3423, 2005 WL 1017811 (E.D. Pa. Apr. 29, 2005) ...... 46, I Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th Cir. 1987) ...... L In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392 (S.D.N.Y. 2003) ...... 1 1 In re Worlds of Wonder Sec. Litig., No. C875491, 1990 WL 61951 (N.D. Cal. Mar. 23, 1990) ...... ? In re Xcel Energy, Inc., Sec., Deriv. & "ERISA" Litig,, 286 F. Supp. 2d 1047 @. Minn. 2003) ...... 2 Young v. Lepone, 305 F.3d 1 (1st Cir. 2002)...... c In re ZZZZ Best Sec. Litig., 864 F. Supp. 960 (C.D. Cal. 1994) ...... 4 Statutes 15 U.S.C. 5 78j(b) ...... 7 15 U.S.C. 5 78r(a) ...... 5 15 U.S.C. 5 78t(a) ...... 7 15 U.S.C. 5 78u-4(b)(l) ...... 13,; 15 U.S.C. 5 78u-4(b)(2) ...... 1 17 C.F.R. 5 240.10b5-1 ...... 7 Fed. R. Civ. P. 8(a) ...... 1 Fed. R. Civ. P. 9(b) ...... I

... Xlll 'IAMTIPXS'OMNLBUS BRLEF m OPPOSITIONTO DEFENUAN'IP' MOTIONS TO UlSMlSS THE PIXST AMENDED CONSOUUATED COMPm 3arc No. C 03-05642 Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 16 of 40

Other Authorities H.R. Cod. Rep. No. 104-369 (1995) ...... 9 H.R. Rep. No. 910, 100th Cong., 2d Sess. 27 (1988) ...... 7

xiv PMLNTIFPS' OMNDUS BRIEF W OPPOSITION TO DEF-ANTS' MOTIONS TO DISMISS THE PIKSr AMENDED CONSOLLUATED COMP- Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 17 of 40

Lead Plaintiff Connecticut Retirement Plans and Trust Funds ("Lead Plaintiff" or "Plaintiff'), individually and on behalf of others ("Plaintiffs") who purchased or otherwise acquired the common stock of Redback Networks, Inc. ("Redback" or the "Company") between and including November 27, 1999 and October 10,2003 (the "Class Period"), submits the following response to the motions to dismiss the First Amended Consolidated Complaint For Violation of The Federal Securities Laws ("FAC") filed by the Redback ~efendants'and PricewaterhouseCoopers LLP ("Pwc")? STATEMENT OF ISSUES TO BE DECIDED 1. Have Plaintiffs sufficiently alleged new facts which, in addition to other facts, adequately plead that Defendants participated in a fraudulent scheme and course of conduct,

including Redback's illicit quidpro quo agreements with Qwest Communications International, Inc. ("Qwest") and other customers that materially overstated Redback's revenue by more than $47 million from the Qwest and UUNET deals alone in 2000-2001, and overstated millions more from other transactions, in violation of generally accepted accounting principles ("GAAP")? 2. Have Plaintiffs sufficiently alleged new facts which, in addition to other facts, adequately plead that certain officers and directors of Redback are liable for knowingly or with deliberate recklessness issuing materially false and misleading statements regarding Redback's sales revenue and business prospects? 3. Should the Court deny Defendants' motions to dismiss when, reviewing the allegations in their entirety, and considering all reasonable inferences, the FAC states new facts which, in addition to other facts, give rise to strong inferences of Defendants' conscious and deliberately reckless misconduct in violation of the federal securities laws?

' The Redback Defendants include Kevin A. DeNuccio ("DeNuccio"), Pierre R. Lamond ("Lamond"), Thomas L. Cronan, 111 ("Cronan"), Vinod Khosla ("Khosla"), Dennis P. Wolf ("Wolf"), Vivek Ragavan ("Ragavan"), Dennis L. Barsema ("Barsema"), Gaurav Garg ("Garg"), William H. Kurtz ("Kurtz"), Craig Gentner ("Gentner"), Randall J. Kruep ("Kruep"), and Promod Haque ("Haque"). The Redback Defendants and PwC are referred to collectively herein as "Defendants." 2 References to the various briefs are as follows: Redback Defendants' Memorandum of Points and Authorities on Global Issues ("GI. Br."), Redback Defendants' Memorandum of Points and Authorities On Individual Issues ("RD Br."), and PwC's Memorandum of Points and Authorities ("PwC Br.")

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1 4. Have Plaintiffs adequately alleged loss causation, where the FAC alleges that Redback's stock declined in response to partial disclosures of the fraud during the Class Period, an( the issue of whether that stock price decline results in any part from a general market downturn or any other event presents a factual issue not appropriate for resolution on a motion to dismiss?

5. Have Plaintiffs adequately alleged claims for accounting fraud based on the newly alleged facts and new explanations in the FAC for why the accounting was improper and violated GAAP?

6. Have Plaintiffs alleged new facts which, in addition to other facts, adequately plead violation of federal securities laws by Redhack, thereby giving rise to a Section 20(a) claim against the Defendants who controlled Redhack, where Redhack unquestionably issued materially false an( misleading statements, and Plaintiffs have alleged that the Company and the Redback Defendants did so with knowledge or deliberate reckless disregard of their falsity?

7. Have Plaintiffs adequately alleged claims for insider trading under Sections 10(h) an 20(A)? 8. Have Plaintiffs adequately pleaded a Section 18 claim against Defendants who signe Redback's materially false and misleading SEC filings? 9. Have Plaintiffs asserted their claims within the applicable statute of limitations?

INTRODUCTION

In their original complaint, Plaintiffs alleged that Redback entered into quidpro quo agreements with Qwest and others in which Redback paid outright bribes (in the form of stock) or purchased products or services Redback did not want or need, in order to obtain reciprocal

agreements by Qwest and others to purchase Redhack products that those companies did not want c need, as they were useless to those customers or were unstable and defective. Plaintiffs alleged thal the Defendants participated in this scheme and made misrepresentations about Redback's sales and revenues in order to artificially inflate Redback's stock price. However, the Court found Plaintiffs' allegations to be conclusory and without "factual basis for the allegation that the [Redback] produci were unstable" and ruled that Plaintiffs had not provided enough information to show how certain

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confidential witnesses identified in the complaint were in positions to know the information they provided to Plaintiffs. January 21,2005 Dismissal Order ("Order") at 8-9. The Court also found that Plaintiffs had not adequately alleged scienter, and had not alleged that certain Defendants had any role in the making of any false or misleading statements. However, as to one of those Defendants (Randall Kruep), Plaintiffs provided new evidence in Plaintiffs Motion For Reconsideration that the Court found could show Kruep's "involv[ment] in the drafting of statements released to the public, even if he did not make the statements personally." Apr. 25,2005 Reconsideration Order at 2.

On May 27,2005, Plaintiffs filed their FAC, including new evidence and allegations against Kruep, as well as new evidence and allegations against the other Defendants. Consistent with the Court's Order, Plaintiffs conducted additional investigation, including a host of additional interviem (many with new witnesses having knowledge of the fraud), and pled substantial new facts and evidence in the FAC that establish the Defendants' direct participation in, and knowledge of, the fraudulent transactions. This new evidence includes information about the Redback Defendants' attendance at key meetings of top executives where Redback's sales and revenues, the defects and problems with Redback's products, and other aspects of the fraudulent scheme were discussed. The FAC also sets forth additional information about the Redback Defendants' sales of Redback stock,

which demonstrate their scienter. The FAC sets forth new details about each of the fraudulent quid

pro quo transactions, and describes additional fraudulent transactions not identified in prior complaints. The FAC also provides new information on Plaintiffs' confidential witnesses, demonstrating that these sources were in positions to know the information they provided to Plaintiffs. This new information and these new allegations meet all applicable pleadings standards. As demonstrated below, Plaintiffs have now alleged with sufficient particularity that the Defendants made materially false and misleading statements including announcements of sales to Qwest and other companies and publication of financial statements that improperly included revenu from these deals without offsetting the amounts Redback paid to obtain that revenue. As explained below, while the Defendants were not required to disclose "every piece of information in [their] possession" (GI. Br. at 27) about Redback's sales, they were required to disclose that the sales were 3 PLAINTIITS' OMNIBUS BRIEF W OPPOSmION TO DEFENDANTS' MOnONS TO DISMISS THE FIRST AMENDED CONSOLIDATED COMTLAINT cal.NO. c 03.0564~ m Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 20 of 40

obtained through quidpro quo deals in which Redback transferred stock or purchased products and services it did not want or need solely to obtain its customers' reciprocal purchases of Redback products (that those customers did not want or need). Likewise, the Defendants were required to disclose that Redback's products were defective and would not be deployed by Qwest and its key customers, but those customers purchased the products because they had been paid to do so. The original complaint focused primarily on the Company's improper deals with Qwest. Th FAC includes new details on additional transactions with UUNET, Broadband Office ("Broadband' and Williams Communications Group ("Williams"). These allegations show that the fraud was greater in scope and magnitude than previously known or alleged and, based upon this new information, the total fraud was clearly material to Redback's bottom line (and ultimately to investors). Plaintiffs have also adequately explained how and why the quidpro quo deals were fraudulent, and how Redback improperly hooked the revenue from those deals. In particular, the FAC contains new facts and new explanations not included in any prior complaint as to the impact of the improper transactions on Redback's financial statements and how the accounting for the transactions violated GAAP. The FAC also shows that the company officers and purported "outside directors" participate in the day-to-day operations of the Company to justify application of the group pleading presumption. In particular, Plaintiffs have adequately alleged that Kruep provided false informatior which he knew would be disseminated to investors, and so he substantially participated in making the false and misleading statements. Plaintiffs also have adequately alleged (based on new information) the scienter of each of the Redback Defendants, many of whom actually negotiated the improper deals, signed the deal documents (such as the Siara Warrant Agreement), and attended meetings where the deals and the problems with Redback's products were discussed. Likewise, Plaintiffs have adequately alleged PwC's scienter, since it knew a whole series of facts that put it on notice of the fraud. Plaintiffs also adequately alleged insider trading claims, since they purchased contemporaneously with the Redback Defendants' sales of Redback stock, and they have adequatel! alleged claims under Sections 18 and 20(a). Finally, Plaintiffs have adequately alleged that they suffered damages proximately caused by the fraud, and all of Plaintiffs' claims are timely.

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In short, Plaintiffs have adequately alleged all of their claims, and Defendants' motions to dismiss should be denied in their entirety.

STATEMENT OF FACTS

Redback was one of a number of high-tech companies in the hotly competitive telecommunications industry that saw its stock rise dramatically following its IPO. Redback's stoc rose from its $23 IPO price to $99.49 by June 28, 1999 and to $169.83 by September 25,2000 and ultimately to more than $382 (adjusted for splits) during the Class Period. 77 3, 174. While Redback's stock ultimately declined along with the stocks of its telecommunications brethren, its stock was artificially inflated by a series of secret bribes and sales incentives paid to customers (including Qwest, Redback's largest source of revenues) to obtain sales (and the coveted

announcements of new sales agreements, which created a positive "buzz" about Redback) in order I create the false appearance of legitimate demand for Redback's products. 77 44, 57, 110, 158. When Congress began investigating Qwest, and the New York Attorney General filed a civil action against Qwest's former executives for improperly taking millions in profits from inappropriate allocations of IPO stock offerings, Qwest could no longer engage in the scheme, and Redback's stock began to decline. 77 35, 117-1 18, 121,240,249-50,260,263,266. The scheme began prior to Redback's IPO, when Redback provided undisclosed "friends an family" shares of its stock to insiders and executives at telecommunications companies in exchangc for commitments from those companies to purchase Redback's products, including the SMSTM 1000,3 whether they needed them or not. 77 44-48, 125-27. As newly alleged in the FAC:

The telecommunications companies who engaged in this aspect of the fraud included Level 3, SBC, GTE, Concentric Networks (where Khosla was a director) and WorldCom's UUNET division. Id. A former District Sales Manager (the "Redback Sales and Marketing Manager") whc worked at Redback from 1997 to 2001) stated that the IPO stock gifts were "dole[d].. .out" with the intention of generating business by indicating to the potentia customers "the better we do, the better you do." 7 45.

3 The FAC has tvmeranhical errnrq that refer tn nur~rrnrntcin ntrrrhnre the SMSTM 1nnnn

5 PUWl'IPrS' OMNmUS BRIEF IN OPPOSITION TO DEIIEM)AN7S' MOTIONS 'rU DISMISS 'lE3 flRST AMENDED CONSOLmATED CO&wLUNI. Caw No. C03-05642 JIi Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 22 of 40

A former Director of Sales for WorldCom and other accounts at Redback who worked there from December 1999 through March 2002 (the "Redback Sales Director") said that Redback sales representatives and account managers met with decision-makers at UUNF,T and other telecommunications companies to offer the "friends and family" shares as incentives to purchase Redback products, and UUNEl received the shares and in return purchased Redback's SMSTMtechnology. W 45-47

In May 1999, Redback secretly transferred to Weisberg and other Qwest executives additional "friends and family" shares in Redback's IPO. 7 52. Plaintiffs added the following new details regarding this aspect of the fraud:

The Redback Sales and Marketing Manager (who handled Qwest's account in 1999) and a former Redback Sales Director ("Former Sales Manager") who personally managed the Qwest account between February 2000 and July 2002 both confirmed that Redback transferred shares to Weisberg and other Qwest executives to obtain (i) Qwest's agreement that Redback could issue a press release announcing that Qwest was deploying Redback's products (even though Qwest did not commit or plan to issue purchase orders for or deploy any Redback products under this agreement), and (ii) Qwest's agreement to purchase and deploy Redback's SMSTMproducts. 117 53- 57.

These witnesses also stated that although Redback announced a "multi-year, multi- million dollar agreement," with Qwest on June 28, 1999 it was only for $5 million in equipment over 3 years. 7 53.

The Redback Sales and Marketing Manager said Redback gave 1,000 shares of pre- IPO stock to "top guys" and to Lewis ~ilks: who was the president of a Qwest subsidiary, and that Mr. Wilks introduced the witness to Weisberg as the contact witl whom the witness would be "dealing.. .down the road" as Weisberg would handle future "shakedowns" on behalf of Qwest. 7 59.

The Redback Sales and Marketing Manager said that Qwest signed off on the announcement even though it had no plans to issue purchase orders for, take possession of, or deploy Redback's products, and that Qwest demanded additional incentives (beyond the friends and family shares) in return for Qwest's purchase orders, as Qwest demanded that Redback "show us [Qwest] that you [Redback] are a partner." 711 53, 56,59.

' Allegations regarding Weisberg's Indictment, which was not available to Plaintiffs when they file' the initial complaint, show that Weisberg also demanded personal stock incentives from Redback in connection with negotiating an agreement with Qwest in April-May 1999. 71 4-5,35,49-51. 5 By March 2000, the 1,000 shares of pre-IPO stock that Redback issued to Wilks had soared in valued to more than $1.1 million. 7 59.

6 PLAINTIFFS' OMNIBUS BRIEF OPPOSmONTO DEFENDANTS' MOnONSTO DlSMlSSTllE lilRSTAMENDEDCONSOUDATED COMPLAINT Case No. C 03.05641 JE Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 23 of 40

This witness explained that the press releases created a "buzz" and were used to driv up the market price of Redback's stock by creating an impression of demand for Redback's products when there was none. 77 57,61.

The Redback Sales Manager said he was pressured by Barsema, Garg and Kruep to get orders from Qwest because Redback had provided stock and customer referrals. 758.

Weisberg was indicted on February 16,2005 for devising and engaging in a scheme pursuant to which he improperly conditioned Qwest business on the receipt of personal investment opportunities, including those received from Redback. The indictment specifically charged Weisberg with extracting such demands while negotiating and participating in a multi-million dollar commercial transaction between Qwest and Redback. 7 50. Weisberg is charged with making material misrepresentations and omissions and reaping over $2 million through this scheme. 751.

Redback again bribed executives at Qwest, when, before Redback's merger with Siara, Ragavan and Khosla caused Siara to issue a warrant for 100,000 shares of Siara stock to Qwest and its executives (through U.S. Telesource, an investment company for Weisberg and other Qwest executives and a wholly-owned subsidiary of Qwest) in exchange for Qwest's agreement to purchas within two years $40 million in equipment that was under development from Siara or its successors. 7 64. As the Siara Warrant Agreement (which was not available to Plaintiffs when they filed their prior complaint) was signed on the day that Siara's board approved the purchase price offered by Redback, Qwest actually committed to purchase the $40 million in products from Redback as at tha time Redback was to be the successor to Siara. 7 65. As newly alleged, the Siara warrant had an exercise price of $2 per share, which quickly soared to a value of $45 million. 7 66. Thus, the Redback Defendants secretly provided Qwest executives with a total of $45 million worth of Redback stock in return for a commitment from Qwest to purchase $45 million of equipment over 2 years ($5 million before May 2002 and $40 million before December 2001). W 65. If Qwest did nc honor its agreement, the Qwest executives were required to forfeit their lucrative Redback stock obtained under the Siara Warrant Agreement. See Exhibit A at 2, attached to the John Kairis Declaration ("Kairis Decl.") at 2.

I P-XS' OMNIBUS BRIEE IN OPPOSITION TO DEFENDANTS' MOTIONS TO DISMISS TlIE FIRST MNOEDCONSOLIDATED COMPLAMT

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Also as newly alleged, Khosla and Ragavan discussed the merger at Siara board meetings when Khosla also served on the Qwest board; Ragavan signed the Siara Warrant Agreement on behalf of Siara; Weisberg signed on behalf of U.S. Telesource and Qwest; and Qwest and U.S. Telesource shared many common board members and executive officers. 77 64-66. Plaintiffs also allegefor thefirst time that, as stated by the Redback Sales W, on or about December 18 or 19, 1999, Kruep and Weisherg worked out the basic terms of the "specifics" of Qwest's product order

that was provided in exchange for the transfer of SiardRedback stock to Qwest executives (througl. U.S. Telesource). 7 71. The Amended Complaint also alleges for thefirst time that the scheme included transaction with Broadband. 77 67-68, 137-139, 177. Broadband was Siara's very first contract. 7 137. Siara (at the behest of Redback which was on the verge of acquiring Siara) gave Broadband a warrant for 4500 shares of stock worth $3 million (to be later exchanged for a lucrative Redback stock or a warrant in the merger) in exchange for Broadband's consent to Siara announcing that Broadband was going to deploy $40 million of Siara's equipment, which was under development at the time. Because of the upcoming RedbacWSiara merger, the agreement was actually between Broadband and Redback (as Siara's successor). 77 67, 137. KPCB, the venture capital firm where Khosla serves as general partner and which owned over 6% of Redback stock, also owned more than 10% Broadband, which purchased $8 million of products from Redback during 2000. 77 15,67, 137. Khosla was on the boards of both Broadband and Siara at the time. 7 139. Plaintiffs again alleged that Redback in the third quarter of 2000 agreed to purchase $1 8 million of Application Service Provider ("ASP") services from Qwest Cyber Solutions, LLC ("QCS"), a Qwest affiliate, in exchange for Qwest's commitment to purchase Redback's SMSTM 10000 product. 7 75. The Amended Complaint adds the following new details:

0 Qwest's commitment was for $20 million in products. 7 75. The former Redback Vice President of North American Sales ("W NA Sales") said that he knew from frequent interaction and sales presentations to Qwest that Qwest could not deploy Redhack's products before going through lab trials at Qwest to make sure the products were "interoperable" in Qwest's network and met certain technical requirements. 7 76. This witness worked with Qwest's Senior Vice President of Engineering, Michael Perusse ("Peruse") in suggesting that Qwest

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purchase the SMSTM10000 to satisfy Qwest's obligations under the Siara Warrant Agreement, and Qwest subsequently purchased that product. 77 76-77. Not just the VP NA Sales, but also the Redback Sales VP, the Redhack Sales Director and the UUNET Account Manager and Sales Engineer, all stated that the SMSTM 10000 was not operational at all in 2000 when it was shipped to Qwest, UUNET and others. 77'

The Redback Sales VP and the VP NA Sales said that all of the Redback Defendants knew that the SMSTM10000 was not operational in 2000. (In fact, it was not operational through at least March 2002.) The VP NA Sales said that Patel provided oral reports at weekly executive meetings attended by the VP NA Sales, Ragavan, Kruep, Barsema, Gentner and other senior executives and sales managers regarding the numerous problems with the SMSTM10000 product that caused it to be non- operational. 77 78, 82, 84.

The Redback Sale VP said that Perrusse provided a $20 million order for SMSTM 10000 units on the condition that Redback buy $20 million of ASP services from QCS, even though Redback had no need or interest in such services as Redhack internally managed its information technology ("IT") department. Pernsse selected the services and the dollar amount to be paid by Redhack (which was astronomical compared to the market price for ASP services). W 79, 81. This witness also said that Ragavan sought and received Khosla's approval before authorizing the purchase and that Kruep, Ragavan, Khosla and others agreed to purchase the services from Qwest solely to obtain Qwest's agreement to buy the SMSTM10000 so Redhack could meet Wall Street's revenue expectations. 7 81.

The Redback Sales and Marketing Manager discovered this deal, and learned that Redback did not need the ASP services but purchased them to obtain press releases and commitments from Qwest, when he heard Redback executives say "if we gotta, we will do what we gotta do" to get Qwest's business. 7 80.

The Redback Sales Director and a former Redback sales engineer at Redback from 2000 to 2002 ("Sales Engineer") said that the SMSTM10000 shipped to Qwest was not operational because the optical cable card could not run at sufficiently high speeds or capacity, and Qwest returned to Redhack in mid-2002 the SMSTM 10000 products, which Redhack "rebuilt" and returned to Qwest, but the products were never deployed by Qwest but were simply stored in a warehouse and then returned tc Redback. 77 82-84.

The Redback Sales VP said that Redhack and Qwest refused to pay each other for thc ASP services and SmartEdgeTM equipment purchased from each other, hut also did not want to disclose the operational problems with those products because they wanted to create the false appearance of strong demand for viable products. To resolve this problem, Redback backdated a contract with QCS so QCS could hook revenue by the end of a certain quarter, and Kruep provided information on sales and revenues for press releases and approved the quidpro quo deals as Redback was desperate to generate revenues. 186.

PLALNTIFW' OMNmUS BRIEF OPWSmON TO DEIIEND*NTSSMOTIONS TO DISMISS nlE MHST AMENDED CONSOLIDATED COMPLALNT

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The Amended Complaint alleges new information regarding a separate quidpro quo deal with UUNET, in which (as described by the UUNET Account Manager) UUNET purchased in late 2000 $4 - $5 million in non-operational SMSTM10000 in exchange for Redback "friends and familq

shares given to UUNET's executives prior to Redback's PO. Redhack shipped the products with01 the required OC-12 cards and hooked revenue from this deal even though the products were not operational without the cards. 7 89. A former account manager for the UUNET account at Redbacl when interviewed by Plaintiffs' counsel, stated that this equipment was not operational at the time that it was shipped and that UUNET returned the equipment to Redback. 7 1 15. In the FAC, Plaintiffs again alleged that Redback improperly accounted for its acquisitions c Abatis and Siara (77 93-94,320-22) and that the Redback Board members refused to revise forecast when the W NA Sales (and Kruep) said that was necessary due to delays in the development of certain SmartEdgeTMequipment. 77 95-97. However, Plaintiffs buttressed these allegations with new facts regarding stock sales by Kruep (64,000 shares) and suspiciously-timed distributions by th~ venture capital funds having designees on Redback's board ($1.7 billion). 7197,370. As with their allegations regarding other facets of the fraudulent scheme, Plaintiffs provided new details on Redhack's sales of SmartEdgeTM800 product to Qwest: Redhack requested that Qwest order that equipment to fulfill Qwest's obligations under the Siara Warrant Agreement, and Qwest (at Perusse's direction) purchased $20 million of the product to fulfill the quidpro quo deal; Qwest did not test the SmartEdgeTM800 equipment; Redback booked $20 million in revenues from the sale without disclosing the $45 million stock bribes; and Gentner, Ragavan, Kruep and the other Redback Defendants caused Redback to overstate its revenues from the sale by failing to reduce the revenues by the value of the stock given to Qwest's affiliates. 7 99. Similarly, Plaintiffs again allege that Redback engaged in a quidpro quo deal to obtain Qwest's agreement to another purchase of ~mart~d~e~~800 product, but Plaintiffs add new details, including: (i) though Redback announced on February 5,2001 that Qwest had agreed to a new mult year, multi-million dollar purchase, according to a former Redback Sales Director who personally handled Qwest's account for Redhack from February 2000 through July 2000 (the "Former Redbacl Sales Manager"), there was no new agreement with Qwest, as Qwest simply placed a $30 million

10 PLANI'WFS' OMNIBUS BRIEF IN OPPOSWION TO DEFENDANTS' MOTlONSTO DISMISS IBE FLRSTllMENDED CONSOLmA- COMPLAINT

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order under an old contract; (ii) the Redback Sales VP and the VP NA Sales confirmed that this purchase merely fulfilled Qwest's obligations under the Siara Warrant Agreement and no new mult year, multi-million agreement had been entered; and (iii) when these two witnesses attempted to shi the products to Qwest, Perusse refused to go forward with the order without additional quidpvo quc purchases by Redback. 77 101-02. As alleged previously and realleged in the FAC, Perusse said that before Qwest would complete the $30 million order, Redback would have to buy $7 million of Indefeasible Rights of Us ("IRU") from Qwest. Plaintiffs added new details about this quidpro quo deal:

The former Redback Sales Manager stated that Perusse held Qwest's $30 million equipment order "hostage." 7 102.

The Redback Sales VP reported Perusse's unusual demand to Ragavan and others, and said that he researched Qwest's request and determined that Qwest wanted Redback to purchase an IRU for a huge capacity on Qwest's fiber-optic network, which was not something that Redback needed or would ever need. 7 103.

According to the Redback Sales VP, Ragavan, Khosla and Wolf authorized the IRU purchase from Qwest in exchange for Qwest's agreement to purchase $30 million in SmartEdge equipment because Redback needed to generate sales revenues to meet it own revenue targets. 7 104.

The former Redback Sales Manager said that Redback executives authorized the IRC purchase over his objection. 7 104.

The Redback Sales VP said he tried to purchase fiber-optic capacity from Qwest that Redback could resell, but was forced to buy an IRU (Qwest's excess capacity between Denver and Dallas) that Redback did not want or need and which it could not resell. This witness went to Enron to resell the capacity but "Enron laughed at him" because of the capacity glut between Denver and Dallas and remarked that Qwest had "skimmed Redback too." 7 104.

The VP NA Sales said that PwC was aware that Redback had purchased the IRU and was booking the revenue from Redback's sale of SmartEdgeTM equipment to Qwest in the first quarter of 2001 - PwC was trying to determine whether the revenues should be decreased by the $7 million cost of the worthless IRU that Redback purchased - but no such reduction was made. 7 105.

The Redback Sales VP said that for several quarters in 2001, Qwest refused to pay fc the $20 million of SmartEdgeTMequipment that Redback shipped in 2000 because th equipment would not function on Qwest's network and Redback in turn refused to pay for the ASP services it purchased from QCS because those services were not Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 28 of 40

functioning properly, but once the large receivables drew PwC's attention, Redback and Qwest agreed to issue checks. 7 105.

In the FAC, Plaintiffs allegefor thejirst time a deal with Williams. Redback announced thai Williams had agreed to buy $120 million of ~mart~d~e~equipment, representing 10-20% of Redback's forecasted SmarEdgeTMrevenues in 2001 and 2002, but there was no disclosure that the deal was the result of stock incentives secretly provided by Redback to Williams. 77 109-10. In May 2001, just three months after Redback announced the $120 million contract with Williams, the

Redback Sales VP told Wolf and others that Williams representatives infor~nedhim that Redback would not receive any revenues from Williams as it was on the brink of bankruptcy. However, as news of the Williams deal had created a positive buzz that increased the value of Redback's stock, Redback did not disclose that Williams would not be ordering any Redback equipment, and Wolf and others failed to revise the Company's published guidance which they knew was false and misleading. fl 110-11,233. Plaintiffs allege again the fraudulent deal in which UUNET used an outstanding $2.9 million credit from a previous purchase of non-operational Redback equipment (that was returned) to purchase ~mart~d~e~equipment, even though the Smart~d~e~equipment had not been tested anc thus could not be deployed by UUNET. This deal was phony because Redback's Senior Vice President of Product Management and Marketing, George Antoun ("Antoun") hired the son of Boob Bagby (UUNET's director of purchasing) as a Redback sales person, despite his lack of credentials, in order to obtain UUNET's purchase order. W 114-16. Finally, the FAC alleges new details regarding the Defendants' violations of GAAP and SEC regulations (and provides new explanations of how those provisions were violated) (77 309-4l), the impact of the improper accounting on Redback's financials (77 342-44), the Redback Defendants' sales of Redback stock and their venture capital firms' distributions of Redback securities during the Class Period (77 354, 358,366,370, 376-77,384-85, 388,394,396,401,409-1 I), how these and 3ther facts put PwC on notice of the fraud (77 412,428-32,436), and how the fraud caused

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1 Plaintiffs' losses. 77 444-46. As alleged, partial disclosures of the fraud and its effects caused a 2 I1 decline in the price of Redback's stock and thereby caused Plaintiffs' losses. 3 ARGUMENT 4 1. STANDARDS ON A MOTION TO DISMISS 5 In considering the Defendants' Rule 12(b)(6) motions to dismiss, this Court must consider 6 I1 well-pleaded allegations of fact in the FAC as true, and must view the FAC in the light most 7 I1 favorable to Plaintiffs. Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 8 1229 (9th Cir. 2004) (finding that such presumptions apply in securities cases). The Court should

9 not grant a motion to dismiss "unless it appears beyond doubt that the plaintiff can not prove any : 10 of facts in support of the claim that would entitle him or her to relief." No. 84 Employer-Teamstel 11 Joint Counsel Pension Trust Fund v. America West Holding Corp., 320 F.3d 920,931 (9th Cir. 12 2003). The issue is not whether Plaintiffs will prevail on their claims, but whether they are entitle 13 to offer evidence in support of their claims.6 In re HI/FNlnc. Sec. Litig., No. 99-4531 (SI), 2000 14 WL 33775286, at *4 (N.D. Cal. Aug. 9,2000).

15 Federal Rule of Civil Procedure 9@) provides that "the circumstances constituting fraud 01 16 mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). Once again, without any case 17 support, the Redback Defendants incorrectly contend that the Private Securities Litigation Reform 18 Act ('PSLRA") "supersedes" Rule 9(b). G1. Br. at 7, 18. As Plaintiffs explained in their original 19 omnibus brief (at 18), the PSLRA only alters the pleading requirements for scienter. See In Re 20 Terayon Comm. Sys., Inc. See. Lilig., No. C 00-01967 MHP, 2002 WL 989480, *2 (N.D. Cal. Ma 21 29,2002) (the PSLRA "mod~~esthis requirement, providing that a securities fraud complaint shal 22 identify: (1) each statement alleged to have been misleading; (2) the reason or reasons why the 23 statement is misleading; and (3) all facts on which that belief is formed") (citing 15 U.S.C. 9 78u- 24 4@)(1)); In re Silicon Graphics Inc. See. Litig., 183 F.3d 970, 996 (9th Cir. 1999) Prowning, J., 25 concurring)) (emphasis added). To plead scienter, the complaint must "state with particularity fac

As made clear infa at Section 11.4, it is not proper for the Redback Defendants in their motion tc dismiss to argue factual issues such as the cause of the fall in Redback's stock price or the reasons why Qwest did not use the products that it ordered. GI. Br. at 24, 37.

13 PLAMTWrS' OMNIBUS BRIEF EV OPPOSmON TO DEFENDANTS' MOTIONS TO DISMISS THE liTHST AMENDED CONSOLLOATBD MMPUZNT CnseNo. C 03-05642 Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 30 of 40

giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. 5 78u-4(b)(2). In this Circuit, the required state of mind is one of "deliberate or conscious recklessness." America West, 320 F.3d at 930. Finally, the Rule 9(b) pleading standard is relaxed in the Ninth Circuit "with respect to matters within the opposing party's knowledge" because "plaintiffs can not be expected to have personal knowledge of the relevant facts." Neubronner v. Milken, 6 F.3d 666,672 (9th Cir. 1993). This "exception" applies to cases of corporate fraud brought under the PSLRA. See In re Emulex Corp. Sec. Litig., 210 F.R.D. 714,716 (C.D. Cal. 2002). Here, the new facts, along with other facts alleged before and included in the FAC, show thai the FAC satisfies all pleading requirements. The reasonable inferences drawn from the allegations, individually and collectively, demonstrate that the Defendants designed and participated in a scheme, and made materially false statements and omissions, which artificially inflated Redback's sales, revenues and income and the Company's stock price, and thereby defrauded Plaintiffs and proximately caused their losses. 11. PLATNTIFFS ADEQUATELY ALLEGE LOSS CAUSATION A. Defendants May Not Defeat Plaintiffs' Claims Through Insertion Of Purported Facts Not Properly Before The Court, Or Resolution Of Anv Factual Issues.

The Defendants have not previously challenged Plaintiffs' allegations that the fraud caused Plaintiffs' economic loss. Now loss causation is the Defendants' primary argument seeking dismissal of Plaintiffs' claim^.^ This argument fails. The Defendants improperly base their argument on facts not properly before the Court. The) argue that the decline in Redback's stock during the Class Period resulted from two factors: (1) a "decline in demand for Redback's products by Redback's customers in the telecommunications industry," and (2) a "bursting" of the "tech bubble" which resulted in a decline in the stock prices of Internet and telecommunications companies. G1. Br. at 16-17; see also PwC Br. at 8 (contending

No Defendant contends that Plaintiffs failed to adequately allege transaction causation. Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 31 of 40

that "Redback's declining stock price may have been attributable to independent market forces" suc as the decline in the dot.com industry).

The Redback Defendants argue that Redback's telecommunications customers "miscalculated demanded and grossly overbuilt their networks;" "borrowed heavily" to build fiber- optic networks; and "over-invested recklessly [and] blindly ignored the threat of newer, cheaper technologies that would turn their main product, voice calls, into a commodity." GI. Br. at 3, 17 (quoting The Economist, May 5,2005). They contend that as a result of these poor business decisions, "newly constructed parts of telecommunications networks went unused," and equipment that was purchased was not deployed and orders were canceled. GI. Br. at 3. As Plaintiffs make clear in their Opposition to the Redback Defendants' Motion for Judicial Notice, the Redback Defendants may not, on a motion to dismiss, introduce these facts or seek resolution of factual issue (such as the cause or effect of the Internet bubble)* on a motion to dismiss nor may the Court take judicial notice of the documents submitted by the Redback Defendants for the truth of the matters asserted (e.g., that telecommunications companies declined because they overbuilt on overly optimistic expectations) in those documents. Therefore, the cause of the Internet and telecommunications boom and bust (e.g., whether that resulted from fraud endemic to the industry, including Redback, or from other factor^)^ may not be resolved at this stage of the litigation. See Ii: * The Court has already taken judicial notice "of the fact that, as the dot.com boom began to falter, many companies in Silicon Valley suffered reversals of fortune." Order at 3 n.2. However, the Court did not, and may not, analyze and rule upon the causes or effects of that dot.com boom and bust, nor, as shown below, whether the entirety of the price movements in Redback's stock resulted from market factors unrelated to the fraud. Indeed, many of Redback's peers have already been named in securities class actions and charged in SEC or DOJ enforcement actions for engaging in securities fraud during time periods overlappin with the Class Period in this case. See In re Global Crossing See. & ERISA Litig., 225 F.R.D. 436, 470 (S.D.N.Y. 2004) (approving settlement of underlying securities claim); In re Lucent Tech., Inc. See. Litig., 307 F. Supp. 2d at 649 (same); In re AOL Time Warner, 2004 WL 992991(denying motion to dismiss securities suit); In re Homestore.com, Inc. See. Litig., 252 F. Supp. 2d 1018, 104: (C.D. Cal. 2003) (same); In re WorldCom, Inc. See. Litig., 294 F. Supp. 2d 392,431 (S.D.N.Y. 2003) (same); In re NortelNetworkr Corp. See. Litig., 238 F. Supp. 2d 613,632 (S.D.N.Y. 2003) (same); Stichting Pensioenfonds ABP v. @vest Comm. Int 'I, Inc., First Amended Complaint, No. Of RB-0238(CBS) @. Colo. filed July 7,2004) (bringing suit for violation of securities laws). Given the prevalence of fraud in the internet and telecommunications industries, it appears that improper actions by companies in those industries caused their own boom and bust. See In re Homestore, 25 F. Supp. 2d at 1019-20 (stating that "[tlhis Complaint provides one explanation of how the now- infamous internet 'bubble' occurred" and upholding securities fraud claims against numerous defendants for structuring and engaging in "round-trip" transactions and making materially false an 15 PUMTIFWOmlBUS BRlEP IN OPPOSlTlON la DEFENDAM-S' MOTIONS TO DISMISS THE FIRST AMENDED CONSOLIDATED COMPLAEYT Case No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 32 of 40

re Immune Response Sec. Litig., No. 01CV1237,2005 WL 1579484, at *32 (S.D. Cal June 7,2005) ("Whether the alleged omissions and misstatements actually were the cause-in-fact of the price of IRC stock raises an issue of fact and, as such, is a question properly reserved for a motion for summary judgment or for the trier of fact"); Picard Chemical Inc. Profit Sharing Plan v. Pernogo

Co., 940 F. Supp. 1101,1126 (W.D. Mich. 1996) (same); Fraternity FundLtd. v. Beacon Hill Asset Mgmt. LLC, No. 03 CV 2387,2005 WL 1631 144, at "1 1 (S.D.N.Y. July 5,2005) ("Defendants argue that there can be no loss causation because plaintiffs' losses supposedly were caused by a dro] in interest rates . . . . But this assertion, even if true, would not necessarily explain all of the Fund's losses"; denying motion to dismiss). B. Plaintiffs Adequately Allege Loss Causation Based On Material Misstatements And Omissions To adequately allege loss causation, a plaintiff need only allege "that the defendant's misrepresentation (or other fraudulent conduct) proximately caused the plaintiffs economic loss." Dura Pharm., Inc. v. Broudo, 125 S.Ct 1627,1633 (2005). As the Supreme Court explained, it is not sufficient to merely allege "that 'the price' of the security 'on the date of purchase was inflated because of the misrepresentation."' Dura, 125 S.Ct. at 1629 (quoting Dura Pharm., Inc. v. Broudo, 339 F.3d 933, 938 (9th Cir. 2003)); id. at 1632 ("an inflated purchase price will not itself constitute

or proximately cause the relevant economic loss"). Rather, a plaintiff must allege "a causal connection between the deceptive acts that form the basis for the securities fraud and the injury suffered by the plaintiff." In re Daou Systems, Inc., Nos. 02-56989, 02-57018,2005 WL 1431833, at *14 (9th Clr.. June 21,2005) (citing Dura). In making this allegation, a plaintiff need only meet the relaxed pleading standard set forth in Fed. R. Civ. P. 8(a) in order to overcome a motion to dismiss, Dura, 125 S.Ct. at 1635, setting forth a "short and plain statement" providing the defendani with "fair notice of what the plaintiffs claim is and the grounds upon which it rests." Conley v. Gibson, 335 U.S. 41,67 (1957). A plaintiff need not at the pleadmg stage prove loss causation, but must provide a defendant with some indication of the loss and the causal connection that the plaintif

misleading statements regarding Homestore's business and revenues which were inflated by the improper transactions).

16 PIAMTIPUS' OMNlllUS RRlEF LN OPPOSlTlON TO DEFENDANTS' MOTEONS TO DISMISS TEE? FUIST AMENDED CONSOIJDATED COMPLMNT Care No. C 03-0560 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 33 of 40

has "in mind." Dura, 125 S.Ct at 1634 (emphasis added). Plaintiffs have clearly met this pleading standard. Plaintiffs have alleged that the Defendants engaged in a series of fraudulent transactions and issued materially false and misleading statements to create the false appearance of demand for Redback's products and revenue, enabling Redhack to meet or exceed analysts' targets and maintain an artificially high price for Redback's stock. As a result of the false and misleading statements, Redback's stock increased from its May 1999 IPO price of $23 to over $382 per share. 77 1-3,444- 46. Once Qwest, Redback's primary illicit partner in this fraudulent scheme, became the subject of governmental investigations and would no longer participate in the fraud, the scheme came to an end, the partial truth dribbled out into the market and Redback's revenue growth and stock price declined, even though the Defendants continued to make false statements in an attempt to keep the stock price artificially inflated." 77 3-4,45-46. At the end of the Class Period, as a result of the enc of the scheme and the truth about Redback's fraud coming out, the Company's stock declined to lesr than $1.00 a share and the Company filed for bankruptcy. 77 3, 120,307. These facts and allegations demonstrate that loss causation was adequately pled. See Daou, 2005 WL 1431833, at * 15 (finding that plaintiffs' claim that "the price of Daou's stock fell precipitously after defendants began to reveal figures showing the company's true financial condition" satisfied the Dura standard for loss causation); Fraternity Fund Ltd., 2005 WL 1631 144, at * 11 (finding plaintiffs' assertion of drop in securities prices in relation to misrepresentations by defendants was sufficiently plead under the loss causation requirements of Dura); Greater Pa. Carpenters Pension Fund v. Whitehall

'O For example, following a series of announcements about the criminal probe of Qwest and lower than expected revenues at Redhack, the Redhack Defendants rationalized that Redhack's poor financial performance was caused by a general "downturn in economic activity" rather than the cessation of the fraudulent scheme with Qwest. 77 266,272. Thus, the Redback Defendants provided "words of comfort" to investors by explaining that the problems were not specific to Redback but were the result of an economic downturn. This "spinning" of the facts could explain any purported lack of an immediate stock drop following corrective disclosures and poses yet another factual issue which cannot be resolved at this stage. See Oran v. Stafford, 226 F.3d 275,28: (3d Cir. 2000) ("lack of adverse price movement may he traceable to defendant's own 'spinning' of [certain] data"); In re DaimlerChrysler AG Sec. Litig., 269 F. Supp. 2d 508, 515 @. Del. 2003) ("Reassurances [from management] can dissipate apparent storm warnings"); WorldCom, 294 F. Supp. 2d at 445 ("In some cases, despite the presence of storm warnings, investors are not placed on inquiry notice 'because the warning signs are accompanied by reliable words of comfort from management"').

17 PWFxS'OMNIBUS BRIEF IN OFFOSITION TO DEFENDANTS MOTIONS TO DISMISS TKE FIRST AMENDED CONSOLmATED COMPIAWI CnaeNa. C 03-05642 Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 34 of 40

Jewelers, Inc., No. 04-C-1107,2005 WL 1563206, at *6 (N.D. Ill. Jun. 30,2005) (finding that plaintiffs had sufficiently pled, in compliance with Dura, loss causation related to the drop in stock prices following the revelation of improper inventory schemes and accompanying restatements; "Plaintiff has alleged more than simply inflation of the purchase price"); Immune Response, 2005 WL 1579484, at *32 (finding that plaintiffs' contention that stock prices dropped following disclosure of the ineffectiveness of Immune Response's product met the Dura standard for loss causation). The Redback Defendants argue (GI. Br. at 14) that the truth was not disclosed until the November 23,2003 publication of a Denver Post article, but that is wrong, as Plaintiffs clearly allege that a series of prior Class Period disclosures" gradually informed the market of the fraud, ol at least the adverse impact on revenues and earnings when the fraud ceased. Among the events and information which dribbled out into the market and gradually disclosed aspects of the fraudi2were Redback's April 12,2001 announcement that revenues and earnings forecast were being lowered (1 215); Qwest's March 2002 announcement that the SEC was investigating its revenue recognition practices, including the quidpro quo sales to customers (7 250); the Forbes report in May 2001 of Lamond's disclosure that the new SmartEdgeTMproduct was delayed in production (7 228); Redback June 2001 disclosure of lowered expected revenues and write offs for excess and obsolete inventory (7 230); Qwest's July 10,2002 announcement that the SEC had begun a criminal probe o Qwest (7 263); the SEC's filing on February 25,2003 of civil fraud charges against Arnold and othf Qwest executives (7 276); Redback's disclosure in its May 2003 10-Q that the SEC was examining its transactions with Qwest (7 290); and the October 2, 2003 publication of an article on the SEC's commencement of an investigation into purchases and sales of products and services between

11 Nowhere in Dura or in any other federal case is there a requirement that the corrective disclosure must come from the defendants. " The Redback Defendants cite absolutely no authority (nor have Plaintiffs discovered any case) holding that the disclosures which caused the drop in the Company's stock price must reveal all aspects of the fraud. See in re Telxon Corp. Sec. Litig.,133 F. Supp. 2d 1010, 1026 (N.D. Ohio 2000) (causation adequately pled where corrective disclosure that gave rise to a securities fraud lawsuit was superseded by more disclosures and facts concerning the fraud).

18 PLALNTIYIS' OMNmUS BRIEF IN OPPOSWION TO DEWENDANTS' MOTIONS TO DISMISS 'tBE FIWT AMENDED CONSOLIDATED COMPLAINT Care No. C 03-05642 Jii Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 35 of 40

Redback and Qwest, with a 'Lparticularinterest" in Redback's past dealings (77 303-04).13 Thus, PwC is wrong in arguing that "Redback's stock price began to decline. ..long before public disc~osure."'~PwC Br. at 8. Claims similar to these alleged here, involving partial disclosures of the truth "dribbling out, have been upheld as adequately alleging loss causation. For example, in Demarco, the court stated:

The fact of gradual price declines is not inconsistent with the theory that the price was artificially inflated, since the misrepresentations may well have buoyed a price that would otherwise have sunk much faster, thus raising the price at which plaintiffs purchased the stock.

[Tlhe Court must conclude that plaintiffs have adequately alleged loss causation because the decline in stock price was a foreseeable

l3 As alleged, additional news dribbled out after the end of the Class Period (after October 10,2003: See, e.g., 74, 306-08. l4 The Redback Defendants argue that the Court should consider "admissions" in Plaintiffs' prior complaints because the current FAC contains "unexplained reversals in position and contradictions" to the prior complaints. GI. Br. at 15. That is incorrect. Plaintiffs have consistently alleged in all 01 their complaints that Redback's stock declined during the Class Period due to partial disclosures of the truth which occurredprior to the November 2003 DENVERPOSTarticle. See 3/29/05 Complaint at 11 119,239,261,308; FAC 77 118, 21 5,230,232,240, 307 (both discussing the partial disclosures). Additionally, the law is clear that an "amended complaint supersedes the original, the latter being treated thereafter as non-existent." Lorn v. Rhay, 375 F.2d 55,57 (9th Cir. 1967); see also Washer v. Bullitt Co., 110 U.S. 558,562 (1994) ("When a petition is amended by leave of the court, the cause proceeds on the amended petition"); Forsyth v. Humana, Inc., 114 F.3d 1467, 1474 (9th Cir. 1997) (an "amended complaint supersedes the original, the latter being treated thereafter as non-existent"); In re Wireless Telephone Federal Cost Recovery Fees Litig., 396 F.3d 922,928 (8th Cir. 2005) ("It is well-established that an amended complaint supersedes an original complaint and renders the original complaint without legal effect:"); Pratt v. Rowland, 769 F. Supp. 1128, 1132 (N.D. Cal. 1991) (same); Datastorm Tech., Inc. v. Excalibur, 888 F. Supp. 112, 114 (N.D. Cal. 1995 (same); Wright, Miller, Kane, Federal Practice & Procedure § 1476 (2d ed. 1990). To the extent tha Reddy v. Litton Indus., Inc., 912 F.2d 291 (9th Cir. 1990 and Bradley v. Chiron Corp., No. 94- 043421996 WL 441022 (N.D. Cal. July 16, 1996, am,136 F.3d 1317 (Fed. Cir. 1998), cited by thc Redback Defendants (Gl. Br. at 15) endorse an exception to this rule, those cases are inapposite, anc the exception (if it exists) does not apply. In those cases, the plaintiffs in amended complaints asserted facts which directly contradicted allegations in prior versions of their complaints. Reddy, 912 F.2d at 296 (plaintiff denied leave to amend "to allege a completely new injury"); Bradley, 1991 WL 441022, at *4 (Plaintiff alleged that he possessed a contract but "was mistaken as to the effect and meaning of contract terms because no one advised him as to what they meant" and the court ruled that "Plaintiffs' mistake was the result of neglect of his own legal duties unless there were misrepresentations regarding the agreement. . . . . Plaintiffs position changed diametrically after receiving the Court's ruling. . . . Suddenly, Plaintiff remembered that he did not have the agreement and that the defendant provided "misleading explanations and representations upon which Plaintiff reasonable relied." The court ruled that "Plaintiff could not, in good faith, have so diametrically reversed his recollection and position between the time of the filing of his original complaint and that of his second amended pleading.").

19 P-FS' OMNIBUS BRIEF IN OPPOSXION TO DEFEND-S' MOTIONS TO DUjMlSS TlIE FIRST AMENDED CONSOLDATED COWL- Care No. C 03.05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 36 of 40

consequence of Defendants' fraudulent statements that allegedly inflated the price, because in an efficient market, revelation of the misrepresentations will lead inexorably to a price correction. On this motion to dismiss, the bursting of the Cowis stock bubble could reasonably be construed, at least in part, as the market's correction of an inflated stock price, pumped up in part by Defendants' false statements about its opinions. Thus, Defendants' attempt to recast the foreseeable price decline of pumped up stock as an unforeseeable intervening market event is unpersuasive. While Defendants may be able to show after discovery that an unforeseeable intervening event caused the stock price to decline plaintiffs' complaint is sufficient to raise an issue of fact as to whether some part of their losses was proximately caused by Defendants' deliberate fraud.

318 F. Supp. 2d at 124-26. See also Greater Pa. Carpenters Pension Fund v. Whitehall Jewellers, Inc., No. 04-1 107,2005 WL 61480, at *5 (N.D. Ill. Jan. 7,2005) (plaintiff adequately alleged loss causation where Defendants had "partially disclosed some adverse information pertaining to the alleged fraud which caused [the Company's stock] price to decline prior to the.. .restatements;" partial disclosures included announcements of lower earnings and SEC and DO investigations); Danis v. USN Communications, Inc., 73 F. Supp. 2d 923, 943 (N.D. Ill. 1999) (loss causation adequately pled where plaintiffs alleged that "the market responded to and corrected the price of USN stock over the better part of a year as bits and pieces of negative information became available and it became apparent that USN was not capable of performing as originally represented"); Fogaruzzo, 341 F. Supp. 2d at 292 ("Plaintiffs here have alleged a number of events that operated, essentially, as disclosures or market corrections . . . taking these allegations in the ligl most favorable to plaintiffs, all of them could be seen as disclosures or corrective events."); accord America West, 320 F.3d at 934 (reversing district court's opinion that alleged omissions and misrepresentations were not material because the market did not immediately react following the corrective disclosures; "the market is subject to distortions that prevent the ideal of 'a free and open public market' from occurring.. .[T]hese distortions may not be corrected immediately.. .Because oi these distortions, adoption of a bright-line rule assuming that the stock price will instantly react would fail to address the realities of the market"); In re Dynegy, Inc. See. Litig., 226 F.R.D. 263,29 (S.D. Tex 2005) ("the precise day on which natural market forces had a reasonable time to digest

20 PLAlNI'IFrS. OmUSBRlEFIN OPPOSlTjON TO DEIENDANI'S' MOTlONSTO DlSMlSS'I'IIl! PIRBI'AMENDED CONSOLIDAI'IID COMPLAINT Case No. C W-05642 JP Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 37 of 40

and reflect the bad news is, necessarily, a question of fact"); In re Oxford Health Plans, Inc., 191 F.R.D. 369, 378 (S.D.N.Y. 2000) (same).'' The Redback Defendants are also wrong in arguing (GI. Br. at 5) that the Company's stocl price declined prior to Qwest's decision to stop doing business with Redback, as Plaintiffs clearly allege that Redback's stock price continued to decline after Qwest's final fraudulent transaction u Redback. W 118,215,230,232. Plaintiffs also allege that any stock price decline during the Clas Period resulted from the dissipation of the effects of prior fraudulent transactions with Qwest and others (such as Williams), requiring the Defendants to engineer additional fraudulent deals. T/fl 14 116,229. The Redback Defendants contend that it was the "bursting" of the "tech bubble" which caused Plaintiffs' losses, not any fraud, but as explained above, these are factual matters not subje to judicial notice. Moreover, the precise argument raised by the Redback Defendants has been explicitly rejected.

In Stichting Pensioenfunds ABP v. Best Communications Int 'I,Inc., No. 04-RB-0238 (CBS), slip op. at 20-21 (D. Colo. Mar. 29,2005), the court found that the plaintiff had adequatel: alleged loss causation, even though the stock of Qwest declined with other Internet stocks, stating

While it is readily conceivable that the burst of the so-called internet bubble played a role in causing ABP's losses, that possibility does not preclude ABP from alleging that the Defendants' false statements concerning Qwest's fmancial status was a significant cause, or even the primary cause, of its losses. Kairis Decl. Ex. B. Demarco, 31 8 F. Supp. 2d 110, is also instructive. In that case, plaintiffs alleged that they purchased stock in reliance on the defendant analysts' research reports and recommendations whia

l5 Courts recognize that corrective disclosures may only partially correct an inflation. See In re Rent-Wuy Sec. Litig., 21 8 F.R.D. 101,117 n .12 (W.D. Pa. 2003) (noting that "the drop after a corrective disclosure will not be conclusive of the amount of original inflation, both because the correction may be only partial .. . and because the prolonged nature of the fraud introduces other market variables which may affect the amount the market reacted to disclosures at different times during the class period") (quoting Blackie v. Barrack, 524 F.2d 891, 909 n.25 (9th Cir. 1975)); In Lucent Tech., Inc., Sec. Zitig., 307 F. Supp. 2d at 649 (noting that a class member's loss "depends the dates on which the stock was purchased and whether the stock was sold or held through the various alleged partial disclosures that occurred during the Class Period"). Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 38 of 40

did not reflect the Defendants' true beliefs about the stock. Id. at 117. Defendants argued (like the Redback Defendants here) "that plaintiffs' loss.. .was due to the general market downturn in telecommunications stock" so that the "bursting of the telecommunications stock bubble" was "the intervening cause of plaintiffs' loss." Id. at 123. The Court rejected this argument, stating:

That argument is not persuasive because plaintiffs' theory of the case is that these Defendants deliberately participated in inflating the bubble in the first place by disseminating the very misrepresentations at issue. Thus, the publication of the intentionally false opinions that allegedly distorted the market price of Corvis stock contained the seeds of loss causation. Unless an intervening event were to occur first, the author of the false opinion will be appropriately held responsible when the market eventually corrects the artificially inflated price by bursting the bubble.

Id. See also In re Homestore, 252 F. Supp. 2d at 1019-20 (fmding that the defendants' fraud provided "one explanation" for the cause of the Internet bubble). Likewise, in this case, Plaintiffs have alleged that the Redback Defendants participated in fraudulent transactions with Qwest, in order to inflate revenues and the stock prices of Redback and Qwest, thus contributing to the telecommunications stock "bubble." 77 1,43-44, 54,61-62, 72, 74-75, 81, 87-88,98. Moreover, as held in Daou, 2005 WL 1431833, at *14: A plaintiff is not required to show "that a misrepresentation was the sole reason for the investment's decline in value" in order to establish loss causation ..." [A]s long as the misrepresentation is one substantial cause of the investment's decline in value, other contributing forces will not bar recovery under the loss causation requirement," but will play a role "in determining recoverable damages."

(quoting Robbins v. Koger Props., Inc., 116 F. 3d 1441, 1447 n.5 (1 1th Cir. 1997)). See also America West, 320 F.3d at 935-36 (finding that district court erred in finding that the existence of other factors, such as the labor disputes, precluded plaintiffs' argument that systemic maintenance issues also contributed to America West's failure to meet its forecasted third quarter earnings). Finally, even if any corrective disclosure could be expected to cause a decline in the stock price, there remains the fact-intensive question as to when the news disclosed in the corrective disclosures would be reflected in the stock price. In Dynegv, 226 F.R.D. at 292 (S.D. Tex. 2005), the court refused to end the Class Period on the day that the corrective disclosure was made because 22 PLAMIPIS' OMNIBUS BRlEF M OPPOSITION TO DEFENDANTS' MWI'IONS TO DISMISS THE PlRST MlENUED CONSOLIDATED COMPLAINT Care No. C 03.05642 .lF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 39 of 40

"the precise day on which natural market forces had a reasonable time to digest and reflect the bad news is, necessarily, a question of fact." See also In re Oxford Health Plans, Inc., 191 F.R.D. 369, 378 (S.D.N.Y. 2000 (same). The question as to when the corrective disclosures in this case could have been expected to he reflected in the stock price is similarly a question of fact that cannot be resolved on a motion to dismiss.

C. Plaintiffs Adequately Allege Economic Losses Proximatelv Caused Bv A Deceative Scheme.

Plaintiffs have alleged that the Redback Defendants participated in a deceptive scheme whicl proximately caused Plaintiffs losses. Starting in mid-2001, when the scheme began to come to an end, Redhack's revenues began to decline and the Company's stock price fell. 77 3,445-46. This is sufficient to plead loss causation. In Emergent Capital, 343 F.3d at 19716 the plaintiff alleged that in negotiations over its purchase of stock in Net Value Holding, Inc. ("NETV"), Defendants misrepresented the size of NETV's largest asset and failed to disclose the relationship between an NETV officer (Panzo) with an individual (Appel) who had been barred from the securities industry for engaging in "pump an dump" schemes -hyping a stock (and inflating its price) so that Appel could "dump" his shares on the market. 343 F. 3d at 197. The court found that the plaintiff had adequately alleged that its losser were proximately caused by an artificial inflating of NETV stock prices through Defendants' "pump and dump" scheme. Id. at 197-98 ("Because the second amended complaint may be read as alleging that NETV was a 'pump and dump' scheme, appellant has adequately alleged loss causation for the purposes of its federal securities law claims"). Thus, the Court held that the plaintiff had adequately alleged a fraudulent scheme involving the defendants' omissions regarding Appel. The Second

Circuit found that loss causation was inferred from the nature of the scheme itself - the decline in th, stock price was not caused by any corrective disclosure, but by the natural effect of the scheme having run its course.

- l6 Again, it is appropriate to consider decisions from the Second Circuit on the issue of loss causation, particularly Emergent Capital, which was cited with approval in Dura.

23 PLAINTIFFS' OMNIBUS BRIEF N OPPOSmON TO DEXENDAVTS MOTIONS TO DlSMlSS TEE FIRST AMENDED CONSOLIDATED COMPLAINT CnaeNo. C 03-05642 JII Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 40 of 40

The court in In re Initial Public OSfering Sec. Litig., 297 F. Supp. 2d 668 (S.D.N.Y. 2003), likewise found that loss causation could be inferred from the natural dissipation of the effects of a fraudulent scheme coming to an end. Plaintiffs there alleged that the defendants forced their clients to buy stock in the aftermarket as a condition to receiving shares in initial public offerings, in a market manipulation scheme. The court held that:

A market manipulation is a discrete act that influences stock price. Once the manipulation ceases, however, the information available to the market is the same as before, and the stock price gradually returns to its true value.

Id. at 674. The court held that once the scheme ends, so does its improper effect, and so it "may be permissible to infer that the artificial inflation will inevitably dissipate." Id. The court went further finding that because "the misstatements and omissions . . . conceal[ed] the . . . alleged manipulation," they "were a cause of plaintiffs' loss." Id. at 675. Thus, the presumption that the alleged price inflation from the market manipulation would inevitably dissipate and cause loss

applied to the misstatement and omission claim.17 See also In re Enron Corp. Sec., Deriv. & ERZS Litig., 235 F. Supp. 2d 549, 577-81 (S.D. Tex. 2002) (upholding claims against investment banks and others who did not make any actual misstatements but assisted in structuring sham entities usec in the fraudulent scheme);18 see also In re Parmalat Sec. Litig., No. 04 MD 1653,2005 WL 1653638, at *24 (S.D.N.Y. July 13,2005). These decisions all show that the natural dissipation of

l7 The IPO court stated that "Emergent Capital ordinarily forbids courts from inferring a dissipatioi in the inflationary effect of misstatements," but it recognized that '[iln some cases, however, the importance of misstatements may diminish over time, and the inflationary effect may diminish (or disappear entirely) with it." IPO, 297 F. Supp. 2d at 674 n. 29, 675. Accordingly, in this case, loss causation may be inferred from the dissipation of both the fraudulent scheme and the lapse of time following the misstatements and omissions. Enron makes clear that market manipulation is not limited to wash sales or "pump and dump' schemes, such as those in Emergent Capital. Fogarazzo, 341 F. Supp. 2d 274, is another case that did not involve one of these types of market manipulation (mdeed, the court explicitly distinguishec the scheme in that case from "pump and dump" schemes), but the plaintiff adequately alleged loss causation resulting from a fraudulent scheme. The court denied the motion to dismiss because "the [was] no doubt" that the plaintiffs had adequately pled loss causation through allegations that the defendant investment banks in their analyst reports "lied about the financial health and future prospects" of a company which ultimately collapsed under financial problems and its stock price fe and the stock was de-listed from the NASDAQ exchange. Id. at 289.

24 PLhlNTlrlS' OMNmUS BRlEF M OPPOSlnON TO DEFENDANTS' MOTIONS TO DISMISS THE IllHST AMENDED CONSOLmAlED COMFLAW

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EXHIBIT A (PART 2) TO JOHN C. KAIRIS DECLARATION IN SUPPORT OF PLAINTIFFS’ OMNIBUS BRIEF IN OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE FOURTH AMENDED CONSOLIDATED COMPLAINT

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the Defendants' fraudulent scheme, which resulted in a decline in Redback's revenues and stock price, caused Plaintiffs' losses.

111. 1'I.AINTIFFS ADEQL'ATELY ALLEGE CLAIMS UNDER SECTION AND RULE IOh-5

This Court ruled that Plaintiffs in their original complaint alleged "in conclusory fashion that the statements in question were misleading" and did not allege "with particularity . . . the material and misleading nature of the alleged statements." Order at 9. As shown below, Plaintiffs have curec this deficiency.

A. Plaintiffs Allege New Facts Which, In Addition To Other Facts, Show That Defendants' Statements Were Materially False And Misleadine.

1. The Representations Regarding Key Sales Agreements With Qwest, UUNET, Broadband, Williams And Other Customers Were False And Misleading.

Under the PSLRA, a plaintiff alleging securities fraud based on misleading or false statements or omissions must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which the belief is formed." 15 U.S.C. 5 78u-4@)(1). Thus, a plaintiff must allege "the time, place, and content of the statements, the individuals who made the statements, the resulting injury, and the method of communication" In re SeeBeyond Tech. Corp. Sec. Litig., 266 F. Supp. 2d 1150, 1156 (C.D. Cal. 2003), and explain why the statements were false or misleading when made. Schlagal v. Learning Tree Int'l, No. 98-6384, 1998 WL 1144581, at *4 (C.D. Cal. Dec. 23, 1998) (citing In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1549 (9th Cir. 1994)).19 In the FAC, Plaintiffs allege that the Defendants made false statements concerning purported sales agreements with Qwest and other customers (including the announcements of those

19 The Defendants do not contend that their alleged misstatements were inaccurately or incompletely identified. In fact, they concede that Plaintiffs adequately alleged the speaker, time and place of the misstatements.

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agreement^)^' and falsely and improperly reported revenue from those deals. See Section 1II.E. of the FAC. Plaintiffs also allege that the Redback Defendants secretly issued millions of dollars wortl of Redback stock to executives at Qwest and other companies executives in order to obtain the right to issue press releases and other announcements of new sales agreements with those companies which falsely reported the demand for Redback's products and artificially inflated the price of Redback's stock (or maintained it in the face of a declining market). The false and misleading press releases that were deliberately "dribbled out strategically" to drive up Redback's stock price (7 57) include:

0 February 1999 pre-IPO announcement that UUNET was deploying SMSTM equipment for the nationwide rollout of UUNET's network (77 47, 123);

0 May 1999 pre-IPO annountyment that Concentric had signed a contract to purchase SMSTMequipment (7 125);

0 June 1999 announcement "multi-year, multi-million dollar" agreement with Qwest for SMSTM equipment; stockprice soared to over $125 per share (7 127-128);

0 November 29, 1999 announcement of Siara-Redback merger and quote from Qwest executive stating that the merger created a "single supplier" for Qwest's network (7 132);

0 December 1999 announcement of $40 million contract from Broadband; stock rose from $139.95 to $153.02 per share (adjusted for August 1999 split) (77 137, 140);

0 May 2000 announcement that Qwest would deploy SmartEdgeTMequipment in its network; stock jumped from $72.07 to $82.32 (adjusted for earlier and April 2000 split) (7 155-56);

0 July 2000 announcement of multi-million agreement with Qwest (7 160-63);

0 January 2001 announcement of $120 million Williams deal (77 109, 199); and

20 The improper deals included: (a) the issuance of "friends and family" shares to UUNET, Concentric, Williams and Qwest (77 45-46,48,52-53, 56, 59, 89, 110); (b) the issuance of warrants for Siara stock to Broadband and Qwest in exchange for equipment orders (77 60,64-66, 67-68,71, 99, 136, 139); (c) the agreement in the third quarter of 2000 to buy $1 8 million of ASP services fron QCS in exchange for Qwest's fulfillment of a pre-existing commitment to buy $20 million of Redback's SMSTM 10000 product (m 75-77,79-81,85-86); (d) the agreement to buy an IRU from Qwest in exchange for Qwest's fulfillment of a pre-existing commitment (77 102-105); and (e) Redback's hiring of the son of UUNET's director of purchasing and the booking of revenue when non-operational equipment was knowingly shipped (77 89, 115-116). As explained above (supra at Section III.E.), Plaintiffs provided new details on each of these facets of the fraud, and all of the allegations regarding the deals with UUNET, Broadband and Williams are new. 2' Due, at least in part, to these pre-IPO announcements, Redback's 1PO was the fifth most successful IPO in history at the time. (7 126).

26 PLAATIPIW OMNTBUS BRIEF IN OPPOSLTION TO DEFENDANTS' MOTIONS TO DISMISS THE FLRST AMENDED CONSOUDATED COMP-

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February 2001 announcement of a new "multi-year, multi-million dollar" agreement with Qwest for deployment of SmartEdge equipment; stock $40.25 to $44.25 (adjusted for earlier splits) (7 199-202). As the FAC alleges, these press releases became more important to the Redback Defendants than

1 orders because the press releases added more value to the stock price then actual orders. 7 61.

; Plaintiffs further allege the effect these improper deals had on Redback's fmancials. See Section V

; of the FAC. Plaintiffs also allege why the press releases and other public statements were false and r misleading - the sales agreements were the product of improper bribes and quidpro quo deals,

; which should have been disclosed, and Redhack should have reduced recorded revenue by the

1 amount of the improper sales inducements. 77 122-308. b The Redback Defendants contend that Plaintiffs "merely attach[ed] . . . labels" to the I transactions (q.,"bogus," "illicit" and "bribery") without "plead[ing] facts showing how those transactions were fraudulent and how they violated the securities laws." GI. Br. at 20. While the I I ; I Court found Plaintiffs prior allegations ll~onclusory,"the PAC includes new allegations showing 1 I1 that the transactions were improper. See supra at Section 1II.E. (discussing new factual allegations ; I regarding the haud) This case is not ahout mere "concessions* such as prim discounts or favorabl, ;I financing provided to Qwest and others to ohtain sales (GI. Br. at 23); it concerns secret transfers oI r I stock and warrants, and agreements by Redback to buy products it did not want or need, in amounts 1 11 roughly equivalent to the amount of sales Redback generated in these agreements - the "going out' 1 I1 was roughly the same as the "coming in."22 While the Redhack Defendants argue that there is "no 111 authority for the proposition that a vendor is legally prohibited from buying products or services I1 from a customer, while at the same time selling products or services to that customer" (Gl. Br. at 22 !I that is clearly not what happened here. Redbaok paid for the sales it made, and would not have I1 obtained those sales if it had not paid for them. That critical fact was kept a secret. 22 As alleged, the Redback defendants provided Qwest executives with $45 million in Redback stoc in return for Qwest's commitment to buy $45 million in Redback products. Supra at 7. Additionally, based on Redback's public filings, Qwest purchased $80 million of products and services from Redhack. Redback purchased this revenue from Qwest through: $45 million of Siar: Warrants (7 66); an unknown amount of Redback's pre-IPO friends and family shares (77 52-54); $18 million of unwanted ASP services (77 79-80); and an unnecessary $7 million IRU (117 102-105: In short, $80 million in revenue cost Redback at least $70 million. Similarly, Broadband's $8 million SmartEdge purchase 'cost' Redhack $3 million in stock. 77 67-68,205-06. Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 5 of 73

Redback's material overstatement of revenues from sales to Qwest and the others while concealing the true nature of those sales "create[d] an impression of a state of affairs that differed in a material way from the one that actually existed." Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002). The Redback Defendants claim that there is no fraud because "Redback simply reported its sales" (GI. Br. at 27), but even literally hue statements are actionable where, as here, they create a false impression (in this case, the false impression was one of real demand for

Redback's products and real sales and revenues). See Kaplan v. Rose, 49 F.3d 1363, 1372 (9th Cir. 1994) (material issue of fact remains regarding whether a true statement was misleading) (citing

McMahon & Co. v. Wherehouse Entm't, Inc., 900 F.2d 576,579 (2d Cir. 1990) ("Some statements, although literally accurate, can become, through their context and manner of presentation, devices which mislead investors")); see also Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1097 (1991) ("not every mixture with the hue will neutralize the deceptive"). Moreover, the claim again'

the Redback Defendants is about what they did not disclose -the corporate bribes - not what they

did disclose - the actual sales. As Plaintiffs explained in their original omnibus brief, claims challenging misrepresentation resulting from fraudulent schemes similar to the scheme in this case have been upheld. See, e.g., in re AOL Time Warner, Inc. Sec. & "ERISA" Litig., No. 02-5575,2004 WL 992991, at *12 (S.D.N.Y May 5,2004) (court sustained claims that America Online misrepresented its sales and revenues because it and others secretly invested in other companies or paid other companies for advertising solely to obtain agreements from those companies to use that money to buy advertising on the America Online Internet sites); In re Homestore.com, Inc. Sec. Litig., 252 F. Supp. 2d at 1024-1025 (motions to dismiss Section 10(b) claims denied because parties engaged in undisclosed round- tripping and recycled money back to themselves); In re Global Crossing Sec. Litig., 322 F. Supp. 2c 319,325-27 (S.D.N.Y. 2001) (representations regarding income held actionable where cash was obtained through unneeded reciprocal "swaps" with other carriers of 1RU capacity in transactions that yielded no actual revenue); In re Northpoint Communications Group Inc. Sec. Litig., 221 F. Supp. 2d 1090 (N.D. Cal. 2000) (Section 10(b) claim sustained on motion to dismiss where compan gave customers "marketing development funds" to attract new clients and then off-set the customer: 28 PW~'OMNlBUSBmF IN OPPOSlTlONTO DEFEh~*NTS'MOTlONSTODlSMlSSYBEFlRIiTMlENDED CONSOLIDATED COMP-T CBw No. C 03-05642 Jr Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 6 of 73

delinquent accounts receivables by "trading" the development funds for past-due bills, in effect, purchasing revenues from its nominal customers); see also Parmalat, 2005 WL 1653638, at *lo-19 Perhaps anticipating this argument, the Redback Defendants make the sweeping claim that some (unnamed) cases do not apply here because they "involve instances where plaintiffs have alleged specific facts demonstrating that one or both parties did not pay for or deliver the product or services allegedly purchased and sold; where the transactions were simultaneous 'swaps' involving identical dollar amounts; or where the transactions were not accounted for properly (e.g.,following restatement)." GI. Br. at 22. This is wrong. For example, in AOL, the exchanges were not "simultaneous," the parties actually paid for the swapped products and services (money was "round tripped") and the restatement covered only some of the improper transactions. See AOL, 2004 WL 992991 (upholding claims challenging numerous transactions which were not subject to a restatement). Other cases in which the courts upheld claims that related party deals should have been disclosed include: In re Initial Public OJjringSec. Litig., 241 F. Supp. 2d 281,353-354 (S.D.N.Y. 2003) (sustaining claim that defendant underwriters, who were involved in pricing initial public offerings, had failed to disclose, among other things, that they required customers to commit to "tie-in agreements" which created the false appearance of demand for the stock at prices in exces of the IPO price and customers had to pay an amount in excess of the listed price through "tie-in

agreements" and undisclosed compensation); In re Xcel Energy, Inc., Sec., Deriv. & "ERISA" Litig. 286 F. Supp. 2d 1047, 1056 (D. Minn. 2003) (rejecting defendants' assertion that the impact of alleged wash sales by an Xcel subsidiary was immaterial to Xcel's trading revenue and that energy tradmg was not the most significant aspect of Xcel's business, and finding omissions about round- trip trades involving Xcel's subsidiary were sufficiently material to investors, holding that "[b]ecause Xcel itself claimed that its trading business was an important part of its overall strategic plan, a reasonable investor could have seen improper trades and artificially inflated revenue as material matters"); Enron, 235 F. Supp. 2d 549 (motion to dismiss denied where defendants failed tm

make proper disclosures regarding related-party transactions); In re Lernout & Hauspie Sec. Litig.,

208 F. Supp. 2d 74, 85-86 @. Mass. 2002) (representations by company that it had licenses with strategic partners that were unaffiliated with the company were held to be false because the 29 PLAINTIFKS' OMNIBUS BRlEF IN OPPOSITION TO DEFENDANTS' MOTIONS TO DISMISS TRE FIRST AMENDED CONSOLIDATEDCOMPLAINT Case No. C 03-05641 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 7 of 73

"strategic partners" from whom the company derived what the court deemed "substantial revenue" (10% in 1998 and 25% in 1999) were owned by parties related to the company).

The lynchpin of these cases is that the transactions - in whatever form - would not have occurred absent the illicit payback to the other party to the deal, and the failure to disclose such quid pro quo deals rendered the representations about the transactions, and the reported revenues and income derived therefrom, materially false. Indeed, the Redback Defendants' representations about sales to Qwest, UUNET and other customers while in possession of facts regarding the improper quidpro quo arrangements, are comparable to the "Buy" recommendations and positive reports issued by brokerage firms in the late 1990's, while in possession of material adverse facts that undermined their reports. In those cases, the brokerage firms gave their recommendations in exchange for investment banking deals with the companies whose stock they were recommending, and illicit payments made to the analysts covering those companies. On motions to dismiss, courts

did not hesitate to find such reports materially false and misleading for the obvious reason - equally apt here -that the credibility of the reports was undermined because the reports were "bought." See

e.g., Swack v. Credit Suisse First Boston, No. 02-1 1943,2004 WL 2203482, at *8 @. Mass. Sept. 21,2004) ("Secret negative reports . . . could support an inference that earlier, more bullish reports were false at the time they were made."); Fogarazzo, 341 F. Supp. 2d at 294 (finding recommendations made by analysts could be misleading where the recommendations were alleged tc be used to "obtain and/or maintain lucrative investment banking business"); WorldCom, 294 F. Supp. 2d at 404 (finding that an alleged arrangement to financially benefit the executives of a brokerage house in exchange for positive analyst reports would sufficiently call the validity of such reports into question). Likewise, here, the announcements of new deals with Qwest and others, and the reports of revenue from those deals, should have included disclosure that the sales and resulting revenues were "bought" by Redback. To have made their disclosures not misleading, the Redback Defendants were not required (by Regulation S-K or otherwise) to "disclose every piece of information in its possession" or "discuss every transaction of any type between Redback and Qwest." GI. Br. at 27,29 (internal quotations omitted). Rather, they were only required to disclose that material amounts of the 30 PLAINTBFS' OMMEUS BRlEr IN OPWSITION TO DERENDmS' MOTIONS 70 DISMISS TAE WHSP AMENDED CONSOLmATED COMPLAINT

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1 Company's sales and revenues were obtained through the quidpro quo deals. The Redback 2 11 Defendants' contention that their nondisclosures would be actionable only if they made a "public 3 I statement denying any purported related transactions with Qwest" (GI. Br. at 27) is ridiculous - no 4 I1 court has ever conditioned liability on a statement by a defendant that he "did not engage in fraud," 5 I1 as that affirmation is self-evident (though unfortunately not always true). I1 Plaintiffs' allegations are not about representations concerning whether "sales would 7 I continue at the same pace into the future? GI. Br. at 2~-29?~Rather, this case concerns 8 11 representations about existing sales and revenues that Defendants knew were not legitimate at the 9 I1 time the representations about them were made, and the Defendants' failure to disclosure that the 10 1 sales and revenues were obtained through bribes and other quidpro quo deals with Qwest and

The Redback Defendants' argument that "Qwest's plans for the products were not relevant" l2 I1 13 a (GI. Br. at 23) is also wrong, because the Redback Defendants knew in advance that Qwest had no 14 1 plans or use for the products, but bought them in exchange for Redback's agreement to buy Qwest'r l5 23 None of the cases relied on by the Redback Defendants applies here. Harmonic Inc. Sec. Litig, l6 No. C-00-2287 VJH), 2002 WL 31974384, at *9 (N.D. Cal. Nov. 13,2002) concerned investors' challenges to predictions and forecasts about future growth prospects. Similarly, plaintiffs in l7 Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) claimed that the defendants made "optimistic predictions about [a] merger" which they allegedly knew could not be met. In re Convergent Tech. Sec. Litig., 948 F.2d 507 (9th Cir. 1991) is wholly inapplicable because it was a decision on summary judgment deciding whether, under the fraud-on-the-market doctrine, statements reporting on past performance in fact implied future growth. In re Apple Computer Sec. Litig., 886 F.2d 1109 l9 11 16 (9th Cir. 1989) also was decided on summary judgment and the court noted that "the investing 20 public justifiably places heavy reliance on the statements and opinions of corporate insiders. In order to avoid Rule lob-5 liability, any material information which insiders fail to disclose must be 21 transmitted to the public with a degree of intensity and credibility sufficient to effectively counter- balance any misleading impression created by the insiders' one-sided representations." Here, the 22 Defendants failed to make the disclosures necessary to "counter-balance" the false impression that Qwest and other customers had a genuine interest in Redback's products. See In re Stratosphere 23 Corp., 66 F. Supp. 2d 1182, 1198 (D. Nev. 1999) ("even optimistic statements are actionable where the defendant does not genuinely believe them, lacks reasonable grounds basis for his belief, or 24 knows of undisclosed facts undermining that belief'). 24 In any event, the Supreme Court has made clear that statements framed as a belief 25 about events to come may be actionable if the belief is known by the speaker to be false when made. See Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1092-94 (1991) (fmdiig that 26 predictions of future events can be a basis for falsity where the maker of the statement had no basis for the prediction); In re Syntex Corp. Sec. Litig., 95 F.3d 922,926 (9th Cir. 1996) 27 ("Optimistic statements may constitute a basis for a claim under section 10(b).")

3 1 PLAMTWFS' OMNIBUS BRIEF M OPPOSmION TO DEFEND-' MOTIONS TO DISMISS TllE IWST AMENDED CONSOUDATED COMPULNT Care No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 9 of 73

products that Redback did not want or need. Thus, both parties entered the deals not because they

actually had a demand or use for the other's products - they merely wanted to generate revenues, even in bogus transactions, that could demonstrate to the market that the companies had viable products and a growing business. While the "mere fact that products ended up in a warehouse" (GI. Br. at 23-24) may not imply fraud, Plaintiffs have alleged much more. See 77 80-81, 103 (Redback and Qwest did not need each other's products and services); 7 104 (Redback and Qwest entered the deals solely to generate revenues to meet targets); 77 84-85 (Redback's products did not work and Redback did not need ASP Services purchased from Qwest); 7 82 (Qwest did not even test the products); f7 76, 82 (the products could not even be deployed by Qwest); f 77 (two Redback sales executives -the Redback Sales VP and the VP NA Sales, said that when Perusse directed Qwest to buy the SMSTM10000, Perusse knew that the product was not operational); f7 76-78 (numerous former Redback officers and employees, including the Redback Sales VP, the VP NA Sales, the Redback Sales Director, the UUNET Account Manager and the Sales Engineer, all stated that the SMSTM10000 was not operational at all in 2000 when the product was shipped to Qwest, UUNET and other customers, and the Redback Defendants who were arranging these improper deals knew that fact too). The Redback Defendants also contend that the omissions were not material because (as the Court noted in its dismissal Order) "three quarters of Redback's revenues came from other customers [other than Qwest and UUNET]." GI. Br. at 21; Order at 9. First, it does not appear that the Court dismissed Plaintiffs' claims on the ground that the revenues generated from the illicit transactions were immaterial. See Order at 8 ("It is not clear . . . that the omission of the facts regarding the agreements . . . rendered the positive statements in question materially misleading"); id. at 9 ("It is entirely unclear that . . . the stock would have traded at a much lower share price . . . il the market had known that Redback was in essence 'purchasing' sales from Qwest, and to a lesser extent, from UUNET"). Indeed, whether a statement is misleading and whether adverse facts were adequately disclosed are generally questions that should be left to the trier of fact. Syntex, 95 F.3d a 926; Kaplan, 49 F.3d at 1375. "[O]nly if the adequacy of the disclosure or the materiality of the statement is 'so obvious that reasonable minds [could] not differ' are these issues 'appropriately 32 PLANZlFKS' OMNIBUS BRIIiP IN OPPOSlClON 10 DEFENDANTS' MOTIONS TO DISMISS TKE FIRST AMENDED CONSOLIDATED COMPLAIN'I'

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resolved as a matter of law."' Fecht v. The Price Co., 70 F.3d 1078, 1080 (9th Cir. 1995) (quoting Durningv. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir.), cert. denied, 484 U.S. 944 (1987))' However, even if the Court had resolved questions of materiality, Plaintiffs have added nem allegations which show that Defendants' fraud was greater in magnitude and scope than alleged in Plaintiffs prior complaints, and show that, in total, the quidpro quo deals were material. As previously alleged, the sales to Qwest were significant on their own, comprising 24% of Redback's total revenue for the third quarter of 2000, more than 18% for the fourth quarter of 2000 and 15% o the Company's total revenue for all of 2000. 7 94.26 The FAC adds new allegations concerning additional improper deals: a $4-$5 million deal with UUNET (7 89), a $40 million deal with Broadband (7 67) and a $120 million deal with Williams that by itself was forecast to comprise 10- 20% of Redback's revenues for SmartEdgeTMproduct sales in 2001 and 2002. 7 109. Also newly alleged, the Siara Warrant had a value of $45 million just weeks after Redback's merger with Siara 7 136. Altogether, all of the quidpro quo deals were without question material to Redback's bottor line and to investors. See In re NUISec. Litig., 314 F. Supp. 2d 388,410 (D.N.J. 2004) (finding thi an allegation of a 5-20% misrepresentation of earnings is material as a matter of law and is sufficie~ to satisfy the materiality prong of a securities fraud claim and survive a motion to dismiss); In re Rhythms See. Litig., 300 F. Supp. 2d 1081, 1089 @. Colo. 2004) (finding material allegations that defendants overstated company's subscriber line count by more than 25% for a particular quarter); Lernout, 208 F. Supp. 2d at 85 (claims regarding misrepresentations regardmg deals generating 109 of the Company's revenue upheld).

25 A statement or omission is material if a reasonable investor would consider it important in determining whether to buy or sell stock. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438,449 (1976); Basic, Inc. v. Levinson, 485 US. 224,231-32 (1988). Whether an omission is "material" is determination that "requires delicate assessments of the inferences a 'reasonable shareholder' woul, draw from a given set of facts and the significance of those inferences to him, and these assessment are peculiarly ones for the trier of fact." Fecht, 70 F.3d at 1081 (quoting TSC, 426 U.S. 450); see also Warshaw v. Xoma Corp.,74 F.3d 955,959 (9th Cir. 1996) (holding that the plaintiffs' complaint "should not have been dismissed under 12(b)(6), without a contextual, 'delicate assessment' of the facts presented"). 26 The FAC contains a chart illustrating the significance of Qwest's purchases to Redback's revenu, during the Class Period, listing for each quarter the Company's total revenues and the percentage and dollar amount of those revenues in each quarter which resulted from deals with Qwest. 7 108. Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 11 of 73

The FAC also contains allegations (many of them new) regarding the increase in the Company's stock price resulting from the Company's announcements of the sales agreements and it reporting of revenues from those deals. 77 100-101, 140; see also 7 110 (announcement "created a buzz that increased the value of Redback's stock"); 7 192 (announcements and financials caused analysts to overvalue Redhack's stock). When the scheme came to an end and the effects of the fraud began to dissipate and Redback's revenues began to decline, the investing community began tc realize, more and more, that Redback was not what it had been represented to be, and the Company' stock price traded concomitantly lower. 77 I 18,228-230,232,234,240,289; see Ex. C to the Kairi: Decl. (showing Redback stock trading at below NASDAQ composite and certain telecommunications indices). The FAC thus alleges how, had the market known that Redhack was in essence "purchasing" sales from Qwest, UUNET, Broadband, Williams and others, the stock would have traded at a much lower share price.27

2. The Representations About Redback's Products Were False And Misleading

This Court dismissed Plaintiffs original complaint because there was "no factual basis for the allegation that [Redback's] products were unstable and no indication how [the former Redback Sales Vice President] came to conclude that Qwest 'knew' of this instability. Jan. 21,2005 Order at 8. Now that Plaintiffs have cured these pleading deficiencie~,'~the Redback Defendants resort to arguing that Plaintiffs must show that the Redhack Defendants "knew that the problems could not bc solved." GI. Br. at 34. But Plaintiffs are not just claiming that the Defendants failed to disclose problems with Redhack's products; Plaintiffs claim that the Defendants knew that Redback was able to sell defective products, or products which its key customers did not want or need, only because

27 in any event, when making a determination of materiality, a court's "fact-specific inquiry" cannot he "short-circuited" by mere failure of the market to react to the relevant information. Miller v. Thane Int'l, Inc., No. 03-1031,2005 WL 1364531, at *8 (C.D. Cal. June 2,2005) (citing America West, 320 F.3d at 935). 28 See supra at III.A.2. (discussing new allegations regarding problems with Redback's products); infra at IIl.A.3. (discussing new allegations regarding how the witnesses came to know this information).

34 PLAMTIFFS' OMNIBUS BRtEF M 0PM)S"TOION TO DEFEYDANTS' MOTtONS TO DISMISS TBE FIRST AMENDED CONSOLIDATED COMPLAN CoseNo. C 03-05642JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 12 of 73

the sales were effectively purchased through bribes and quidpro quo arrangements, so the "standard" proffered by the Redback Defendants does not apply here. Additionally, that standard overstates the pleading requirements in the Ninth Circuit. Allegations of undisclosed, specific problems are a sufficient explanation of how optimistic statements are rendered false. See Oracle, 380 F.3d 1226 (finding that phoney sales invoices and manipulated revenue demonstrated that statements regarding reported revenues, forcasts and produc demand were false and misleading), America West, 320 F.3d at 933 (finding statements that omittec different cost expenses and other adverse facts rendered numerous optimistic statements regarding defendants' financial condition materially false). In America West, 320 F.3d at 935, the Ninth Circuit found, on a motion to dismiss, that undisclosed deferred maintenance costs, unsafe maintenance practices, and a possible sanction to be imposed on the company (as a result of a settlement) were material to a reasonable investor's view of the overall economic health of the company, and there was no requirement to allege that the defendants knew the costs could not be alleviated, the maintenance practices could not be made safer, or that the sanction would definitely be imposed. Likewise, in Warshaw v. Xoma Corp., 74 F.3d 955,960 (9th Cir. 1996), the court found material statements that FDA approval of a product was "imminent" where the complaint described undisclosed internal clinical studies performed by the defendants that revealed that the dmg "might not work and would never be approved by the FDA" -there was no requirement to show that the defendants knew that the problems with the drug could never be remedied. Id. at 958. 59. And in Fecht, 70 F.3d at 1078, the Ninth Circuit found that the complaint sufficiently alleged that the defendants made optimistic statements regarding their business expansion, which they knev were false, based upon their possession of material information which strongly indicated the expansion program's negative performance. Id. at 1081 n.2. The Ninth Circuit held that "[tlhe cautionary statements cited by the district court, when considered against the backdrop of the allegations [of known but undisclosed adverse infonnation] -allegations which at this stage we mu:

accept as trne - do not 'so obviously' render the challenged public documents not misleading as to

35 PLAINTIPPS' OMNmUS BRlEF M OPPOSITION la DEWENDANTS' MOTIONS TO DISMISS THE FLRST AMENDED CONSOLIDATED COMP- Cars No. C 03-05642 .lE Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 13 of 73

permit adequacy of the disclosure to be determined as a matter of law." Id. at 1081 (internal citatio:

Even if Plaintiffs are required to allege that the Defendants knew that the problems with Redback's products could not be cured, they have done so. Redback planned to ship non-operation, products, so there was no present intention to remedy the technical problems. 77 77, 82-84, 89,95, 105, 115, 162, 164, 173,177, 183, 194,228. Also, they knew the SMSTM10000 product was being returned as defective. 77 83, 107, 115-116, 177,213,261,269,287,337,406. Likewise, to the extent Plaintiffs must allege the "magnitude or severity" of the problems (Gl. Br. at 34), they have done that too. With respect to the SMSTM10000, according to numerous former Redback officers and employees, the product was not operational at all in 2000, and the SMSTM10000 equipment tha Redback had shipped to Qwest and to WNET remained inoperable well into 2002. W 77-78, 82-

83, 86, 89, 105, 114. The product was essentially "stillborn" - due in part to the fact that the optica cable "card" that was developed to run the SMSTM 10000 was incapable of running at the speeds and capacity necessary to support the bandwidth for which the product had been designed. W 82-82 Further, the development of new router capabilities for the SmartEdgeTMrouter was incomplete in 2000, which caused the product not to be ready for shipment that year and long into 2001, in contra

29 See also In re 2TheMart.com, Inc. Sec. Litig., 114 F. Supp. 2d 955,961 (C.D. Cal. 2000) (finding that disclosure of the fact that the defendants had not yet entered into a contract with IBM to design and build a web site would have been considered an important part of an investment decision by shareholders); In re Terayon Communications Sys., Znc., No. C 00-01967 MHP, 2002 WL 989480, : *3 (N.D. Cal. Mar. 29,2002) (misrepresentations that the company's technology had received industry certification for use in certain cable systems held actionable when defendants knew that thc certification had not been granted); In re Emulex, 210 F.R.D. at 716 (representations about company's anticipated growth were actionable as false statements because they were made after several customers delayed and canceled orders, which occurred immediately before or about the same time as defendants' allegedly false statements, where plaintiffs identified certain of the company's main customers who had decreased orders, and allegations of defendants' knowledge of the order cut-backs were premised on the defendants' practice of frequently reviewing customer requests; there was no requirement to show that the defendants knew that the delayed orders could not be accelerated or that the canceled orders could not be revived); Powers v. Eichen, 977 F. Supp. 1031, 1037-38 (S.D. Cal. 1997) (upholding challenges to defendants' optimistic public statements where plaintiffs alleged that defendants knew that the company was actually suffering from component part and supply shortages and scheduling difficulties which would hinder the company': ability to stay competitive, and the company was experiencing problems in development and manufacturing; no requirement to show the problems could not be remedied).

36 PLAINTIPPS'OMNTBUS BRIEPM OFPOSITION TO DEFENDAVTS' MOTlONS TO DlSMlSS THERRST AMENDED CONSOLIDATEDCOMPLAINT Cars No. C03-05642 .lZ Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 14 of 73

to the Redback Defendants' representations to the investment and telecommunications community. 7 95. The Redback Defendants assert that they cannot be liable for statements made by Qwest, PwC, the SEC, securities analysts and journalists. GI. Br. at 36, n. 13; RD Br. at 16. Plaintiffs do not allege that the Redback Defendants are liable for statements by PwC or the SEC or by Qwest. Rather, Plaintiffs challenge fi-audulent statements made by Redback and/or the Redback Defendants, during the class period, that were repeated in or incorporated into reports by analysts. See W 138, 161, 163, 178, 197,200,218,228-29,233,238,243,261,303-04. Because the Redback Defendants used securities analysts as a conduit for disseminating false or misleading factual statements, Plaintiffs need not allege that they placed their imprimatur on the analysts' statements. See, e.g., Warshaw v. Xoma Corp., 74 F.3d 955,959 (9th Cir. 1996) (holding that, if it is true that defendants intentionally used third parties to disseminate false information to the investing public, defendants cannot escape liability simply because they carried out the alleged fraud through the public statements of third parties and, therefore, dismissal under Rule 12(b)(6), "without a contextual, 'delicate assessment' of the facts presented -- including the statements of third-party analysts" is inappropriate (citing Fecht, 70 F.3d at 1080-81) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. at 450)); Allison v. Brooktree Corp., No. 97-CV-0852,1998 WL34074832, at *8 (S.D. Cal. Nov. 27, 1998) (holding that, where complaint alleges that company insiders used analysts as a conduit for disseminating false or misleading information, plaintiffs need not allege that Defendants placed their imprimatur on the analyst's statements). Plaintiffs also have alleged that the Redback Defendants made statements of fact to analysts that intentionally omitted material information knowing that those statements would mislead the analysts who would reflect that false information in their reports. See W 160, 162, 164-165,178-179, 191-194, 197,218,228,243,353,406. This is sufficient to withstand a challenge to false statements in such reports. See Allison, 1998 WL 34074832, at *8 (finding sufficient allegations that specifically identify factual statements made by company insiders that were subsequently repeated in the analyst reports). For these reasons, Syntex,

95 F.3d at 934 and Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231,1249 (N.D. Cal. 1998), relied upon by the Redback Defendants, are distinguishable. 37 PLAMTIFES' OMNIBUS BRLEF M OPPOSmON TO DEFENDANTS' MOTIONS TO DISMISS TRX FIRST AMENDED CONSOUDATED COWLAW Care No. C 03.0564 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 15 of 73

3. Plaintiffs Have Addressed the Court's Concerns Over the Use of Anonymous Sources

The Redback Defendants belittle Plaintiffs' factual allegations by attacking the sources of this information. The Redback Defendants claim that "[als in the prior complaint, Plaintiffs still offer an insufficient factual basis from which to infer that the unnamed former Redback employees described in the complaint have personal knowledge of Qwest's internal deployment plans and testing of products purchased from Redback." GI. Br. at 23-24. This is a distortion of the Court's opinion, which held that only the allegations regarding the former Redback Sales Vice President

were insufficient. See Order at 8 (discussing only this witness and finding that "Plaintiffs do not allege any factual basis for the source's conclusory statement[sIwthat Redback purchased web- hosting services solely to convince Qwest to buy Redback's SMSTM 10000 products, that Qwest did not test these products and knew they were unstable, and that Qwest simply warehoused the products).30 Plaintiffs have acknowledged and addressed the Court's concerns and, upon subsequen investigation and questioning of witnesses, have included new factual allegations regarding the confidential witnesses, which show that they were in positions to know the facts and information provided to ~laintiffs.~~ As previously alleged (and realleged in the FAC), the Redback Sales Vice President ("Redback Sales VP") was in charge of the Qwest account when he worked at Redback from Augus 1999 to March 2002. In this capacity, he was intimately familiar with Qwest's practices and needs for products and services, as well as Redback's ability to fulfill them. In the FAC, Plaintiffs have alleged additional facts that support the Redback Sales VP's statements provided to Plaintiffs. 7 57

30 Nowhere in the Court's opinion is there a discussion of any of the other witnesses, or even a suggestion that Plaintiffs failed to adequately describe their other confidential sources. 3' No Defendant disputes that confidential sources need not be identified by name in a complaint as long as they are "described. ..with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged." Daou, 2005 WL 1431833. As explained in Plaintiffs' Reply Brief in Support of their Motion for Reconsideration (at 5), the reason to keep Plaintiffs' sources confidential is particularly important in this case: the telecommunications equipment industry is a small, relatively insular community, and the witnesses fear that their livelihoods will be threatened if their names are revealed. In fact, Defendants' counsel, John Stigi and Cameron Hoffman, and Redback executives, includmg Georgine Nordin, have already contacted individuals in an attempt to discover the witnesses' identities.

38 PLAINTIFFS' OMNIBUS BRIEFIN OPPOSITIONTO DEFENDANTS' MOnONSTO DlSMlSSTllE PlRSTMlENDED CONSOLIDATED COMPULNT Case No. C 0)-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 16 of 73

(Redback Sales and Marketing Manager confirmed the importance of the press releases); 7 76 (VP NA Sales replaced Redback Sales W and confirmed Qwest's routine business practices); 7 77 (Redback Sales W, Redback Sales Director and W NA Sales all said the SMSTM 10000 was non- operational and Qwest knew that when it ordered it); 77 78, 87 (WNA Sales and Patel confirmed that all of the Redback Defendants knew the SMSTM10000 was non-operational when shipped to Qwest and UUNET); 7 79 (Redback Sales W and W NA Sales confirmed that Redback purchased $18 million of unneeded ASP services so that Qwest would complete its order); 7 80 (Redback Sale: and Marketing Manager confirmed that Redback did not need the ASP services); lf 82-83 (Sales Engineer and Redback Sales Director confirmed that the SMSTM10000 was non-operational througk at least 2002); 7 86 (Kruep provided false revenue figures for press releases). Plaintiffs' allegations regarding the identities and positions of the other confidential

witnesses are adequate (and such allegations are not challenged by the Defendants). See 7 76 (describing the W NA Sales as a "former Vice President of North American Sales .. . at Redback from August 2000 through August 2001 [that] was in charge of sales for all of Redback's equipment lines for all of North America); 7 82 (describing the Sales Engineer as "a former sales engineer .. . at Redback throughout 2000,2001 and 2002"); 7 45 (describing the Redback Sales Director as "a former Director of Sales for WorldCom and other accounts at Redback .. . from December 1999 through March 2002" and describing the Redback Sales and Marketing Manager as a "former District Sales Manager ... at Redback from 1997 to 2001); 7 46 (describing UUNET Account Manager as a "former account manager who worked at Redback in 1999 [until approximately] August 2001, and who personally handled the UUNET account"); and 7 53 (describing the Former Sales Manager "a former Redback Sales Director .. . who personally managed the Qwest account between February 2000 and July 2002"). These witnesses all provided consistent statements regarding the problems with Redback's products. Every witness stated that the SMSTM10000 was not operational in 2000, when it was shipped to Qwest and other customers. a 77-78, 82, 84, 164. The Redback Defendants claim that "the unnamed sources alleged to have attended the[] meetings" where Patel discussed the problems with Redback's products "did not work at the Company throughout the entire Class Period" (RD Br. at 9), but that is irrelevant, as Plaintiffs allege 39 PWZNTIFPS' OMNIBUS BRIEF lN OPPOSmONTO DEFENOANTS' MOTIONS TO DlSMlSSTAE FlRSTAMEMlED CONSOUUATEDCOMPLAJNI Core No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 17 of 73

that the VP NA Sales attended the weekly executive meetings, as did the Sales VP. 778 ("weekly executive meetings attended by . . . the W NA Sales."); 7 84 (weekly executive meetings were attended by, inter alia, the VP NA Sales and the Sales VP); 77 179, 352 (VP NA Sales spoke to the Redback Defendants at the weekly executive meetings). Additionally, the confidential sources were at Redback during each of the Redback Defendants' tenure at the Company. Redhack Sales and

Marketing Manager: 1997-2001 (7 45); Redback Sales Director: December 1999 - March 2002 (7 45); UUNET Account Manager 1999 -August 2001 (7 46); Redback Sales Manager: February 2000 -July 2002 (7 53); Redback Sales VP: August 1999 -March 2002 (7 57); VP NA Sales:

August 1999 -March 2002 (7 57); Sales Engineer: 2000 - 2002 (7 82). Every sales executive involved with the Qwest account confirms that the "multi-year, multi- million dollar" Qwest contract announced on February 5,2001 did not exist, but was instead a purchase order under a prior contract. 101,201 (former Redback Sales Manager, Redback Sales VP, and VP NA Sales all state that there was no new agreement and Redback Sales and Marketing Manager confirms that the press releases were more important than the deals). The VP NA Sales, the Redback Sales W and the Redback Sales Manager all give fxst hand accounts of the quidpro quo nature of the IRU purchase in exchange for orders from Qwest, as well as first hand accounts oj what was discussed in weekly executive meetings. 77 102-105, 173, 179. In summary, the first

hand accounts by all of the witnesses are consistent and clear - Qwest and Redback were engaging in undisclosed quidpro quo deals that were material. See In re Cabletron Sys., 3 11 F.3d 11,31-32 (lS' Cir. 2002) (adopting a case-by-case approach to evaluating allegations of confidential sources b: reviewing the level of detail provided by the confidential sources. .. the coherence and plausibility o the allegations, the number of sources.. .and similar indicia"); In re Commtouch Software Ltd. Sec. Litig., No. C 01-00719 WHA, 2002 WL 3147998, at *I3 (N.D. Cal. July 24,2002) (finding that while some of the confidential witnesses' basis for knowledge were not adequately pled, the fact thi the complaint's allegations and the witnesses statements "dovetail[ed] and reinforce[d] each other was sufficient for a "strong inference that pefendant] acted with deliberate recklessness.").

40 PMIFFS' OmUSBRIEFIN OPPOSlTlON TO DEWNDMTS' MOTIONSTODlSMlSS IKE FlRSTAMtNDEDCONSOUDATEDCOMTLiUNT

Cnse No. C 03-05642 JP Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 18 of 73

B. The Misstatements Can Be Attributed to the Purported "Outside Directors" Under the Groua Pleading Presumption

The Redback Defendants contend that the group pleading presumption "did not survive the Reform Act." RD Br. at 12. They are wrong?' See, e.g., Berry v. Valence Tech., Inc., 175 F.3d 699, 706-07 (9th Cir. 1999) (discussing the pleading requirements of the group pleading presumption); In re Adaptive Broadband Sec. Litig., No. 01-1092,2002 WL 989478, at "18 (N.D. Cal. 2002)(stating that the doctrine is still good law in the Ninth Circuit); In re Secure Computing Corp. Sec. Litig., 120 F. Supp. 2d 810, 821-22 (N.D. Cal. 2000)(citing Ninth Circuit cases

recognizing the doctrine); Stanley v. Safeskin Corp., No. 99CV454,2000 WL 331 15908, at *4 (S.D. Cal. Sept. 15,2000) (applying presumption to the PresidentICEO, an Executive Vice PresidentKFO the Vice-president of Sales and the Vice-President/Controller/Secretarywho participated in the company's daily activities, took part in the preparation of reports, and attended meetings where the company's fmancial condition was discussed); see also In re AgriBioTech Sec. Litig., No. CV-S-99-

144 WL 1277603, at *4 @. Nev. Mar. 2,2000) (the assertion of collective liability under the group pleading theory is grounded in reasonableness). In fact, a "majority of courts facing the issue have determined that the group pleading doctrine does in fact survive the passage of the PSLRA." In re

Raytheon Sec. Litig., 157 F. Supp. 2d 131, 152-53 @. Mass. 200l)?~

32 The Redback Defendants do not dispute that they can be held liable for misstatements that they signed. See Howard v. Everex Sys,, 228 F.3d 1057, 1061 (9th Cir. 2000) (defendants subject to liability for signing SEC document); In re Enron Corp. Sec. Litig., 258 F. Supp. 2d 576,587 (S.D. Tex. 2003) (corporate official who signs an SEC filing, "regardless of whether he participated in the drafting of the document, 'makes' a statement"). DeNuccio, Lamond, Cronan, Khosla, Wolf, Ragavan, Barsema, Garg, Kurtz, Gentner, Kmep and Haque each signed a false and misleading statement. 7 12 (DeNuccio); 7 13 (Lamond), 7 14 (Cronan); 7 15 (Khosla); 7 16 (Wolf); 7 17 (Ragavan); 7 18 (Barsema); 7 19 (Garg); 7 20 (Kurtz); 7 21 (Gentner) and 7 22 (Hague). In addition, Barsema, Cronan, DeNuccio, Lamond and Ragavan made statements quoted in Redback's press releases and forms 8-K andlor during conference calls held during the Class Period. 77 123, 125, 130, 152, 157 (Barsema), 77 295,298 (Cronan); fl238,268,271,274,286,293,294 PeNuccio) 77 227,228 (Lamond); 77 93,114, I3 1,137,152,156,160,171,176,191,199 (Ragavan). 33 In re OxfordHealth Plans, Inc. Sec. Litig., 187 F.R.D. 133, 142 (S.D.N.Y. 1999) (rejecting the argument that either the PSLRA or Central Bank altered the group pleading doctrine); In re Livent, Inc. Sec. Litig., 78 F. Supp. 2d 194,219 (S.D.N.Y. 1999) (holding that the argument that the PSLRA invalidated the group pleading doctrine is "not persuasive"); Johnson v. Tellabs, 262 F. Supp. 2d 937,946 (N.D. 111.2003) (applying doctrine). Importantly, the group pleading presumption was well-established before the PSLRA's enactment. Wool v. Tandem Computers, Inc., 81 8 F.2d 1433, 1440 (9th Cir. 1987); GlenFedInc. Sec. Litig., 60 F.3d 591, 593 (9th Cir. 1995). "Congress is 41 PmTmS' OMNlBUS BRIEFIN OPPOSITIONTO DEIIBNDAN1S'MOTIONS TODlSMlSSTllE FRST AMENDED CONSOUUATEDCOMPLNNT CnseNo. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 19 of 73

As to Garg, Lamond, Khosla, Kurtz and Haque, the Redback Defendants argue that if the group pleading presumption exists, it cannot apply to those Defendants, characterized as "Outside Directors." RD Br. at 12. This argument fails.34 "Where outside directors either participate in the day-to-day corporate activities, or had a special relationship with the corporation, such as participation in preparing or communicating groul information at particular times . . . the group pleading presumption may apply." Mitzner v. Hasting No. 04-3310,2005 WL 88966, *6 (N.D. Cal. Jan. 14,2005) (holding that "plaintiffs allegations thi pefendants] . . . were members of the Audit Committee during the Relevant Period may suffice in pleading such a special relationship"). The presumption also applies where the outside directors participate in executive meetings, see Stanley, 2000 WL 331 15908, at *4, or where the misrepresentations relate to matters that are "fundamental" to the company's operations. Lindelow v. Hill, No. 00-C-3727,2001 WL 830956, at *7 (N.D. Ill. July 20,2001). As demonstrated below, Plaintiffs allege facts which support the application of the group pleading presumption to each of th purported "outside directors."

Lamond served as Chairman of the Board and CEO, was a member of the Audit and the Nominating Committees, was involved in the day-to-day operations through the Senior Vice President of Worldwide Sales (Richard Bibb) who reported directly to Lamond, attended weekly executive meetings at Redback and received product reports, signed SEC filings and made statements to the public on Redback's behalf. 77 13, 84,96, 179, 197,227-28.

became Redback's director as part of the Siara acquisition and had connections to several of the companies which engaged in the improper deals with Redback: Qwest director (7 15), Concentric director (7 48), Siara director (7 64), Broadband director (77 139,205), family ties to Abatis (7 92 - Khosla brought the Abatis deal to Redback). Redback's purchase of $18 million in services from Qwest required his approval (7 81); he helped solve the outstanding receivables problem created when Qwest refused to pay for $20 million in equipment (7 86); he authorize IRU purchases from Qwest (7 104); and he considered it part of his job as a venture capitalist to be involved in the companies he and his firm invested in - he said it was

presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation." Lorillard, Div. ofLoew's Theatres, Inc. v. Pons, 434 US. 575, 580-81 (1978). 34 Plaintiffs have alleged (supra at 24, n. 15) that each of these Defendants signed false and misleading statements as well. See Schaffer v. Evolving Sup., Znc., 29 F. Supp. 2d 1213, 1225 (D. Colo. 1998) (denying motion to dismiss by director defendants - including outside directors - who signed prospectus containing misstatements).

42 PULNTIFTS' OWNIBUS BRIEF M OPPOSITION TO DEFEND-S' MDnONS TO DISMISS TAE FIWI AMENDED CONSOLLDATED COMP- CnseNo. C 03-0564 JIi Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 20 of 73

"ethical" to arrange deals among these companies, as long as everything was fully disclosed. 7 361.

Garg was one of Redback's original founders in 1996 (7 41); he was a Seniorvice President of Product Management and a Senior Vice President of Corporate Strategy and Business Development (77 19 and 387); he pressured Redback employees to get orders from Qwest as part of a quidpvo quo deal (7 58); he attended weekly executiv meetings, both as an employee and then as a director (7 387). Thus, Garg was an inside director during the Class Period.

is a Redback Director; he was a member of the Audit Committee from 2000 through 2003, and he attended weekly executive meetings where the revenue figures and problems with products were discussed (77 20, 197,393-95). He served on the Audit Committee in part because he was a certified public accountant with financial management expertise (7 20).

_Haclue was a Redback director from March 2000 through 2003, coming aboard as a representative for Nonvest during the Siara acquisition. 77 22,70. Haque served on the Audit Committee (77 22, 367) and his participation was sufficient for him to knoy when to suggest to his partners at Nonvest when to offload their stock. 117 174,365- 66. Haque received updates about delays in product development and sales and revenues 7 197. Plaintiffs Allegations Against Kruep Support Liability Under Central Bank and the "Substantial Participation" Test Not only does Kruep contend that there were no false and misleading statements, he argues that, even if there were, he is not liable because he did not substantially participate in making them. hepis wrong. Kruep concedes (as he must) that "the Ninth Circuit has indicated that 'substantial participation' in the making of an alleged misstatement can support primary liability under Section 10(b)." RD Br. at 14. Indeed, this Court already adopted the "substantial participation" test in granting Plaintiffs Motion for Reconsideration. Reconsideration Order at 2 (“[Biased upon the reasoning set forth in Homestore and adopted by this Court, Plaintiffs could make out a viable 5 10(h) claim against Krnep if he was sufficiently involved in the drafting of statements released to th

public, even ifhe did not make the statementspersonally.") (emphasis added). Kruep argues, however, that to substantially participate in the making of a false or misleadin statement, one must sign, draft or edit the misstatement. RD Br. at 15. That is inconsistent with what Kruep concedes is the "expansive approach" used in the Ninth Circuit in applying this

43 PLAINTIFFS' OMNIBUS BRIEF BN OPPOSI.PION TO DEFENDAhTS' MOTIONS TO DISMISS TlIE FLRST mmEDCONSOLIDATED COWLm Csse No. C W-05642 .IF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 21 of 73

standard. RD Br. at 14. For example, in In re Homestore.com, Inc. Sec. Litig., 252 F. Supp. 2d 1018,1041 (C.D. Cal. 2003), the court held that the defendants need only "be connected in some material way to the draftmg of the statements made to the investing public" to be liable under Section 10(b). (emphasis added); see also In re Homestore.com Sec. Litig., 347 F. Supp. 2d 790, 800 (C.D. Cal. 2004) (substantial participation in the creation of statements distinguishes primary liability from the aiding and abetting liability eliminated by the Supreme Court in Central As held in In re ZZZZ Best Sec. Litig., 864 F. Supp. 960,970 (C.D. Cal. 1994), mere "[plreparation of misleading projections or provisions of the raw data for such projections can constitute participation in a misrepresentation, and lead to primary lob-5 liability." (internal quotation and citation omitted). During his time at ~edback:~Kruep actuallyprovided the false revenue and sales figures tc other Redback executives and the Board -knowing that they were false and knowing they would bt included in public statements and SEC filings. 37 See 77 5/80, 399. He provided the information for the February 5,2001 press release announcing that Qwest bad agreed to another "multi-year, multi million dollar" deal when there was no new agreement with Qwest. 7 201. He negotiated the amount and timing of the quidpro quo agreement with QCS (77 71 and 86), and told the other Redback Defendants that the Company could not meet revenue targets for 2000 because they were based on a product that would not be ready for deployment until late 2001, yet he provided false figures for inclusion in public statements. 77 95, 197. Because Kruep provided information that he knew would be incorporated into SEC filings and press releases, he was, in fact, "connected" to the making of a statement that he knew would be false. Here, the connection to the false and misleading statements is even greater than that in the

35 For a very thorough and well-reasoned discussion of Central Bunk and its interplay with Rule10b-5(a) and (c) see the recently issued opinion in Parmalat, 2005 WL 1653638, at * 10- 19. This opinion appears to be the only post Central Bankopinion that discusses the interplay of scheme liability with mis-statement liability.

36 Kruep was Redback's Vice President of Sales from 1997 to 1999; he became the Vice President I Worldwide Sales in 1999 though February 2001. 7 23. 37 The Redback Sales W confirmed that Kruep provided the financial information for the Company's press releases. 77 57, 86.

44 PLAINI'IWEX' OMNlBUS BRLEFM DPPOSmONTO DEFENDANTS' MOTlONSTO OISMLSSTBE EBIUT AMXNDED CONSOLIDATEDCOMPLAMT

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cases cited above, as the defendants in those cases were auditors, whereas here Kruep was a Redbac executive. See Homestore, 252 F. Supp. 2d at 1038 ("courts have no trouble finding liability where the actor is a corporate insider, even when that actor claims not to have committed the actual fraudulent statement"). Kruep was not an outsider. He was one of Redback's five highest paid executives in 1998 through 2000. 77 23,400. As the Worldwide VP of Sales, he negotiated fraudulent agreements and provided and certified the false revenue and sales figures knowing they were to be used in the Company's press releases, financial statements and SEC filings. The cases cited by the Redback Defendants (RD Br. at 14-15) have no application here. Th, court in In re Sojware Toolworks Inc. Sec. Litig., 50 F.3d 61 5,628 n.3 (9th Cir. 1994) actually reversed summary judgment for the defendant auditor when the only evidence was that the auditor merely saw the misleading statement. Id. at 629 ("Deloitte claims that it did not draft, or even see, the [misleading statement] and cannot therefore be liable for it. Deloitte, however, ignores the fact that the misleading language . . . was actually quoted in the body of the July 1 SEC letter itself, which Deloitte admittedly saw."). The court in In re Harmonic, Inc. Sec. Litig., 163 F. Supp. 2d 1079, 1099 (N.D. Cal. 2001) dismissed claims against defendant C-Cube because it did not exist as corporation when the misleading statements were made and thus could not have "substantially participated" in making any statements prior to its existence, absent the pleading of its connection tl the corporation which made the statements, such as alter ego or control. In dicta the court acknowledged some ways in which a person could substantially participate in the making of a

misleading statement - if he "drafted, prepared, reviewed, or edited" a misstatement - but the court did not say that was required, or if its list was all-inclusive. Finally, In re CylinkSec. Litig., 178 F. Supp. 2d 1077, 1085 (N.D. Cal. 2001) does not apply because the plaintiffs failed to allege that the defendant "substantially participated or was intricately involved in preparing the statements," whereas Plaintiffs here clearly alleged that Kruep was intricately involved in providing false revenu projections based on sales he knew could not be made because of product problems, while knowing those revenue projections were false and would be disseminated to investors.

45 PLAM~IIFS'O~US B~P m OPWSITION m DEFENDMTS' MonnNs m DISMISS Tll~FIRST AMENDED CONSOL~ATEDCOMPLAINT Care Nu. C 03-05641 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 23 of 73

D. Plaintiffs Have Adequately Alleged That The Defendants Particioated In A Fraudulent Scheme

Plaintiffs recognize that the Court dismissed Plaintiffs' scheme liability claims predicated or Rule lob-5(a) and (c), based on the reasoning in in re Homestore.com. Order at 6-8. Accordingly, Plaintiffs will not at this time repeat the arguments made in their original omnibus brief (at 20-21, 32-36) in support of their claims under Rule lob-5(a) and (c). However, for the reasons set forth in that brief, including that Homestore.com does not preclude finding that "scheme" liability can be alleged in circumstances such as those present in thi: action, Plaintiffs respectfully submit that the Court's opinion was in error, and that, based upon the new facts alleged in the FAC, that opinion no longer applies. Indeed, subsequent to Homestore.com two courts have recently found that, in a complaint that alleged a fraudulent scheme, a defendant may still be held liable as a "secondary actor" pursuant to Rule lob-5(a) and (c), even where the defendant did not make a false or misleading statement, if the complaint specifies the fraudulent act in which the defendants engaged. Parmalat, 2005 WL 1653638, at *19-20; WMHigh Yield Fund v. O'Hanlon, No. 04-3423,2005 WL 101781 1, *8 (E.D. Pa. Apr. 29,2005). See, e.g., In re McKessov, HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1274 (N.D. Cal. 2000) (finding that complaint adequately alleged the existence of a fraudulent scheme to inflate revenue by recognizing contingen consignment, or even non-existent transactions as sales, which culminated in the publication of fala financial data in the company's press releases, in news articles and in SEC filings). Furthermore, in the appeal of Homestore.com, which is still pending, the Ninth Circuit will consider the SEC's amicus curiae brief explaining why the court's holding that only "outsiders" with a "special

relationship" to the corporation can be liable - is the wrong standard for finding a primary violation of Section 10(b), and disagreeing with the requirement that a third party schemer be "connectes' to the drafting of a misstatement or omission. See SEC Amicus Curiae Brief at 7-8,22, Ex. D to Kairi! ~ec1.~~

38 In addition, the court in Parmalat noted that the court in Homestore.com failed to discuss in depth the text of Section 10(b) in its analysis of primarily liability, under that statute, of business partners who structured transactions that became the basis of misrepresentations in the issuer's financial statements, and it upheld, based on such an analysis, Rule lob-5(a) & (c ) 46 PIAEVIWW' OMMBUS BRlEP LN OPPOSITION TO DEFEND-' MOTIONS 11)DlSMlSS TAE VMT AMENDED CONSOLIDATEDCOMPLAHT Case No. C 03-05642 .IF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 24 of 73

E. Plaintiffs Allege New Facts Which, In Addition To Other Facts, Show That Plaintiffs Have Stated A Claim For Accounting Fraud

This Court held that Plaintiffs in their prior complaint "failed to allege the Defendants' accounting fraud with particularity;" that is, the Court found that Plaintiffs had inadequately described the fraudulent transactions and had inadequately explained how the accounting for those transactions violated GAAP. Order at 12. As demonstrated above, based on new witnesses, interviews and information, Plaintiffs have now alleged the quidpro quo transactions and other aspects of the fraud with particularity. Additionally, as demonstrated below, Plaintiffs' accounting fraud allegations are not (as the Redhack Defendants contend) "fundamentally unchanged" nor does the FAC (as they contend) contain only the "same basic accounting standards and concepts as the previous complaint." GI. Br. at 30-31. Rather, the FAC contains new and detailed explanations of how the accounting for the quidpro quo transactions, including the revenues booked from those transactions, violated GAAP, and the impact of these improper transactions on Redback's financial statements.

1. The Standard for Alleging Accounting Fraud With Particnlaritv

When properly pled, "overstating of revenues may state a claim for securities fraud, as under GAAP, revenue must be earned before it can be recognized." Daou, 2005 WL 1431833, at * 5 (citations, internal quotations and emphasis omitted). To plead actionable "irregularities in revenue recognition," a plaintiff must allege information sufficient for a court to "discern whether the allege( GAAP violations were minor or technical in nature, or whether they constituted widespread and significant inflation of revenue." McKesson, 126 F. Supp. 2d at 1273. Basic details that should be alleged to support a claim for securities fraud include:

(1) the approximate amount by which revenues and earnings were overstated; (2) the products involved in the transaction; (3) the dates of any of the transactions; or

liability for claims against certain defendants who structured sham transactions. Parmalaf, 2005 WL 1653638, at *18, n. 153.

47 PLzWVl'IFIS' OhNIBUS BRIEPm OPPOSrrIONTO DEFWWS' MOTlONS'r0DLSMISSTIlB~T~M)EDCONSOLDATEDMMPLALNT

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(4) the identities of any of the customers or [company] employees involved in th, transactions.

Daou, 2005 WL 1431833, at *6 (citations and quotations omitted). Each of these particular details need not be alleged, but "the plaintiff must show with particularity how the adjustments [to overstate revenue] affected the company's fiancial statements and whether they were material in light of the company's overall financial position." Daou, 2005 WL 1431833, at *6-7. Plaintiffs here have met these pleading requirements. The FAC has alleged with particularitJ that Redback (at the direction of the Redback Defendants and with PwC's concurrence and blessing) fraudulently overstated revenue in violation of GAAP by failing to properly account for secret stock bribes and other quidpro quo agreements with Qwest, Broadband, UUNET and others, and by failing to properly account for Redback's acquisitions of Siara and Abatis. 2. Improper Purchase Accounting And Abuse of Goodwill Plaintiffs allege that Redback improperly accounted for its mergers with Siara and Abatis, which occurred in March 2000 and September 2000, respectively. The FAC explains why the accounting was improper: Defendants shifted $40.4 million from goodwill to one-time charge-offs of expenses and increased annual earnings by more than $10 million in each of 2001,2002 and 2003. Specifically, in violation of APB 16, Business Combinations, and FAS 2, Accounting for Research and Development Costs, Redback improperly allocated $40.4 million of the purchase price for those companies to in-process research and development ("IPR&Dn) in order to manipulate future earnings. 7 93. By inappropriately allocating excessive amounts of the purchase price to IPR&D instead of to goodwill, Defendants were able to charge-off $40.4 million in the year of the acquisition as a one time "non-recurring" event instead of over the four-year life of the goodwill asset and thereby eliminated future reductions in Redback's earnings. 77 93,322. Plaintiffs also explain how Redback improperly overvalued the goodwill acquired in those mergers. Redback acquired Siara for $4.5 billion, of which $4.4 billion was allocated to goodwill, and acquired Abatis for $655 million, of which $567 million was allocated to goodwill. 7 320. Plaintiffs alleged that Redback overpaid for these two companies by $2.7 billion, as demonstrated b) Redback's write-off of $2.7 billion (or 85% of the remaining unamortized amount of goodwill) in

48 PmIFFS' OMNIBUS BRmF IN OPPOSITION TO DEFENDMS' MOTIONS TO DISMISS TBE FIRST AMENDED CONSOLIDATED COMPLAINT Case No. C 03-05642 .IT Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 26 of 73

the quarter ended September 30,2001. 7 320. The FAC provides an explanation for the GAAP violation (not alleged in the prior complaint): GAAP required that in 2000, as soon as Defendants were aware that the new SmartEdgeTMequipment was delayed in production, they should have written down Redhack's goodwill as required by SFAS 121, Accounting for the Impairment ofLong Lived Assets and for Long-LivedAssets to Be Disposed Of. 7 321. The FAC newly alleges the effec of this GAAP violation on Redback's financials: by delaying the write down for more than one yea] Defendants materially overstated Redback's assets and stockholders' equity by $3 billion for year- end 2000 and also understated its net loss by $3 billion. 7 321. 3. The Undisclosed Stock Payments Plaintiffs allege that Redback in the following deals issued stock (or warrants) to Qwest and other customers in order to obtain those customers' commitments to purchase Redback products:

Redback issued ''friends and family" shares to executives of Qwest and other telecommunications companies for which Redback obtained commitments to purchase Redback's SMS TM 1000 equipment, including Qwest's agreement to purchase $5 million of that equipment over three years. 77 44-48, 53,59, 125-27.

Redback (through Siara) issued a warrant for 100,000 Siara (Redback) shares to Qwest executives (through U.S. Telesource) in exchange for Qwest's commitment to buy $40 million of Redback's products over two years. 7 64. Thus, Redback secretlj gave Qwest executives $45 million in stock for $45 million in equipment purchases tc be made over two years. 7 65.

Redback (through Siara) issued a warrant to Broadband for 4,500 shares of Siara (worth $3 million) in exchange for Broadband's commitment to buy $40 million of Redback's products. 77 67-68,205-06.

Redback issued pre-IPO stock to UUNET in return for UUNET's commitment to buy $4-5 million in SMSTM10000 equipment. 77 45-47,77-78,82,89, 115-16. The FAC explains how each of these transaction and related sales and revenues violated GAAP. GAAP required that the terms of the stock and warrant grants be disclosed because they constituted a material event that would have a favorable impact on net sales and revenues, and because the resulting sales would not necessarily be indicative of actual demand for Redback's products or future operating results. 77 309-10, 317-44.39

39 Defendants erroneously argue that they adequately disclosed Redback's relationship with Broadband and Qwest. GI. Br. at 26-30. However, Defendants failed to disclose in the Company's 49 PLAmTrrrS' OMNIRUS BRIEF LN OPPOSITIONTO DEFENDllhnS' MOTIONS TO DISMISS TEEB?XST MmEDCONSOLIDATED COMPMLNT Cnw No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 27 of 73

Additionally, new allegations in the FAC explain that under GAAP, Redback was required tt account for stock or warrants issued to Qwest and other customers as sales incentives and reduce revenue concomitantly in the Company's operating statement at the time of the related sales. 7 327. Specifically, EITF 98, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services, and FAS 123, Accounting for Stock-Based Compensation, require that Redback should have accounted for the value of stock issued to Qwest and other customers as a sales incentive, reducing the revenue recorded ham the related equipment sales. 7 327. In failing to do so, Defendants caused Redback to materially overstate revenues from two separate $20 million sales of SmartEdgeTMequipment to Qwest in fourth quarter 2000 and frst quarter 2001 from sales to by a total of at least $16 million in violation of GAAP.~' 71190, 195,216,223,323-327,342. These sales were approved by Perusse, even though he knew tha the equipment was materially defective, because Qwest was obligated to purchase $40 million of the equipment before December 2001 under the Siara Warranty Agreement 764. The FAC also specifically alleges that "Redback had improperly recognized revenues from UUNET's long-returned SMSTM 10000 units in December 2000" and that Redback "continued to

proxy, or any other SEC filing, information that would put investors on notice of the improper accounting methods or quidpro quo nature of Redback's dealings with Broadband or Qwest. See Marksman Partners, 927 F. Supp. at 1307 (stating that disclosed information must "directly address the allegedly misleading information in the statements" and "noting that the purpose of a proxy statement issued to shareholders is 'to inform, not to challenge the reader's critical wits"') (citing and quoting Virginia Bancshares, Inc, v. Sandberg, 501 US. 1083, 1097 (1991)). 40 The Redback Defendants seek to impose on Plaintiffs a duty to interview accounting personnel of Redback to determine exactly how Redback booked its sales to Qwest before alleging that revenues were overstated. GI. Br. at 3 1. However, because of the material nature of the Qwest-generated revenues to Redhack's overall revenues, the Company publicly reported the amount of revenues it booked from the sales. The Redback Defendants cannot dispute that Redback itself reported $41 million in revenue from sales to Qwest in 2000, and approximately $41.5 million in revenues from sales to Qwest in 2001. 7 253. As described in the FAC, former senior officers of Redback reportel that these sales and revenues were generated in exchange for stock issued under undisclosed pre-IP( "friends and family" agreements and the Siara Warrant Agreement. See supra at III.A.3. (discussin, anonymous sources). Thus, Plaintiffs need not (and are not required to) access Redback's general ledger to allege with particularity that Redhack overstated revenues. The Redhack Defendants also ignore the significance of new allegations in the FAC describing the Siara Warrant Agreement and Company Registration Statements demonstrating that Redback issued undisclosed stock bribes to Qwest, Broadband, UUNET and Concentric. 77 44-68. These facts collectively provide a strong inference that Redback overstated its revenues.

50 PLUNTIFIS' OmUSBHlEF LN OPPOSITION TO DEPENDANTS' MOTIONS TO DlSMLSS THE FIRST AMENDED CONSOLIDATED COMP- Csae No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 28 of 73

engage in deceitful business practices to avoid having to write down the revenues as the Company should have when the product was not accepted." 1116. Specifically, the FAC alleges that UUNE agreed to use a credit for $2.9 million from the defective SMSTM10000 equipment that was returne to purchase SmartEdgeTMequipment that had not been tested and approved by UUNET and was incompatible with UUNET's network. 7 115. These new allegations give context to the materialit) of UUNET's subsequent agreement to purchase another Redback product, the SmartEdgeTM800

equipment (in exchange for further quidpro quo inducements, although this time in the form of employment for the UUNET purchasing director's son), to enable Redback to avoid debooking at least $2.9 million of revenue from the defective SMSTMequipment sale to UUNET in late 2000. 11115-16. As a result of these improper deals, Redback's fmancial statements were materially misstate throughout the Class Period. See, e.g., 77 144-48,207-14,251-58,279-81, 342-43. See Marksman Partners L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297, 1305 (C.D. Cal. 1996) (a company's overstatement of revenue in violation of GAAP "can constitute a false and misleading statement of material fact necessary to establish a Section 10(b) and Rule lob-5 violation."); Carley Capital

Group v. Deloitte & Touche, LLP, 27 F. Supp. 2d 1324, 1335 (N.D.Ga. 1998) (violations of GAAP "may constitute false or misleading statements of material fact in violation of Rule lob-5") (citation omitted). Indeed, the overall impression created by Defendants in the fmancial statements was not consistent with the business realities of the Company's true financial position and operations. 7 344 These detailed descriptions of the improper stock deals are more than sufficient and similar allegations have been repeatedly sustained on motions to dismiss. For example, in In re CBT Grouj PLCSec. Group Litig., No. 98-21014,2001 WL 1822729, at *6 (N.D. Cal. Dec. 28,2001), this Court upheld claims of accounting fraud where a single paragraph in a complaint identified numerous instances of improper revenue recognition, including false purchase orders, shipping products to the wrong customers and other means of falsely counting revenue, but did not allege the names of the customers, the dates or the amounts of the sales. The court held that requiring that

5 1 PLAZYTIFFS' OMNIBUS BKLEF ZN OPPOSITION TO DEFENDANTS' MOTIONS TO DISMISS TRE FIRST AMENDED CONSOLIDATED COMP- Cow NO.C 03-05642 JJF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 29 of 73 Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 30 of 73

4. Redback's Other Quid Pro Quo Transactions With Owest Fraudulently Inflated Revenue

Plaintiffs also adequately describe the accounting violations related to other quidpro quo agreements with Qwest in which Redback bought products or services in return for Qwest's commitments to buy Redback's products and services. The FAC alleges that in third quarter 2000, at Peruse's direction, Qwest agreed to purchase $20 million of Redback's new SMSTM 10000 equipment, even though Perusse knew that the product was not operational and Qwest had not testec it, in exchange for Redback's purchase of $18 million of ASP services from Qwest's affiliate, QCS. 77 75-77,172-3. Neither party had any need for the other's products and services (and Qwest even returned the equipment to Redback) (77 80, 86, 108, 173,177,332), but Redback paid $18 million tc Qwest so that the Company could improperly book and report $20 million in revenues during third quarter 2000 and meet Wall Street's revenue expectations for Redback and maintain its inflated stock price. 77 81, 88. Because Redback's total reported revenues in third quarter 2000 were approximately $80 million, Qwest's $20 million purchase was significant and material. 7 108. In a second quidpro quo transaction, in first quarter 2001, Perusse held Qwest's agreement to purchase $30 million worth of SmartEdgeTM800 equipment (under the Siara Warrant deal) "hostage," and demanded that Redback purchase a worthless IRU from Qwest for $7 million before he would issue a purchase order for the equipment. 7 102. Redback had no need and would never have any need for the IRU, but Ragavan, Khosla and Wolf authorized the IRU purchase from Qwest to maintain the Company's reported revenues and inflated stock price. 77 102-104. In exchange,

accountants the responsibility that belongs to the courts. It would also allow officers and directors o corporations to exercise an unwarranted degree of control over whether they are sued, because they must agree to a restatement of the financial statements."); Feiner v. SS & C Tech., 11 F. Supp. 2d 204,209 (D. Conn. 1998) ("[Tlhe fact that [the company] has not elected to restate or reverse its earnings or revenue figures . . . does not indicate, much less prove, the accuracy of those figures."); ln re Williams, 339 F. Supp. 2d at 1222 (finding lack of restatement did not render statements not actionable, noting that because the company filed for bankruptcy, its financial results were not subject to additional audits which may have mandated a restatement); see also Daou, 2005 WL 1431833, at "1 1 ("plaintiffs adequately pled fraud as to defendants' alleged misuse of the GAAP protocols"); Oracle, 380 F.3d at 1233, (reversing district court's holding that Plaintiffs had not pleac that revenue was improperly recognized and that there was no strong inference that defendants hem of alleged accounting improprieties).

53 PWlNTr*.FS' OMNIBUS BRIEF LN OPPOSmION TO DEFENDANTS' MDTK!NS TO DISMISS TIlE FLRST MNDEDCONSOLIDATED COMTLAMT CIJ~No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 31 of 73

Qwest purchased over $25 million of SmartEdgeTM800 equipment from Redback in first quarter 2001, which generated 28% of Redhack's total revenue that quarter. 7 108,223, 332. The FAC explains how these quidpro quo transactions were not recorded in accordance wit GAAP. f7 177,224. Under EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (including the codification of EITF 00-14, Accounting for Certain Sales Incentives), the $18 million ASP services and $7 million IRU that Redback purchased from Qwest should have beel recorded as a reduction of revenue in the operating statement at the time of the related Qwest sales. 7 335-36. In violation of CON 5, Recognition and Measurement in Financial Statements of Busine: Enterprises, Defendants structured these quidpro quo transactions in a manner that presented more

favorable operating results than actually existed. f 334. Also under CON 5, Defendants failed to record the transactions in Redback's financial statements based on their true economic substance an overstated revenue by $18 million in third quarter 2000 and $7 million in first quarter 2001, which rendered the Company's financial statements materially false and misleading. f7 210, 335. See Marksman Partners, 927 F. Supp. at 1305 (a company's overstatement of revenue in violation of GAAF' "can constitute a false and misleading statement of material fact").

5. The Redback Defendants' Deliberate Sales of Defective Products Overstated Redback's Revenues

The Redhack Defendants also violated GAAP because (as they knew) Redback shipped non operational SMSTM10000 equipment to Qwest and UUNET to create the false impression of legitimate orders and to generate revenue to prop up Redback's stock price. 77 83-84, 87,191. Under CON 5, Recognition andMeasurement in Financial Statements of Business Enterprises, the Redhack Defendants should not have recorded any revenue from the SMSTM 10000 sales because tf equipment was not operational and therefore could not have substantially satisfied the terms of any agreement with Qwest or UUNET. 7 337. The FAC states new facts which allege that both Qwest and UUNET accepted incomplete, non-working STSTM 10000 units, and then returned them to Redback after Redback had improperly booked approximately $20 million from the sale to Qwest

54 PLAEVnFFS' OMNIBUS BRIEF 3N OPWSITIONTO DEFENDANTS' MOTIONS TO DISMLSSSSTH &PUlSTMENDEDCONSOLLDATED COMPLAINT Caw No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 32 of 73

and $4-$5 million from the sale to UNET. 77 89,99, 107, 173, 177, 185,374, 429.44 Because these transactions had no business purpose, other than to inflate fraudulently Redback's revenues to meet Wall Street expectations, Defendants deliberately and improperly booked at least $24 million in revenue in third and fourth quarter of 2000 from the SMSTM10000 equipment sales to Qwest and UUNET in violation of GAAP. 77 88, 185,287,337-38. As a result, Redback's financial statement were materially false and misleading. 77 175-77, 180-81,223-26. See Daou, 2005 WL 1431833, at *6-7 (financial statements were misleading because revenue was being recognized before it was

earned in violation of GAAP). See also In re Lucent Tech., Inc. Sec. Litig., 217 F. Supp. 2d 529, 538-39,553 (D.N.J. 2002) (Faced with declining product demand, Lucent shipped faulty products to inflate reported sales and improperly booked revenue from sales to meet earnings expectations in violation of Section lO(b)). For each of the foregoing transactions described in the FAC, Plaintiffs have alleged specific facts to support their claim that Redback failed to follow proper accounting and failed to present financial statements that fairly presented Redback's financial positions and results of operations as required by APB 22, Disclosure ofAccounting Policies. 7 339. See Cherednichenko v. Quarterdecl; Corp., Civ. No. 97-4320 (GHK), 1997 WL 809750, at *2 (C.D. Cal. Nov 26, 1997) ("it is sufficient if the complaint identifies the who, what, when, where, and how that suggest fraud"). Also, for each alleged improper transaction, the FAC sufficiently states the amount by which revenue was overstated, the dates of the related transactions and the identities of Redback's customers and certair executives involved in the transactions. See Daou, 2005 WL 1431833, at *8; McKesson, 126 F. Supp. 2d at 1273 (the complaint provides all the information required by Greebel as it reveals

44 The Redback Defendants claim that Qwest's plans for the non-operational SMSTM10000 equipment were not relevant, and that no matter what Qwest did with the equipment, the $20 million revenue resulting from the sale was "earned." GI. Br. at 23. Defendants are wrong. Under GAAP, in addition to being exchanged for cash, goods must be made ready for use and delivered before revenue can be recognized. See SAB 101, Revenue Recognition in Financial Statements. 77 337-38 Booking revenue (to meet analysts' revenue expectations) from the shipment of non-working equipment that Qwest returned to Redback elevated form over substance and failed to represent the true economic substance of the transaction and the business realities of the Company's financial position and operations, in violation of GAAP and SEC regulations. 77 313,315, 334,340. See Daou, 2005 WL 143 1833, at 8 ("financial reporting should be reliable in that it represents what it purports to represent") (quoting FASB Statements of Concepts No. 2).

55 PLAW~IF~'OMNIBUSBRLEFM OPPOSITIONTO DEFENDANWMO~ONSTO DISMSS~EFETMIENDED CONSOUDATEDCOMP~T CBs No. C 03-056D JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 33 of 73

substantial evidence that "revenue inflation exceeded 25% in some quarters" and was widespread and "details numerous individual transactions" involving a "variety of customers" and several executives of defendant); Cooper v. Pickett, 137 F.3d 616, 627 (9" Cir. 1997) (the complaint adequately identifies the inflated revenues by specific amounts and "points to specific quarters and specific customers, and provides dollar figures for each quarter."). 6. Redback's Overstated Revenues and Earnings Were Material The FAC demonstrates that the improper accounting was material to Redhack's financial statements. The FAC states that, without properly accounting for the stock incentives provided to Qwest executives, Defendants caused Redback to book $25 million in revenue from the SmartEdgeTM800 equipment sale to Qwest in first quarter 2001, which was 28% of Redback's total revenue for that quarter. 77 106,108. The $20 million sale to Qwest in fourth quarter 2000 constituted 18% of Redback's revenue that quarter. 7108. The $40 million agreements with each of Qwest and Broadband were significant and material to Redback's business because the Company had reported revenues of only $9.8 million for 1998, and $64 million for all of 1999. 77 145-46, 324,344. The continuous nature of the fraud from at least 1999 to 2001 further demonstrates that the Defendants' accounting fraud caused "widespread and significant inflation of revenue." See McKesson, 126 F. Supp. 2d at 1273. See also Daou, 2005 WL 1431833, at *9 ("Certainly, prematurely recognizing millions of dollars in revenue is not minor or technical in nature."); Carley Capital, 27 F. Supp. 2d at 1336 (alleged false misrepresentations in connection with earnings report: are "clearly not so unimportant that reasonable minds could not differ as to their materiality. . . . Whether earnings are increasing or decreasing is highly material to investors."). As a result of Defendants' accounting fraud from reported sales to Qwest alone, Redback's financial statements materially overstated revenue by approximately $20 million (24%) in third quarter 2000, $8 million (7%) in forth quarter 2000 and $1 5 million (16%) in first quarter 2001.~' 77 108, 342.

45 The $16 million in unreported stock incentives generated approximately $40 million in revenues, $20 million in each of fourth quarter 2000 and first quarter 2001, and therefore Plaintiffs have alleged that revenues were overstated by $8 million in each quarter. In addition, Plaintiffs allege tha Redback overstated revenues by $7 million in first quarter 2001 by failing to account properly for the worthless IRU that it brought from Qwest. Redback also improperly hooked approximately $20 56 FLAIN'nWS' OMNlBUS B-F EV OPPOSlTlON TO DEFENDANTS' MOTIONS TO DISMISS Tlie FLRSTMENDED CONSOLmATED COMPLAINT CmNo.C 03-05642 .IT Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 34 of 73

Indeed, the FAC provides strong support for the inference that Redback round-tripped at lea: $41 million to Qwest in stock and quidpro quo purchases to create $65 million of reported revenue during the nine-month period from July 1,2000 to March 3 1,2001. 7 333. See In re Homestore.com, 252 F. Supp. 2d 1018 @Iomestore's "revenue sharing agreement" may be "valid on its own, but set the stage for allegedly illegal transactions" when Homestore created "revenue" in order to meet the revenue targets, resulting in an inflated stockprice."); see also Parmalat, 2005 WL 1653638, at * 10-19 (Financial institutions participated in factoring and securitization transactions which on their own appeared valid, but in reality were sham transactions). Defendants were in essence fraudulently "purchasing" Redback's revenue through transactions with Qwest and others that were material under SAB 99, Materiality, because they inflated Redback's revenue, earnings and stock price and enabled the Company to meet Wall Street analysts' expectations. 7 339. Undoubtedly, the FAC more than adequately pleads facts demonstrating that Defendants' overstatements of revenue were material in light of the Company's total revenue, operations and overall financial position. 77 342-44. See Marksman Partners, 927 F. Supp. at 1306 ("Given that the purpose behind such accounting rules is to protect investors by giving them a clear and accurate picture of the position and performance of the business, the notion that the reasonable investor woul~ find Defendants' alleged overstatements of revenues to be 'material' information has intuitive force.") (internal quotation and citations omitted).

F. Plaintiffs Have Alleged New Facts That Support A Strong Inference Of The Scienter of Each of the Defendants

The Defendants claim that the FAC does not allege their scienter with sufficient particularity In doing so, the Defendants misstate the standard for pleading scienter and ignore the bulk of Plaintiffs' factual allegations, addressing only certain of the new facts alleged in the FAC.

million in third quarter 2000 from defective SMSTM10000 units. Plaintiffs allege that these same revenues also were overstated because the quidpro quo $1 8 million purchases were not properly booked to reduce the revenues. Plaintiffs have not "double dipped" and allege only that revenues were overstated by at least $18 million and more likely by $20 million in third quarter 2000. In addition, the defective SMSTM 10000 equipment sale to UUNET in fourth quarter 2000 overstated revenues by $4-5 million. In total, the Redback Defendants caused Redhack to overstate revenues by at least $47 million from third quarter 2000 to first quarter 2001. Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 35 of 73

First, the Court "must determine whether particular facts in the complaint, taken as a whole, raise a strong inference that defendants intentionally or [with] deliberate recklessness made false or misleading statements to investors." In re Read-Rite Corp, 335 F.3d 843, 846 (9" Cir. 2003)(emphasis added); see also America West, 320 F.3d at 932 (the Court must consider all the facts in the complaint to determine whether the "total of plaintiffs' allegations, even though individually lacking, are sufficient to create a strong inference that defendants acted with deliberate or conscious reck~essness");~~Oracle Corp., 380 F.3d at 1226.~~ The Redback Defendants contend that Plaintiffs must meet an even higher standard, by essentially provingtheir case in the FAC and showing that the inference of Defendants' scienter is "the most plausible of competing inferences" which can be drawn from the factual allegations. RD Br. at 4 (citing Gompper v. VISX Inc., 298 F.3d 893, 897 (9th Cir. 2002)). However, the Ninth Circuit in Gompper did not adopt the "most plausible" standard, as that quoted language is merely contained in a parenthetical for a Sixth Circuit case. Gompper, 298 F.3d at 897 (citing Helwig v. Vencor, Inc., 251 F.3d 540, 553 (6th Cir. 2001)). As explained in In re Commtouch Sofhyare, 2002 WL3 1417998, at "3, "[rlequiring plaintiff to plead facts conducive to a strong inference of fraud does not impose upon it a duty to negate every last non-fraudulent possibility, no matter how speculative." (emphasis in original). The Redback Defendants misrepresent the ruling in Gompper a second time when claiming that to have scienter, a defendant must know his omission presents "the danger of misleading buyers." RD Br. at 4 (quoting City ofPhiladelphia v. Fleming Cos., 264 F.3d 1245, 1260 (10th Cir.

46 The Ninth Circuit in America West reversed the district court's dismissal of plaintiffs' claims for failure to adequately allege scienter, stating that "the District Court failed to accept Plaintiffs' allegations as true and construe them in the light most favorable to Plaintiffs" as the court must "examine all the circumstances in determining whether a strong inference of scienter has been raised." Id. at 935, 937. 47 The Redback Defendants suggest that omissions cannot form the basis of a claim under Rule 10b- 5. RD Br. at 4 (quoting Brody, 228 F.3d at 1006 for the proposition that "[a]llegations that a defendant knew certain information was not disclosed can support only an inference that the defendant knew a statement was incomplete[,]" which is "not sufficient to state a claim under Rule lob-5.")). What Brody actually said with respect to omissions was: "[tlo survive a motion to dismiss under the [PSLRA], the plaintiffs' complaint must specify the reason or reasons why the statements . . . were misleading or untrue, not simply why the statements were incomplete." Brody, 280 F.3d at 1006 (citing 15 U.S.C. 5 78u-4@)(1)). As demonstrated above, Plaintiffs have demonstrated why the Defendants' statements were false and misleading.

58 PLATNT~FS'OMNIBUS BRIEX M OPPOSITION m DEFENDANTS' MOTIONS TO DISMISS m m MENDED CONSOL~ATEDCOMTLII~ Case No. C 03-05641 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 36 of 73

2001)). The Redback Defendants claim that Cily of Philadelphia was "cited with approval by the Ninth Circuit in Gompper," but Gompper cited City of Philadelphia (in a parenthetical) only for the proposition that "evidence in [a] complaint must lead to the conclusion that [the] company and [its] officers must have known that litigation against it would be meritorious in the end." Gommper, 29t F.3d at 896. 48 in other words, they must have known their statements were false. As shown below, and as alleged in the FAC, the Redback Defendants and PwC had knowledge of certain fact: that were obviously material and which they knew should have been disclosed in order to render other disclosures not misleading.49 Their knowledge of the falsity is sufficient to establish scienter See Cox v. Viacom Int'l, Inc., No. 02-01598 (KI), 2004 WL 1763906, at *601 (9th Cir. 2004) "Detailed allegations of actual knowledge are sufficient to plead scienter.") (internal citations omitted). In re Silicon Graphics Sec. Litig., 183 F.3d at 976-77 (scienter can be alleged and proven with direct or circumstantial evidence); Adaptive Broadband, 2002 WL 989478, at * 10 (same); In r, PeopleSofl, Inc. See. Litig., No. 99-00472,2000 WL 1737936, at *3 (N.D. Cal. May 25,2000) ("Scienter may be proven and pled by reference to circumstantial evidence, for it is rare that the perpetrators of a fraud would confess outright.").

1. Plaintiffs Allege New Facts Which, In Addition To Other Facts, Support A Strong Inference Of Scienter Of Each Of The Redback Defendants The Redback Defendants argue that "the fundamental flaw in Plaintiffs' scienter allegations is that "Plaintiffs do not plead a factual basis" for their "assumptions . . . that the alleged related transactions with Qwest and other customers were inherently wrongful." RD Br. at 8. As demonstrated above, Plaintiffs do, indeed, allege and explain why the transactions were fraudulent

48 In Pirraglia v. Novell, Inc., 339 F.3d 1182, 1187-88 (lothCir. 2003), a Tenth Circuit case decidec after Gompper, the court analyzed Gompper and ultimately held that "[ilf a plaintiff pleads facts with particularity that, in the overall context of the pleadings, includingpotentially negative inferences, give rise to a strong inference of scienter, the scienter requirement of the Reform Act is satisfied." (emphasis added). 49 "Detailed allegations of actual knowledge are sufficient to plead scienter." Cox v. Viacom Intal, Inc., No. 02-01598 (KI),2004 WL 1763906, at *601 (9th Cir. 2004) (internal citations omitted). Those allegations can be by direct or circumstantial evidence. In re Silicon Graphics Sec. Litig., 18 F.3d at 976-77; Adaptive Broadband, 2002 WL 989478, at *lo; In re Peoplesoft, Inc. Sec. Litig., No. 99-00472,2000 WL 1737936, at *3 (N.D. Cal. May 25,2000) ("Scienter may be proven and pled by reference to circumstantial evidence, for it is rare that the perpetrators of a fraud would confess outright.").

59 PmLFrS' OMNIBUS BRLEFLN OPPOSITIONTO DEFENDAMS'MOTIONSTO DISMISSTEE EBXT AMENDED CONSOLUIATED COMPLAINT Csat No. C 03-05641 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 37 of 73

and how the transactions (and the revenues therefrom) were improperly recorded in violation of GAAP and the witnesses who provided the information are described with particularity sufficient to show that these sources were in positions to know that information. Furthermore, Plaintiffs have alleged the falsity of the Defendants' statement^.^' Additionally, throughout the FAC, as to each of the Redback Defendants, Plaintiffs allege facts supporting a strong inference of their scienter. For the most part, the Redback Defendants fail to address these particularized allegations, and instead cheny-pick summaries of the new factual allegations and resort to sweeping arguments that Plaintiffs' allegations are "conclusory" or are not sufficiently supported by references to "documents, meetings or other factual circumstances." See, e.g., RD Br. at 5. This approach must fail. Plaintiffs have properly alleged the scienter of each of the Redback Defendants, through new factual allegations, as well as factual allegations alleged before (and realleged here). As discussed throughout this brief, these allegations include: (I) detailed allegations about the improper deals; (2) the Redback Defendants' signatures on statements they knew were materially false and misleading; (3) material GAAP violations; (4) insider trading; (5) the participation by high-level Redback directors and officers in the fraud; (6) the Redback Defendants' position and involvement; (7) Defendants that are on both sides of a transaction; (8) Qwest's materiality to Redback's "bottom line," (9) SEC investigations; (1 0) the Redback Defendants' compensation; and (I 1) the use of Redback's stock for acquisitions. Plaintiffs originally alleged that Kruep negotiated the terms of the deal in which Siara Warrants were transferred to Qwest for Qwest's agreement to buy $40 million of products from Redback (as Siara's successor). Based upon new information, Plaintiffs now allege that, in addition to Kruep's role in this deal (7 71), Ragavan and Khosla caused the issuance of the Siara Warrant and Ragavan signed it. 77 64-66. Thus, Kruep, Ragavan and Khosla all had actual knowledge of this aspect of the fraudulent scheme.

"Falsity and scienter in private securities fraud cases are generally strongly inferred from the samc set of facts." Daou, 397 F.3d at 712 (internal citation omitted); Read-Rite, 335 F.3d at 846 ("falsity and scienter are generally inferred from the same set of facts"); In re Vantive Corp. Sec. Litig.,283 F.3d 1079, 1091 (same); Ronconi v. Larkin, 253 F.3d 423,429 (same).

60 PLAMTIFW' OMNIBUS BRIEF M OPFOSmION TO DEIICNDANTS' MOnONS TO DISMISS TEE FIRST AMENDED CONSOLIDATED COMPLAINT CsreNo. C 03-05642 JZ Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 38 of 73

As originally alleged, Kruep (and others at Redback) agreed to purchase services from QCS to obtain Qwest's agreement to purchase the SMSTM10000 product. Plaintiffs now allege (with, as with all of their new allegations, substantial support from witnesses in positions to provide this information) that Ragavan and Khosla approved this deal as well as the ASP deal. 77 81,363-64. Likewise, while Plaintiffs originally alleged that Wolf (as Redback's CEO) authorized the purchase of a $7 million IRU from Qwest that Redback did not want or need (in order to obtain Qwest's commitment to purchase $30 million of Redback's products), Plaintiffs now allege, based on new sources and information, that Ragavan and Khosla were also involved in this deal, and authorized it because Redback needed the revenues to meet targets set by the Company and Wall Street. 77 104- 105. Plaintiffs also newly allege that Lamond knew about and discussed the true nature of the IRU sale (7 352), and that Barsema, Garg and Kruep knew about and pressured sales personnel to obtain the Qwest orders under the undisclosed quidpro quo stock deals. 7 58. As explained above, Qwest was Redback's largest source of revenue. "[Tlhe fact that a particular matter constitutes a significant source of income to a company can establish a strong inference that the company and its relevant officers knew of easily discoverable additional facts that directly affected that source of income." Epstein v. Itron, Inc., 993 F. Supp. 13 14, 1325-1326 (D. Wash. 1998), abrogated on other grounds; In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970,97~ (9th Cir. 1999) (citing Cosmas v. Hassen, 886 F.2d 8, 10 (2d Cir. 1989)). Facts that are critical to ar important transaction "generally are so apparent that their knowledge may be attributed to the company and its key officers." Id. As further explained in In re Northpoint Communication Group,

Inc., Sec. Litig. & Consol. Cases, 221 F. Supp. 2d 1090,1104 (N.D. Cal. 2002), "upon the laying of a proper factual foundation that information was known within a corporation, it may be inferred that facts critical to a business's core operations or an important transaction are known to a company's responsible officers." (internal citation omitted). Under this theory, all of the Redback Defendants are imputed with knowledge of the details of contracts with Qwest (including the Siara Warrant

Agreement) - Redback's largest customer during most of the Class Period. Plaintiffs have alleged that each of the Redback Defendants was aware of product defects primarily through meetings where those defects and resulting delays were discussed. See 795. 61 PLAIN1 IQIW OMNlUUS BREP tN OPPOSITION TO DEFENDMS' MOTIONS TO DISMISS TELE FIRST AMENDED CONSOLIDATED COMPLAINT Caw No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 39 of 73

Wuep told entire Board that the SmartEdge would be delayed); 77 78,84, 164, 179,228 (meetings regarding the SMSTM10000 operational problems). The Redback Defendants argue that Plaintiffs failed to allege "when these purported meetings occurred, who attended the meetings or what was said at the meetings." RD Br. at 8. Perhaps they should read a little more closely: the Redback Defendants, Pate1 and senior executives and sales managers (who), attended weekly (when) meeting and discussed, inter alia, reports by Patel on problems with Redback's products (what).51 See 7 78 magavan, Kruep, Barsema and Gentner attended), 7 84 (Ragavan, Lamond, DeNuccio, Gentner, Wolf and Kruep attended), 1387 (Garg attended). The Redback Defendants claim that the Plaintiffs' allegations regarding these weekly executive meetings are not credible because "the Class Period here covers more than three-and-a ha1 years;" Patel did not work at the Company throughout the Class Period; and during that time "Redback had three different CEOs, three different CFOs and many different executives and directors." RD Br. at 8-9. The Redback Defendants conveniently ignore that every one of their tenures at Redback overlapped with Patel. W 12-24, 34. Patel was at Redback from March 2000 to January 2003 (7 34), and the Redback Defendants' tenures were as follows: DeNuccio: August 2001 through at least the end of the class period (October 10,2003) (712); Lamond: 1996 - May 2003 (1 13); Cronan: April 2001 through at least the end of the class period (1 14); Khosla: 2000 - May 2003 (7 15); Wolf: January 2001 - January 2003 (7 16); Ragavan: March 2000 - May 2001 (117); Barsema: 1997 - May 2001 (7 18); Garg: 1996 through at least the end of the class period (719); Kurtz: October 1999 through at least the end of the class period (7 20); Gentner: 1999 - January 2001 (7 21); Haque: March 2000 through at least the end of the class period (7 22); and Kruep: 1997 - February 2001 (7 23). Thus, Patel discussed the product development problems at the weekly meetings during times when every one of the Redback Defendants was at ~edback.~'

51 The Redback Defendants' claim that Plaintiffs' sources did not attend these meetings (RD Br. at 9) is wrong: the VP NA Sales attended the weekly executive meetings, as did the Sales VP. 11 78 ("weekly executive meetings attended by . . . the VP NA Sales."); 7 84 (weekly executive meetings were attended by, inter alia, the VP NA Sales and the Sales VP); 77 179, 352 (VP NA Sales spoke tc the Redback Defendants at the weekly executive meetings). 52 Furthermore, the confidential sources who told Plaintiffs what was said at the meetings and who attended them were also at Redback during each of the Redback Defendants' tenure. Redback Sales and Marketing Manager: 1997-2001 (7 45); Redback Sales Director: December 1999 - March 200; 62 PLAWI'IIWS' OMNIBUS BmFM OPPOSITXON 1U DEIENDAWS' MOTIONS TO DISMISS THE FIRST AMENDED CONSOLIDATED COMPLAlHr Care Na C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 40 of 73

Ragavan, Lamond, DeNuccio, Gentner, Wolf, Barsema, Garg and Kruep knew that the SMSTM10000 was non-operational. See 7 78 (Kruep, Ragavan, Barsema and Gentner); 7 84 (Lamond, Wolf and DeNuccio). As newly alleged, all of the Redback Defendants knew (because Kruep told them) that the SmartEdgeTMproduct was experiencing significant delays and would caus Redback to miss its 2001 revenue targets. 7 95. This means that (as newly alleged): Barsema kneu his statements regarding "first production shipments" were false (7 158); Lamond knew that current business and product schedules were not "on track" (7 227); Wolf knew that revenue was improperl: reported for sales of the SMSTM10000 (7 265); Wolf knew customers were returning equipment (77 115-16); DeNuccio knew the SmartEdgeTMrouter was not in trials with 10 customers (7 161); and all of the Redback Defendants knew Redback's revenue projections were materially false and misleading (see, e.g., 77 74, 78, 81, 83-85, 88, 173, 179, 197,248,271,363). Thus, the Redback Defendants knew that products they told the world were going to be ready in late 2000 or early 2001 would not be ready until at least the fourth quarter of 2001 (77 77-78, 84, 95-96, 164, 179,228, 387: 398); and in spite of this knowledge, they published revenue forecasts based on projected sales of these products (77 96, 165, 175-79, 197,218,228,243,366,377, 388,401). The GAAP violations alleged in the FAC provide further support for a strong inference of ~cienter.~~As required, Plaintiffs set forth specific amounts by which revenue was knowingly overstated, the dates of the transactions, the products, customers and specific officers involved.

7740-1 16, 342.54 See In re SmavTalk Telesewices, Inc. See. Litig., 124 F. Supp. 2d 527, 539 (S.D. Ohio 2000) ("Although allegations of accounting errors in violation of GAAP are, by themselves, insufficient to establish scienter. . . such violations are relevant when combined with allegations to show that Defendants knew or could have known of the errors") (internal citation omitted);

(7 45); LJUNET Account Manager 1999 -August 2001 (7 46); Redback Sales Manager: February 2000 -July 2002 (7 53); Redback Sales W: August 1999 March 2002 (7 57); VP NA Sales: August 1999 -March 2002 (7 57); Sales Engineer: 2000 - 2002 (7 82). 53 The GAAP violations are more fully discussed supra in Section 111. E.

54 The Redback Defendants cannot rely on PwC's clean audit opinions to shield them from liability because "in determining whether there is scienter, there is no hard and fast rule that there can be no scienter where there has been a clean audit." In re Ramp Networks Inc., See. Litig., 201 F. Supp. 2d 1051, 1074 n.6 (N.D. Cal. 2002)

63 PLAINTLFFS' OMNIBUS BRIEF IN 0PPOS"'ION TO DEFENDANTS' MOTlONS TO DISMSS PI&EmST AMENDED CONSOLIDATED COMPLAN Care No. C03-05642 JX Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 41 of 73

Adaptive Broadband, 2002 WL 989478 at *39 ("GAAP violations are particularly credible evidenc~ where a plaintiff provides specific amounts by which revenue was overstated, dates of transactions andlor the identities of customers or company employees involved"); McKesson, 126 F. Supp. 2d a1 1273 ("[wlhen significant GAAP violations are described with particularity in the complaint, they may provide powerful indirect evidence of scienter."); In re Nuko Info. Sys. See. Litig., 199 F.R.D. 338,344 (N.D. Cal. 2000) ("The facts supporting these alleged GAAP violations, in conjunction with [improper revenue recognition and other practices and facts demonstrating the defendant's motive and opportunity], give rise to a strong inference that Defendants acted with deliberate reck~essness.").~~

Insider trading can also support a strong inference of scienter. See America West, 320 F.3d : 938 ("~]nusualor suspicious stock sales by corporate insiders may constitute circumstantial

evidence of scienter. . . ."). The inference may be drawn from both the amount of the stock sales an their timing. See Oracle, 380 F.3d at 1232 (where insiders' trade results in an astronomical figure ($900 million) the trades give rise to a strong inference of scienter); In re Terayon, 2002 WL 989480, at *12 (stating that while the plaintiffs did "not include allegations regarding defendants' prior trading history, the timing of defendant's sales . . . reasonably confirms other direct evidence .. . supporting a strong inference of scienter."). Here, both the timing and the huge amount of the Redback Defendants' stock sales and distributions are suspicious. As discussed in further detail below, Barsema, DeNuccio, Garg, Gentner, Kruep, Kurtz, Lamond and Ragavan (the "Trading Defendants") all traded stock while in possession of insider

55 The extent of the accounting errors and improprieties, which are alleged in the FAC in greater amounts and covering more transactions than alleged in prior complaints) is further evidence from which scienter may be inferred. See In re Network Assocs. Sec. Litig., No. C 99-01729WHA, 2000 WL 33376577, at *9 (N.D. Cal. Sept. 5,2000); PR Diamonds Inc. v. Chandler, 364 F.3d 671,684 (6th Cir. 2004) (pervasive and egregious accounting errors have been found by courts to support a strong inference of scienter); Rolhman v. Gregor, 220 F.3d 81,92 (2d Cir. 2000) (agreeing that the magnitude of write-offs involved "renders less credible" defendants' argument that they acted without scienter); In re Ancor Communications, Inc., 22 F. Supp. 2d 999, 1005 @. Minn. 1998) (finding support for a strong inference of conscious behavior from a company's substantial overstatements of revenues); Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297 13 13-14 (C.D. Cal. 1996) ("A violation of [GAAP] may be used to show that a company overstated its income, which may be used to show the scienter .. ."). Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 42 of 73

inf~rmation?~In total, the Trading ~efendants'~dumped over $467 million of their personal

holdings. While the Court found that Plaintiffs' allegations in their prior complaint regarding insid~ stock sales were insufficient for failure to explain why certain Redback Defendants did not sell thei stock during the Class Period (Order at 1I), Plaintiffs now provide such explanation: as newly alleged, the only Redback Defendants who did not trade (Wolf and Cronan) could not trade because of contractual and legal restrictions. 7 404 (Wolf); 7 14 (Cronan). Kruep (and by implication other would have sold more but for the fact that he was contractually or legally prohibited from doing so.

The Redback Defendants argue that Plaintiffs fail to show that the trading was "'dramaticall out of line with prior trading practices."' RD Br. at 10 (quoting In re Silicon Graphics, 183 F.3d at 986). The court in Silicon Graphics stated that "[wlhen evaluating stock sales, we have held that th proportion of shares actually sold by an insider to the volume of shares he could have sold is probative of whether the sale was unusual or suspicious." In re Silicon Graphics, 183 F.3d at 986. Here Plaintiffs have provided this information which shows that the trading (and timing) (7 41 1) wa suspicious: DeNuccio, Barsema, Garg, Kruep and Wolf would have sold more but for the fact that their options were "out of the money" (11 371, DeNuccio; 7 385, Barsema; 1388, Garg; 1400, Kruep; and 7 404, Wolf); Kurtz and Gentner's options were "under water" (W 394,396); Garg sold 12% of his holdings in 2000 and 34% in 2001 (7 388); Kurtz sold 70% of his holdings in 2000 (7 394); and Kruep sold 16% in 2000 (7 401); see also 7 97 (board members and others sold their stocl in August-October 2000, while knowing revenue targets would next be met)?* Plaintiffs' insider

56 AS previously alleged, Khosla, Haque and Lamond (the Venture Capital Defendants) caused their venture capital firms to distribute 4 million shares worth $1.7 billion to themselves and their ventur4 capital partners. 1403. 57 The Tradmg Defendants sold, gifted, distributed or exercised the following shares: Barsema - 966,500 shares for $127.2 million; Ragavan - 1,913,655 shares for $37.39 million; Garg-2,206,53 shares for $42.98 million; Kruep - 114,600 shares for $25.99 million; Kurtz - 35,000 shares for $4.57 million; Gentner- 120,000 shares for $15.67 million; Lamond - 1,504,112 shares for $213.7' million; and DeNuccio - 500,000 shares for $150,000. 7409. 58 Because Redback was a start-up company in 1999, there is limited trading history before the Clas Period (beginning April 2000), and so the failure to compare the Redback Defendants' stock sales tc prior periods is unavoidable, and not detrimental to Plaintiffs' case. In re FVC.com Inc., No. 00- 15555,32 Fed. Appx. 338,342 (9th Cir. July 11,2001) ("an. . . absence of trading history does not make sales suspicious").

65 FLATNTIFFS' OMNIBUS BRLEF OPPOSITION TO DEFENDANTS' MOTlONS TO DISMISS TEE FIRST AMEM)ED CONSOLIDATED COMP-Y Case No. C (U-05642 JT Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 43 of 73

trading allegations clearly support a strong inference of scienter. See in re Terayon, 2002 WL 989480, *12 ("By analyzing the insider selling allegations in isolation, defendants ignore the fact that plaintiffs do not seek to sustain scienter on insider trading alone but as one component in combination with other factors . . . . While the FAC does not include allegations regarding defendants' prior trading history, the timing of defendants' sales . . . reasonably confms other direc evidence . . . supporting a strong inference of scienter") (internal quotations omitted). As the Redback Defendants point out in their brief, motives also strongly support an inference of scienter. RD Br. at 9-10. As stated in the FAC, the Redback Defendants' motives to make materially false and misleading statements included: personally profiting from their insider sales;59increasing Redback's share price to finance further acqui~itions;6~ensuring the success of the 1~0;~'and having the venture capital partnerships to which certain of the Redback Defendants belonged profit from the stock sales. (7 403). Other facts supporting a strong inference of scienter include the following: the Redback Defendants' prominent positions at Redback and concomitant re~~onsibilities;6~the fact that some Defendants were on both sides of the transactions in the U.S. government's indictment of Weisberg based, in part, on an investigation into transactions

59 1409. As discussed above, insider trading can support a strong inference of scienter as well as provide a motive. 60 77 63,91, 112, 186. Like other start-up companies in the high-tech sector, Redback was not profitable and depended on revenue growth to give value to its stock price. See, e.g., 7 72 ("Reporting revenue growth was critical to maintaining and increasing Redback's stock price."); 7 190 (net loss for fiscal 2000 was $1.0 billion or $(8.68) per share compared to net loss of $7.9 million or $(0.15) per share for the prior year). Consistently meeting Wall Street analysts' expectations for revenue and earnings also was essential to Defendants' scheme to drive up Redback's stock price. 77 178, 192. Redback also relied on the purported value of its stock to acquire companies with burgeoning technology to fuel the Company's growth and establish its placc as a real player in the industry. 77 63,91, 112, 186. Therefore, Defendants had strong incentives to overstate Redback's reported revenues. In re Terayon, 2002 WL 989480, *10 ("Courts have recognized the powerful motive to distort a company's stock price when the stock will be used to acquire another company") (citations omitted). 61 17 57,61, 142. In re American BankNote Holographics See. Litig., 93 F. Supp. 2d 424,445 (S.D.N.Y. 2000) (finding misleading statements that allowed the Defendant to borrow cash for an IPO were actionable). 62 W 12-23, 88. Oracle, 380 F.3d 1226, 1234 (allowing allegations of involvement in operations to support a strong inference of scienter). 63 Khosla was on the boards of Siara, Concentric, Qwest, and bad family connections to Abatis. 1/11 15,48,70. Ragavan was on Siara's Board. 764.

66 PLAEYTWFS' OMNLBUS BmFIN OPPOSITION TO DEFWANTS' MOTlONS TO DISMISS --T MNDEDCONSOLIDATED COMPWNT Cnaa No. C 03.05642 .IF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 44 of 73

between Qwest and ~edback;~~the compensation packages of the Redback ~efendants;~~and the materiality of the sales to ~west.6~See Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1106 (10~ Cir. 2003) (where one high level officer knows of falsehoods in financials, it is less likely that others can be ignorant of that fact). All of these facts, taken together, support a strong inference of scienter of each of the Redback Defendants. In re Southern Pacific Funding Corp. Sec. Litig., 83 F. Supp. 2d 1172, 1177 (D. Or. 1999) ("materiality and factual context are critical factors in examining the adequacy of pleading scienter"). Thus, Plaintiffs have not relied merely upon the Redhack Defendants' "positions" at the Company. Moreover, while the Court found that Plaintiffs in their prior complain1 did not "cite any specific documents, meetings or other factual circumstances from which a strong inference of such knowledge could be drawn" (Order at lo), Plaintiffs have provided such evidence (although it is not The "factual circumstances" and numerous meetings which the Redhack Defendants attended and conversations in which they engaged are discussed above.

2. Plaintiffs Allege New Facts Which, In Addition To Other Facts, Support A Strong Inference of PWC's Scienter PwC contends that Plaintiffs fail to adequately allege PwC's scienter because the allegations are "conclusory" and "sound in negligence, not fraud." PwC Br. at 7. While the Court originally

64 On February 17,2005, a Grand Jury issued a criminal indictment of Weishurg that specified he improperly conditioned Qwest's participation in a multi-million dollar commercial deal with Redback on the receipt of personal investment opportunities. 77 4, 35,49-51. This deal may have violated Cal. Pen. Code 5641.3, which makes the parties on both sides of a commercial bribe guilty of commercial bribery. 65 77 12-23, America West, 320 F.3d at 944 (fmding strong inference of scienter for senior officers who were motivated to inflate America West's fmancial results and stock prices because their eligibility for stock options and bonuses was based principally on the company's financial performance). 66 AS shown in the chart in 7 108, Qwest made up a significant portion of Redback's revenue, and, ir fact, was Redhack's largest customer throughout most of the Class Period. 77 54,246,250,258, 319,439. 67 See, e.g., In re Ashanti Goldfields Sec. Litig., 184 F. Supp. 2d 247,259 (S.D.N.Y. 2002) (finding that "the shareholders have met the requirements of Rule 9(b) and 78u-4(b)(i)" even though they "d[id] not rely on any internal documents" for their claims).

67 PLAlNTmFS' OMNmUS BRIEF M OPPOSLnON TO DEPENDmW MOTIONSTODWIMISS rn -T AMENDED CONSOL~ATED~MP-T Csan No. C 03.05641 m Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 45 of 73

dismissed Plaintiffs' claims on these grounds,68Plaintiffs have presented new factual allegations which, together with those previously alleged (and alleged here again), demonstrate PwC's scienter As set forth in the FAC, PwC knew a whole series of facts which Plaintiffs allege put PwC c

notice of the fraud but which PwC deliberately disregarded, including, inter alia: (1) Qwest was Redback's largest customer, with sales to Qwest comprising at times 27% of Redback's total sales (77 429,439,442); (2) Redback and Qwest entered sales agreements that generated large sales at th end of each quarter enabling Redback to meet financial targets and Wall Street's expectations (71 429,442); (3) Redback had announced several multi-million dollar, multi-year agreements with Qwest, but failed to ship any equipment or book any revenues for several quarters, at a time when Redback had agreed to purchase services from Qwest, but had not paid Qwest under that agreement (71 429,431); (4) Redback booked $80.6 million in revenue (20% of the Company's total revenue) from sales to Qwest in quidpro quo deals (7 429); (5) Redback purchased $7 million of economically worthless IRU for which Redback had no use or need (7 429); (6) Redback had no need for the ASP services that Redback purchased from QCS, a Qwest affiliate, as Redback managed its IT in-house (7 430); (7) Redback was not able to ship its SmartEdgeTM product and so could not meet revenue targets or Wall Street's expectations (PwC knew this from its attendance at Redback board meetings) (7 433); and (8) and Redback was growing in a rapidly declining industry (17 442,423). PwC ignored these "in your face facts . . . that cry out, 'how could [PwC] not have known that the financial statements were false."' In re OxfordHealth Plans Inc. Sec. Litig., 51 F. Supp. 2d 290,294 (S.D.N.Y. 1999). Plaintiffs also allege PwC's motive to engage in the fraud. PwC provided significant consulting, tax, restructuring, securities filing and acquisition-related services to the Company from 1996 through 2003 and received fees of approximately $1.5 million, $1 .I million, $955,000 and $I. million, respectively, in 2000,2001,2002 and 2003 for those services. 77 414-419. As newly alleged, PwC used its audit practice at Redback to cross-sell consulting services to other technolog).

68 The Court held that "Plaintiffs do not set forth facts to support these conclusory allegations" against PwC and failed to allege violations that "were the result of intent or deliberate recklessness rather than negligence." Order at 12.

68 PLAINTIPXS' OMNlBUS BRIW W OPPUSlTlON TO DEFENDANTS' MOTlONS TO DISMISS TmFIST AMENDED CONSOLLDATED COMPLAINT Case No. C 03-05642 JII Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 46 of 73

companies formed by KPCB and other Silicon Valley venture capital firms and created a lucrativ~ information technology and systems risk management consulting practice that brought tens of millions of dollars to PwC and its partners. 7 419. PwC and its member firms provided such services to entities affiliated with the Redback Defendants, including Sun Microsystems (founded Khosla) and Internet Security Systems (funded and privately held by KPCB, Khosla's venture capital firm). 77 420-23. In In re Global Crossing, Ltd. See. Litig., 322 F. Supp 2d 319,345 (S.D.N.Y. 2004), the auditor, Andersen, made the same argument that PwC makes here that it had no motive to risk its professional reputation in exchange for auditing fees. The court disagreed, holding the complaint "adequately sets forth a motive distinct fiom mere profit, namely, Andersen's desire to build its consulting practice." Id. The Global Crossing court further noted that "[c]ourts have been especially ready to find motive pleading to survive 12(b)(6) motions in cases where the auditing company plays a dual role with respect to the client." Id. (citing In re Complete Mgmt., Inc. See. Litig., 153 F. Supp. 2d 314,335 (S.D.N.Y. 2001) (auditor's receipt of non-audit compensation in excess of $1 million for the class period, coupled with other red flags, established scienter); In re MicroStrategy Inc. See. Litig., 115 F. Supp. 2d 620, 654 (E.D. Va. 2000) (auditor's receipt of

"substantial fmancial rewards,' including $188,000 in licensing fees and an undisclosed amount fi consulting fees . . . earned by PwC fiom eight deals" helped establish scienter); Carley Capital Group v. Deloitte & Touche, LLP, 27 F. Supp. 2d 1324, 1339 (N.D. Ga. 1998) (the fact that "the Defendant was not just an auditor," but "was heavily involved in the management of Medaphis an had unrestricted access to its financial records and data," helped establish scienter). Plaintiffs also allege that a host of "red flags" put PwC on notice that the accounting at Redback was improper, or at least demanded more scrutiny, including: (1) Redback's executives I employment contracts motivating them to engage in fraud; (2) Redback was dominated by a smal group with significant stockholdings and little compensating controls; (3) Redback's insiders unloaded $150 million of Company stock and distributed another $1.7 billion of Redback holding while the Company was engaging in the reciprocal deals with Qwest; (4) Redback relied on its stc

to fund acquisitions and used aggressive purchase accounting; (5) Redback's growth ran counter I

69 PLAWlWE3' OMMBUS BRlRP IN OPPOSll ION TO DEFEND-' MOl'lONS TO DISMISS THE RRST AMENDED CONSOLIDATED COMPLAW CSSONo. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 47 of 73

declining telecommunications industry; (6) Redback depended upon a select few customers, including Qwest, with whom it entered numerous sales transactions at the end of reporting periods; (7) sales to Qwest ceased when the SEC began to investigate suspicious accounting at Qwest; (8) Qwest purchased millions of dollars of Redback products (some non-operationable) that Qwest did not even subject to its customary testing procedures, in amounts enabling Redback to meet revenue targets; (9) Redback failed to timely pay Qwest for the ASP services purchase, and Qwest failed to timely pay Redback for its $35-$40 million purchase in 2000-2001; (10) DeNuccio directed Redbac to hire Arnold for a key executive position, and Redback did so, just prior to the disclosure of the SEC's investigation of Arnold's participation in fraud at Qwest; and (1 1) the SEC later named Arnold as a defendant in a scheme to artificially inflate revenues at Qwest. 7 436. Plaintiffs also allege a host of violations of GAAP, GAAS and SEC regulations that, while themselves may not raise a strong inference of PwC's scienter, when combined with the "red flags" and other allegations in the FAC, provide powerful evidence of PwC's scienter. 117 412-413. See Ponce v. SEC, 345 F.3d 722,733-34 (9thCir. 2003) (fact that financial statements violated GAAP supported finding that auditor "was reckless in certifying the financial statements"); Homestore, 25 F. Supp. 2d at 1043-45 (GAAP and GAAS violations, combined with "red flags" confronting PwC, "g[a]ve rise to the requisite strong inference' that PwC acted with deliberate recklessness when it issued its audit opinion"). PwC fails to address any of these factual allegations and red flags, arguing only that certain of the new facts alleged by Plaintiffs are insufficient to establish a reasonable inference of PwC's

scienter in and of themselves. See PwC Br. at 5-7. However, the Court must consider all of Plaintiffs' allegations together, and the FAC in its entirety, not claim by claim, or "red flag" by "rec flag". See Stanley v. Safeskin Corp.,No. 99-454BTM (LSP), 2000 WL 331 15908, at *2 (S.D. Cal. Sept. 15,2000) ("each allegation supporting a strong inference of scienter should not be considered individually. Rather, the Court must 'answer the larger question of whether [plaintiffs'] complaint, considered in its entirety, states facts which give rise to a strong inference of deliberate recklessness."'), quoting In re Silicon Graphics, 183 F.3d at 985. The new factual allegations in th~ FAC, when considered with the other allegations, support a reasonable inference of PwC's scienter 70 PLAINTIWES' OMNBUS BRlW A OPYOSlnON m DBrEND*NTS' MOTIONS TO DISMISS TAE FmTAMENDED CONSOUUATED COMPm CsseNo C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 48 of 73

PwC is wrong in arguing (PwC Br. at 5) that Plaintiffs did not provide sufficient detail regarding the $150 million in stock sales and $1.7 billion in distributions by Redback insiders. While only eight of the sixteen original Redback Defendants sold Redback stock during the Class

Period, in the governing FAC, there are twelve Redback insiders named as Defendants, and eight ht;ire alleged to have sold their stock in such a fashion as to put PwC on notice of possible fraud. See 7

Additionally, Plaintiffs explain why all the insider Defendants did not (and could not) sell :311 their Redback stockholdings. Supra at Section V. Plaintiffs' allegation that Redback and Qwest failed to timely pay each other for various purchases is not "innocuous" (PwC Br. at 5), but rather is a glaring red flag, as Redback had a sizeable, unexplained and long-outstanding receivable with its largest customer, Qwest, from whom Redback had agreed to purchase services. That demanded further scrutiny. 7 86. Moreover, PwCI's attempt to prove that Redback's accounting was proper, and PwC's challenges to Plaintiffs' allegations of improper accounting practices, are inappropriate on a motion to dismiss (PwC Br. a1 6).70 See Garbini v. Protection One, Inc., No. 99-03755,2002 WL31395954, at *2 (9th Cir. Oct.

23,2002) (reversing dismissal under Rule 12(b)(6) where the auditor disputed whether a change ir 1 amortization rates as part of the company's restatement supported the plaintiffs' accounting fraud, finding that "fact-intensive inquiries, normally aided by the testimony of expert witnesses, are bes t left to trial or summary judgment, and not to a motion to dismiss"); In re Burlington Coat Factoiy See. Litig., 114 F.3d 1410, 1421 (3d Cir. 1997) (finding that the determination of whether a particular accounting method was more consistent with GAAP was fact question not properly addressed at pleading stage); In re Keyspan Corp. See. Litig., No. 01-5852,2003 WL 21981806, at *15 n.5 P.D.N.Y. July 30,2003) ("whether Defendants violated GAAP is 'best resolved by expert testimony, and thus should not be addressed on a motion to dismiss"') (citation omitted).

69 AS explained above, if courts were to consider allegations in prior complaints rather than the governing and amended complaint, no amendment would ever be successful, as no plaintiff could "cure" pleading deficiencies if held to the same deficiencies in the original pleading.

70 Even if the audit complied with GAAP and GAAS, such compliance does "not immunize an accountant who consciously chooses not to disclose on a registration statement a known material fact." Monroe v. Huges, 31 F.3d 772,774 (9" Cir. 1994); see also Strauss v. Holiday Inns, Inc., 4 60 F. Supp. 729,736 (S.D.N.Y. 1978) (compliance with GAAP is not sufficient to show compliance with federal securities laws).

71 PLAMTIFE' OMVBllS BRIEF IN OPPOSmION TO DEFENDANTS' MOTIONS TO DISMISS FlWAMENDED CONSOLIDATED COMPLNNT Case No. C 03-0564 Jli Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 49 of 73

PwC has no response to the new allegations (77 433,441) that PwC should have verified tha Redback's sales were real, by checking to determine if the products were even operational, or had shipped, or were returned. Indeed, PwC failed to perform any of these simple verification steps. PwC's other arguments should be rejected. PwC contends that Plaintiffs' claims sound only

in negligence, citing Rieger v. PricewaterhouseCoopers LLP, 117 F. Supp. 2d 1003 (S.D. Cal. 2000). That case has no application here, as the Rieger plaintiffs merely alleged that PwC failed to review certain documents, and those claims without more raised only negligence, not fraud. Id. at 1012. DSAMGlobal Value Fundv. Altris Software Inc., 288 F.3d 385,390 (9thCir. 2002), is equally distinguishable, as the plaintiff there merely alleged that the accountant "negligently failed t closely review files or follow GAAP" whereas here, Plaintiffs have alleged that PwC actually knew a series of facts which put it on notice of the fraud. PwC's reliance on Rieger v. PricewaterhouseCoopers and Rieger v. Altris Sofhyare, Inc., Nc 98-CV-528 TW JFS, 1999 WL 540893 (S.D. Cal. Apr. 30, 1999), for the proposition that PwC would not risk its reputation to participate in the fraud of a single client is also misplaced, as the conclusions reached by the courts in those cases will certainly be revisited (and no longer apply) in light of the recent numerous corporate frauds perpetrated with the assistance of the country's largest accounting firms. See John C. Coffee, Jr., Understanding Enron: It's About the Gatekeepers, Stupic 57 Bus. Law at 1403, 1406-12 (August, 2002) ("During the 1990s, many courts bought this logic hook, line and sinker," but in the light of real world experience the logic proved utterly false). Marc recently, in reversing a dismissal of a common law fraud claim against an auditor, aNew York cour expressly took account of the hard truths about auditors recently learned, stating that "it has been widely acknowledged that our society is experiencing a proliferation of frauds perpetrated by officers of large corporations, for their own personal gain, unchecked by the 'impartial' auditors the

hired." Houbigant, Inc. v. Deloitte & Touche LLP, 303 A.D.2d 92,98-9 (N.Y. App. Div. 2003) (emphasis added). Recent securities class actions and SEC and DOJ actions and investigations against the country's largest accounting firms for securities fraud show that the accounting firms,

like their corporate clients and directors, perpetrate fraud for simple monetary gain - these cases show that accounting firms have engaged in fraud in their services for a single client. Here, PwC 72 PLAiNTIFFS' OMNmUS BRIEP M OPPOSmlON TO DEFENDANTS' MOTIONS TO DlSMlSS TAE VlRST AMENDED CONSOLIDATED COMI'IAW Care No. C 03-05642 51' Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 50 of 73

engaged in the fraud not just for one client - it sought to expand its practice to other entities affiliated with the Redback directors and their Silicon Valley venture capital firms.

IV. PLAINTIFFS ADEQUATELY ALLEGE A SECTION 20(a) CLAIM The Redback Defendants' argument that Plaintiffs have not adequately alleged a Section 20(a) claim because Plaintiffs have not asserted a primary Section lo@) claim against Redback cannot be taken seriously. GI. Br. at 17. As Defendants are well aware, Redback's bankruptcy filir precluded Plaintiffs from naming Redback as a defendant in this action. 77 10-1 1. The Redback Defendants' second argument that Plaintiffs have failed to properly allege a primary Section lO(b) claim against the Redback Defendants is equally unavailing to defeat Plaintiffs' Section 20(a) claim GI. Br. at 17. Liability under Section 20(a) may be predicated on any violation of the Exchange Act and i:

not limited to only Section lo@) violations. See 15 U.S.C. § 78t(a) ("Every person who, directly oi

indirectly, controls any person liable under any provision of this chapter or any rule or regulation thereunder shall also be liable jointly and severally . . .") (emphasis added). Because the complaint suff~cientlyalleges numerous primary violations of Section 10(b) and Section 18 by Redback, the Redback Defendants can be held liable under Section 20(a) as control persons of Redback, even though the Company is not joined as a defendant and even if the Redback Defendants are found not to have committed a primary violation themse~ves.~~"A control person need not be a 'culpable participant' in the alleged fraud." McKesson, 126 F. Supp. 2d at 1277 (citing Hollinger v. Titan Capital Coup., 914 F.2d 1564 (9th Cir. 1990)). Moreover, it is not necessary to show actual

participation or the "exercise of power" to plead a prima facie case under Section 20(a). 72 See

71 See In re DVISec. Litig., No. 03-5336,2005 WL 1307959, at "12 (E.D. Pa May 31,2005) (contrs liability claims can be sustained against individuals without joining the controlled party); In re Hayes Lemmerz Int'l, Inc. 271 F. Supp. 2d 1007, 1022, n. 11 (E.D. Mich. 2003) (even if a company is not named as a defendant, if the complaint alleges a primary violation by the company, controllin persons can be held liable under Section 20(a)); In re Citisource, Inc. See. Litig., 694 F. Supp. 1069 1077 (S.D.N.Y. 1988) (bankrupt "controlled person" need not be joined to assert Section 20(a) claim); Elliot Graphics, Inc. v. Stein, 660 F. Supp. 378,381 (N.D. Ill. 1987) (bankrupt "controlled person" need not be joined to assert control liability claim); Briggs v. Sterner, 529 F. Supp. 1155, 1171 (S.D. Iowa 1981) (same); SEC v. Savoy Indus., Inc., 587 F.2d 1149,1170 n.47 @.C. Cir. 197: (same). 72~dditionally,as the Ninth Circuit held in America West, 320 F.3d at 945, whether or not someone is a "control person" is "an intensely factual question." See also In re CV Therapeutics, Inc., No. 73 PLAUYTWFS' OMNmUS BRIEF M OPPOSITION TO DE~END~1B'MOTlONSTO DISMISS THE F.ULSTAMENDED CONSOLIDATED COMPLAINT C~seNo.C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 51 of 73

America West, 320 F.3d at 945. Plaintiffs' allegations are more than sufficient to plead control for purposes of Section 20(a). See, e.g., W 25-29,349-51,353-54,359,362-63,365, 367-69,373-74, 378-381, 382-83, 386,387,389-90,391-93,395, 397, 398-400,402,405-06,407, 515-517.

V. PLAINTIFFS ADEQUATELY ALLEGE INSIDER TRADING IN VIOLATION OF SECTION 10(b) AND SECTION 20(A)

The Redback Defendants argue that Plaintiffs' insider trading claims fail because Plaintiffs have not sufficiently alleged facts demonstrating contemporaneous trading or that the Redback Defendants used non-public inside information for their own advantage. RD Br. 18-24. The Redback Defendants are wrong.

A. Contemporaneous Trading Is Satisfied With Respect to Plaintiffs' Purchases

For insider tradmg claims under Section lo@) and Section 20(A), liability is "confined to persons who traded contemporaneously with the insider." See Neubronner, 6 F.3d at 670. The Ninth Circuit has not delineated how close in time the trades must be to satisfy the contemporaneou trading requirement. See id. (declining to establish contemporary trading temporal requirements where allegation of three-year contemporaneous trading was "clearly insufficiently specific to establish contemporaneity"); Brody, 280 F.3d at 1002 (refusing to define contemporaneous but stating that alleged two-month trading period exceeded any possible definition). While the Redbac Defendants cite a few cases that have required same-day trading to qualify as contemporaneous trading, Neubronner restricts contemporaneous trading only to plaintiffs who may have "suffer[ed] the disadvantage of trading with someone who has superior access to information." Brody, 280 F.3 at 1001 (quoting Neubronner, 6 F.3d at 670). Other courts have imposed liability where the insider and the plaintiff have traded anywhere from on the same day, to less than a week, to within a montl or to "the entire period while relevant and nonpublic information remained undisclosed." In re

Enron Corp. Sec., Deriv. & ERISA Litig., 258 F. Supp. 2d 576,599 (S.D. Tex. 2003) (citing numerous cases). In Enron, Judge Harmon stated "that an appropriate time period might be less ths

03-03709,2004 WL1753251, at *12 (N.D. Cal. Aug. 5,2004) (same, denying motion to dismiss Section 20(a) claim).

74 PLAlNTIFPS' OMNmUS BRIER W OPPOSmON 'TO UEWENDANTS' MOTIONS TO DISMISS nn:nL3T AMENDEo CONSOLmAl'EDCOMPLAINT Core No. C 03-05642 JP Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 52 of 73

a week," and rejected the narrow interpretations of contemporaneous in Microstrategy and AST Research, cases relied on by Defendants here. Id. at 600.7~Indeed, courts must resolve the contemporaneous issue on a "case-by-case" basis. See In re Worlds of Wonder See. Litig., No. (375491, 1990 WL 61951, *8 (N.D. Cal. Mar. 23, 1990); Buban v. O'Brien, No. 94-0331,1994 Wl 324093, at *2, n.3 (N.D. Cal. June 22, 1994) ("Congress specifically contemplated a case-by-case approach to defining 'contemporaneousness."') (citing legislative history for 5 20(A) in H.R. Rep. No. 910, 100th Cong., 2d Sess. 27 (1988))'~ In the case at bar, Plaintiffs sufficiently allege numerous same-day trades between Plaintiffs and Trading Defendants Barsema, Gentner, Kurtz, Garg and DeNuccio. See FAC Exhibit A. In addition, Plaintiffs describe trades within one day between Plaintiffs and Kruep and Ragavan. Id. These trades are sufficiently close in time to be considered contemporaneous. B. Contemporaneous Trading Has No Price Requirement

The Court should reject the Redback Defendants' contention that discrepant pricing is a factor to be examined at this stage of the litigation. Whether trades bought and sold at different prices or on days with heavy trading can be considered contemporaneous raises factual and legal issues that should not be resolved on a motion to dismiss. See In re Gupta Corp. See. Litig., 900 F.

73 Both Microstrategy and ASTResearch established a same-day trading parameter for contemporaneous trades. See Microstrategv, 115 F. Supp. 2d at 663-64 (defendants trade on same day as plaintiff clearly is contemporaneous); ASTResearch, 887 F. Supp. at 233 (requiring same daj trading). In Microstrategy, the court easily rejected claims of contemporaneity for a sale of 100,000 shares of stock 3 days prior to plaintiff's purchase of 15 shares of the same stock where only 79.35 shares of stock were outstanding. 115 F. Supp. 2d at 664. Similarly, in ASTResearch, because defendants had sold 10,000 shares of stock that were traded on NASDAQ over a seven-day period and plaintiffs' purchase of 15 shares occurred three days later, the court summarily concluded that the market had already "absorbed" the defendants' shares prior to plaintiffs' purchase. 887 F. Supp. at 234. These decisions were fact specific and are not persuasive authority here where many of Plaintiffs' trades occurred in similar amounts on the same day as the Redback Defendants' trades. 74 As examples of contemporaneous trading, Congress cited: Shapiro v. Merrill Lynch Pierce, Fenner & Smith, Inc., 495 F.2d 228,241 (2d Cir. 1974) and O'Connor & Assoc. v. Dean Witter Reynolds, Inc., 559 F. Supp. 800,803 (S.D.N.Y. 1983), where the courts held that trades within one week and within four days, respectively, were contemporaneous. Thus, the drafters of Section 20(A "meant to protect and compensate investors who trade at the same time as the insiders or for some short period thereafter, and that a reasonable period of liability could be as short as a few days, but no longer than a month." Verifone, 784 F. Supp. at 1489. These standards should continue to apply here. See Neubronner, 6 F.3d at 669, n.5 ("Congress did not define the 'contemporaneous' as used in 5 20(A), but instead apparently intended to adopt the definition 'which has developed through the case law."').

75 PUMTIF*S' OMNIBUS BRTEP M OPPOSITION TO DEFENDNS' MOTlONS 'IU DlSMlSS THE DlRST AMENDED CONSOLmATED COW-I. Case No. C 03-05642 SF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 53 of 73

Supp. 1217, 1244 (N.D. Cal. 1994) (contemporaneous requirement cannot be resolved on a motion to dismiss for allegation of same day trades of sale of 10,000 shares of stock at $30.38 and purchase of 2000 shares of stock at $30.25); In re AppliedMicro Circuits Corp. Sec. Litig., No. 01CV0649, 2003 U.S. Dist. LEXlS 14492, at *16 (S.D. Cal. July 10,2003) (determination ofwhether two days is contemporaneous requires factual and legal findings that are inappropriate on a motion for class certification). Moreover, the blanket assertion that a purchaser and seller are matched at a "single

price" in every trade (RD Br. at 20) fails to account for pertinent facts that currently are not before the Court such as the spread between the hid and the ask price for buyers and sellers. The Redback Defendants rely on Buban to erroneously conclude that any price discrepancy between a purchase and a sale precludes a finding of contemporaneous trading. RD Br. at 19-20. The Buban court relied on specific amounts of shares that were heavily traded on certain days to conclude that the market had already absorbed defendant's sales prior to plaintiffs purchase of 3 shares of stock three days later. 1994 WL 324093, at *3-4. At issue was a purchase of approximately 6,000 shares by a broker for a company Employee Stock Purchase Plan in which plaintiff was a participant. The purchase was at approximately $35.25 per share, of which only 2,649 were allocated to plan participants, and plaintiffs specific account was credited with slightly less than 3 shares of stock for a total of $100.00, while the defendant, a former director and chairma of the board of the company, had sold three separate blocks of shares ranging from 10,000 to 12,50( shares for $36.50 per share on days where total shares traded were between 108,100 and 140,000. Id. at * 1. Because over 140,000 shares had traded on the date of plaintiffs purchase, the court concluded that the plaintiffs purchase was not contemporaneous with the defendant's sales, as the market had already absorbed defendant's sales prior to plaintiffs purchase of 3 shares three days later. Id. at *4. Although the court also noted that there was a difference in price between plaintiff shares and defendant's shares, Buban cannot be relied upon as imposing a requirement that purchases must match the exact price of sales to be considered contemporaneous. The only other case cited by the Redback Defendants, MicroStrutegy, 115 F. Supp. 2d at 666 is equally distinguishable. The court held that the plaintiff had alleged relatively few circumstances of the contemporaneous trades, and the allegations were sufficient to warrant a conclusion that a

76 . PLANPIPQS' OMNIBUS BRZEF EX OPPOSITION TO DEFENDANTS' MOTIONS TO DISML3.7 TllE FLRST MIENDED CONSOLIDAD COMYLAMT Csse No. C 03-05662 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 54 of 73

one-day contemporaneity period was appropriate. Id. The trades analyzed by the court were three days apart, and the court never even analyzed whether the disparity in price was important. Id. Likewise, for other trades that the court determined had met the one-day contemporaneous requirement, the court never even discussed the price of those trades. Therefore, this Court should not rely on MicroStrategv or Buban to impose a strict price requirement on Plaintiffs' contemporaneous sales. Any price discrepancies between Plaintiffs' purchases and the Trading Defendants' sales do not conclusively demonstrate that Plaintiffs could not have suffered the disadvantage of trading with someone who had superior access to information. Neubronner, 6 F.3d at 670. Thus, Plaintiffs' contemporaneous trading chart and other allegations sufficiently allege actionable insider trading by the Trading Defendants. 75 C. The Connecticut Funds Have Standing to Represent the Class The Redback Defendants' argument that the Connecticut Funds have no standing to represen other Plaintiffs who traded contemporaneously with the Trading Defendants (RD Br. at 22) is wrong and premature. The Connecticut Funds have sufficiently alleged that they made trades contemporaneous with certain ~efendants.~~See FAC, Exhibit A. Nothing more is required. "There is no requirement that Plaintiffs establish a contemporaneous trade for each and every one of

Defendants' trades during the Class Period." Plumbers & Pipefitters Local 572 Pension Fund v. Cisco Sys., Inc., No. 01-20418,2004 U.S. Dist. LEXIS 27008, *16 (N.D. Cal. May 27,2004) (granting motion for class certification on 5 20(A) claim where plaintiff alleged at least one trade made contemporaneously with defendants); see also In re Worlds of Wonder Sec. Litig., 1990 WL 61951, at *9 (certifying class and rejecting standing challenge where allegations demonstrated that some plaintiffs purchased stock shortly after some defendants sold their stock). The Redback Defendants also cite no authority for their argument that the Connecticut Funds cannot represent a

75 The Redback Defendants' proposed insider trading chart (RL) Br. at 21) inappropriately recasts Plaintiffs' contemporaneous trading chart in the light most favorable to the Trading Defendants and therefore should not be considered by the Court. 76 The Redback Defendants concede, as they must, that the Connecticut Funds purchased Redback stock on the same day as both Barsema and Garg. RD Br. at 21.

77 PLAMTIFFS' OMNIBUS IlRlEFM OPPOSITIONTO DEFENDANTS' MOTlONSTODlSMlSSTBE lilRSTMNDEDCONSOLIDATED COMTLAW

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;lass of shareholders who suffered similar harms as the Connecticut Funds resulting from the Trading Defendants' unlawful insider trading. In certifying the class in the Worlds of Wonder litigation, the court stated that individual issues of contemporaneousness and damages could be addressed separately once plaintiffs had established defendants' insider trading. Id. Thus, the Redback Defendants' argument is more appropriately made at class certification and not at this stagf of the litigation.

D. The FAC Adequately Alleges That The Redback Defendants Engaged in Unlawful Insider Tradin~

"Trading on material, nonpublic "information qualifies as a 'deceptive device' under 5 10(b) . . . because a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation." America West, 920 F.3d at 937 (quoting O'Hagan, 521 U.S. at 652). In O'Hanlon, the Supreme Court stated that insider trading may violate Section 10(b) and Rule lob-5 "when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information." 521 U.S. at 651-52 (emphasis added). 1. The Standard Of Liabilitv For Insider Trading Relying on UnitedStates v. Smith, 155 F.3d 1051, 1070 n.28 (9th Cir. 1998), a criminal insider-trading action, the Redback Defendants contend that it is insufficient merely to allege that th Trading Defendants possessed material nonpublic information, and instead, Plaintiffs must plead "how the trade was made on the basis of inside information." RD Br. 23. That is not required. The Smith decision, upon which the Redback Defendants rely, followed (in part) the holding in SECv. Adler, 137 F.3d 1325, 1332, 1334 (1 lth Cir. 1998), a civil enforcement action where the Eleventh Circuit analyzed whether "possession or use" of material non-public information was the proper standard for alleging trading "on the basis of material nonpublic information." Although the SEC argued that knowingpossession of material non-public information while trading was sufficien to establish insider trading liability under Section 10(b) and Rule lob-5, the Eleventh Circuit adopted the "use" test but held that "when an insider trades while in possession of material nonpublic information, a strong inference arises that such information was used by the insider in 78 PLAINTIFFS' OMNlBUS BKlEF 1N OPPOSITEON TO DEFENXXTS' MOTIONS TO DISMISS TBE FMTAMENDED CONSOLIDATED COMPLAWT

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trading." Id. at 1337. See also Unitedstates v. Teicher, 987 F.2d 112,119 (2d Cir. 1993) (suggesting that a causal connection is not required and that knowing possession of material non- public information while conducting a trade is all that is required). Following Adler, the Ninth Circuit held that "Rule lob-5 requires that the government.. . demonstrate that a suspected inside trader actually used material nonpublic information in consummating his transaction." See Smith, 155 F.3d at 1069. Because Smith was a criminal prosecution, however, the court stated that it was not at liberty to establish an "evidentiary presumption that gives rise to an inference of use" and did not decide whether the "use" standard would apply to civil actions under lob-5. Id. at 1069 (citation omitted). More importantly, the cou expressly left open the question of whether the "Adler-type presumption" may be employed in civil

enforcement proceedings. Id. at 1069 n.27. Smith cannot be read to require a civil-action plaintiff 1 plead how defendants used inside information to trade. Moreover, Smith does not foreclose a presumption that a strong inference of use arises "when an insider trades while in possession of material nonpublic information." Id. See also Adler, 137 F.3d at 1337. To resolve the conflict between the Circuits, the SEC adopted Rule 10b5-1 under the Exchange Act to define "when a purchase or sale constitutes trading 'on the basis of material nonpublic information in insider trading cases brought under Section 10(b) of the Act and Rule lob 5 thereunder." 17 C.F.R. 5 240.10h5-1. The Rule provides that "a purchase or sale of a security of an issuer is 'on the basis of material nonpublic information about that security or issuer if the persc making the purchase or sale was aware of the material nonpublic infovmation when the person maa the purchase or sale." Id. (emphasis added). In Enron, Judge Harmon stated that the new rule (effective October 23,2000) "largely adopts the Second Circuit's 'knowing possession' test in Teichev but, as in Adler, employs it to create a rebuttable presumption: a plaintiff makes aprima facie case that the defendant is liable for insider trading merely by showing that the defendant was 'aware of the material nonpublic information' when he made the purchase or sale of the securities."

Enron, 258 F. Supp. 2d at 592 (quoting 17 C.F.R. § 240.10b5-1). The Enron court deferred to the SEC and adopted the "awareness" standard promulgated in Rule 10b5-1. Id. at 593.

79 PLUNTIYF.3' OMNlBUS BHlEW LN OPFOS~IONTODEFENDANTS' MOnONS TO DISMISS THE FIWMNDEDCONSOLlUATBD COMPLAW CaaeNo. C 03-0S6m JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 57 of 73

I Section 10(b) explicitly delegates authority to the SEC to prescribe rules "as necessary or ! appropriate in the public interest or for the protection of investors." 15 U.S.C. 5 78j(b). The SEC'! I standard in Rule 10b5-1 provides a reasonable and balanced approach to resolving the conflict

L between the "knowing possession" and "use" standards. See Enron, 258 F. Supp. 2d at 592. i Therefore, this Court also should defer to the SEC and adopt the awareness standard of liability for i insider trading. See SEC v. Zandford, 535 U.S. 813, 819-20 (2002) (holding that the SEC's interpretation of Section lO(b) is entitled to deference if reasonable). i 2. The FAC Pleads Insider Trading With Particularity The FAC is replete with allegations that the Trading Defendants were aware of material I nonpublic information when they sold Redback stock during the Class Period. See, e.g., 77 174,37 487-89.77 Plaintiffs also specifically allege that the Trading Defendants unlawfully took advantage

! of this non-public adverse information and "used" it to sell Redback stock for their own benefit. 7

i 490. See, e.g., 77 174,401 (Kruep sold his stock in August and October 2000 to take advantage of I. I material nonpublic adverse information); 7 377 (Ragavan's sales of Redback stock during February i 1 May 2001 were timed to take advantage of material nonpublic information); fl 174,184 (all of i I Barsema's trades were suspiciously timed to take advantage of Defendants' artificial inflation of

I I Redback's stock as well as nonpublic material information); 7 394 (Kurtz's stock sale in October 1 2000 was timed to take advantage of undisclosed material facts); 11 396 (Gentner's stock sale in

I October 2000 was timed to take advantage of material nonpublic information).

77 Beginning with the undisclosed friends and family stock incentives and continuing with the Siara Warrant Agreement and similar undisclosed stock-induced agreements, Barsema, Kruep, Gentner, Kurtz, Ragavan and DeNuccio each possessed non-public information about Redback's secret stock and quidpro quo inducements to Qwest, Broadband and others. 53,58,60, 64-65,67-68,71,86 99 and 203. Kruep, Ragavan, Gentner, Kurtz and Garg also were keenly aware in third quarter 2001 that the SMSTM10000 product was not operational and that the new SmartEdgeTMproduct was moribund in production. W 78, 82-84, 89,97,401. In February 2001, Defendants also knew that there was no new multi-year, multi-million dollar agreement with Qwest as was publicly announcec 77 199,201,348. Ragavan, Wolf and others further were aware that Redback had agreed to purchase a worthless IRU for $7 million and unneeded ASP services from Qwest in exchange for equipment orders that Redback relied upon to meet its revenue forecasts. fi 81, 104. Consequentlj revenue was overstated by millions of dollars. 77 88, 105,323-27,332-38,340,342. None of thest adverse facts was publicly disclosed.

80 PLAINTIFFS' OMNIBUS BRIEF lN OPWSmION TO DEFENDANTS' MOTIONS TO DISMISS THE FLRST AMENDED CONSOLmACED COMPLMT Cnse No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 58 of 73

The Redback Defendants argue that there is no factual basis for the claim that Garg used material nonpublic information regarding Redback's undisclosed stock bribes and equipment failure

(RD Br. at 24), but the FAC states with particularity that Garg - according to a first-hand witness

account - was aware that Redback had provided stock to Qwest in exchange for Qwest's promises t~ purchase Redback's equipment. 158. Moreover, the FAC alleges that Garg was an inside director since he was a Senior Vice President of Corporate Strategy and Business Development for the Company. 7 387. In addition, Plaintiffs allege, inter alia, that in December 2000, Garg took charge of Redback's Product Management to try to resolve some of Redback's equipment problems; attended weekly executive meetings; was aware in August 2000 that the launch of Redback's new SmartEdgeTMrouter would be delayed until late in 2001, and that consequently he began dumping his stock. 77 97,387, Similarly, there is no merit to the Redback Defendants' assertion that Plaintiffs' particular allegations regarding DeNuccio's unlawful insider trading in August 2003 are somehow undercut b~ other, unrelated allegations. RD Br. at 24. Defendants' belated partial disclosures that Redback's revenues were declining (7 21 5), products were delayed in production (71 228-29), Qwest had begur to order less product than expected (1 229), excess and obsolete inventory was written off (7 230), and earnings forecasts were being lowered (11 113,230), have no bearing on the fact that DeNuccio knowingly possessed material nonpublic information regarding the fraudulent nature of Redback's dealings with Qwest and the Company's overstated assets, revenues and earnings when he sold 500,000 shares of Redback stock in August 2003. 1374. The facts pled by Plaintiffs are more than sufficient to support an insider trading claim based on the Trading Defendants' sales of Redhack stock on the basis of material nonpublic information during the Class Period. VI. PLAINTIFFS ADEQUATELY ALLEGE A SECTION 18 CLAIM Plaintiffs brought a Section 18 claim against DeNuccio, Lamond, Cronan, Kurtz, Khosla, Wolf, Gentner, Ragavan, Barsema, Garg, Haque (the "Section 18 Defendants") and PwC. 1500. The Section 18 Defendants argue that Plaintiff has not plead reliance with requisite particularity and cannot allege reliance on a class-wide basis. GI. Br. at 41-42. These arguments should be rejected. 8 1 PLAMTIFFS' OMNlBUS BRIE* M OPPOSITION TO DEBENDANTS' MOTIONS TO DISMISS WIE IImT AMENDED CONSOLIDATED COMP- Cme No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 59 of 73

"A plaintiff seeking recovery under 5 18 faces a significantly lighter burden [than a plaintiff seekmg recovery under 5 10(b)]. He must merely plead and prove that a document filed with the [SEC] contains a material misstatement or omission. If he can show reliance on that statement, liability is established ....." Ross v. A. H Robins Co., Inc., 607 F.2d 545, 556 (2d Cir. 1979). As demonstrated below, Plaintiffs have adequately alleged a Section 18 claim. Plaintiffs identify Redback's Forms 10-K and 8-K containing the materially false and misleading statements, explain why those statements are false, and allege that each of the Section 12 Defendants that were officers and directors of the Company signed those filings and PwC certified the Forms 10-K. 11 501-03. Plaintiffs have also alleged that "in connection with the purchase of Redback's stock, Plaintiff and other Class Members read and reasonably relied upon the statements contained in the reports and documents set forth above not knowing that such statements were false and misleading." (emphasis added). 7 501. Accordingly, Plaintiffs have adequately pleaded their

Section 18 claim. See Zindner Dividend Fund, Inc. v. Ernst & Young, 880 F. Supp. 49,56 (D. Mass 1995) (finding plaintiffs met burden of alleging that they saw and relied upon the alleged misstatements contained in the documents where plaintiffs alleged that they "specifically relied up01 various statements contained in said reports" and those "various statements" were quoted throughou the amended complaint). The Section 18 Defendants argue that Plaintiffs' Section 18 claim fails because "plaintiffs make no attempt to identify with particularity which statements they relied upon." GI. Br. at 42. That is not an element of the claim. "Requiring plaintiffs to link particular misrepresentations with particular trades in their allegations of direct reliance would impose additional burdens without significantly improving the quality of notice to defendants and without affording much added protection from reputation-endangering and extortionate frivolous suits." WMHigh Yield Fund v. O'Hanlon, 2005 WL 101781 1, at "10 (E.D. Pa. 2005) (rejecting that argument), citing Argent Classic Convertible Arbitrage FundL.P. v. Rite Aid Corp., 315 F. Supp. 2d 666, 678 (E.D. Pa. 2004). The Section 18 Defendants' argument that Section 18 claims cannot proceed as class claims is more appropriately raised in the context of a class certification motion, and does not justify 82 PLALNCLFFS' OMNIBUS BRlW W OPPOSWION TO DEFENDMTS' MOTIONS TO DUIMlSS TEE FmTAMENDED CONSOIJDATED COMPLAMT Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 60 of 73

dismissal of the claims altogether. This much is obvious when one considers that Lead Plaintiff has asserted its claims both individually and on behalf of the Class. 7 452. Therefore, even if the

Section 18 Defendants were to succeed on their argument at the class certification stage, Plaintiff - which has pleaded (and is able to prove) its own actual reliance -- would be entitled to pursue an individual claim under Section 18. Even if the Court were to consider the Section 18 Defendants' argument that reliance cannot be pleaded on a class-wide basis, that argument should be rejected. A number of courts that have considered this issue have upheld Section 18 claims asserted on behalf of a class and certified such

claims in class actions. See, e.g., In re Hayes Lemmerz Int'l, Inc., 271 F. Supp. 2d 1007 at 1026

(denying motion to dismiss Section 18 claim brought as a class action); Simpson v. Specialty Retail Concepts, 149 F.R.D. 94, 102 (M.D.N.C. 1993) ("the question ofwhether Defendants. . . made material misrepresentations, and if so, whether they were made intentionally or recklessly or negligently are common to the entire class and predominate over individual issues of reliance" on Section 18 claim); In re MDC Holdings Sec. Litig., 754 F. Supp. 785, 806-7 (S.D. Cal. 1990) (certifying Section 18 claim as class action where plaintiffs "alleged a common course of wrongdoing based on the same misrepresentations," and "[tlhe alternative would be to unleash thousands of individual suits into the judicial system, and risk that many plaintiffs would be unable to seek redress because of economics"); State of Wisc. Inv. Bd. v. Ruttenberg, Nos. CV-99-BE-3097

& CV-99-BE-3129, slip op. at 16-18 (N.D. Ala. July 3,2001) (certifying class for Section 18 claim) Kairis Decl. Ex. E; Helfand v. Cenco, Inc., 80 F.R.D. I, 8-9 (N.D. 111. 1977) (certifying class action that included Section 18 claims).78Indeed, this argument would effectively bar any class action

The Section I8 Defendants cite to In re American Cont '1 Corp./Lincoln Sav. & Loan Sec. Litig, 794 F. Supp. 1424,1438 @. Ariz. 1992) and Beebe v. PaclJic Really Trust, 578 F. Supp. 1128, 1151-52 (D. Or. 1984) where the courts found that reliance could not be pled or proven for the class. These cases are in the minority and should not be followed here. Additionally, the article by Stuart Grant, cited by the Section 18 Defendants, actually supports Plaintiffs' argument. See The Institutional Investor's Silver Bullet for Financial Fraud Section 18, 1 139 PLIICorp 377,384 (1999) (citing case that "reject[s] the argument that the existence of individual issues of reliance alone may disqualify a suit from proceeding as a class action.. .If need be, there may be separate trials on the issue of reliance"). The Section 18 Defendants also completely miscite another article by Plaintiffs' counsel, Stuart M. Grant & Megan D. McIntyre, Class CertiJicationand Section 18 of the Exchange Act, The Rev. of Sec. and Commodities Reg.: An Analysis of Current Laws and Reg. 83 PLAMTIF~'OMNTBUS BRIEF IN OPPOSITION TO D&FENDMTS'MOTIONS TO DISMISS TAE FIRST MENDED CONSOLIDATED COmUMT Case No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 61 of 73

Section 18 claims and effectively deny individual stockholders a meaningful remedy, frustrating the entire purpose behind Section 18, which is to "encourag[e] use of and reliance upon records filed

with the S.E.C." Ross, 607 F.2d at 556; Wachovia Bank & Trust Co. v. Nat'l Student Mktg Corp., 650 F.2d 342,357 (D.C. Cir. 1980).79

VII. PLAINTIFFS' CLAIMS ARE NOT BARRED BY ANY STATUTE OF LIMITATIONS

The Redback Defendants and PwC have jettisoned their prior arguments that Plaintiffs' Section lo@) and Section 18 claims are untimely. Instead, they seek dismissal of only "the claims arising in the newly added portion of the Class Period (November 27,1999 to April 11,2000)." GI.

Br. at 37 & 38, n.14; PwC Br. at 9. The Court should reject the argument that Plaintiffs' claims based on the extended Class Period are barred by the statute of limitations. First, the claims of Lead Plaintiff and the other members in the extended Class were brought well within the applicable statute of limitations period Second, the additional allegations relate back to the allegations in Plaintiffs' complaint filed in August 2004. 1. Facts Relevant To Statute Of Limitations Analysis The expanded Class Period, like the initial Class Period, encompasses claims of Lead Plaintiff and other investors in Redback common stock who were defrauded by Defendants' materially misleading statements concerning the various quidpro quo agreements. Lead Cot and Lead Plaintiff determined that they had sufficient facts to expand the Class Period back after it was revealed for the first time in December 2004 that Ragavan executed the Siara Warrant

Affecting the Sec. and Futures Indus., 255 (2002) (attached to Kairis Decl. as Ex. F). The Section 18 Defendants suggest that the article said that the "majority rule" is that Section 18 claims are not available for class action treatment. In reality, that article plainly stated that there was a "severely divided" split in the case law, and that increasingly, courts are certifying Section 18 classes. Id., at 257-258,260.

79 TO the extent that Defendants attempt to dispute the truth of Plaintiffs' allegations of reliance Pefendants do not appear to do so), that dispute cannot be resolved on a motion to dismiss, where the allegations in the Complaint must be accepted as true. Ruttenberg, mem. op. at 2, 10 n.1 (N.D. Ala. Jan. 12,2001) (denying motion to dismiss Section 18 claim which challenged pleading of reliance on class-wide basis).

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Agreement on November 27, 1999. 765. Neither the date of the secret agreement nor the specific names of the parties to the agreement were known to Lead Plaintiff until Weisherg filed a copy of the agreement in support of his motion to dismiss the prior complaint. 7 64; see also 7 121. After the Court granted leave to amend the complaint, on March 27,2005, Lead Plaintiff filed the FAC with the appropriately revised Class Period that encompasses the securities fraud claims of Lead Plaintiff and all other additional investors in Redback common stock who, like those on whose behalf the prior complaint was filed in August 2004, were defrauded by Defendants' fraudulent concealment of the terms of the Siara Warrant ~~reement.~'

2. The Section 10(b) Claim of the Additional Class Members Is Timely

The Redback Defendants argue that the claims encompassed by the expanded Class Period are untimely because they concern false and misleading statements made more than five years befor the March 2005 filing of the FAC. The Redback Defendants have it wrong. The Sarbanes Oxley Act's statute of limitations is stated disjunctively and therefore a complaint filed after July 30, 2002, the effective date of the Act, is timely if it was filed two years after discovery of the facts evidencing the securities fraud or five years after the fraudulent conduct. In Stichting Pensioenfunds ABP v. Best Communications Int'l, Inc., Civil Case No. 04-RB-0238

(CBS), slip op. at 10-1 1 @. Colo. Mar. 29,2005), the court expressly held that the Sarbanes-Oxley two yeartfive year statute of limitations applied to a Section 18 claim filed after enactment of the Sarhanes-Oxley Act. See also Tello v. Dean Witter Reynolds, Inc., 410 F.3d 1275 (I lth Cir. 2005). Here, the complaint filed in August 2004 included allegations regarding the Siara merger, tht Siara Warrant Agreement, and other facets of the quidpro quo agreements with Qwest (and ULTNET). Once Plaintiffs learned in December 2004 of new facts sufficient to form the basis of securities fraud claims based on Defendants' earlier statements about the Siara Warrant and certain other quidpro quo deals, Plaintiffs included those new claims in their FAC, filed in March 2005.

During the initial Class Period, Lead Plaintiff suffered losses of more than $3.3 million. See priol complaint at 712. During the expanded Class Period, Lead Plaintiff suffered losses in excess of $7 million. 7 7.

85 PLAmFS' OMNIBUS BRLEX IN OYPOSlllON TO DEFENDANTS' MOTIONS TO DISMISS TXE FIRST MmEDCONSOL3DATED COMPLNNT Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 63 of 73

Because those claims were brought less than one year from when Plaintiffs could he deemed to havc been on "actual" notice of the expanded scope of the Section 10(b) claim, those claims have clearly been brought within the statute of limitations. Even if the running of the two-year statute of limitations were to be calculated based on the filing of the initial complaint against the Redback Defendants on December 13,2003 (see, e.g., In re Commtouch Sqfhvare, 2002 WL31417998, at *6), the Section lO(b) claim on behalf of Lead Plaintiff and the other members of the expanded Clar filed in March 2005 is timely.

3. The Section 10(b) Claims Of The Additional Class Members Relate Back To The Allegations In The Prior Com~laint

Fed. R. Civ. P. 15(c) governs the relation back of amendments. Under that rule, an amendment of a pleading relates back to the original pleading if "the claim or defense assei amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be sf forth in the original pleading." Fed. R. Civ. P. 15(c)(2). In the Ninth Circuit, when a plaintiff seeks to expand the class period, it is viewed as a request to add party plaintiffs and, thus, the court must determine whether the proposed amendment relates back under Rule 15(~)(3).~' The Ninth Circuit has developed a three-part test for determining whether an amendment adding a plaintiff relates back. See Syntex, 95 F.3d at 935. Under the Ninth Circuit's test, the amendment relates back if (1) the original complaint gave the defendant adequate notice of the claims of the newly-proposed plaintiff, (2) the relation back does not unfairly prejudice the defendant, and (3) there is an identity of interests between the original plaintiff and the newly-

proposed plaintiff. See id. Since all of these requirements are met, the new allegations relate back 1 the original complaint. First, the Redback Defendants do not even address, and thus concede, that the prior complaint gave them adequate notice of the claims of Redback investors who purchased Redback

Rule 15(c)(3) provides: "[Ilf the foregoing provision (2) [quoted above] is satisfied and ... the party to be brought in by amendment (A) has received such notice of the institution of the action thi the party will not be prejudiced in maintaining a defense on the merits, and (B) knew or should havc known that, but for a mistake concerning the identity of the proper party, the action would have bee brought against the party."

86 PMINTIFW' OMNBUS BRlEs IN OPPOSITION TO DEEEND*NTS' MOTIONS TO DISMISS TRl FIRST MIENDED CONSOLDATED COMPLAINT Cwe No. C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 64 of 73

stock in the earlier period. They must concede this because the prior complaint plainly discussed thc Siara Warrant Agreement and described its suspicious underpinnings. The additional evidence that thereafter came to light in December 2004, and was included in the FAC, makes clear that the undisclosed terms of the warrant agreement rendered all statements of the Redback Defendants made during the expanded Class Period about the merger with Siara, the agreement itself, and the purchases by Qwest and others of Redback products, materially false and misleading. Second, the Redback Defendants do not argue that they would be prejudiced in any way by the addition of the new allegations and the expansion of the Class Period. In light of this waiver, the expanded Class Period appropriately relates back to Plaintiffs' previously filed complaint.

The Redback Defendants' sole basis for dismissal is the third Syntex factor - the "identity of interest" factor. Relying on one sentence in Syntex, the Redback Defendants make the unsubstantiated assertion that the "proposed additional plaintiffs here purchased their shares at different prices and after different disclosures than did the original class period plaintiffs" and for that reason alone, there is no relation-back to Plaintiffs' initial complaint. GI. Br. at 38. This assertion begs the question of what is sufficient to show an "identity of interest." In Syntex, the Ninth Circuit found that the plaintiff had failed to show that the "two classes" had an identity of interest. However, the decision is devoid of any discussion of what, if anything, the plaintiff had advanced to support the "identity-of-interest" prong. Thus, Syntex offers no guidance as to what a plaintiff must show to satisfy the third factor for relation back.82 In a prior decision, however, the Ninth Circuit did articulate the grounds for determining

whether the identity-of-interest requirement of Rule 15(c) is met - when "[tlhe circumstances giving rise to the claim remained the same [under the amended complaint] as under the original complaint.' Raynor Bros. v. Am. Cyanimid Co., 695 F.2d 382, 384 (9th Cir. 1982). Further, as the Eleventh Circuit cautioned, there ought not be a "rigid rule that any amendments that modify and thus enlarge

82 Commtouch, 2002 WL 31417998, at *7, the other case upon which the Redback Defendants rely (GI. Br. at 38), likewise contains no analysis of what constitutes a sufficient showing of an "identity of interest." Indeed, in contrast to Plaintiffs here, the plaintiff in Commtouch made no showing of why that factor had been met. Id.

87 PLAMTIFFS' OMNIBUS BRIEF M OPPOSlTlON TO DEI'ENDIWTS' MOTIONS TO DISMISS THE I'1RST AMENDED CONSOLmATED COmm Cnls No. C W-05642 Jr Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 65 of 73

a class will not relate back under any circumstances" because such a determination requires a case- by-case analysis. Cliffv. Payco Gen. Amer. Credits Znc., 363 F.3d 11 13, 1133, n.16 (1 1th Cir. 2004). Here, and apparently in contrast to the plaintiff in Syntex, Lead Plaintiff bought Redback stock during the expanded Class Period. Accordingly, Lead Plaintiff is similarly situated and its claims are identical to those of all class members, having bought Redback stock at prices that were artificially inflated by the materially false and misleading disclosures described in the prior complaint. See Dynegy Corp. Sec. Litig., 339 F. Supp. 2d 804,844 (S. D. Tex. 2004) (allowing nev

class action claims asserted against existing defendants by existing plaintiff on its own behalf and 01 behalf of other investors added to the class). Furthermore, in accordance with Raynor, the circumstances giving rise to the claims of the Redback investors in the expanded part of the Class are the same as those that give rise to the claim! of later investors in Redback, as all the claims are premised on the undisclosed facts surrounding thc Siara Warrant Agreement and the undisclosed true reasons for Redback's announcements of sales tc Qwest and others. The facts here are very similar to those in Blanchard v. EdgemarkFin. Corp., No. 94 C 189( 2000 WL 33223385 (N.D. 111. May 22,2000), where the court granted the class representative's motion to amend the complaint to expand the beginning of a class period. The court allowed the expansion of the class because no new claims were added and, thus, the complaint with the propose, amended class period clearly arose out of the same conduct, transaction, or occurrence set forth in the original complaint. Blanchard, 2000 WL 33223385, at *7. The court also found an identity of interest between the new and the original plaintiff because, although the new plaintiffs were voting- trust certificate holders, whereas the original plaintiffs were common stockholders, both groups had an identical interest with their respective claims insofar as they were victims of the same alleged fraudulent behavior. Id.. In addition, the defendants had failed to contend that they had not been given fair notice of the new plaintiffs claims against them, and did not claim undue prejudice if the amended class was allowed. Id. at *7-8. Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 66 of 73

Here, as in Blanchard, Defendants were on notice since the filing of the August 2004 Consolidated Class Action Complaint of class-member Lead Plaintiffs assertion that the undisclosed Siara Warrant Agreement was one of the true motivating forces underlying Redback's announcements of Qwest's purchases of Redback products. Therefore, Defendants "should have fairly .. . [been] on notice that the class period could be altered as discovery proceeded." Id. Also here, as in Blanchard, Defendants do not claim undue prejudice if the Court permits the amended class period. Moreover, here too, Lead Plaintiff has an identity of interest with the other defrauded investors who purchased Redback common stock in the earlier Class Period because they all have

the same grounds for asserting securities fraud violations in that their losses were due to the same (c substantially the same) material nondisclosures. See also Immigrant Assistance Project Of The Los Angeles County Federation Of Labor (AFL-CIO v. INq, 306 F.3d 842, 858-59 (9th Cir. 2002) (new plaintiffs who are similarly situated to the original plaintiffs did not cause the INS any prejudice because there was an identity of interest between plaintiffs in original class action complaint and those in amended complaint where plaintiffs all alleged that their employers violated the terms of their non-immigrant visas and alleged that the INS'S regulations made them ineligible for legalization); Int'l Bhd. of Teamsters v. Am. West Airlines, Inc., No. CIV-95-2924-PHX-RGS, 1997

WL 809760 (D. Ariz. Sept. 25, 1997) (fmding that current employees added to amended complaint had identity of interest with past employees, where they raised the identical claims based on identic; factual allegations, and the defendant failed to explain how it would be prejudiced by the amendment). Cases that have found no "identity of interest" under the third Syntex factor are wholly distinguishable because, on their face, the plaintiffs in the expanded class period held disparate claims and had interests clearly different than those of the plaintiffs in the original class period. For example, in Clzg the Eleventh Circuit applied the Syntex factors to deny the plaintiffs request to expand the class period on the grounds that the plaintiff had originally made the strategic decision tc

limit the class to individuals residing in one state, and subsequently decided - after the statute of limitations had run -to expand his suit to encompass individuals in all f@ states. Id. In contrast,

here, Lead Plaintiff has made a benign expansion - by less than six months - of the class period 89 P-PS' OMNIBUS BRIEF EV OPPOSlTlON TO DEFEND-S' MOTIONSTODlSMlSSTBE FIRST AMEMlED CONSOLIDATED COMPMT Case No. C 03.05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 67 of 73

beyond the scope of the class proposed in the August 2004 complaint, to include investors that were damaged by disclosures based on the Siara Warrant Agreement, which is clearly fair game since tha undisclosed transaction was the subject of the prior complaint. Likewise, Youngv. Lepone, 305 F.3d 1, 16 (1st Cir. 2002), is inapposite, as the class action

plaintiffs in the later filed action were distinctly different from Cape Ann, the plaintiff in the

previously filed individual action. Cape Ann had invested in NutraMax stock to become a "strategi partner" in the ownership and management of a third company whose later acquisition Cape Ann funded. Cape Ann acquired its NutraMax stock at negotiated prices and took an active role in the company's affairs. Id. In contrast, the class action plaintiffs purchased their shares on the open market at a much wider range of times and prices, and thereafter were purely passive investors. Id. Accordingly, Cape Ann and the new plaintiffs had different vantage points from which to observe how NutraMax was being run, different incentives and opportunities to investigate the ongoing fraud, and had no beneficial interest at all in each other's claims. Id. Similarly, in Howardv. Hui, No. C 92-3742-CRB, 2001 WL 1159780, at *7 (N.D. Cal. Sept 24,2001), the court found that the even though the new plaintiff was a member of the class when tb~ original complaint was filed, he asserted an entirely new claim that the first plaintiff did not and could not allege due to lack of standing, and thus the plaintiffs had different interests. In contrast, here, Plaintiff purchased Redback common stock during the original Class Period and during the expanded Class Period and was damaged in the same way as alleged originally, in that those purchases were based on the same (or similar) misstatements and omissions. For these reasons, and because the decisions involving plaintiffs with no identity of interests are inapplicable, the Court should deny the Defendants' motions seeking to dismiss the Section 10(b) claim as untimely. 4. Plaintiffs' Section Ma) Claim Is Timely.

The Redback Defendants argue that "for the same reasons that the Section 10(b) claim is time barred, plaintiffs' Section 18(a) claim is barred by the even shorter statute of limitation set fortl in Section 18(c)." GI. Br. at 38 n.14. PwC similarly argues that the claims encompassing the expanded class period are untimely under the one yearlthree year statute of limitations period. PwC Br. at 9. Defendants apply the wrong statute of limitations period.

90 PLAWI'IFFJ' OMNIBUS RRIEF hl OPMSmON TO DEPENDNS' MOTIONS TO DISMISS THE QmSTAMENDED CONSOLDATED COMP- Case No. C 03.05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 68 of 73

Section 804 of the Sarbanes-Oxley Act extended the applicable statute of limitations for any "private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws" to the earlier of two years following notice or five years after the occurrence of the facts giving rise to the claim. 28 U.S.C. 5 1658 (2004). Although the Ninth Circuit and courts in the Ninth Circuit have not yet applied the limitation period contained in the Sarbanes-Oxley Act to a Section 18 claim, it is apparent from the legislative scheme that its application is appropriate because a Section 18 claim is a claim involving deceit. Section 18(a) of the Exchange Act establishes civil liability for false or misleading statements filed with the SEC, where such statements are relied upon in the purchase or sale of securities at a price that was affected by the misleading statement. See 15 U.S.C. 8 78r(a). The Supreme Court has expressly recognized that Section 18 is among the arsenal of the Exchange Act's

causes of action designed to root out corporate fraud. See Musick, Peeler & Garret v. Employers Ins. of Wausau, 508 U.S. 286,295-296 (1993) ("[Sections] 9 and 18 . . . both 'target the precise dangers that are the focus of $j1 Om),' and the intent motivating all three sections is the same-'to deter fraud and manipulative practices in the securities markets, and to ensure full disclosure of information material to investment decisions. . . ."') (internal citations omitted); see also Randall v. Loftguarden, 478 U.S. 647, 664 (1986) (noting that "Congress' aim in enacting the 1934 Act was not confined solely to compensating defrauded investors. Congress intended to deter fraud and manipulative practices in the securities markets, and to ensure full disclosure of information material to investment decisions."). It is beyond dispute that limitation periods contained in the Sarbanes-Oxley Act apply to claims under Section 10(b) of the Exchange Act. See, e.g., In re Heritage BondLifig., 289 F. Supp. 2d 1132, 1148 (C.D. Cal. 2003). Given that Section 18 "target[s] the precise dangers that are the focus of 5 1001) . . . to deter fraud and manipulative practices in the securities markets, and to ensure full disclosure of information material to investment decisions," Musick, 508 U.S. at 296 (internal citations omitted); it follows logically that the Sarbanes-Oxley Act's limitations periods are properly applied to Plaintiffs Section 18 claim.

9 1 PLAINTIFFS' OMNBUS BRIEli LN OPPOSITION TO DEFENDmTS' MOTIONS TO DLWTSS TAE FMTAMENDED CONSOLIDATED COMPLAINT

Cn~eNo. C 03-05642 .W Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 69 of 73

Therefore, the Court should reject Defendants' contention that Plaintiff cannot recover on it! Section 18 claim for purchases between November 27, 1999 and August 23,2001, as the Sarbanes- Oxley Act extended the recovery period under a two year "discovery" rule. For the same reasons discussed above demonstrating that the Section lo@) claims of Plaintiff and all other class member, are timely, the Section 18 claims for Lead Plaintiff and the other class members in the expanded Class Period are timely. They were filed in March 2005 which is well within two years of August

2004 when Plaintiff arguably was on actual notice of those Section 18 claims by virtue of filing its Consolidated Class Action Complaint that included background facts about the Siara Warrant Agreement. Even accepting Defendants' argument that the Section 18 claims are subject to a one yearlthree year limitations period, Plaintiffs and all other class members' Section 18 claims are stil timely because they were filed within one year of actual notice of the possible existence of the claims. In any event, the Section 18 claims brought on behalf of Plaintiff and the other members of the expanded Class are timely for the same reasons discussed above demonstrating that the expande Section 10(b) claims relate back to Plaintiffs' Consolidated Class Action Complaint filed in August 2004.

VIII. THE COURT'S LEAD PLAINTIFF APPOINTMENT NEED NOT BE UPSET

The Redback Defendants claim that the Court should re-open the process for Lead Plaintiff appointment in the event that this case proceeds with the expanded Class Period. GI. Br. at 38, n.15 The time for challenging the adequacy of the Connecticut Funds or anyone else to serve as Lead Plaintiff has long since passed, and the Redback Defendants do not even have standing to make this challenge.

A. The Time Established By the PSLRA to Appoint Lead Plaintiff Or Challenge The Adequacy of A Lead Plaintiff Has Long Expired

"The PSLRA imposes strict time requirements. It even requires that the Court consider any

motion for lead plaintiff within ninety (90) days of the date on which notice is published." See In n

92 PLABiTlFFS' OMNTBUS BRIEF Bi OPPOSITlON TO DEFENDAWE' MOTIONS TO DLSMISS lliE mTAMENDED CONSOLIDATED COMPLUNT Case No. C 03-05642 JB Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 70 of 73

Telxon Corp. Sec. Litig., 67 F. Supp. 2d 803,818-19 (N.D. Ohio 1999) (internal emphasis and citations omitted). The Ninth Circuit requires "straightforward application of the pSLR.4 Lead Plaintiff] statutory scheme." In re Cavanaugh, 306 F.3d 726, 729-734 (9th Cir. 2002). In Cavanaugh, the Ninth Circuit reviewed in detail the three-step process for appointing a lead plaintiff in class actions governed by the PSLRA: 1) plaintiffs publish notice of the pending action; 2) the court compares financial losses to identify the presumptive lead plaintiff who meets the typicality and adequacy requirements of the PSLRA; and 3) other plaintiffs have the opportunit).

to rebut the typicality and the adequacy of the presumptive most adequate lead plaintiff. Id, at 729- 32. This Court rigidly followed the three-step process and appointed the Connecticut Funds as the "most adequate lead plaintiff' for this case. See Order dated May 17,2004 at 8. There are no provisions in the PSLRA allowing the Court to upset its appointment of lead plaintiff more than a year later, as the Redback Defendants suggest. In Telxon, one of several competing lead plaintiff movants urged the court to consider losses suffered during a class period that was proposed in a complaint filed after the 60-day deadline to move for lead plaintiff. Id. at 806. The Telxon court refused and held that the "plain language of th, [PSLRA] precludes consideration of a financial loss asserted for the first time in a complaint, or any other pleading, for that matter, filed after the sixty (60) day window has closed." Id. at 818 (emphasis in original). The court also stated that "new notices need not be filed when an amended complaint asserting a different class period is filed because a contrav rule 'would mean that the lea( plaintiff could not be appointed until sixty days after publication of the last notice" and the "obviou: intent of [the PSLRA's] provisions is to ensure that the lead plaintiff is appointed at the earliest possible time, and to expedite the lead plaintiff process." Id. at 819. Likewise, this Court should reject the argument that the strict statutory scheme of the PSLRA should be ignored.

1. Defendants Havc No Standing or Any Meritorious Basis to Challcnec the Adequacy of Lead Plaintiff

In addition, the plain language of the PSLRA limits standing to challenge the adequacy or typicality of a presumptive lead plaintiff only to other plaintiffs. See 15 U.S.C. 5 78u- 4(a)(3)(B)(iii)(II); see also In re Read-Rite Corp. See. Litig., No. C-97-20059 RMW, at 3 (N.D. 93 PULNTIFFS' OMNIBUS BRIEF M OPPOSlTlON TO DEPENDANTS' MOTIONS TO DLSMlSS THE RRSi -NDED CONSOLmATED COMP-T Cam No. C 03-05642 3T Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 71 of 73

Cal. May 27, 1997) ("rebuttal of the lead plaintiff presumption is restricted to plaintiffs or members of the purported class"); Gluck v. Cellstar Corp., 976 F. Supp. 542, 550 (N.D. Tex. 1997) ("The statute is clear that only potentialplaintiffs may be heard regarding the appointment of a Lead Plaintiff.") (emphasis in original). Moreover, there is no authority (and the Redback Defendants cite none) requiring a lead plaintiff to rigidly adhere to the same proposed class period defined by one or more plaintiffs when a case is initially filed. To the contrary, a lead plaintiff has a fiduciary duty to class members to

analyze and determine the most appropriate class period to obtain the largest recovery for the class. See In re NetworkAssoc., Inc. See. Litig., 76 F. Supp. 2d 1017, 1032 (N.D. Cal. 1999) ("The lead plaintiff owes a fiduciary duty to all members of the proposed class to provide fair and adequate representation and actively to work with class counsel to obtain the largest recovery for the proposed class consistent with good faith and meritorious advocacy."). Here, Lead Plaintiff conducted an extensive investigation into the Defendants' unlawful scheme and conduct and uncovered facts demonstrating that the Class Period should begin on November 27, 1999 -the day that Ragavan executed the Siara Warrant Agreement. 7 65. Neither the date of the secret agreement nor the specific names of the parties to the agreement were known to Plaintiffs until November 8,2004 (more than two months after Lead Plaintiff filed its prior complaint), when Marc Weisberg filed a copy of the agreement in support of his motion to dismiss the Consolidated Complaint. 7 64. After the Court granted leave to amend, Lead Plaintiff appropriately revised the Class Period to encompass Defendants' fraudulent concealment of the Siara Warrant Agreement and all false and misleading statements issued subsequent to the execution of the agreement on November 27,1999. See, e.g.,W 64-65, 130-15 1. While the Redback Defendants oppose the expanded Class Period under the guise of concern for absent Class Members, in reality they seek to minimize their potential exposure resulting from additional Class Members and a larger recovery of damages for the Class. Lead Plaintiffs losses alone increased from over $3 million to more than $7 million in the expanded Class Period. 7 7. Also, by seeking to oust Lead Plaintiff (and potentially Lead Plaintiffs choice of Lead Counsel), the Redback Defendants surreptitiously are trying to disrupt and delay this

94 PWFFS'OMNUlUS BRIEF M OPPOSITION TO DEIIENIANTS' MOTIONS 1.0 DISMISS lltE FIRST AMENDED CONSOLDATXD COMPLAIN7 Cere No. C 03-05642 .IT Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 72 of 73

litigation, which in no way will benefit Class Members. Allowing the Redback Defendants to wrangle control of this case from the Connecticut Funds, an institutional investor with a large stake and active participation in this litigation, would fly in the face of the requirements of the PSLRA. See Cavanaugh, 306 F.3d at 737 (Ninth Circuit agreeing with SEC position in amicus brief stating that "Congress sought to 'encourage institutional investors to take a more active role,' which would 'ultimately benefit shareholders and assist courts by improving the quality of representation

in securities class actions."') (citing H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995 U.S.C.C.A.N. 679); Network Assoc., 76 F. Supp. 2d at 1020 ("Congress expected that the lead plaintiff would normally be an institutional investor with a large stake in the outcome."). The Redback Defendants' argument should be rejected.

95 PLAMTIFPS' OMNmUS BRIEF M OPPOSmON TO DEXENDAW' MOTIONS 'TO DISMISS TAE BIRST AMENDED MNSOUUATED MMPLNNT Case No. C 03-05642 JP Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 73 of 73

CONCLUSION

For all the foregoing reasons, all of the motions to dismiss should be denied.83

Dated this 19th day of July, 2005. Is/ Stuart M. Grant Stuart M. Grant (pro hac vice) John C. Kairis (pro hac vice) Lauren E. ~a@er(pro hac ;ice) Kimberly L. Wierzel (pro hac vice) GRANT & EISENHOFER P.A. Chase Manhattan Centre 1201 N. Market Street Wilmington, DE 19801 Tel: 302-622-7000 Fax: 302-622-7000 Lead Counsel for Lead Plaintgf The Connecticut Retirement Plans and Trust Funds Merrill Glen Emerick (State Bar No. 117248) ANDERLINI, FINKELSTEIN, EMERICK & SMOOT 400 S. El Camino Real, Suite 700 San Mateo, CA 94402 Tel: 650-348-0102 Fax: 650-348-0962 Local Counselfor Lead Plaint~fThe Connecticut Retirement Plans and Trust Funds

83 The Redback Defendants contend that the FAC should be dismissed without leave to amend (GI. Br. at 43-44), but a dismissal with prejudice is warranted only if "it is clear . . . that the complaint could not be saved by any amendment." In re Daou, 397 F.3d at 710 ("Dismissal without leave to amend is improper unless it is clear . . . that the complaint could not be saved by any amendment."); see also Carol Gamble Trust 86 v. E-Rex, Inc., 84 Fed. Appx. 975,979 (9th Cir. 2004) ("adherence to the principle of liberal grants of leave to amend is especially important in the context of the PSLRA.") (internal quotations and brackets omitted) (emphasis in original). The FAC is, essentially, Plaintiffs' first amended complaint as Plaintiffs were permitted to add allegations agains Kruep (following the Court's grant of Plaintiffs' Motion for Reconsideration) and were permitted to address new law (following the U,S. Supreme Court's decision in Dura). Indeed, the FAC is only the second complaint filed by Plaintiffs which the Defendants have sought to dismiss. Having had only one chance to amend, and keeping with the liberal policy favoring leave to amend, should this Court find that the FAC is deficient in any respect, the dismissal should be with leave to replead.

96 PLANTWPS' OMNmUS BRIE# IN OPPOSITION TO DEIENDmTS' MVI'IONS TO DISMISS Tfir FIRST AMENDED CONSOLmATED COMPLAINT Case No. C 83-05642 JF EXHIBIT B TO JOHN C . KAIRIS DECLARATION IN SUPPORT OF PLAINTIFFS' OMNIBUS BRIEF IN OPPOSITION TO DEFENDANTS' MOTIONS TO DISMISS THE FOURTH AMENDE D CONSOLIDATED COMPLAINT ••= . . , - ~z `6~w ~i'~•'~~~_' :a `cax alz~ =•.:3+S~t-kaaw.~;. x.---9~,.•-":Ly

ORIGINAL +~.~~ NEl'iHER, THE SECM ~. EVIDENCED BY THIS WANT NORNO THER SECT IU= ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT Off'' 1933, AS AMENDED. SUCH SBMRT IES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL FAR THE HOLDER. OF SAID SECURITIES THAT IS REASONABLY ACCEPTABLE TO UM • CO ANY; STATING THAT SUCH SALE OR TRANSFER IS E WT FROM TE REGISTRATION REQUT ME I S OF TUE SAM ACT OR THE COI's OTC" SE SATXSMES ITSELF THAT SUCH TRANSACTION IS E MeT MOM REGISTRATION. '

COMMON STOCK WARRAW OF SLARA SYSTEMS, INC. THIS CERTIFIES THAT, subject to the terms and conditions of this Warrant, for the consideration of $1 .00, the receipt arid gufficiency of which are hereby aclcaowledged" U.S. Telesourc;, lnc,, a Delaware corporation, or its successors and assigns (the `IHoldee is entitled to purchase from Siam Systems, Inc., a t)eliware coi oration (the `r-anWaz►y"), at any time and from time to time an or after the date hereoZ of shares of Common Stock par value $0.001 per share (the "Common Stock), of the Company in such number and at such price as determined in accordance with this Warrant . Upon delivery of this Warrant (with the Notice of Exercise in the form attached hereto as gxhibit , together with payment of the Warrant Price (as deed below) for the shares of Common Stock to be issued, which payment may be made by converting this Wanrant, or any portion thereof, pursuant to Section 5 below ("Warrant Conversion'), at the principal office of the Company or at such other office or agency as the Company may designate by notice in writing to the Holder hereo the Holder shy be entitled to receive a certificate or certificates for the sham of Common Stock so pwcbasid, v All share's of Common Stock that may be issued upon t ho exercise of this :Warrant will,'upon issuance in accordance with the terms hereof, be fully paid a nonassessable and five &otn all taxis, liens and charges with v ape ct to the issuance and delivery themof. " . This Warrant is subject to the following terms and conditions :

x. Tam of Warra nt . 'his Warrant may be exercised in whole or in part at .any time and from time to time on or after the date hereof; roQ ovi however, that this W W=t shall expire to the extent then uneacercised as of 5:00 p.m., eastern trims on December 31, 2004. .2. Number of Wan=t Sharer. Subject to adjustment from time to time pursuant to Section 4 hereof and subject to all the othertonns and conditions of this Warmer, the Holdermay exercise this'Warrarlt with respect to 100,000 shares (the "Sha s") of Common Stock (or other serurides issuable in the event of a reclassification, change, merger or consolidation as set forth in Section 4 hereof.

FOJA cps, aential Treatment QDSEC S 14420 3 ReQUested by Qwest Communications 1ntJ Inc,

CCO 43toot s Corr nee Stork Wursnr

TT/E'd LS~li - )4JT1 ~ [+l► t~ :@~ SBA BE AN Qwesr Communications Corporation, a Delaware corporation and the parent corporation of Holder ("Qwest`"), hereby agrees to purchase (on its own behalf or through its aff hi tes) fro m the Company or its successors upon reasonable and customary terms at least 40 mil .ion worth of equipment, that is currently under development by the Company, on or prior to December 31 , 2001; provided that the Company snail have made available to, Qwest equipment that meets in all material respects the sp ecifications and product pricing 'and service level agreements (commensurate with pxiciug and service .-levels offered o•third parties for sibtilar quantifies ) which shall be reasonably agreed to by Qwest and the Company. If Qwest does not purchase at least million worth of such equipment from the Company on of priorto December 31, 2001, then the Company may pursue all remedies available to it at law or in equity to recover al l damages (including re asonable attorneys' lees) arising it connection with Qwest's breach of Qwest's agmen.ent in the immediately preceding sentence.

3. " "Watra»t Price. The exercise price of US Warrant (the "Warrant Price") shall equal SUD per Share, subject to adjustment from time to time pursuant to Section 4 hereof.

4. Adjustment of Number of Shares and Warrant Price . The number and kind of Shares pw basable upon the exercise of the Warrant and the Warrant price shall be subject t o adjustment from time to time, in accordame with the following provisions: (a) Adjustment for Stock Splits and Combinations . If at any time or from time to time while this Warrant ternains outstanding and unexpired , the Company s ti effect a subdivision of the outstanding Cow=on Stock,, the Warrant Price then in eflbct immediately before that subdivision sbn"I be proportionately decreased . If at any time or from time to lime while this Warrant remains outstanding and unexpired , the Company shall combine the , .-_.. outstanding shares of Common Stork, the Warrant Price th= in effect 3 inedietely before the 4' S combination shall be proportionately increased. Any adjustment under this subsection (a) shall become effective at the close of business on the date that the subdivision or combination I bceames effective.

(b) Mustnent for ertain Dividends and Distributions . In the event that, while Ibis Wan t remains outstanding and unexpired, the Company at any time or fibm time to die s W make or issue a dividend or other distdbution on its Common Stock payable- in Common Stock, then and in each such event the Warrant Prier shall be decreased as of the time of such issuance, by multiplying the Warrant Price by a fraction, the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuace, and the denominator of which sib. be the total number of shares of Common Stork is l and outstanding immediately prior to the time of such issuance plus the number of shares of Common Stock issuable in payment of such dividend of distribution. `

(e) Adjustments for Other Dividends and Distriibutions, In the event that, while this Warrant remains outstanding an unexpired, the Company at any time, or from time to time shalt nuilt* or issue, a divideAd or other distribution on its Common Stock payable in securities of the Company other than shares of Common Stock then and in each such event provision "I be made so that the Holder shall receive upon the exercise of the Warrant in addition to the number of Shares receivable thereupon, the amount of swuifks of the Compagy that the Holder would have received had the Warrant been exercised with respect to the Share s

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FOlA Confidential Treatmen t Requested byQwest QDSEC 5142 1 CommunicaVons int'f Inc. _ ; .~~'~`ar"~~';~'=x _ _.~rc~~u!K~z~3~{~=cs"t:, .y~,~ . _ .ao~ ~1±x~~n~,~ti~w:_.• a .r~ :~~~'-' . ..n r ..,.. »ti . . .. .~J,. ~~~;w -+ .._~.;. ~Ec.~ ~2~x"F..l ~" " :1. ~`i•?~c"~ . : . .v .s ~ . :n . ~v...~~ :i::_e.L• ti_~::~:e;:.ue~Y1'#-$ rte, t on the date of such event and had thereafter, during the period from the date of suOit event to and including the date on which the Warrant was exercised, retained such securities receivable by the Holder as aforesaid during such period Sivcn application to all adjustments called for during such period. {

(ci) R lassz cation, Consolidation or Mcraer. hi' case of any capital reorganizatiarr¢ reclassification or change of o ustandin securities of the class issw'~ble u exercise of the Warrant (other than as a result of a subdivision, split, combination or stock dividend). or in one of any consolidation or merger of the Company with or into another entity, the Company, or such successor entity, as the'case may be, shall execute a new Warrant, with substantially the same terms as this Warrant, or amend this Warrant, to provide that the Holder "I have the right to exercise such new Warrant or amended Warrant and procure upon such exercise in lieu of the Common Stock theretofore issuable upon exercise of this Warrant the kind and amount of stress of stock, other secikitie*, money and/or prop" receivable upon such reorganization, reclassification, change, cattso ;elation or Mftger by the Holder as if this Warrant had been telly exercised irnme lately prior o such evsnt. Any such now Warrant shall provide for wdjust tents which shall be as nearly:equiyalcnt as may be practicable to the adjustments provided for in this Sermon 4. The provisidw of this subsection (d) shall similarly apply to successive reorganizations, reclassi cation§.changes, consolidations and mergers.

(e) Certificate as to Adiustnients . Upon the occurrence of each adjustment or readjustment of the Warrant Price pursuant to this Section 4, the Company at its expense shall promptly compute such adjustment or readjust nc t in accordance with the tcnr hereof and furnish to the Holder a certificate setting fork such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based and shall file a copy of such certificate with its corporate records . The Company shall, upon the reasonable written request of the Holder, furnfshh or cause to be furnished to the Holder a similar certificate sett forth (i).sueh adjustments and readjustmcn s, (ii) the Warrant Price then in eft and (iii) the number of Shares and the amount, if any, of other property which th= would be received upon the exercise of the Warrant.

S.' Parr ent by Na no Conversion. The Holder may exerise the purchase right represented by this Warrant with respect to a particular number of Shares subject to this Warrant {`'Converted Warrant Shares") and elect topay for a number of such Converted Warrant Shares through. Warrant Conversion by 'specif'ying such electron in the Notice of Exercise attached hereto as Exhibit In such event, the Company shall deliver to the Holder (without paynnentby, the Holder of any Wan t Price or any cash-or other consideration) that number of Shares equal to the quotient obtained by dividing (x) th* value of this Warrant (or the specified portion heft f) on the daft of exercis% which value shall be determined by 'subtracting (A) the aggregate Warrant price of the Converted Warrant Shares immediately prior to the exercise of the Warrant from (H) the aggregate fair market value of the Converted Warrant Shores issuable upon exercise of this Warrant (or the specified portion hereof) on the date of ext:wise, by (y) the fair market value ofone Share on the date of exercise. • For purposes of ft Section, 5, fair market value of a Share as of a particular date shall be (i) the average closing price of the Company's Common Stock for the twenty (20) trading days immediately prior to the exercise of the applicable Warrant if the Company's Common Stock is then publicly traded; or (ii) the value determined by i FOIAConfidential Treatment QDSEC 514422 Requested by Qwes t COmmugPcai[ons intl Jnc. CC1:+~3SOS1.S 3 CoMrFm Qtaek Watmsc TT/P d -LM - >f3It't4i WMG .-OT 66 . 62 At1h! the Company's Board of Directors in good faith, if no public market exists for the Company's C,mnion stockk •

6. Notices. Upon any adjustment of the Warrant Price and any increase or decrees in the number of Shares purchasable upon the exercise of this Warzant, then, and in each suc)t case, the Company, within 30 days. thereafter, shall give writtea notice thereof to the registered bolder of this Warrant (the'Watico") . The Notice dull be mailed to the address of such holder as shown on the books of the Company ; and shall state the Warrant Price as adjusted and the increased or deuced number of shays purchasable upon the exercise of this Wanant, setting forth in reasonable detail the method of calculation of each.

7. Transfer and change of th Warrant and Shares. When this Warrant or Shares are presented to the Company with a request to register their transfer or to exchange such Warrant for an equal number of war ants of other authorized denominations, he Company stall register the transfer or make the exchange as requested if the following requirern .ents are met: (a) The Warrant shall be duly cndorssd or accompanied by a written instruction of transfer in form satisfactory to the Company, duly executed by the Holder thereof or by its attorney-in-fact, duty authori in writing ; and (b) In the case of Shares, such request shall be accompanied by the following additional information and documents (all of which may be sub pitted by facsimile), as applicable: (1) If such Shares are being transferred (A) to a "qualified institutiox buyeel (as deftned in Ruse 144A) In acco once with Rule 144k or )pursuant to an exemption from registration in accordance with Rule 144 (and based on an opinion of counsel ift a Company so guests), or (C) pursuant to an effective registration statement under the Securities Act, a certification to that effect; (ii) If such Shares are being transferred pursuant to an exemption from registration in accordance with Rule 904 under the Securities Act (and based on an opinion ofcouritsel ifThe Company so requests), aoertificationi to that effect; or (iii) If such Slum are ' being transferred in reliance on another exemption from the registration requirements of the Securities Act (and based on an opinion of counsel ifft Company so rcghests), a cert icatiott to that effect.

Representations and Warranties: zThe Company represents and. warrants to the Holder as follows: (a) Q anization and Powers. The Company (1} is a corporation dilly or ized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; and `(ii) has alt the requisite power and author ity to carry on its business and to execute, deliver and perform its obligations under this Wanent. () Authori anon; No Cori iict. The offer and sale of the Warrant and the Common Stock underlying file Warrant, and the execution, delivery and perfbrmance by the

1.1 W:48061.5 4 common creek ra M"t T'T/S's! 1531 - 1 XI1434 4TS :O 56t 6'F AOW FOIA Confidential Treatment Requested by Qwest QDSEC S14423 Communications Intl Inc, ~. . . •Y Company of the Wir*ant have been duly authorized by all necessary corporate action of t Company and do not and will not (J)contravene the Company's articles of incorporation or by rs; (ii) result an a breach or default under any material instrument, contract or other ageerneat to which the Company is a party ; or (iii) to the Company's knowledge, violate any provision of any law, :u1e, regulation, order. judgment, decree or the like binding an or affecting the Company.

(c) Binding Ctbli&aiaaus The Warrant constitutes, or will constitute, a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as may be limited by bar ptcy, insolvency, reorgantizatiou, moratorium or other similar laws relating to or affecting creditors' rights generally and general principles of equity, including, without limitation, concepts of materiiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief; regardless of whether considered in a proceeding of equity or at law . - (d) Capitalization As of the date of this Warrant, tine authorized capital stock of the Company consists of 3S,0006000 shares of the Common Stock and 13,500,000 shares of preferred stock, par value $0.001 per share of the Company (the "P referred Stock'), of which (i) 14,226,153 shares of the Common Stock were issued and outstare ing (11) no shares of the Common Stock were held in the treasury of the Company, (iii) 7,05$,905 shares of the ?referred Stock were issued and ou tstanding, (iv) 3,657,370 shares of the Common Stock reserved for issuance upon exercise of outstanding stock options issued by the Company to c=ent or former employees and directors of the Company, and (v) 16,477 shares of the Common Stock reserved for Issuance upon exercise of authorized but issued stock options . In addition, warrants to > -. . .~ purchase approximately 18,000 shares of Common Stock and 135,OD0 shares of series B Preferred Stock we currently outstanding .

(e) Shares uly Issued. The Shares, when issued upon the exercise of this Warrant pursuant to the terms hereof shall be duly issued, fully paid and non-assessable.

(1) No Registration. Based upon the representation of the Holder in Section 11, and in reliance thereon, and based upon the applicable provisions of the Securities Act of 1933, as amended (the "Sectuities Act"}, and the riles and regulations promulgated th eumde r, the' offer and sale of the Warrant and the underlying Shares of Common Stock are exempt from the registration and prospectus delivery reqWre ents of the Securities Act .

9, Ke istrat oa. Rim. The Holder sbull have such registration rights with respect to the Shares as are applicable to shares of Common Stock as specified in that cep Amended and Restated Investors' Rights Agicement dated- as of December 21, 1998 .

10. press Releases. The Holdertshaf have the right to approve the Bonn and content of all press releases or public announcements that shall be made concerning this Warrant and the transactions contemplated hereby, and the Company shall not make any press release or public annotuwemein without the Holder's prior written consent, which shall not be unreasonably wit helc .

FQI,4 ConfldentiaT Treatment QDSEC SI4424 Requested by Qwes t Communications In£I Inc. •. CCIA39 bt,s S Common Siock wuraat

ct~9'd IS3M >DIMN3i•itsta : 3t 66, 62 dOM rte . .. s

i 13. tepresentation and Warranties and A ncuts of older. The Holder hereby repr nts and warrants to, and agrees with, the Compa y as fellows:

(a) Inyestmct t Pumase. The right to acquire the Common Stock iss abk upon exercise of the Holder's rights contained herein ~i11 be acquired for investment and not with a view to the sale or dionbutiou. ofany part therecs, and the Holder has no present mention, of selling or engaging in any public distribution of the eaznc except pt nsnant to a registration or exemption.

(h) Private Issue. The Holder tenders ds (f) that the Conunou Stock issuable upon exercise of this 'tent is not registered = der the Securities Act; and (ii) that the Company's reliance on exemption £ om the Securities Act is predicated on the representauom and warranties of the Holder.

(e) Financial • Risk. The Holder ::ss such knowledge and experience in financial and badness matters as to be capable of evaluating the merits and risks of its investment. and has the ability to bear the erne mierisks of its investment, • i (4) Accredited Investor., The Holder is an "accredited iuvestof within the meaning of Rule 501 under the Securities and Exchange Act of 1934, as amended, as presently in efFeet. .

(e) State ofResidence, The Holder amides in the state of Colorado .

`f . ( Market Standoff A{ rreement. 1 connection with the Company's Wtial underwritten public offering of the Coznpsny's secures, neither the Holder nor any transferet ~` of the Holder may sell, make short sale of, loan, nt any options for the purchase of, or otherwise dispose of any Shares (other than any Shares included in the registration) without the prior written consent of the Company or the underx:•?ters managing such initial underwritten public offering ofthe Company's securities for one Bred eighty (180) days from the effective date of such re stration. The Holder agrees to execute any form of lockup agrccraeat substantially similar to the preceding sentence pzapared . by the Company or the ma g underv iters that is also requited of the Company's v-s directors std employees generally.

(it) 'he terms thiss Wanrnt shall be binding upon and shall inure to the benefit of any successors or assigns of a Compat>

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FOJA Confidential Treatment Requested by Owes t C DS EC S14426 Cornmunicalkins Inn Inc. Y

/~ 1 { (c) AGCectance. Receipt of6& Witt by the Holder hereof that . constitute acceptance of and agreement to the foregoing terms and conditiot s.

(d) Fier Assurances. The Cczpaiy will not, by amendment of its certificate of incoxpor'ation or bylaws or through arz;, other act n, avoid or seek to avoid to observance or performance of any of the terms;of this 'Wv arrant, but will at all times in good faith assist in the carrying out of PR such-ter and in the .song ofall actions as rosy be necessary or appropriate in order to protect the rights of the Holdear, ainst impairment

(c) R Iaceme t upon, receipt cf evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation othis Warrant and, in the case of any such loss, theft or distribution, upon delivery of an iude ity agreement onably satisfactory in foram and amount to the Company or, in the case of my such mutilation, 'upon surrender and cancellation 4f such Warrants, the Company at its xpense will. execute and deliver, in lieu thereof, a new Warrant of like date and tenor. (t) Amendment and I aiver.. Any vision of this Warrant may be amended, waived or modified upon the written consent of the Cc=pany and the Holder. (g) tea ation of 5ha . The Ccpauy hereby agrees that at all times there shall be reserved for issuance and/or delivj upon ex se ofthis Warrant, free from preemptive rights, such number of authorized but unissued shams ofCommon Stock as fom time to time shall be required for issuance or delivery upon exerts of this Warrant The Company further agrees that it will promptly to take all action as may om time to time be required in order to permit the holder hereof to exercise this Wamut and a Company duty and a ectively to issue shares of Common Stock hereunder. .

(!x) Gower L . This Warr... shalt be governed by and construed in accordance with the laws of the State of Delaware grit out regard to the conf licts of laws provisions thereof

[Remainder of Page lntenti {y Left Blank]

FOI d Confidential Treatment A Requeste by y c Qw west QDSEC S14426 Communications Intl Inc .

7 Cv~snna~StoCklvYrreni CC1t418Cb1. tT/~'d J53M - >OD*Gj M R,; :81 fib, 62 AN It BY ; situ Systems ; 1550 237 2iOO ; Nov-20-99 3 .33P~k ; page 2!3

{

IN WT'2NESS WHEMP, tie catvrny: the ol~fea 21A Q.rs~t t~AVe caus~ad th e W=M to be sjg~xcd 'by thoirMpcdivo duly au*t n cis, .

ST . S YS EMS,1NC.

Sy: LY Nam:. .Mi ..

U.S. m SOUvrE.INC.

Bit

Ni: Title-

QW 5t CO UNIGATICNS CORPO"TION

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TN WIThtS W[1RRF.OF, ttko. Company, tiro iILNlder and Qwvst have Cau cd This Warrant its b4; iigned by tit r. spcctive duly uutbtn lzcd offtccrS.

Dated: Mav~rrakxor , 1)99

SIAM SYSTEMS, INC.

By: ..

Tito,

U.S. TELESOURCE, INC .

ov r Name: /G

QWEST COMMUNICATIONS CORPORATION

KUM

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TT/aT Id FOIA ConMentia] Treatment Requested by Qwest QDSEC S14428 Commun€caflons Intl Inc. EXIIT A

NOTICE OF E tCISE

TO. Sia* System, Inc.

L. The undersigned hereby elects to purchase _ sly of ti e Common Stock of Siam Systems, Inc. pursuant to the terms of the attached Wat, and gets liewith payment of the purchase price of such shaves in ML together nth all applicable tra,.sfer taxes, if any.

2, no undersigned hereby elects to exercise the purchase right with respect to shares of such Common Stock through Wszxant Conv ersion1 as set ftth in Section 5 of the attached Warrant.

3. Please issue a certificate or certificates representing said shares of Common Stock in the mwe of the undersigned or in such other names as is specified below:

(Nome)

0-.) (Address)

Signature of Holder:

BY. Name: Title.

A-4 Comtnc SOck Wnnnt Zl~«1 ;[AR60D1~}C,,19bS~9# .~ k TT/TT *CI .L 31 - ) I t PS;O't 65, 6E im

• 3 ' FOIA Conffdentiaf Treatment Requested by Qwest QDSEC S14429 ComfMUnfrations lnri Fne . MM- Vu-.-T UP PMO ALTO, C& WASMOTON. bC SAM EJLaWCO . CA ` ►5` i. , `io M Two Paco Afro gram, PtdoA" Of 94396

DATE: November 29 ;1999 ACCOVNT#: 21248-W60a'

MUM. Tyler R. Cam= (650) 858-7635 Direct Dial (650) 494-0600 Geaaai (650) 49+4-1417 Fax

0 I 3)ENTIA L

TO: SFARFJJ~ WCUNUCKC ~ova~ :ryL isua Tom WiElkei► ,

ER OF PAGES: , 21 (including covet sheet) J

GL:

Attached is sn cI ccuted copy of the Common Stock Warrant dated November 27,1999 . Should you have any qu ois, please call me at (650) 858-7635.

I' • IF YOV DO NOT REEEWE "M COREEC"x M OIM OF PAGES, OR lF lax ARE NOT CLEAR. PL E M LL T E FAX (650) X600 W.7240Olt JAN CREWS ATE'. 7358. The inium, a~ +eansed ja thIs t o aresuge is prfviftgsd uui aonfldcuUM i ion thtmdxd onlyFar th u afths Indjvtdwl ar crnny named abe a oe iWrdaIpa. Ifdhronlorcftlacmump ism the%M wed eipiet4 you erebe cby noti6ed dw any diraem na* on . disc 'burian ce eopya!'this ~dai>r sari iyprcbibi'xd : Ifynu bivo cc vcdt t ronuiwm + as is agar, pierce imnicdi*ly Ito if7 nsbyidephan a ~undse n cri~iad m gato + u ~hecWve.dthees vI the 1 r9 . Posu1$en icc `[,'Sank y u .

'Ctr'C'd ' .t.M - 3 1 PJ3 d WUBP:OT W o E AOW FOJA Con fi dential Treatrr nt Requested by Qwest QDSEC S1443O Communicefons Ind lnc_ Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 1 of 198

EXHIBIT C TO JOHN C. KAIRIS DECLARATION IN SUPPORT OF PLAINTIFFS’ OMNIBUS BRIEF IN OPPOSITION TO DEFENDANTS’ MOTIONS TO DISMISS THE FOURTH AMENDED CONSOLIDATED COMPLAINT

Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 2 of 198

11 2 Stuart M. Grant (pro hac vice) 2 John C. Kairis (pro hac vice) 3 Lauren E. Wagner (pro hac vice) 3 Kimberly L. Wierzel (pro hac vice) 4 Grant & Eisenhofer P.A. 4 Chase Manhattan Centre 5 1201 North Market Street 5 Wilmington, DE 19801 6 Tel: 302.622.7000 6 Fax: 302.622.7100 7 7 Merrill Glen Emerick (State Bar No. 117248) 8 Anderlini, Finkelstein, Emerick & Smoot 8 400 S. El Camino Real - Suite 700 San Mateo, CA 94402 99 10 Attorneys for Lead Plaintiff 10 The Connecticut Retirement Plans and Trust Funds 11 11 IN THE UNITED STATES DISTRICT COURT 12 FOR THE NORTHERN DISTRICT OF CALIFORNIA 12 SAN JOSE DIVISION 1313 14 IN RE REDBACK NETWORKS, INC. Case Number C 03-05642 JF 14 SECURITIES LITIGATION 15 15 This Document Relates to: All Actions 16 FIRSTFOURTH AMENDED 16 CONSOLIDATED COMPLAINT FOR 17 VIOLATION OF 17 THE FEDERAL SECURITIES LAWS 1818 CLASS ACTION 1919 20 20 DEMAND FOR JURY TRIAL 2121 2222 2323 2424 2525 2626 2727 2828

FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 1 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 3 of 198

11 TABLE OF CONTENTS 2 2 Page 3 3 I. NATURE AND SUMMARY OF THE ACTION 15 4 4 II. The Parties 18 5 5 Lead Plaintiff 18 6 6 Non-Party Redback Networks, Inc. 19 7 7 Individual Defendants 19 8 8 PricewaterhouseCoopers LLP 116 9 9 Non-Party Pankaj Patel 117 10 10 Non-Party Marc B. Weisberg 117 11 11 Jurisdiction And Venue 117 12 12 III. Defendants’ Fraudulent Scheme and Deceitful Course of Business 118 13 13 Undisclosed Pre-IPO Stock Bribes 119 14 14 Redback’s Illicit Agreement With Weisberg And Qwest 121 15 15 Redback’s Undisclosed Relationship With Qwest 122 16 16 The Broadband Office Warrant 128 17 17 Redback’s Scheme Continues 129 18 18 Material Delay of the New SmartEdge™ Router 139 19 19 The Williams Deal 145 20 20 Redback Uses Artificially-Inflated Stock For A Third Acquisition 145 21 21 Redback’s SMS™ 10000 Operational Product’s Problems Continued In 2001 And 2002 146 2222 Qwest’s Illicit Practices Begin To Come To Light 147 2323 IV. Defendants’ False and Misleading Statements 149 2424 Defendants’ Pre-Class Period False and Misleading Statements 149 2525 Defendants’ False And Misleading Statements During The Class Period 153 2626 2727 2828 Without the Sales From Bribery and Quid Pro Quo Transactions with FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 2 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 4 of 198

1 1 Qwest Redback Descends Into Bankruptcy and Investors Begin to Learn Why 15106 22 33 44 55 66 77 88 99 1010 1111 1212 1313 1414 1515 1616 1717 1818 1919 2020

2121 2222 2323 2424 2525 2626 2727 2828

FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 3 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 5 of 198

11 V. Redback’s Fraudulent Accounting Practices 1112 22 Generally Accepted Accounting Principles (“GAAP”) 1112 33 SEC Regulations 1112 44 Redback’s Financial Disclosures Violated GAAP And SEC Regulations 1114 55 The Overall Impact Of The GAAP And SEC Rules Violations 1124 66 VI. Scienter 1125 77 Pierre R. Lamond 1127 88 Vinod Khosla 1129 99 Promod Haque 1132 1010 Kevin DeNuccio 1135 1111 Vivek Ragavan 1136 1212 Dennis Barsema 1139 1313 Gaurav Garg 1140 1414 William H. Kurtz 1142 1515 Craig Gentner 1143 1616 Randall Kruep 1144 1717 Dennis P. Wolf 1146 1818 Thomas L. Cronan, III 1146 1919 PwC’s Scienter And False And Misleading Audit Reports 1151 2020 PwC’s Audits Of Redback Failed To Comply With GAAS 1156 2121 VII. Loss Causation 1166 2222 VIII. Inapplicability Of Statutory Safe Harbor 1171 2323 24 IX. Applicability of Presumption of Reliance: Fraud-On-The-Market 24 Doctrine 1173 25 25 X. Class Action Allegations 1173 26 26 FIRST CAUSE OF ACTION 1176 27 27 SECOND CAUSE OF ACTION 1178 28 28 THIRD CAUSE OF ACTION 1181

FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 4 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 6 of 198

11 FOURTH CAUSE OF ACTION 1183 22 FIFTH CAUSE OF ACTION 1184 33 SIXTH CAUSE OF ACTION 1186 44 PRAYER FOR RELIEF 1187 55 JURY TRIAL DEMANDED 1188 66 77 88 99 1010 1111 1212 1313 1414 1515 1616 1717 1818 1919 2020

2121 2222 2323 2424 2525 2626 2727 2828

FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 5 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 7 of 198

11 Lead Plaintiff, Connecticut Retirement Plans and Trust Funds (the “Connecticut 22 Retirement Fund” or “Lead Plaintiff” or “Plaintiff”), individually and on behalf of all others that 33 purchased or otherwise acquired the common stock (“Plaintiffs”) of Redback Networks, Inc. 44 (“Redback” or the “Company”) between and including November 27, 1999 and October 10, 55 2003 (the “Class Period”), alleges the following upon information and belief, except as to those 66 allegations concerning the Connecticut Retirement Fund, which are alleged based upon personal 77 knowledge. Plaintiffs’ information and belief are based upon, among other things, the 88 investigation conducted by and through Plaintiffs’ attorneys, which included: (a) a review and 99 analysis of Redback’s filings with the United States Securities and Exchange Commission (the 1010 “SEC”); (b) review and analysis of press releases, public statements, news articles and other 1111 publications disseminated by or concerning Redback or the defendants; (c) review and analysis 1212 of Redback’s analyst conference calls; (d) review and analysis of securities analysts’ reports 1313 regarding Redback; (e) interviews with over 20 former employees of Redback; (f) review and 1414 analysis of documents filed by Redback and other creditors and entities in the United States 1515 Bankruptcy Court for the District of Delaware during the course of Redback’s bankruptcy 1616 proceedings; (g) review and analysis of a Common Stock Warrant Agreement with Qwest 1717 Investment Company (formerly known as U.S. Telesource, Inc.) dated November 27, 1999; (h) 1818 review of the criminal Indictmentindictment of Defendant Marc Weisberg; and (i) other 1919 publicly-available information concerning Redback and the defendants. 2020 Plaintiffs believe that further substantial evidence exists to support the allegations in this 2121 FirstFourth Amended Consolidated Class Action Complaint For Violation of the Federal 2222 Securities Laws (“Am. Compl.”) that will become available after a reasonable opportunity for 2323 discovery. Most of the specific facts supporting the allegations herein are known only to 2424 defendants or are exclusively within their custody or control. 2525 I. NATURE AND SUMMARY OF THE ACTION 2626 1. During the Class Period, the defendants embarked on a fraudulent course of 2727 business, simple in design, but devastating in effect. The defendants engaged in a series of 2828 transactions that had the purpose and effect to create the false appearance of legitimate revenue,

FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 6 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 8 of 198

11 thus enabling Redback to meet or exceed targets set by analysts and maintain an artificial high 22 price for Redback’s stock. Rather than obtain legitimate orders for Redback’s products, the 33 defendants sought to prevail in the highly-competitive communications industry by paying 44 bribes to obtain business. The defendants paid those bribes to some of Redback’s customers’ 55 executives – some of whom have now been criminally indicted – and in return those customers 66 ordered products from Redback that the customers did not need. In some cases, the unneeded 77 products did not even work, and in other cases they sat unused in warehouses. 88 2. Redback held its initial public offering (“IPO”) on May 17, 1999. Redback’s 99 common stock was priced in the IPO at $23 per share, and the Company registered and sold 1010 2.875 million shares. Through its IPO, Redback raised from investors net proceeds in excess of 1111 $50 million and its common stock began trading on the NASDAQ National Market under the 1212 symbol “RBAK.” Subsequent to Redback’s IPO, and continuing over the next two years during 1313 the Class Period, Redback touted numerous multi-million dollar deals, without disclosing that 1414 the deals had been secured by bribes rather than by legitimate demand for Redback products. 1515 More than $80 million of the $345.5 million of Redback’s total revenue booked during the two- 1616 year period from July 2000 through June 2001, was obtained through the defendants’ illegal and 1717 undisclosed scheme. 1818 3. Redback’s inflated stock price increased to more than $382 per share (adjusted for 1919 a two-for-one split on August 1999) as a result of the defendants’ fraudulent scheme. Its Class 2020 Period market capitalization reached $43 billion before the scheme began to unravel when 2121 Redback’s illicit partner, Qwest Communications International, Inc. (“Qwest”) became the 2222 subject of numerous governmental investigations and could no longer participate in the fraud. 2323 Once Qwest found itself under governmental scrutiny, its executives could no longer accept 2424 bribes in return for business. Qwest immediately stopped purchasing Redback products since 2525 Qwest had never needed those products in the first place. As a result, Redback’s revenue growth 2626 halted, its revenues began to decline and its stock price, which was based upon its purported 2727 revenue growth, declined to less than $1.00 per share by August 2002, and the Company 2828 eventually filed for bankruptcy on or about November 3, 2003. While Redback’s stock price

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11 was inflated, the Redback insiders sold in the open market over $178 million of Redback stock, 22 unloading their shares on an unsuspecting public that – unlike the defendants -- did not realize 33 the shares were inflated by fraud. Defendants also distributed more than $2.1 billion to their 44 affiliates during the Class Period while the stock was inflated by fraud. 55 4. Based upon these and other facts, Plaintiffs filed their consolidated and Class 66 Action Complaint, but on January 21, 2005, the Court dismissed that complaint with leave to 77 amend, providing Plaintiffs with an explanation of the deficiencies of the allegations and 88 directions on what would be necessary for the claims to be sustained. 99 5. 4. OnAfter the Court’s ruling, on or about February 17, 2005, a Grand Jury sitting 1010 in the District of Colorado issued a criminal indictment of Marc Weisberg (“Weisberg”), a senior 1111 executive at Qwest who perpetrated Qwest’s massive fraud (including Qwest’s fraudulent stock 1212 kickback program with Redback). This indictment specified that Weisberg in April and May 1313 1999, in connection with a multi-million dollar commercial transaction between Qwest and 1414 Redback, improperly conditioned Qwest’s participation in the deal on the receipt of personal 1515 investment opportunities. Weisberg has since (on December 28, 2005) pled guilty to one count 1616 in the indictment. 1717 6. 5. Based upon the newly-revealed facts in the Weisberg indictment, and in 1818 conjunction with facts previously known, plaintiff hasPlaintiffs revised itstheir claims pursuant 1919 to the Court’s direction in its January 21, 2005 opinion. Plaintiff now asserts, and pursuant to 2020 the Supreme Court’s decision in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 125 S. Ct. 2121 1627 (2005). On May 27, 2005, Plaintiffs filed a revised amended complaint, asserting claims 2222 for violations of Section 10(b) and Rule 10b-5 promulgated thereunder, Section 18, Section 2323 20(A) and Section 20(a) of the Securities and Exchange Act of 1934 (the “Exchange Act”) 2424 against certain former officers and directors of Redback and against Redback’s accounting firm 2525 PriceWaterhouseCoopers LLP (“PwC”) to compensate Redback investors for the losses they 2626 suffered from the fraudulent scheme. 2727 7. On March 20, 2006, the Court issued an opinion and order dismissing the revised 2828 amended complaint with leave to amend. The Court was “satisfied that Plaintiffs have provided

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11 the basis for their belief that those [improper quid pro quo and other] transactions occurred” and 22 had “provided more specificity with respect to their scienter allegations” which “may be 33 sufficient to at least some of the Redback Defendants.” However, the Court found that Plaintiffs 44 needed to “clarify the precise nature of their injury and how that injury was caused by 55 Defendants’ conduct.” The Court therefore permitted Plaintiffs to amend, inter alia, their 66 allegations regarding loss causation. 77 8. As set forth below, beginning in April 2001, the Company did not, and could no 88 longer, engage in improper quid pro quo transactions and other deals with companies such as 99 Qwest. Thus, starting on April 2, 2001, Redback began to trickle out bad news (by lowering 1010 earnings and revenue expectations and later by lowering actual reported earnings and revenues) 1111 so that the disappearing improper deals (and the disappearing revenues) would not be so obvious 1212 and would not trigger increased scrutiny from investors. While Redback attempted to keep its 1313 stock price artificially inflated, it also continued to trickle out the bad news through the end of 1414 the Class Period. The stream of corrective disclosures failed to alert investors to the fraud yet 1515 managed to cause a gradual correction in Redback’s stock price, so that it dropped from $13.08 1616 at the beginning of April 2001 to $0.55 when the true extent of the fraud was revealed at the end 1717 of the Class Period. 1818 II. THE PARTIES 1919 Lead Plaintiff 2020 9. 6. Lead Plaintiff, the Connecticut Retirement Fund, is a public pension fund that 2121 invests assets on behalf of public employees in the State of Connecticut. With approximately 2222 $2023 billion in assets under management, the Connecticut Retirement Fund consists of six 2323 pension funds and eight trust funds, representing, among others, approximately 160,000 teachers, 2424 police officers, firefighters, and state and municipal employees who are pension plan participants 2525 and beneficiaries. 2626 10. 7. During the Class Period, the Connecticut Retirement Fund purchased more than 2727 184,000 shares of common stock of Redback and suffered losses in excess of $7 million. 2828

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11 11. 8. By Order dated June 25, 2004, the United States District Court for the Northern 22 District of California (the “Court”) appointed the Connecticut Retirement Fund as Lead Plaintiff 33 in this case pursuant to 15 U.S.C. § 78u-4. 44 Non-Party Redback Networks, Inc. 55 12. 9. Non-Party Redback is incorporated under the laws of the State of Delaware 66 with its headquarters located at 300 Holger Way, San Jose, California. Redback’s common 77 stock is publicly traded and listed on the NASDAQ National Market under the symbol “RBAK.” 88 Redback is and was throughout the Class Period a seller and provider of broadband networking 99 equipment that enables carriers and service providers to build broadband networks that can 1010 deliver broadband services to large numbers of subscribers. 1111 13. 10. On November 3, 2003, shortly after news stories and public disclosures about 1212 the fraudulent course of business described herein, the Company filed a voluntary pre-packaged 1313 Plan of Reorganization under Chapter 11 of the United States Bankruptcy Code in the United 1414 States Bankruptcy Court for the District of Delaware. Redback emerged from bankruptcy on 1515 January 2, 2004. The Company’s Plan of Reorganization included, inter alia, a 73.39:1 reverse 1616 stock split that left the pre-bankruptcy shareholders with only 2.5 million shares of Redback 1717 common stock (5% of Redback’s post-emergence equity), and an issuance of 47.5 million shares 1818 (95% of the Company’s post-bankruptcy equity) to holders of Redback’s 5% convertible 1919 subordinated notes due 2007, which were extinguished in the bankruptcy proceedings. 2020 14. 11. Redback would be named a defendant in this case if it were not for the 2121 Company’s bankruptcy filing. 2222 Individual Defendants 2323 15. 12. Defendant Kevin A. DeNuccio (“DeNuccio”) has been the President, Chief 2424 Executive Officer (“CEO”) and a director of Redback since August 2001. Prior to arriving at 2525 Redback, DeNuccio was a Senior Vice President of Worldwide Service Provider Operations at 2626 Cisco Systems, Inc. (“Cisco”). He was responsible for and signed Redback’s SEC filings on 2727 Forms 10-Q and 10-K, Proxy Statements and Registration Statements while CEO and a Board 2828 member during the Class Period after he began working for Redback. DeNuccio also signed

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11 Redback’s Form 8-K that was filed with the SEC during July 2003. Specifically, DeNuccio 22 signed Redback’s Form 10-K for fiscal year 2001 (filed with the SEC on March 27, 2002) (“2001 33 10-K”), and pursuant to § 13(a) of the Exchange Act and § 906 of the Sarbanes-Oxley Act of 44 2002, he signed and certified Redback’s Form 10-K for fiscal year 2002 (filed with the SEC on 55 March 31, 2003) (“2002 10-K”), Form 10-K for fiscal year 2003 (filed with the SEC on March 66 15, 2004) (“2003 10-K”) and Quarterly Reports on Form 10-Q for the second quarter for fiscal 77 year 2002 (filed with the SEC on August 14, 2002, the “August 2002 10-Q”), the third quarter for 88 fiscal year 2002 (filed with the SEC on November 14, 2002, the “November 2002 10-Q”), the 99 first quarter for fiscal year 2003 (filed with the SEC May 15, 2003, the “May 2003 10-Q”), and 1010 the second quarter for fiscal year 2003 (filed with the SEC on August 14, 2003, the “August 2003 1111 10-Q”). 1212 16. 13. Defendant Pierre R. Lamond (“Lamond”) served as Chairman of the Board of 1313 Directors of Redback (“Board”) from November 1996 through May 2003. When Defendant 1414 Vivek Ragavan was ousted from the Company as CEO in May 2001, Lamond assumed the role 1515 of acting CEO on May 21, 2001, and served as Redback’s CEO until Defendant DeNuccio was 1616 hired on August 29, 2001. Lamond also served on the Audit Committee of the Board until May 1717 2003, and on the Nominating Committee from 2002 until May 2003. As Chairman, Lamond 1818 signed Redback’s Form 10-K for fiscal year 1999 (filed with the SEC on February 10, 2000) 1919 (“1999 10-K”), its Form 10-K for fiscal year 2000 (filed with the SEC on April 2, 2001) (“2000 2020 10-K”), 2001 10-K, and its 2002 10-K, as well as several Registration Statements during those 2121 years. Lamond has been a partner in Sequoia Capital (“Sequoia”) a venture capital firm, since 2222 1981. Sequoia, along with its affiliates, was an early investor in Redback, and was, at the time of 2323 Redback’s IPO, the biggest investor in the Company, holding about 5 million preferred shares 2424 that were issued for approximately $7.2 million ⎯ about a quarter of Redback’s preferred stock 2525 prior to the IPO. Lamond personally acquired almost 110,000 pre-IPO Redback preferred shares 2626 for slightly over one dollar per share and, with Sequoia, owned over 27% of Redback’s 2727 outstanding stock before the IPO, which were converted to common stock following the IPO on a 2828 one-for-one basis. During the Class Period, Sequoia held a substantial position in Redback,

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11 controlling approximately 2-3% of Redback’s common stock. In August 2000 during the Class 22 Period, Sequoia distributed approximately 1.6 million shares of Redback stock worth $226 33 million as a dividend to its partners and investors, of which Sequoia (Lamond’s firm) received a 44 significant portion. Lamond, along with the other non-executive director Defendants Khosla and 55 Haque, received compensation for his services on the Redback Board entirely in Redback stock 66 options. During the Class Period, Lamond received 300,000 Redback options for his Board 77 service. 88 17. 14. Defendant Thomas L. Cronan III (“Cronan”) has served as Redback’s Senior 99 Vice President of Finance and Administration and Chief Financial Officer (“CFO”) since January 1010 2003. From April 2001 to January 2003, he served as Redback’s Vice President, General 1111 Counsel and Corporate Secretary. Pursuant to §13(a) of the Exchange Act and § 906 of the 1212 Sarbanes-Oxley Act of 2002, Cronan signed and certified Redback’s 2002 10-K, May 2003 10- 1313 Q, 2003 10-K and its August 2003 10-Q. Cronan also signed Redback’s Forms 8-K during 2003. 1414 18. 15. Defendant Vinod Khosla (“Khosla”) served as a director of Redback from 1515 2000 through May 2003. As a non-employee director, Khosla received his compensation for his 1616 Board service entirely in Redback stock options, amounting to 140,000 options during the Class 1717 Period. He was a member of the Board’s Compensation Committee responsible for establishing 1818 the Company’s policy on executive and key-employee compensation. Khosla came to Redback 1919 from the board of Siara Systems, Inc. (“Siara”) after Redback acquired that company in a stock 2020 merger, which closed on March 8, 2000. Khosla is a founder and former CEO of Sun 2121 Microsystems, Inc. and founder of Daisy Systems. He was also a director of Concentric 2222 Networks in 1999. He has been a general partner of the Silicon Valley venture capital firm, 2323 KPCB, from February 1986 to the present. KPCB held over 6% of Redback’s outstanding 2424 common stock, which it acquired in exchange for its interest in Siara in a stock swap transaction 2525 with Redback in March 2000. During August and October 2000 (during the Class Period), 2626 KPCB distributed approximately 6.6 million shares of Redback stock worth over $940 million to 2727 its investors and partners, of which KPCB (Khosla’s firm) received a significant portion. While 2828

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11 at Redback, Khosla signed Redback’s 2000 10-K, and 2001 10-K and Redback’s Registration 22 Statements filed in those years. Khosla has also been director of Qwest since June 1998. 33 19. 16. Defendant Dennis P. Wolf (“Wolf”) served as Redback’s Senior Vice 44 President of Finance and Administration and as CFO from January 2001 until January 2003. 55 Wolf signed Redback’s 2000 10-K, 2001 10-K, all the Forms 10-Q for fiscal years 2001 and 66 2002, and Redback’s Forms 8-K and Registration Statements for those same years. Furthermore, 77 pursuant to §13(a) of the Exchange Act and § 906 of the Sarbanes-Oxley Act of 2002, he signed 88 and certified Redback’s August and November 2002 10-Q. Wolf also signed Redback’s Form 99 10-Qs for all of 2001 and the first quarter of 2002. 1010 20. 17. Defendant Vivek Ragavan (“Ragavan”) served as a director of Redback from 1111 March 2000 through May 2001. He also held various executive positions, including President 1212 and CEO from July 2000 through May 2001, and President and Chief Operating Officer (“COO”) 1313 from March to July 2000. Ragavan signed the Siara Warrant Agreement, which obligated Qwest 1414 to purchase $40 million of Redback’s products in a two-year period. Ragavan subsequently 1515 signed Redback’s 2000 10-K, Redback’s Proxy Statement for 2001, and Redback’s Registration 1616 Statements in 2000 and 2001, and he deliberately and recklessly omitted material information 1717 regarding the Siara Warrant Agreement from all SEC filings and press releases made by Redback 1818 (and authorized by Ragavan) during the Class Period. Between February 2001 and May 2001, 1919 Ragavan sold 100,000 shares of Redback stock for more than $2.5 million. In May 2001, 2020 Ragavan resigned from Redback and sold over 600,000 shares of Redback stock back to the 2121 Company for proceeds of $11.87 million, and transferred over 1.88 million shares of Redback 2222 stock (worth $23 million at the time) to a family trust. 2323 21. 18. Defendant Dennis L. Barsema (“Barsema”) was Redback’s President, CEO, 2424 and a director from November 1997 to July 2000. Barsema continued as Vice Chairman of 2525 Redback’s Board until May 2001. Between March 2000 and December 2000, Barsema sold over 2626 677,000 shares of Redback stock at artificially inflated prices, reaping more than $86 million in 2727 proceeds. During the Class Period, Barsema signed Redback’s 1999 10-K, 2000 10-K, Proxy 2828 Statements, and several Registration Statements.

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11 22. 19. Defendant Gaurav Garg (“Garg”) has served as a director of Redback since 22 May 2001. He served on the Nominating Committee in 2002 and 2003. He was also one of the 33 founders of Redback and was a Redback Senior Vice President of Product Management from 44 August 1996 through May 2001. Between October 2000 and August 2003, Garg sold 2,206,538 55 shares of Redback stock for $43 million. Garg signed Redback’s 2000 10-K, 2001 10-K and 66 2002 10-K, as well as the Company’s various Registration Statements. Garg has been a partner 77 at Sequoia since May 2001. 88 23. 20. Defendant William H. Kurtz (“Kurtz”) has served as a director of Redback 99 since October 1999. Like the other non-executive directors, he received compensation for his 1010 services on the Redback Board entirely in Redback stock options. Kurtz was a member of the 1111 Audit Committee of the Board from 2000 through 2003, where he was held out as a certified 1212 public accountant with financial management expertise. Kurtz signed Redback’s 1999 10-K, 1313 2000 10-K, 2001 10-K, 2002 10-K and 2003 10-K. He also signed Redback’s Registration 1414 Statements filed with the SEC in those same years. In October 2000, Kurtz sold 35,000 shares of 1515 Redback stock, reaping proceeds of almost $2.5 million. 1616 24. 21. Defendant Craig Gentner (“Gentner”) was Redback’s Vice President of 1717 Finance, CFO and Corporate Secretary from 1999 to January 2001. Mr. Gentner signed 1818 Redback’s materially false and misleading Forms 10-Q for the third quarter of 1999 and the first, 1919 second, and third quarters of 2000, and various Forms 8-K and Registration Statements during 2020 that same year. He also signed Redback’s 1999 10-K. During October 2000, Gentner sold 2121 120,000 shares of Redback stock for $15.7 million. 2222 25. 22. Defendant Promod Haque (“Haque”) served as a director of Redback from 2323 March 2000 through 2003. As a non-employee director, Haque was paid for his Board service 2424 entirely in Redback stock options, receiving 220,000 options during the Class Period. He served 2525 on the Audit Committee from 2001 through 2003. Haque signed Redback’s 2000 10-K, 2001 10- 2626 K and 2002 10-K and various Registration Statements filed in those same years. Haque has been 2727 a partner with Norwest Venture Partners since 1990. During the Class Period, Norwest Venture 2828 Partners maintained a substantial ownership position, as high as 4.76%, in Redback. During

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11 August and October 2000, Northwest Ventures distributed 4 million shares of Redback stock 22 worth approximately $571 million to its investors and partners, of which Norwest Venture 33 (Haque’s firm) received a significant portion. 44 26. 23. Defendant Randall J. Kruep (“Kruep”) joined Redback in 1997 and was 55 Redback’s Vice President of Worldwide Sales from 1999 to February 2001, and he was one of 66 Redback’s highest-paid executives. Prior to 1999, Kruep served as the Company’s Vice 77 President of Sales. One of Kruep’s responsibilities was to provide sales and revenue information 88 for Redback’s press releases and SEC filings. Between March 2000 and October 2000, Kruep 99 sold 114,600 shares of his Redback stock for more than $25.9 million. 1010 27. 24. DeNuccio, Lamond, Cronan, Khosla, Wolf, Ragavan, Barsema, Garg, Kurtz, 1111 Gentner, Haque and Kruep are sometimes collectively referred to herein as the “Individual 1212 Defendants.” 1313 28. 25. By virtue of the Individual Defendants’ positions within the Company, they 1414 had access to undisclosed adverse information about Redback’s business, operations, operational 1515 trends, sales, finances, revenue recognition markets and present and future business prospects. 1616 The Individual Defendants were privy to confidential information through Redback’s internal 1717 corporate documents (including the Company’s operating plans, budgets, forecasts, and reports 1818 of actual operations compared thereto), conversations, meetings and connections with other 1919 corporate officers and employees, conversations, meetings and connections with vendors and 2020 customers, attendance at sales, management, and Board meetings, including committees thereof, 2121 and through reports and other information provided to them in connection with their roles and 2222 duties as Redback officers and directors. 2323 29. 26. The Individual Defendants, by virtue of their high-level positions within the 2424 Company, directly participated in the management of the Company, were directly involved in the 2525 day-to-day operations of the Company at the highest levels and were privy to confidential 2626 proprietary information concerning the Company and its business, operations, sales, prospects, 2727 growth, finances, and financial condition, as alleged herein. Because of their positions and 2828 access to material non-public information available to them but not to shareholders or the

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11 investing public, each of the Individual Defendants knew that adverse facts specified herein were 22 not disclosed and that the positive representations that they were causing Redback to make were 33 materially false and misleading when made. 44 30. 27. The Individual Defendants were involved in drafting, producing, reviewing, 55 approving and/or disseminating the materially false and misleading statements and information 66 alleged herein, including SEC filings, press releases, and other public documents, knew or with 77 deliberate recklessness disregarded the fact that materially false and misleading statements were 88 being issued regarding the Company, and approved or ratified these statements, in violation of 99 federal securities laws. 1010 31. 28. As officers and controlling persons of a publicly-held company whose 1111 common stock was registered with the SEC pursuant to the Exchange Act, traded on the 1212 NASDAQ, and governed by the provisions of the federal securities laws, the Individual 1313 Defendants each had a duty to promptly disseminate accurate and truthful information with 1414 respect to the Company’s financial condition and performance, growth, operations, sales, 1515 financial statements, business, markets, management, earnings and present and future business 1616 prospects, and to correct any previously issued statements were materially misleading or untrue, 1717 so that the market price of the Company’s publicly-traded securities would be based upon 1818 truthful and accurate information. The Individual Defendants’ material misrepresentations and 1919 omissions violated these specific requirements and obligations. 2020 32. 29. The Individual Defendants, by virtue of their positions of control and 2121 authority as officers and/or directors of the Company were able to and did control the content of 2222 the various SEC filings, press releases and other public statements pertaining to the Company. 2323 The Individual Defendants were provided with copies of the documents alleged herein to be 2424 misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to 2525 prevent their issuance or cause them to be corrected. Accordingly, they are responsible for the 2626 accuracy of the public reports and releases detailed herein. 2727 2828

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11 PricewaterhouseCoopers LLP 22 33. 30. Defendant PricewaterhouseCoopers LLP, (“PwC”), which is headquartered in 33 New York City, at all times relevant hereto was a limited liability partnership. PwC, from its San 44 Jose, California office, served as Redback’s external auditor since it began as a publicly-traded 55 Company in 1999. 66 34. 31. PwC issued clean and unqualified audit opinion letters in connection with 77 Redback’s financial statements for fiscal years 1999, 2000, 2001 and 2002, which were 88 incorporated with PwC’s approval in Redback’s Form 10-K and other public filings in the Class 99 Period. PwC also reviewed Redback’s quarterly financial statements, which were incorporated 1010 in the Company’s Forms 10-Q filed with the SEC in 1999, 2000, 2001, 2002 and 2003. PwC and 1111 various individual partners of the firm have participated in the audits of Redback since 1996, and 1212 prepared, reviewed, approved, and directed the production of financial statements, reports and 1313 releases issued or disclosed by Redback throughout this period. 1414 35. 32. PwC audited Redback’s financial statements during all relevant periods and 1515 issued materially false and misleading opinions on those financial statements. PwC also 1616 consented to the use of its unqualified opinions in Redback’s financial statements and reports 1717 filed with the SEC, which were disseminated to the investing public during all relevant periods. 1818 These financial statements were incorporated into and made a part of the Company’s public 1919 filings and offering memoranda with the knowledge and express consent of PwC. 2020 36. 33. At all relevant times, as Redback’s independent auditor, PwC was well aware 2121 that revenue derived from sales to Qwest – Redback’s largest customer – was material to 2222 Redback’s business and financial statements. PwC knew, through its audits and access to all of 2323 Redback’s financial information, or with deliberate recklessness disregarded, that Redback was 2424 issuing stock kickbacks to Qwest executives, and purchasing Qwest’s products and services that 2525 Redback did not want or need, in exchange for Qwest’s agreement to purchase millions of 2626 dollars in products and services from Redback. 2727 2828

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11 Non-Party Pankaj Patel 22 37. 34. Pankaj Patel (“Patel”) was Redback’s Senior Vice President of Engineering 33 from March 2000 to January 2003. Patel joined Redback in March 2000 as a result of Redback’s 44 acquisition of Siara. In March 2001, Patel sold 144,000 shares of Redback stock for 55 approximately $4.3 million. 66 Non-Party Marc B. Weisberg 77 38. 35. Marc B. Weisberg (“Weisberg”) was Executive Vice President, Corporate 88 Development of Qwest from October 2000 until September 2001. He joined Qwest as Senior 99 Vice President, Corporate Development in September 1997. Weisberg oversaw Qwest’s strategic 1010 alliances. He was also President and Chief Executive Officer of Qwest Investment Company, 1111 formerly known as U.S. Telesource, Inc. (“U.S. Telesource”), which is a direct wholly-owned 1212 subsidiary of Qwest Communications Corporation, which is a direct wholly-owned subsidiary of 1313 Qwest Corporation. According to documents filed with the SEC, Qwest Corporation is a wholly- 1414 owned subsidiary of Qwest. Philip Anschutz owns 100% of the stock of the Anschutz Company, 1515 which in turn owns 39% of Qwest. According to a Form SC 13D filed by U.S. Telesource in 1616 November 1999, U.S. Telesource’s principal business “is to acquire and hold securities and other 1717 investment assets.” On or about February 16, 2005, Weisberg was indicted by the U.S. 1818 Attorney’s office in Denver, Colorado on federal criminal charges for wire fraud, money 1919 laundering, and forfeiture of $2.9 million of illegal proceeds in connection with undisclosed pre- 2020 IPO private placement investments in at least 9 different technology companies that were vendors 2121 of Qwest, including Redback. Weisberg’s Indictment is attached hereto as Exhibit “A” and is 2222 incorporated herein by reference. On December 28, 2005, Weisberg pled guilty to one count in 2323 the indictment. But for the Court’s Order dated January 21, 2005, dismissing Weisberg from this 2424 action, Weisberg would be named as a defendant in this Amended Complaint. 2525 Jurisdiction And Venue 2626 39. 36. This Court has jurisdiction over the subject matter of this action pursuant to 28 2727 U.S.C. §§ 1331, 1337, and Section 27 of the Securities Exchange Act of 1934 (the “Exchange 2828 Act”), 15 U.S.C. § 78aa.

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11 40. 37. The claims asserted herein arise under and pursuant to Sections 10(b), 18 and 22 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78r and 78t(a), and Rule 10b-5 promulgated 33 thereunder, 17 C.F.R. § 240.10b-5. 44 41. 38. Jurisdiction and venue are proper in this District pursuant to Section 27 of the 55 Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1391 (b)-(c). Venue is proper in this District 66 because many of the acts and practices complained of herein occurred in substantial part in this 77 District. In addition, Redback is headquartered in this District at 300 Holger Way, San Jose, 88 California 95134. 99 42. 39. In connection with the acts and omissions alleged in this Amended Complaint, 1010 the defendants, directly and/or indirectly, used the means and instrumentalities of interstate 1111 commerce, including without limitation, the mails, interstate telephone communications and the 1212 facilities of the national securities markets and exchanges. 1313 14 III. DEFENDANTS’ FRAUDULENT SCHEME AND DECEITFUL COURSE OF 14 BUSINESS 1515 43. 40. Redback provides telecommunications networking equipment and services 1616 that enable carriers and service providers to deploy high-speed access to the Internet and 1717 corporate networks. The Company’s product lines include the Subscriber Management System 1818 (“SMS™”) and SmartEdge™ family of networking hardware and software products that enhance 1919 and manage a full-range of broadband connections, including Ethernet, DSL, cable and wireless 2020 connections. Redback’s SMS™ products were designed to connect and manage devices used to 2121 gather a large number of high-speed access technology subscribers such as DSL subscribers at 2222 one end of the network with devices at the other end of the network used to connect to the 2323 Internet. Redback’s earliest-developed SMS™ products such as the SMS™ 10000 product were 2424 designed to support several thousand subscribers. During the Class Period, large 2525 telecommunications companies were interested in a product being developed by Redback known 2626 as the SMS™ 10000, which was supposed to be able to support 100,000 subscribers. The 2727 SmartEdge™ products were designed to enable service providers to add revenue-generating 2828 services to their networks.

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11 44. 41. Founded by Defendant Gaurav Garg and others in 1996, Redback never sold a 22 single product or service until the end of 1997. The Company lost almost $10 million in 1998, 33 but claimed that with the Internet “exploding” and “thousands of users going on-line each 44 month,” Redback’s SMS™ technology offered an economical solution for the challenges 55 associated with scaling and configuring existing networks to accommodate a large number of 66 users of new high-speed services, without compromising network performance. 77 45. 42. In May 1999, Redback held its IPO, selling 2.875 million shares of its 88 common stock at $23 per share, raising over $50 million from investors. 99 46. 43. Redback’s stock instantly became one of the many Internet darlings in the 1010 high-tech sector. With the promise that large telecommunications service providers like Qwest, 1111 Concentric Networks and UUNET were testing and going to implement Redback’s SMS™ 1212 technology into their networks, the Company’s stock rose from its $23 IPO price to $99.49 by 1313 June 28, 1999. 1414 Undisclosed Pre-IPO Stock Bribes 1515 47. 44. The promising start-up Company had an undisclosed secret to its success – 1616 bribes and sales incentives paid to customers to obtain sales (and the coveted announcement of 1717 new sales agreements) in order to create the false appearance of legitimate demand for 1818 Redback’s products with the purpose of deceiving investors. Defendants’ fraudulent practices 1919 began prior to the Company’s IPO when Redback provided undisclosed “friends and family” 2020 shares of its stock to insiders and executives at certain telecommunications companies in 2121 exchange for commitments from those companies to purchase Redback’s products, whether they 2222 needed the products or not. 2323 48. 45. A former District Sales Manager who worked at Redback from 1997 to 2001 2424 and was the sales representative who handled Qwest’s account in 1999 (the “Redback Sales and 2525 Marketing Manager”) interviewed by Plaintiffs’ Counsel stated that he knew that “friends and 2626 family” shares had been provided to many potential customers and that pre-IPO shares were 2727 offered to Level 3, SBC and GTE. He further stated that there was a limited amount of stock and 2828 therefore Redback had to use some care to “dole it out.” He said that the IPO stock gifts were

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11 given with the intention of inducing business by indicating to potential customers that “the better 22 we do, the better you do.” A former Director of sales for WorldCom and other accounts at 33 Redback who worked for the Company from December 1999 through March 2002 (the 44 “Redback Sales Director”) said that Redback sales representatives and account managers met 55 with decision makers at UUNETWorldCom’s UUNET (“UUNET”) division and other 66 telecommunications companies to offer “friends and family” shares to these company executives 77 as an incentive to purchase Redback’s products and create by these purchases a false impression 88 of demand. 99 49. 46. The Redback Sales Director stated that while he was employed at Redback, he 1010 attended meetings in which it was discussed that WorldCom’s UUNET (“UUNET”) 1111 divisionUUNET had received stock from Redback in the “friends and family” secret offerings. 1212 A former account manager who worked at Redback in 1999 and left in or around August 2001, 1313 and who personally handled the UUNET account for Redback (the “UUNET Account 1414 Manager”), stated that there was a block of “friends and family” stock set aside by Redback’s 1515 management for distribution to “favored customers.” The UUNET Account Manager confirmed 1616 that UUNET received “friends and family shares” of Redback’s stock before Redback’s IPO. 1717 50. 47. In return, UUNET was one of the first reported users of Redback’s SMS™ 1818 technology. On February 1, 1999, three months prior to Redback’s IPO, Redback announced 1919 that UUNET had selected Redback’s “flagship” SMS™ 10000 system to rollout Digital 2020 Subscriber Line (“DSL”) services. Throughout the Class Period, Redback heralded UUNET as a 2121 major-player in the telecommunications industry and repeatedly emphasized that UUNET was 2222 purchasing Redback’s SMS™ product to support its DSL services. However, the Individual 2323 Defendants failed to disclose that Redback had provided undisclosed sales incentives in the form 2424 of pre-IPO shares to UUNET to facilitate UUNET’s agreement to purchase Redback’s SMS™ 2525 product. As described below, during the Class Period, UUNET had technical problems with the 2626 SMS™ products and also discovered problems with features of the SmartEdge™ product when 2727 UUNET was testing the product in its labs, but neither Redback nor UUNET ever publicly 2828 disclosed these problems.

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11 51. 48. In March 1999, Redback also provided a warrant to purchase 4,500 shares of 22 Redback’s stock at the IPO price ($23) to Concentric Networks (“Concentric”). Defendant 33 Khosla served on Concentric’s Board of Directors prior to and at the time Redback issued the 44 undisclosed warrant to Concentric. On May 3, 1999, Redback announced that Concentric had 55 signed a contract to purchase Redback’s SMS™ 10000 and unspecified services. However, 66 defendants failed to disclose that Redback had issued a lucrative stock warrant – worth more 77 than $3 million within one year of being issued – to Concentric to obtain Concentric’s 88 commitment to deploy Redback’s SMS™ product. 99 Redback’s Illicit Agreement With Weisberg And Qwest 1010 52. 49. According to the criminal Indictment filed against Weisberg in the United 1111 States District Court for the District of Colorado on or about February 16, 2005 styled asCase 1212 No. 05-CR-081RB, to which Weisberg later (on December 28, 2005) pled guilty, Weisberg 1313 devised and engaged in a scheme pursuant to which he improperly conditioned Qwest business 1414 on the receipt of personal investment opportunities including investment opportunities from 1515 Redback. See Indictment at 5-6, 9. Specifically, Weisberg managed and developed Qwest’s 1616 corporate development group and was responsible for evaluating, securing and managing 1717 corporate investments for the benefit of Qwest and its shareholders. The Indictment states that, 1818 pursuant to Qwest company policy and at Weisberg’s direction, Qwest purchased stock through 1919 a “directed share program” in private technology companies before or at the time of their IPOs. 2020 Many of these investments were made through a company called U.S. Telesource, which is a 2121 subsidiary of Qwest that was formed by Qwest executives to hold securities and other 2222 investments including pre-IPO shares that Qwest received from Redback and other private 2323 technology companies. See Indictment at 2-4. Prior to entering into commercial transactions 2424 with technology companies like Redback, Qwest, through Weisberg, demanded as a quid pro 2525 quo for its business, equity in the supplier companies. Id. at 3. This quid pro quo was not 2626 disclosed to Redback investors. 2727 53. 50. Specifically with regard to Redback, the Indictment states that: 2828

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11 2 In or around April of 1999, and continuing through on or about May 2 17, 1999 [the date of Redback’s IPO], while negotiating and 3 participating in a multi-million dollar commercial transaction 3 with Redback on behalf of Qwest, Defendant Marc B. Weisberg 4 secretly used his position, power, and influence as a Qwest 4 executive to obtain personal investment opportunities in Redback in a manner not authorized by or in the best interests of Qwest. 55 See Indictment at 10 (emphasis added). 66 54. 51. The Indictment states that in connection with the personal investment 77 opportunities that he obtained in Redback, Weisberg made material omissions and materially 88 false misrepresentations and used false pretenses, including: failure to disclose making 99 misleading statements, intimidating and threatening to fire a Qwest employee who attempted to 1010 disclose Weisberg’s conduct as it related to one of Qwest’s vendors and attempting to destroy 1111 and causing the destruction of personal and corporate records reflecting his conduct. See 1212 Indictment at 11-12. Weisberg reaped a net profit in excess of $2 million as a result of his 1313 personal investments in Redback and other telecommunications companies that were selling 1414 products to Qwest. See Indictment at 12-13. 1515 Redback’s Undisclosed Relationship With Qwest 1616 55. 52. In or around May 1999, Redback first secretly transferred to Weisberg and 1717 other Qwest executives “friends and family” shares of stock worth millions in Redback’s IPO. 1818 56. 53. On June 28, 1999, Redback issued a press release announcing that Qwest was 1919 deploying Redback’s SMS™ product in Qwest’s network. Redback announced that Qwest 2020 “would use the Redback SMS™ 10000 to aggregate traffic from DSL, cable and wireless POPs, 2121 providing customers with high-speed connectivity to the Qwest nationwide IP-based network 2222 and the Internet.” The Company stated that the deal was a “multi-year, multi-million dollar 2323 agreement.” Two witnesses, the Redback Sales and Marketing Manager and a former Redback 2424 Sales Director (the “Former Sales Manager”), who personally managed the Qwest account 2525 between February 2000 and July 2002, both confirmed that the arrangement was only for $5 2626 million in equipment over 3 years. Both witnesses also stated that the agreement was a quid pro 2727 quo for the “friends and family” pre-IPO shares of Redback stock that Qwest and its executives 2828 had received. Moreover, according to the Redback Sales and Marketing Manager, Qwest signed

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11 off on the announcement even though it had no immediate plans to actually deploy Redback’s 22 products. Qwest agreed to the announcement because Redback had provided friends and family 33 pre-IPO shares to Qwest in Redback’s IPO. The Individual Defendants knew that using stock 44 kickback payments to purchase the business of a telecommunications giant like Qwest would 55 create the false appearance that there was a real demand for Redback’s equipment. 66 57. 54. In response to the news regarding Redback’s new agreement with Qwest, 77 Redback’s stock price jumped more than 25 percent in two days, from a close of $99.49 on June 88 28, 1999, to $113.39 on June 29, 1999, and to $125.99 on June 30, 1999. Redback and the 99 Individual Defendants quickly understood that doing business with industry giant Qwest 1010 provided instant credibility to Redback and resulted in an immediate jump in the Company’s 1111 stock price. With Qwest’s stamp of approval for Redback’s products, the market perceived 1212 Redback not as a young start-up with its attendant risks, but as an established new 1313 telecommunications equipment supplier. Having quickly learned the value of Qwest’s 1414 endorsement, Redback, throughout the Class Period, reported that Qwest had selected Redback’s 1515 SMS™ products to deploy in its network and continually emphasized that Qwest was one of 1616 Redback’s largest customers. 1717 58. 55. However, unbeknownst to the Class and the investing public, Qwest’s 1818 purported multi-year, multi-million dollar agreement had been induced through undisclosed 1919 stock kickback payments from Redback. When Redback announced the agreement with Qwest, 2020 Redback’s officers and directors (the Individual Defendants named herein) deliberately and 2121 recklessly failed to disclose the lucrative stock incentives that had been provided to Qwest’s 2222 executives because they wanted to create the appearance that there was a real demand by Qwest 2323 for Redback’s products to artificially inflate Redback’s stock price. The Individual Defendants 2424 and their affiliates collectively held millions of shares of Redback’ stock and therefore stood to 2525 gain hundreds of millions of dollars by boosting Redback’s stock price. 2626 59. 56. According to the Redback Sales and Marketing Manager, despite the existence 2727 of the purported agreement, there was no real commitment from Qwest in June 1999 to actually 2828 issue purchase orders for and take possession of Redback’s SMS™ equipment. He stated that he

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11 personally called upon representatives at Qwest in 1999, and that they refused to actually issue 22 purchase orders for Redback’s SMS™ 10000 product unless Redback provided certain 33 additional incentives beyond the friends and family shares already received, i.e. bribes, to Qwest 44 such as more Redback stock. He further stated that Qwest demanded that Redback “show us that 55 you are a partner” in return for which Qwest purportedly would give Redback orders. The 66 Redback Sales and Marketing Manager said that he and others at Redback complied with 77 Qwest’s demands by providing stock and other sales incentives and by referring customers to 88 Qwest, but he said it was to no avail because from May to November 1999, Qwest had still not 99 agreed to take possession of any equipment from Redback in flat contradiction to Redback’s 1010 June announcement. 1111 60. 57. The Redback Sales and Marketing Manager stated that, in exchange for the 1212 friends and family stock, Qwest had agreed to allow Redback to issue a press release announcing 1313 that Qwest had deployed Redback’s products, but that there were no revenues generated during 1414 1999, because products were not actually purchased by Qwest. He further stated that the June 1515 press release was part of a “barter” with Qwest and that Qwest allowed Redback to issue press 1616 releases if Redback provided stock, prospects and customer referrals to Qwest. The Redback 1717 Sales and Marketing Manager stated that press releases were “dribbled out strategically” to 1818 create a “buzz to the stock,” in other words, the press releases were used to drive up the market 1919 price of Redback’s stock by creating an impression of a strong demand for Redback’s products, 2020 where there was none. He further stated that, while getting orders was “problematic,” the press 2121 releases were more important because they added more value to the stock price. He indicated 2222 that Larry Blair in marketing created the press releases, and former Redback Vice President of 2323 Sales for North America who worked at the Company from August 1999 to March 2002 (the 2424 “Redback Sales VP”) confirmed that Kruep provided material information for the releases. 2525 61. 58. The Redback Sales and Marketing Manager said that he “took a lot of heat” 2626 for managing the Qwest account because, despite the agreement to purchase $5 million in 2727 equipment over 3 years, Qwest did not provide any purchase orders to Redback in 1999, while 2828 he was managing the account. He stated that he received pressure from Defendants Barsema,

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11 Garg and Kruep to get orders from Qwest, and that they each emphasized to him that Redback 22 had provided stock and customer referrals to Qwest and that Qwest had promised orders for 33 Redback’s equipment in return. 44 62. 59. According to the Redback Sales and Marketing Manager, Redback had a 55 difficult time selling its equipment to Qwest because the equipment was not better than 66 substantially similar equipment sold by Redback’s competitors. He stated that Qwest executives 77 were constantly intimating that Qwest would only buy Redback’s products if Redback would 88 “help them out,” and when Redback continued to send him and others to Qwest to get orders in 99 1999, Qwest’s executives were not even courteous and blatantly stated: “When I want to reach 1010 you, I will call you.” He said that the Qwest executives were too busy trying to enrich 1111 themselves to provide orders for Redback’s products, even though Qwest had agreed to provide 1212 orders if Redback gave Qwest executives stock. The Redback Sales and Marketing Manager 1313 stated that he did not know how many “friends and family” shares Redback had given to Qwest 1414 executives, but he was aware that Redback had given 1,000 shares of pre-IPO stock to the “top 1515 guys” and to Lewis Wilks, who was the president of a Qwest subsidiary. He also stated that he 1616 did not deal directly with Weisberg, but that Lew Wilkes had introduced him to Weisberg one 1717 day when the Redback Sales and Marketing Manager was at Qwest’s offices. He said that 1818 Wilkes told him that “you will be dealing with Marc down the road,” and the Redback Sales and 1919 Marketing Manager understood Wilkes to mean that Weisberg would handle more 2020 “shakedowns” on behalf of Qwest, like the pre-IPO stock in exchange for favorable press 2121 releases and equipment purchase commitments. 2222 63. 60. The Redback Sales and Marketing Manager stated that one day during May 2323 1999, when he walked into Redback’s offices in California, Barsema showed him a document 2424 and said that it was “some paperwork from U.S. Telesource.” He said that apparently U.S. 2525 Telesource was the named recipient of Redback stock that Redback had agreed to provide to 2626 Qwest’s executives. Barsema asked the Redback Sales and Marketing Manager “What is U.S. 2727 Telesource,” and the Redback Sales and Marketing Manager stated in response that he had never 2828 heard of U.S. Telesource.

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11 64. 61. According to the Redback Sales and Marketing Manager, Redback executives 22 lost sight of what was important because the press releases added more value to the stock price 33 than actual orders. He also stated that providing pre-IPO shares to Qwest and other customers 44 boosted the stock price because in exchange for the stock, Redback earned the right to issue a 55 press release announcing that Qwest or the other customers had entered into agreements to 66 purchase and deploy Redback’s equipment. He further commented that the press releases were 77 “not worth the paper that they were written on.” 88 65. 62. As Redback continued to report a growing customer base (without disclosing 99 bribes and other material sales incentives used to purchase the new customers and new orders for 1010 Redback), the Company’s stock continued to climb, reaching $214.98 on August 19, 1999, and 1111 splitting two-for-one the next day, closing at $104.76 on August 20, 1999. In November 1999, 1212 the stock had continued to soar and closed at $150.02 on November 29, 1999. 1313 66. 63. Redback and the Individual Defendants decided to use the Company’s rising 1414 stock as currency for acquisitions. On November 29, 1999, the Company announced that it 1515 would acquire another communications company, Siara Systems, Inc. (“Siara”), for 1616 approximately $4.5 billion (using Redback’s stock as currency). Siara had only $7.6 million of 1717 book value assets and a $14.2 million deficit in stockholders’ equity. In addition, Siara had yet 1818 to record any revenue and had no saleable products at the time of the acquisition. It did have the 1919 SmartEdge™ technology under development. 2020 67. 64. Redback again bribed executives at Qwest, this time so that they would 2121 actually purchase Redback products. Prior to consummation of Redback’s merger with Siara, 2222 Defendants Ragavan (Siara’s President and CEO), Khosla (a member of Siara’s Board of 2323 Directors who assumed a position on Redback’s Board through the merger) and others caused 2424 Siara to issue a warrant for 100,000 shares of Siara’s stock to Qwest and its executives (through 2525 U.S. Telesource) in exchange for an agreement by Qwest Communications to purchase $40 2626 million worth of equipment that was currently under development from Siara or its successors 2727 on or prior to December 31, 2001. This agreement is referred to herein as the “Siara Warrant 2828 Agreement.” The Siara Warrant Agreement was never publicly disclosed by Redback, Siara or

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11 Qwest or any of their affiliates or insiders. Lead Plaintiff obtained a copy of the agreement and 22 become aware of its terms and the parties to the Agreement for the first time when Weisberg 33 filed his motion to dismiss the First Amended Complaint in this action and attached a copy of the 44 agreement as an exhibit to his motion. 55 68. 65. The Siara Warrant Agreement was signed on November 27, 1999, the same 66 day that Siara’s Board approved the purchase price offered by Redback, and within days of 77 Redback executing a definitive merger and acquisition agreement with Siara. Therefore, the 88 purchase agreement entered into by Qwest was in fact a commitment to purchase $40 million in 99 products from Redback at the time that Siara entered into the Agreement, because Redback was 1010 to be the successor to Siara. According to Redback’s Registration Statement filed in connection 1111 with the Redback/Siara merger and acquisition, Defendants Khosla and Ragavan participated in 1212 special meetings of Siara’s Board of Directors to discuss the status of the possible acquisition 1313 throughout November 1999. Khosla also was on the Board of Directors for Qwest at the time 1414 that Siara entered into the Siara Warrant Agreement, and consequently he and Ragavan 1515 understood that the Siara Warrant Agreement obligated Qwest to purchase $40 million worth of 1616 Siara’s SmartEdge™ equipment (which was still under development in late 1999) from Redback 1717 on or before December 31, 2001. Ragavan signed the Siara Warrant Agreement on behalf of 1818 Siara, and Weisberg signed on behalf of U.S. Telesource and on behalf of Qwest 1919 Communications. 2020 69. 66. Qwest and U.S. Telesource shared many common Board members and 2121 executive officers, including Weisberg (President and Chief Executive Officer of U.S. 2222 Telesource; Senior Vice President of Qwest Communications Corporation; and Senior Vice 2323 President Corporate Development of Qwest); Joseph P. Nacchio (Director of U.S. Telesource 2424 and Director and Chairman and Chief Executive Officer of Qwest); and Drake S. Tempest 2525 (Director of U.S. Telesource and Director, Executive Vice President and General Counsel of 2626 Qwest). In addition, U.S. Telesource was wholly owned by Qwest. At the time that Siara issued 2727 the warrant to U.S. Telesource, the exercise price of the warrant was $2 per share, and the stock 2828 issued under the warrant (100,000 shares of Siara stock that were exchanged for 119,000 shares

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11 of Redback’s stock at $136.50 per share) had a value of approximately $16 million. Within 22 weeks of Redback’s merger with Siara, the stock issued under the Siara Warrant Agreement 33 soared in value to approximately $45 million. Therefore, Qwest directly benefited from the 44 Siara Warrant Agreement, pursuant to which Qwest obtained at least $45 million worth of 55 Redback’s stock. 66 The Broadband Office Warrant 77 70. 67. On December 1, 1999, Siara announced that Broadband Office had selected 88 “Siara’s software and platforms (which were still in the production phase) for deployment in 99 Broadband’s Office’s network, which was then under development. Siara stated that the new 1010 contract was valued at $40 million, and that implementation was scheduled to begin in the first 1111 half of 2000. Redback and Siara had already announced their merger, and therefore investors 1212 and shareholders understood that the contract was really an agreement between Redback and 1313 Broadband Office. Like Qwest’s obligations under the secret Siara Warrant Agreement, 1414 Broadband Office had secretly agreed to allow Siara to announce that Broadband Office was 1515 going to deploy $40 million of Siara’s equipment, in exchange for lucrative shares of Siara’s 1616 stock. Neither Siara nor Broadband Office disclosed (nor did Redback later in the Class Period 1717 when it reported sales to Broadband Office) that Ragavan and others had secretly given the Siara 1818 warrant for 4500 shares of the stock (which were to be exchanged for lucrative Redback stock or 1919 a warrant in the merger) to Broadband Office as payment for Broadband Office’s commitment to 2020 use Siara’s SmartEdge™ technology. KPCB owned more than 10% of Broadband Office, which 2121 purchased $8 million in products from Redback in 2000, and like Qwest’s affiliates received a 2222 warrant for stock that was exchangeable for Redback stock worth millions of dollars. 2323 71. 68. In connection with the Siara merger and acquisition, Redback filed a series of 2424 Registration Statements and Prospectuses with the SEC. The fact that Siara had issued 2525 unspecified, unregistered securities to Broadband Office and U.S. Telesource is buried in a series 2626 of exhibits and appendices to an amended Investors’ Rights Agreement from 1998 that was 2727 attached to the Registration Statement. There is no disclosure in the prospectus that these 2828 securities were a quid pro quo for business from Qwest and Broadband. In fact, a reader of the

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11 prospectus would be unable to even determine that the securities had been issued to a Redback 22 customer. The prospectus reveals only that U.S. Telesource and Broadband Office held non- 33 registered securities under a warrant for Siara stock. Defendant Barsema signed the amended 44 Investors’ Rights Agreement on behalf of Redback, and Defendant Ragavan signed it on behalf 55 of Siara. Ragavan also signed the Siara Warrant Agreement with U.S. Telesource, and therefore 66 he knew that Redback had provided undisclosed sales incentives to U.S. Telesource, and he and 77 Barsema knew that Siara had provided undisclosed stock incentives to U.S. Telesource and 88 Broadband Office because they signed the amended Investors’ Rights Agreement. 99 Redback’s Scheme Continues 1010 72. 69. In March 2000, Redback consummated its acquisition of Siara, and holders of 1111 shares, warrants and options of Siara received over 31 million shares of Redback’s common 1212 stock, which was more than 38% of the Company’s total outstanding common stock. The Siara 1313 warrants were exchanged for Redback warrants when the merger of these companies was 1414 consummated. The value of the Siara warrants given to Broadband Office was never disclosed 1515 and is not currently known to the Class, but was likely in excess of $1.48 million at the time that 1616 Siara merged with Redback. 1717 73. 70. Pursuant to the Merger Agreement between Redback and Siara, Defendants 1818 Haque, Khosla and Ragavan, who were members of Siara’s board of directors, became members 1919 of Redback’s Board. Defendant Ragavan, a director and the Chief Executive Officer of Siara, 2020 also became the CEO of Redback after the merger. Redback and Qwest now shared a common 2121 Board member, Khosla, who through his powerful Silicon Valley venture capital firm, Kleiner, 2222 Perkins, Caufield & Byers (“KPCB”) was a large investor in Redback. Khosla, now serving on 2323 the board of directors of both Redback and Qwest, was in a unique position to manage the 2424 important relationship between Redback and Qwest, including the impact on Redback’s reported 2525 revenues of $40 million of equipment purchases by Qwest before December 31, 2001, as 2626 required under the Siara Warrant Agreement. Defendant Khosla also was on the Board of 2727 Directors for Concentric Networks, one of Redback’s earliest customers and another rising 2828 telecommunications company that also secretly entered into a lucrative stock quid pro quo

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11 purchase transaction with Redback to create the illusion for strong demand for Redback’s 22 SMS™ products. 33 74. 71. The Redback Sales VP became aware of the secret payments and other sales 44 incentives and inducements provided by Redback to Qwest in late 1999, when Kruep informed 55 him that there were large Qwest orders that “were going to come” in the near future. This news 66 surprised the Redback Sales VP, as he was in charge of the Qwest account and would thus be 77 aware of Qwest’s purchases or plans to purchase Redback products. Additionally, prior to 88 making any purchases, Qwest routinely conducted field trials and lab tests on products to ensure 99 the quality of the products and their usefulness to Qwest, but such tests by Qwest had not been 1010 conducted on any Redback products. Kruep told the Redback Sales VP that Kruep was 1111 communicating with Weisberg regarding products to be ordered by Qwest to fulfill its 1212 obligations under the Siara Warrant Agreement. The Redback Sales VP stated that on or about 1313 December 18 or 19, 1999, Kruep and Weisberg worked out the basic terms of the “specifics” of 1414 Qwest’s product order that was provided in exchange for the transfer of Siara warrants to Qwest 1515 executives (through U.S. Telesource). 1616 75. 72. Reporting of revenue growth was critical to maintaining and increasing 1717 Redback’s stock price. Since Redback was not profitable, and had no expectation of being 1818 profitable in the near future, the only metric of success that it could report was revenue growth. 1919 Thus, for Redback and the Individual Defendants, to keep the stock price up, increased revenue 2020 had to be reported – whether it was real or not. For example, a Wells Fargo analyst who covered 2121 Redback reported in the Spring 2001 that Redback’s revenue potential supported a “Buy” 2222 recommendation. 2323 76. 73. In 1999, Redback reported total revenues of only $64.3 million. However, the 2424 Company soon began to report the revenues it desperately needed to satisfy investors. In early 2525 2000, Redback began reporting financial results derived in substantial part from its undisclosed 2626 stock transfers, payments and other sales incentives provided to Qwest, UUNET, Concentric, 2727 Broadband Office and other customers. For the first two quarters of 2000, Redback reported 2828 record revenues of $183 million, a 370% increase over the first two quarters of 1999. As

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11 Redback and the Individual Defendants expected, Redback’s stock price continued its steep 22 ascent and closed on April 12, 2000 at $96.01, which (adjusted for a two-for-one split on April 4, 33 2000) was an 834% increase from the stock’s IPO price. 44 77. 74. Having touted numerous multi-million, multi-year agreements in place by 55 April 2000, Redback could hold itself out as a pioneer in network services with a proven client 66 base including Qwest. Redback and the Individual Defendants decided to capitalize on their 77 fraud by tapping the secondary markets again, this time in a debt offering. In or around July 21, 88 2000, Redback sold $500 million of 5% Convertible Notes due 2007 to the investing public. The 99 Registration Statement was materially false and misleading because it omitted that Redback had 1010 provided millions of dollars worth of stock to customers in order to obtain commitments to 1111 purchase Redback’s equipment. In the Registration Statement, Redback reported that the first 1212 customer shipments of SmartEdge™ equipment were expected in the second half of 2000, and 1313 claimed that Redback’s “position” would be used to penetrate the subscriber management 1414 market, without disclosing that the Individual Defendants had already purchased commitments 1515 for Qwest and Broadband to buy Redback’s products through secret stock kickback payments. 1616 78. 75. Redback and the Individual Defendants needed additional revenues from 1717 Qwest to sustain the illusion of business success at Redback. Accordingly, they expanded their 1818 fraudulent scheme and deceitful course of business to include another instance of Redback 1919 buying revenues from Qwest. As part of this scheme, in the third quarter 2000, Redback agreed 2020 to purchase $18 million of Application Service Provider (“ASP”) services from Qwest Cyber 2121 Solutions, LLC (“QCS”), an affiliate of Qwest that was founded in July 1999, in exchange for 2222 Qwest’s commitment to purchase $20 million of Redback’s SMS™10000 product. 2323 79. 76. According to a former Vice President of North American Sales that worked at 2424 Redback from August 2000 through December 2001 and was in charge of sales for all of 2525 Redback’s equipment lines for all of North America (the “VP NA Sales”), Qwest had not tested 2626 Redback’s SMS™ 10000 product in Qwest’s labs as required under Qwest’s routine business 2727 practices. The VP NA Sales also stated that Qwest did not have Redback’s SmartEdge™ 2828 product in its labs, and he knew from frequent interaction and sales presentations to Qwest that

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11 new products could not be deployed by Qwest before going through lab trials at Qwest to make 22 sure that the products were “interoperable” in Qwest’s network and that they met certain 33 technical requirements. Working with Perusse, who was the Senior Vice President of 44 Engineering at Qwest, the VP NA Sales said that he and others suggested that Qwest purchase 55 the SMS™10000 to satisfy Qwest’s obligations under the Siara Warrant Agreement as they were 66 working hard to determine what Qwest could buy to meet these contractual obligations. 77 80. 77. In the third quarter of 2000, Qwest -- at Perusse’s direction -- agreed to 88 purchase the SMS™ 10000. According to both the Redback Sales VP and the VP NA Sales, 99 Defendant Perusse knew at the time that Qwest (at Perusse’s direction) agreed to purchase the 1010 SMS™ 10000 that the product was not operational. Numerous former Redback officers and 1111 employees, including the Redback Sales VP, the VP NA Sales, the Redback Sales Director, the 1212 UUNET Account Manager and the Sales Engineer, stated that the SMS™ 10000 was not 1313 operational at all in 2000, when the product was shipped to Qwest and other customers, 1414 including UUNET. 1515 81. 78. According to the Redback Sales VP and the VP NA Sales, all of the Individual 1616 Defendants, including Kruep, Ragavan and others, also knew that the SMS™ 10000 product was 1717 not operational in 2000, based upon tests conducted by Redback’s engineers, including Patel. 1818 The VP NA Sales recalled that at weekly executive meetings attended by senior executives and 1919 sales managers, including the VP NA Sales, Ragavan, Kruep, Barsema, Gentner and others, Patel 2020 provided weekly oral reports regarding numerous bugs and problems with the SMS™ 10000 2121 product that caused it to be non-operational. Patel and these same senior executives and sales 2222 managers also knew that the product was not able to pass beta testing in UUNET’s labs. 2323 Nevertheless, according to the Redback Sales VP and the NA Sales, the Individual Defendants 2424 knowingly concealed problems with the product from the public and used undisclosed sales 2525 incentives and secret contractual obligations arising from lucrative friends and family stock and 2626 secret warrant deals to create the false illusion that Redback was generating sales and revenue 2727 from large telecommunications companies like Qwest and UUNET, and that these companies 2828 had selected the SMS™ 10000 for deployment in their networks.

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11 82. 79. According to the VP NA Sales, in September 2000, Qwest did give Redback a 22 large order for the SMS™ 10000. The Redback Sales VP stated that Perusse provided a $20 33 million order for a large number of Redback’s SMS™ 10000 “boxes” after demanding -- and 44 expressly on the condition -- that Redback buy approximately $20 million of ASP services from 55 QCS. He further stated that Perusse demanded that Redback purchase ASP services from QCS, 66 although there had not been any previously-expressed interest, need or testing of such services 77 by Redback. The ASP services offered by QCS essentially allowed companies to outsource their 88 information and technology (“IT”) departments, but Redback did not need them as it 99 successfully internally managed its own IT systems. Perusse also told the Redback Sales VP that 1010 Redback had to agree to give QCS a $20 million order before Qwest would purchase anything 1111 from Redback. The fact that Perusse selected the services to be purchased by Redback, and 1212 suggested the dollar amount to be purchased, further demonstrates that Redback had no real need 1313 for the services. Nevertheless, Redback entered into a five-year contract to purchase $18 million 1414 (essentially $300,000 per month) of unneeded ASP services from QCS. Moreover, the amount 1515 that Redback agreed to pay QCS was astronomical compared to the market price for ASP 1616 services. Indeed, the Redback Sales and Marketing Manager confirmed that for $300,000 per 1717 month, Redback could have gotten a “gold-plated IT department.” 1818 83. 80. In 2000, after starting his position in Redback’s marketing department, the 1919 Redback Sales and Marketing Manager stated that he became aware that Redback agreed to 2020 purchase ASP services from Qwest, and that he knew that the ASP services were not somethinga 2121 product that Redback really needed but were purchased as an inducement to obtain press releases 2222 and equipment-purchase commitments from Qwest to increase Redback’s stock price. He heard 2323 the Redback executives, when referring to the $18 million ASP services deal, state “if we gotta, 2424 we will do what we gotta do,” meaning that management would do what it had to in order to get 2525 Qwest’s business. The quid pro quo agreement with Qwest provided no benefit to Redback 2626 because, under the terms of the agreement as disclosed in a press release issued by Qwest in 2727 September 2000, QCS was to service four existing software applications that Redback had 2828

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11 already been successfully servicing in house. The Redback Sales and Marketing Manager said 22 that in response, he just started shaking his head in disgust. 33 84. 81. The former Redback Sales VP stated that Kruep, Ragavan, Khosla and others 44 at Redback agreed to purchase the services from Qwest solely to obtain Qwest’s agreement to 55 purchase the SMS™10000, so that Redback could meet Wall Street’s revenue expectations for 66 the third quarter of 2000. He further stated that the $18 million purchase by Redback required 77 senior management’s approval and that Ragavan sought and received Khosla’s approval before 88 Ragavan authorized the purchase. As noted above, because it was the revenue numbers that 99 were driving the stock price, Redback executives were willing to enter into deals that provided 1010 no real benefit in order to keep the stock price inflated. The false statements about the 1111 Company’s revenues and business, which eventually were issued after this agreement with 1212 Qwest, flowed as a natural consequence of the Individual Defendants’ deceptive acts in entering 1313 into the deal with Qwest. 1414 85. 82. Qwest had no need or use for the SMS™10000 product because the product 1515 had not been tested in Qwest’s labs and was not even operational, and therefore it could not have 1616 been used by Qwest or deployed in Qwest’s network. A former sales engineer who worked at 1717 Redback throughout 2000, 2001 and 2002 (the “Sales Engineer”) explained that the 1818 SMS™10000 units that Redback shipped to Qwest were not operational because the optical 1919 cable “card” that was developed to run the SMS™10000 was woefully incapable of running at 2020 speeds and capacity to support an OC-12, which is the description for the bandwidth that the 2121 SMS™ 10000 had been designed to support. The Redback Sales Director explained that at OC- 2222 12 speed, a certain amount of bandwidth can be transmitted, but at OC-3 speeds a significantly 2323 narrower bandwidth of data can be transmitted, and the SMS™10000 only transmitted 25% of 2424 what it was guaranteed to transmit because the OC-12 card for the SMS™10000 would only run 2525 at OC-3 speed. The Redback Sales Director stated that Redback was not able to fix this serious 2626 problem with the SMS™10000 before he left the Company in March 2002. Therefore, the Sales 2727 Engineer stated that the SMS™10000 was not stable and never worked reliably and therefore 2828 was not operational. He further stated that while he was at Redback there was no record of any

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11 technical support from Redback because the SMS™10000 was never deployed by Qwest or 22 UUNET or any other customer. 33 86. 83. The Sales Engineer stated that Redback shipped 40 units (which he said was a 44 massive quantity) of the SMS™10000 to Qwest, but they did not work, and Qwest returned the 55 units to Redback in early to mid-2002. The Sales Engineer also stated that he knew that Qwest 66 had bought and paid for 40 SMS™10000 units in 2000 and 2001, but that there was a great deal 77 of conversation at Redback about whether the Company was going to have to “debook” the 88 revenue from those units. He also commented that a problem with commissions owed to 99 Redback sales persons handling the Qwest account arose as a result of the problems with the 1010 Qwest SMS™10000 sales because of “a year’s worth of revenue recognition problems.” 1111 According to the Sales Engineer, he was closely tied to Redback’s support organization and was 1212 responsible for consulting engineering at the Company, and, over the summer of 2002, they 1313 “rebuilt” the SMS™10000 units that were to be returned by Qwest. He further stated that 1414 Redback shipped the SMS™10000 units back to Qwest in or around September 2002, although 1515 the SMS™10000 was still not capable of running an OC-12 card at the time. He understood that 1616 Qwest never took the units out of the box, and he said that the SMS™10000 was not operational 1717 and never deployed by Qwest in its network, and that Qwest held the product in a warehouse 1818 with no intention of ever deploying the equipment. 1919 87. 84. Indeed, the Redback Sales VP confirmed that the SMS™10000 product was a 2020 “stillborn” product that was never operational and that Patel admitted that the SMS™10000 2121 product was not operational at weekly sales management and executive meetings that he and 2222 others regularly attended in 2000 and 2001, including the CEO (Ragavan, and then Lamond after 2323 Ragavan’s resignation, and then DeNuccio); the CFO (Gentner and then Wolf); the Sales VP, the 2424 VP NA Sales, Kruep and others. The Redback Sales VP confirmed that the SMS™10000 units 2525 that Qwest purchased from Redback languished for years in Qwest’s warehouse where that 2626 product was stored. While these facts were material to investors, they were not important to 2727 Redback or Qwest, as Redback was simply seeking ways to book revenue, and Qwest was 2828 seeking a customer to purchase and endorse the QCS product.

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11 88. 85. The Redback Sales VP was informed that Perusse was trying to create 22 revenues for QCS in or around September 2000, because Qwest was planning an IPO of QCS, 33 which, if successful, would enable Qwest’s executives to reap millions from their QCS stock 44 holdings. The Redback Sales VP stated that the ASP services that Redback purchased from QCS 55 would not properly function and only worked intermittently. He further stated that he told 66 Perusse, after Redback received some of the ASP services from QCS, that because the ASP 77 service quality “stinks”, Redback was withholding payment. The Redback Sales VP stated that 88 Redback’s order constituted 40% of QCS’s revenue in 2000, and therefore Perusse was alarmed 99 because of the contemplated IPO for QCS. In response to Redback’s complaints and refusal to 1010 pay for the services, Perusse informed the Redback Sales VP that Qwest was not going to pay for 1111 a large order of SmartEdge™ products that had been purchased by Qwest in the fourth quarter of 1212 2000, because of Redback’s position on the ASP purchase. 1313 89. 86. According to the Redback Sales VP, neither Redback nor Qwest wanted the 1414 other to publicly disclose operational problems with the products that they had exchanged 1515 because both wanted to create the false appearance of strong demand for viable products. He 1616 discussed the accounts receivable and ASP services problem with Defendant Ragavan after the 1717 accounts receivable for the non-functioning SmartEdge™ equipment that Redback had shipped 1818 to Qwest in late 2000 had been outstanding for several months. The Redback Sales VP recalled 1919 that Redback had to “jump through all kind of hoops” to process the ASP order. He also stated 2020 that Redback had to agree to backdate the contract with QCS so that QCS could book revenue 2121 from the contract by the end of a certain quarter. The Redback Sales VP stated that Kruep 2222 worked with Lew Wilkes (who had become the President of QCS) to negotiate the specific 2323 details (such as actual amount purchased and timing of the sale) for the quid pro quo agreement 2424 with QCS. Further, according to the Redback Sales VP, Kruep provided information on sales 2525 and revenues for press releases and SEC filings, even though Kruep knew that these revenues 2626 were not honestly earned, but were the result of barter and bribery. Also according to the 2727 Redback Sales VP, Khosla and Ragavan both approved the quid pro quo deal with Qwest in third 2828 quarter 2000, when Redback was desperate to generate revenues. Both Ragavan and Khosla

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11 became involved in solving the outstanding receivables problem with Qwest in the first or 22 second quarter of 2001, when Qwest refused to pay for the $20 million worth of SmartEdge™ 33 equipment because the DS-3 cards in the equipment would not work, and subsequently 44 “management [of Qwest and Redback] met in the street for a showdown and exchanged checks.” 55 The Redback Sales VP recalled that after Defendant Wolf had arrived at Redback and became 66 aware of the material amount of the outstanding receivables from Qwest and the quid pro quo 77 nature of Redback’s business dealings with Qwest, and that the transactions had no valid 88 business purpose, Wolf told the Redback Sales VP that Perusse and other Qwest executives were 99 “crooks” and “extortionists.” 1010 90. 87. The end result of these various unnecessary and undisclosed transactions was 1111 to create the false impression of legitimate orders and revenues. Defendants’ scheme and 1212 fraudulent course of business was successful in propping up Redback’s stock price, which traded 1313 as high as approximately $150 - 160 per share in the third quarter of 2000. 1414 91. 88. Based upon the purported sales to Qwest, Redback continued to report 1515 growing revenues. On October 13, 2000, Redback issued an earnings release announcing its 1616 financial results with net revenues of $80.6 million for the third quarter of 2000, a 291% increase 1717 over the third quarter of 1999. Upon news of the record revenues, Redback’s stock price soared 1818 35 percent in three trading days, increasing from $102.70 on October 12, to $121.53 on October 1919 13 and to $138.76 on the next trading day, October 16, 2000. Redback sales to Qwest during 2020 third quarter 2000, all of which were the result of illicit agreements between the companies, 2121 constituted 24% of Redback’s revenues. The Individual Defendants intentionally or with 2222 deliberate recklessness concealed the quid pro quo nature of Qwest’s purchase of non- 2323 operational equipment and Redback’s purchase of services that Redback did not really want or 2424 need. Defendants also intentionally or with deliberate recklessness concealed that through the 2525 Individual Defendants’ deceitful course of business with Qwest, Redback had essentially paid 2626 $18 million as an inducement to Qwest so that the Company could improperly book and report 2727 $20 million in revenues during the third quarter of 2000. 2828

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11 92. 89. According to the UUNET Account Manager, Redback also sold $4 - $5 22 million of the non-operational SMS™ 10000 product to UUNET in late (around December) 33 2000. This order was part of the quid pro quo transactions with UUNET in exchange for 44 Redback’s “friends and family” stock that had been given to UUNET’s executives prior to 55 Redback’s IPO. Redback then shipped between 5 and 10 SMS™ 10000 units to UUNET. The 66 UUNET Account Manager stated that before Redback shipped the units to UUNET, lab tests at 77 Redback had “turned up problems with the OC-12 cards,” which read data in the SMS™ 10000 88 units. Therefore, Redback shipped the SMS™ 10000 units to UUNET without the OC-12 99 cards.” According to the UUNET Account Manager, Redback booked the revenue from the sale 1010 to UUNET at the end of 2000 when the units without the cards were shipped even though the 1111 units were not operational without the cards. 1212 93. 90. In late September 2000, Redback’s stock traded as high as $169.83 per share. 1313 In October 2000, the stock traded as high as $138.76. 1414 94. 91. The Individual Defendants used Redback’s artificially inflated stock during 1515 the Class Period as currency to acquire more companies and their attendant revenues. In October 1616 2000, Redback acquired Abatis Systems Corporation (“Abatis Systems”), a developer of systems 1717 for IP service management solutions, for approximately $655 million. Former holders of shares, 1818 warrants and options of Abatis Systems acquired 5.2 million shares of Redback’s common stock 1919 in that transaction, not aware that those shares were inflated by the defendants’ fraud. 2020 95. 92. According to the Redback Sales and Marketing Manager, Defendant Khosla 2121 brought the Abatis deal to Redback, and Abatis was a company that Khosla had ties to through 2222 his family. 2323 96. 93. Redback’s CEO, Defendant Ragavan, heralded the acquisition as having 2424 “significant operational cost savings and revenue generating benefits.” In reality, Redback 2525 manipulated its accounting in connection with both Abatis and the Siara acquisitions to 2626 understate the Company’s expenses. Through its acquisitions of Siara in March 2000 and Abatis 2727 in September 2000, Redback improperly allocated $40.4 million of the purchase price for those 2828 companies to in-process research and development (“IPR&D”) in order to manipulate future

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11 earnings. By inappropriately allocating excessive amounts of the purchase price to IPR&D 22 instead of to goodwill, Redback was able to charge-off the entire $40.4 million in the year of the 33 acquisition as a one time “non-recurring” event instead of over the life of the goodwill asset and 44 therefore, Redback eliminated future reductions in earnings. 55 97. 94. Defendants’ fraud had a material effect on Redback’s reported revenue, and 66 therefore, its stock price as well. Sales to Qwest accounted for 24% of Redback’s total revenue 77 for the third quarter 2000, more than 18% for the fourth quarter 2000 and 15% of the Company’s 88 total revenue for all of 2000. During the third and fourth quarters of 2000, Redback’s sales to 99 Qwest totaled approximately $40 million. 1010 Material Delay of the New SmartEdge™ Router 1111 98. 95. According to the VP NA Sales, in or around August and September 2000, 1212 Patel and other Redback engineers reported to Kruep and others at Redback that development on 1313 the new capabilities for the SmartEdge™ product was not complete and that the product would 1414 not be ready to ship in 2001 as had been anticipated by senior executives and sales managers. 1515 Although Redback had developed a basic routing product known as the “SmartEdge™ 800 1616 metropolitan optical access platform, “ the technology for a new SmartEdge™ router with 1717 additional capabilities was still under development in 2000 and was highly anticipated by large 1818 telecommunications customers. Kruep then immediately communicated these facts to Ragavan 1919 and all of the other Board members and warned that the Company’s established revenue targets 2020 for 2001 could not be met without sales from the SmartEdge™ product that was then currently 2121 under development. 2222 99. 96. According to the VP NA Sales, in 2000, Redback established forecasts of 2323 revenue of $750 million, but the revenues were based in large part on anticipated sales of the 2424 SmartEdge™ equipment which was still under development with additional router capabilities. 2525 The VP NA Sales said that he informed Ragavan in 2000 (and Lamond in 2001 when Lamond 2626 stepped in as acting CEO after Ragavan’s resignation), that Redback could not meet the 2727 forecasted revenues if the new SmartEdge™ equipment was not going to be available for sale in 2828 2001, as definitively reported by Patel.

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11 100. 97. Also, according to the Redback Sales VP, when the Board refused to revise 22 forecasts, Kruep became disgusted. From August to October 2000, Kruep – taking advantage of 33 material non-public information - started dumping his Redback stock holdings. During this 44 period, Kruep sold 64,600 shares of Redback stock worth more than $9.6 million. Ragavan, 55 Khosla and the rest of the Board, however, refused to revise the unrealistic revenue targets or 66 Redback’s business plan for 2001, even though they knew, because they had been informed by 77 Kruep and the VP NA Sales, that the Company could not generate sales sufficient to meet 88 Redback’s guidance or Wall Street’s expectations. Taking advantage of this non-public material 99 adverse information, however, in August to October 2000, the Board members and other insiders 1010 started dumping their Redback holdings, and the venture capital firm designees on Redback’s 1111 Board (Khosla, Lamond and Haque) caused their venture capital funds to distribute over $1.7 1212 billion in Redback stock to the funds’ partners and investors. 1313 101. 98. By November 2000, Redback’s stock price began to decline, along with the 1414 stock of Redback’s telecommunication peers and other Internet companies. However, the 1515 Individual Defendants desperately wanted to distinguish their Company from other 1616 telecommunication and Internet companies. The Individual Defendants were determined to 1717 announce another big deal with Qwest, and, as a result, drive up the price of Redback’s stock, or 1818 at least keep it at an artificially-inflated level and avoid the decline affecting the stocks of the 1919 Company’s peers. 2020 102. 99. In order to book more revenues from Qwest, Redback once again turned to 2121 Perusse and requested that Qwest order Redback’s SmartEdge™ equipment to fulfill Qwest’s 2222 obligations under the Siara Warrant Agreement. Redback had announced the new SmartEdge™ 2323 line of equipment in the second quarter of 2000, but the Company did not start shipping the 2424 SmartEdge™ 800 product until the third quarter of 2000. According to the Redback Sales VP, 2525 in the fourth quarter of 2000, Qwest – at the direction of Perusse -- agreed to purchase 2626 approximately $20 million of the SmartEdge™ 800 product as a quid pro quo for the lucrative 2727 stock warrant that Qwest’s executives had received under the terms of the secret Siara Warrant 2828 Agreement. At the time Perusse agreed to the proposed purchase, Qwest did not have the

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11 SmartEdge™ 800 equipment in its testing labs. During fourth quarter 2000, Redback shipped 22 approximately $20 million of the SmartEdge™ 800 to Qwest and booked $20 million in 33 revenues from the sale, without disclosing the stock bribe worth $45 million that Redback had 44 given to Qwest under the Siara Warrant Agreement to induce Qwest to purchase the equipment. 55 Defendants Gentner, Ragavan, Kruep and other Individual Defendants also caused Redback to 66 overstate its revenues from the sale by failing to reduce the net revenues generated from the 77 SmartEdge™ transaction by the value of the stock incentive that had been provided to Qwest’s 88 affiliates under the Siara Warrant Agreement. 99 103. 100. Revenues generated from sales to Qwest in the fourth quarter 2000 1010 constituted 18% of Redback’s revenues that quarter and enabled Redback to keep its stock price 1111 at an artificially-inflated level. Redback’s stock price closed between $39.32 and $48.75 in the 1212 weeks following the Company’s January 18, 2001 announcement of revenues of $114.6 million 1313 and strong demand for the SMS™ 10000 and SmartEdge™ 800 products. 1414 104. 101. On February 5, 2001, Redback announced that Qwest had agreed to another 1515 multi-year, multi-million dollar purchase of Redback’s SmartEdge™ 800 product. Redback’s 1616 stock price increased 9% on news of the new contract, going from $40.25 on February 2, 2001 to 1717 $44.25 the next day – a ten percent increase – even though Redback’s announcement did not 1818 specify the terms or amount of this new deal. According to a former Redback Sales Director 1919 who personally handled Qwest’s account for Redback from February 2000 through July 2000 2020 (the “Former Redback Sales Manager”), there was no new agreement with Qwest in February 2121 2001. He stated that in first quarter 2001 Qwest placed an additional $30 million order for the 2222 SmartEdge™ equipment under an old contract that had been in place prior to the former 2323 Redback Sales Manager’s arrival at Redback. The Redback Sales VP and VP NA Sales 2424 confirmed that Qwest was purchasing the equipment to fulfill its obligations under the Siara 2525 Warrant Agreement and no new multi-million, multi-year agreement had been entered by Qwest 2626 in or around February 2001. The press release also was materially false and misleading because 2727 it failed to disclose the quid pro quo nature of Redback’s agreement with Qwest or the shares of 2828

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11 stock that had been provided to Qwest executives under the Siara Warrant Agreement in 22 exchange for Qwest’s commitment to buy Redback’s products. 33 105. 102. When the VP NA Sales and Redback Sales VP attempted to ship to Qwest 44 the SmartEdge™ 800 equipment before the end of first quarter 2001, so that Redback could meet 55 its forecasted revenue numbers and Wall Street’s expectations, Perusse refused to go forward 66 with the order. According to the Redback Sales VP, when he met with Perusse late in March 77 2001, Perusse said that he would not allow Redback to ship any more SmartEdge™ 800 units to 88 Qwest unless Redback purchased an Indefeasible Right of Use (“IRU”) from Qwest before the 99 end of the first quarter. The Former Redback Sales Manager stated that Perusse held Qwest’s 1010 $30 million order for equipment in first quarter 2001 “hostage” and demanded that Redback buy 1111 an IRU before Qwest would issue a purchase order for the equipment. 1212 106. 103. The Redback Sales VP reported Perusse’s highly-unusual demand for the 1313 IRU purchase to Ragavan and others, and the Redback Sales VP explained that he researched 1414 Qwest’s request and determined that Qwest wanted Redback to purchase a right of use for a huge 1515 quantity of capacity (known as a DS-3) on Qwest’s fiber-optic network. An IRU is a right to use 1616 a specific amount of fiber capacity for a specified time period, which was not something that 1717 Redback needed because the Company sold equipment and had no need for fiber-optic capacity 1818 and would never have any need for an astronomical amount of capacity from a DS-3 IRU. 1919 107. 104. Nonetheless, the Redback Sales VP stated that Ragavan, Khosla and Wolf 2020 authorized the IRU purchase from Qwest in exchange for Qwest’s agreement to purchase $30 2121 million of SmartEdge™ equipment in first quarter 2001, because Redback needed to generate 2222 revenues from sales to Qwest to meet Redback’s own revenue targets. The Former Redback 2323 Sales Manager stated that the Redback executives authorized the IRU purchase over his 2424 objection. The Redback Sales VP said that he tried to no avail to purchase fiber-optic capacity 2525 that could be resold by Redback, but was forced by Qwest to buy capability that Redback could 2626 not resell, as Qwest had an excess of capacity between Denver and Dallas that it demanded that 2727 Redback purchase, though Redback did not want or need that capacity. When the Redback Sales 2828 VP went to Enron Corporation to try to resell the capacity, he said that “Enron laughed at him”

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11 because of the glut of capacity between Denver and Dallas and remarked that Qwest had 22 “skimmed Redback too” meaning that several other Qwest customers had been forced to 33 purchase worthless IRUs from Qwest to obtain Qwest’s business. 44 108. 105. Even though Redback had no need for and would never have any need for 55 the IRU, Redback desperately needed additional revenues, so it agreed to Perusse’s demands in 66 order to obtain the needed business from Qwest. According to the Redback Sales VP, Defendant 77 Wolf authorized the $7 million payment to Qwest for the IRU. In addition, according to the VP 88 NA Sales, Defendant PwC was aware that Redback had purchased the IRU and was trying to 99 determine how to book the revenue for Redback’s sale of the SmartEdge™ equipment to Qwest 1010 in first quarter 2001, because PwC was trying to determine whether the revenues should be 1111 decreased by $7 million for the cost of the worthless IRU that Redback had purchased from 1212 Qwest. The VP NA Sales stated that PwC did not make Redback reduce its first quarter 1313 revenues by $7 million for the IRU. In addition, according to the Redback Sales VP, for several 1414 quarters in 2001, Qwest refused to pay for the $30 million worth of SmartEdge™ equipment that 1515 Redback had shipped because the “key cards” that make the equipment operational would not 1616 support the DS-3 fiber optic capacity requirements on Qwest’s network. He further stated that 1717 when Qwest refused to pay for the SmartEdge™ equipment, Redback in turn refused to pay for 1818 the ASP services that it had purchased from QCS because the services were not properly 1919 functioning. After Redback’s large outstanding receivable from Qwest drew the attention of 2020 PwC, Redback and Qwest agreed to “swap checks” according to the Redback Sales VP. 2121 109. 106. Redback’s secret quid pro quo arrangements with, and undisclosed sales 2222 incentives to, Qwest during the Class Period resulted in huge contributions to Redback’s total 2323 reported revenues. Redback disclosed that sales to Qwest accounted for 28% of Redback’s total 2424 revenue in the first quarter of 2001, and 27% of Redback’s total revenue for the six-month 2525 period ended June 30, 2001. These revenues would not have been generated without Redback’s 2626 undisclosed bribes and other sales inducements, including $45 million worth of Redback’s stock 2727 and secret agreements to purchase products from Qwest (and services from Qwest’s affiliate 2828 QCS) that Redback did not want or need.

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11 110. 107. During the Class Period, Redback booked over $80 million in revenues from 22 sales of equipment and other unspecified services to Qwest. The reported revenues from 33 Qwest’s purchases enabled Redback to complete at least three acquisitions in the Class Period 44 and artificially inflated the price of Redback’s stock. However, unbeknownst to investors and 55 the investment community, the impressive sales (for a start-up company) to an established 66 industry titan (Qwest) resulted from an undisclosed scheme in which Redback either bribed 77 Qwest executives or “round-tripped” Redback’s own money to Qwest which was then returned 88 to Redback through bogus deals designed to artificially inflate Redback’s reported revenues, 99 income and assets. Redback entered these deals with Qwest solely to obtain Qwest’s business 1010 and to record revenues from sales that would not have occurred but for the fraud. 1111 111. Redback had not inked any new deals with Qwest since the first quarter 2001 1212 SmartEdge™ 800 equipment sale (though that sale was actually pursuant to the undisclosed 1313 November 1999 Siara Warrant Agreement and was therefore not a new deal, as Redback 1414 represented). Additionally, the effect of Redback’s earlier quid pro quo deals with Qwest had 1515 dissipated. Therefore, Redback had to condition the market to a drop in its revenues as a result 1616 of the end of its improper deals with its biggest customer. Accordingly, on April 2, 2001, 1717 Redback began to announce lower than expected revenues. Shortly thereafter, analysts began 1818 reporting that Qwest was buying less than expected product from Redback. 1919 112. 108. The following chart illustrates the significance of Qwest’s purchases to 2020 Redback’s reported revenues during the Class Period: 2121 REDBACK REPORTED REVENUE 2222

2323 TIME QWEST TOTAL APPROX. REVENUE PERIOD PERCENT REVENUE QWEST S W/OUT 2424 AGE S PORTION QWEST SALES 2525 3 Q ’00 24% $80.56M $19.33M $61.23M 2626 4 Q ’00 18% $114.6M $20.62M $93.98M 2727 All of ’00 15% $278M $41.7M $236.3M 28281 Q ’01 28% $90.94M $25.46M $65.48M

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11 1st Half of ’01 27% $150.36M $40.6M $109.76M 2 All2 of ’01 18% $227.5M $40.95M $186.55M 1 yr33 July ’00 – 23% $345.5M $80.5M $265.0M June ’01 44 55 66 The Williams Deal 77 113. 109. On January 29, 2001, Redback announced yet another “multi-year, multi- 88 million dollar” agreement, this time with Williams Communication Group (“Williams”). 99 According to a January 29, 2001 LightReading.com article, “the $120 million contract calls for 1010 Williams to deploy several SmartEdge™ platforms in both its metro networks and long-haul 1111 networks over the next two years.” According to the article, a Redback marketing vice president 1212 called it a “very significant win” for Redback. It was the largest deal Redback had entered into 1313 and made Redback “a serious contender” for the “multibillion” dollar business in next- 1414 generation broadband equipment. In fact, a February 5, 2001 LightReading.com article stated 1515 that “Brean Murray & Co. Inc. analyst Gina Sockolow, in a note to clients, estimated the 1616 Williams deal could represent 10 percent and 20 percent, respectively, of Redback’s 1717 SmartEdge™ revenues for fiscal years 2001 and 2002.” 1818 114. 110. Just like the deals with Qwest, the deal with Williams created a buzz that 1919 increased the value of Redback’s stock. Also like Qwest, pay to play and quid pro quo deals 2020 were de rigueur at Williams, as reported in a November 23, 2003 Denver Post article. In fact,

2121 Redback’s former Sales VP stated that there was no way to get equipment into Williams unless a 2222 vendor provided stock incentives. 2323 115. 111. In May 2001 (3 months after Redback announced the $120 million contract 2424 with Williams), the Redback Sales VP said that he told Wolf and others that Williams 2525 representatives had informed him that Redback was not going to receive any revenues from 2626 Williams because Williams was cash strapped and on the brink of bankruptcy. Redback had 2727 counted on at least $15 million in revenues from Williams in the second quarter 2001, and had 2828 issued guidance based in part on those revenues. Redback failed to disclose that Williams would

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11 not be ordering any equipment, and Wolf and others knowingly failed to revise the Company’s 22 published guidance for the second quarter, of 2001, which they now knew was false and 33 misleading. 44 Redback Uses Artificially-Inflated Stock For A Third Acquisition 55 116. 112. In September 2001, Redback completed its third acquisition since going 66 public in 1999. In another all-stock deal valued at approximately $57 million, Redback acquired 77 Merlin Systems (“Merlin”) by issuing 3.5 million shares of Redback’s stock in exchange for all 88 of Merlin’s outstanding stock, warrants and options. 99 117. 113. Also, in September, Redback repriced outstanding options that were held by 1010 the Individual Defendants and others. Because Redback’s stock price had fallen below $5.00 in 1111 August 2001, after Redback missed its revenue forecasts and finally admitted that the new 1212 SmartEdge™ router product was delayed and would not be released until late 2001, all of the 1313 options issued to the Individual Defendants in 1999 and 2000 were “out of the money” by 1414 August 2001. Therefore, Redback’s Board authorized outstanding options to be repriced at 1515 $3.16 or $4.17 per share, depending on the original price of the options. Significantly, the 1616 vesting period for the option was extended to a full year from the repricing, which meant that the 1717 newly-priced options did not vest until September 2002. By August 2002, Redback’s stock price 1818 had fallen below $1.00 per share, and therefore the Individual Defendants options were again 1919 “out of the money.” 2020 Redback’s SMS™ 10000 Operational Product’s Problems Continued In 2001 And 2002 2121 118. 114. Throughout 2001 and 2002, Redback’s SMS™ 10000 equipment remained 2222 inoperable because the software and hardware could not support the capacity for which it was 2323 designed. Redback did not disclose these problems to shareholders. Instead, Ragavan and the 2424 other Individual Defendants falsely claimed that the launch of the SMS™ 10000 product was a 2525 “major milestone” and falsely claimed that the product would support 100,000 users. 2626 119. 115. In early 2002, UUNET had an outstanding $2.9 million credit from a 2727 previous purchase in December 2000, of the SMS™ 10000 units, which according to the 2828 UUNET account manager were returned by UUNET because the equipment was not operational.

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11 To prevent having to reverse the $2.9 million in revenues from the UUNET SMS™ 10000 sales, 22 the Redback Sales Director and Redback’s Senior Vice President of Product Management and 33 Marketing, Georges Antoun, held a meeting at UUNET in early 2002, to try to convince UUNET 44 to use the $2.9 million credit to purchase Redback’s SmartEdge™ equipment. However, some 55 of the features of the SmartEdge™ product did not work well for UUNET, and the Redback 66 Sales Director told Antoun that Redback could not ship the SmartEdge™ product to UUNET 77 because it had not been lab tested and approved as required under UUNET’s purchasing 88 procedures. Undeterred, Antoun arranged a meeting with UUNET’s director of purchasing, 99 Boots Bagby (“Bagby”). The meeting culminated with Bagby agreeing to UUNET’s purchase of 1010 the SmartEdge™ equipment with the $2.9 million credit from Redback. 1111 120. 116. The Redback Sales Director stated that he was shocked that UUNET agreed 1212 to purchase the SmartEdge™ equipment because it had not been tested and therefore could not 1313 be deployed by UUNET. He later understood what happened. Antoun had cut a quid pro quo 1414 deal with Bagby. Bagby’s son was hired as a sales person in Redback’s Dallas, Texas office, 1515 notwithstanding his complete lack of credentials for the position. UUNET agreed to accept 1616 SmartEdge™ equipment from Redback as a favor-for-a-favor to Antoun so that Redback could 1717 falsely inflate its revenues by $2.9 million. Thus, Redback had improperly recognized revenues 1818 from UUNET’s long-returned SMS™ 10000 units in December 2000, and continued to engage 1919 in deceitful business practices to avoid having to write down the revenues as the Company 2020 should have when the product was not accepted. 2121 Qwest’s Illicit Practices Begin To Come To Light 2222 121. 117. In March 2002, Qwest disclosed that the SEC was investigating its revenue 2323 recognition practices, including its sales of IRUs and equipment to customers from which Qwest 2424 bought equipment or services or to which it contributed equity financing. The SEC and the 2525 Justice Department began investigating Qwest in early 2002, for fraudulently inflating revenues 2626 by at least $3 billion through fraudulent transactions with other telecommunications companies. 2727 Criminal charges were filed in connection with some of those fraudulent transactions, and 2828 numerous shareholder suits were filed against Qwest in 2001 and 2002. The scrutiny of Qwest

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11 and its fraudulent business practices intensified by August 2002, when the U.S. Congress began 22 investigating Qwest and its executives’ fraudulent practices. In addition, in September 2002, the 33 New York Attorney General, Elliott Spitzer, filed a civil action against Philip Anschutz (Qwest’s 44 former chairman) and Joseph Naccio (Qwest’s former CEO) for improperly taking millions in 55 profits from inappropriate allocations of IPO stock offerings. 66 122. 118. As a resultWhile Redback had not, in fact, been able to ink any new deals 77 with Qwest since the SmartEdge™ equipment sale in the first quarter of 2001 (which was 88 actually a part of the undisclosed Siara Warrant Agreement in November 1999), now, as a result 99 of the SEC investigation, Qwest could no longer engage in the illicit quid pro quo deals with 1010 Redback, and so Redback lost its largest source of revenue. In fact, Redback’s revenues were 1111 reported at only $17.4 million for the third quarter 2002, which was a 57% decrease from the 1212 third quarter 2001. When Redback’s true revenues were reported without quid pro quo or stock- 1313 induced deals with Qwest, Redback’s stock price sank further, going from over $4 per share to 1414 below $1 per share during March 2002 to August 2002. Redback falsely blamed the decrease in 1515 revenues on a “deepening economic downturn” and a “delayed” demand for the SMS™ 1616 products. The significant drop in Redback’s stock price was actually caused because the truth 1717 became known, at least in part, about Redback’s stagnant sales, lack of purchases by Qwest and 1818 declining revenues. After Redback’s stock sank below $1 per share, NASDAQ warned that 1919 Redback would be delisted. 2020 123. 119. On March 21, 2003, Redback filed with the SEC its Annual Report on Form 2121 10-K for fiscal 2002 and reported that the Company had yet to be profitable. Redback further 2222 reported that revenues had “decreased 45% to $125.6 million in 2002 from $227.5 million in 2323 2001, which included a reduction in quarterly revenue from a high during 2001 of $90.9 million 2424 in the first quarter of 2001.” The Individual Defendants, including DeNuccio, Cronan, Haque, 2525 Kurtz, Garg and Lamond, caused Redback falsely to state that the reported revenues in 2002 2626 were “substantially lower than . . . . we had anticipated coming into 2002” because of lower than 2727 anticipated product deployments by customers, a downturn in the economy and a slow-down in 2828 “networking business.” Reporting only $22 million from SmartEdge™ equipment sales in all of

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11 2002, these Individual Defendants knowingly failed to disclose that scrutiny of Qwest by the 22 SEC, Congress, Elliot Spitzer and the Justice Department had shut down its fraudulent quid pro 33 quo transactions with Qwest. They further knowingly, deliberately and recklessly omitted 44 material facts regarding Qwest’s obligations to purchase $40 million worth of Redback’s 55 equipment by December 31, 2001, and material facts regarding serious impairments to the 66 functionality of Redback’s SMS™ 10000 and SmartEdge™ products. 77 124. 120. The Company failed to restructure its huge and growing debt and on 88 November 3, 2003, Redback filed a pre-packaged bankruptcy plan of reorganization under 99 Chapter 11. Through the Company’s bankruptcy reorganization, Redback eliminated $467 1010 million of debt to Convertible Noteholders and executed the approximate 73:1 reverse stock 1111 split. After emerging from bankruptcy in January 2004, Redback had 52 million shares of 1212 common stock outstanding, compared to 183 million before its restructuring. Through the 1313 complex recapitalization, shareholders’ stake in Redback’s common stock was reduced to 5%, 1414 with the other 95% of the shares created by the reverse split going to former Noteholders. 1515 125. 121. Additional facts regarding Redback’s fraudulent acts, practices and course of 1616 business were revealed when Plaintiffs obtained a copy of the Siara Warrant Agreement from 1717 Weisberg in late 2004, and again in March 2005 when Weisberg was indicted by the U.S. 1818 Attorney’s office in Denver for his participation in a fraudulent scheme to personally benefit 1919 from undisclosed stock kickback payments with Redback and other telecommunications 2020 companies in connection with multi-million dollar transactions he negotiated for Qwest. 2121 IV. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS 2222 126. 122. Beginning prior to Redback’s IPO, Redback gave its stock, or extremely 2323 valuable warrants for Siara stock (to be exchanged for Redback stock during the merger), to 2424 executives at Qwest and other telecommunications companies in exchange for those companies’ 2525 commitments to purchase Redback’s products. From the start of the Class Period, Redback 2626 reported product sales and revenues which, unbeknownst to investors, were based upon the 2727 business Redback had acquired through these secret grants of stock and warrants. 2828 Defendants’ Pre-Class Period False and Misleading Statements

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11 127. 123. On February 1, 1999, Redback announced that WorldCom’s UUNET was 22 using Redback’s SMS™ product. The Press Release stated: 33 4 Redback Networks announced today that UUNET, an MCI 4 WorldCom Company and a global leader in Internet 5 communications solutions, is deploying its flagship Subscriber 5 Management System™ (SMS) throughout UUNET DSL Points of 6 Presence (PoPs). The Redback products are an integral part of 6 UUNET’s nationwide rollout of business and consumer Digital 7 Subscriber Line (DSL) services announced at Fall Comdex. 7 UUNET is deploying the SMS 10000 at major Network Access 8 Points to offload the processing burden of existing backbone 8 routers while enabling thousands of new subscribers to come “on- net” quickly and cost effectively. 99 * * * 1010 11 UUNET has announced DSL availability in more than 600 PoPs 11 by March 1999, the largeslargest DSL deployment offered by any service provider to date. 1212 * * * 1313 14 Once users are online, the SMS 10000 can aggregate as many as 14 4000 logical connections over high-speed links issuing from 15 various Central-Office sources. That means UUNET and its 15 partners can work with multiple carriers to deliver DSL services 16 and thus offer the widest range of coverage at the most competitive 16 prices. 17 17 At each UUNET PoP, the SMS 10000 acts as an edge device that 18 performs all of the aggregation, management, and conversion 18 functions necessary to deliver router-ready IP data streams to the 19 backbone. UUNET thus can handle the extra volume of traffic 19 resulting from high-speed DSL without adding any more router power to its backbone. 2020 21 UUNET became a leading Internet Service Provider by designing 21 their network to support huge amounts of traffic, without 22 compromising performance,” said Dennis Barsema, president and 22 CEO at Redback. “In like fashion, RedBackRedback has designed 23 the SMS 10000 to support thousands of high-speed data links 23 without compromising existing IP backbones. The combination of Redback and UUNET is a natural fit.” 2424 128. 124. On March 16, 1999, Redback filed its Form S-1, IPO Registration Statement 2525 and Prospectus (the “Registration Statement”), in which it stated that it “believe[d]” that its 2626 software “differentiates” its product from others and provided the Company with a “competitive 2727 advantage.” This was false and misleading because Redback failed to disclose that its 2828

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11 competitive advantage and ability to sell its product also depended upon outright bribes. While 22 Redback noted in its IPO Prospectus that “competition in [its] market is intense,” it did not 33 inform investors that it had already embarked on its scheme to obtain a competitive edge by 44 paying third parties such as UUNET, Concentric and Qwest for their business. Additionally, in 55 the MD&A section, Redback stated that “a significant portion of [its] revenues has resulted from 66 a small number of relatively large orders” and that most of its sales were based upon “purchase 77 orders rather than long-term agreements.” Unbeknownst to investors, a significant portion of 88 Redback’s revenues resulted from bribery, and most of its sales were based upon bribes, not 99 legitimate purchase orders. Defendants Barsema and Lamond knowingly or with deliberate 1010 recklessness signed the materially false and misleading Registration Statement. 1111 129. 125. On May 3, 1999, Redback announced that Concentric “ha[d] signed a 1212 contract to purchase the Subscriber Management System™ (SMS) 10000 and associated 1313 service.” In the Presspress release, Defendant Barsema is quoted as saying: 1414 As one of our earliest customers, Concentric has worked closely 1515 with Redback during the past year and has come to appreciate the 1616 advanced capabilities of the SMS 10000 . . . As Concentric grows, it continues to rely on Redback to provide market-leading 1717 solutions that enable it to enter new geographic areas and turn up large numbers of users quickly. 1818 130. 126. The Presspress release regarding Redback’s contract with Concentric was 1919 materially false and misleading because it failed to disclose that Redback had induced the sale by 2020 providing a lucrative warrant for Redback stock worth $3 million to Concentric in exchange for 2121 the contract, and more importantly for the right to issue a press release announcing that 2222 Concentric had chosen Redback’s products to deploy in Concentric’s network. Defendants 2323 Barsema and Lamond knew or deliberately and recklessly disregarded that the press release was 2424 materially false and misleading, as they signed an amended Registration Statement filed with the 2525 SEC on April 22, 1999, which stated that Redback had provided a warrant to Concentric for 2626 4,500 shares of Redback’s stock in March 1999. Redback never disclosed that the stock warrant 2727 provided to Concentric was a stock kickback payment for Concentric’s business. 2828

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11 Announcements like the Concentric press release were intended to and did create the appearance 22 of strong demand for Redback’s products, which hyped Redback’s stock and caused Redback’s 33 stock to reach record-high increases for post-IPO trading. Redback’s IPO was at the time the 44 fifth most successful IPO in history. 55 131. 127. The next month, on June 28, 1999, Redback issued a press release 66 announcing that Redback had entered into a “multi-million, multi-year agreement” with Qwest to 77 use Redback’s SMS1000™ equipment to aggregate traffic on Qwest’s network. The press 88 release stated: 9 9 “We selected the Redback solution because the SMS 10000 has the 10 proven scalability to accommodate thousands of subscribers and 10 multiple services,” said Lewis O. Wilks, President of Internet and 11 Multimedia Markets at Qwest. “The flexibility of the platform 11 enables us to integrate the SMS 10000 seamlessly with the Qwest 12 fiber network as we expand our service offerings globally. 12 Redback's ability to handle large concentrations of traffic ensures 13 that customers can fully benefit from our high-capacity network to 13 exchange multimedia content with the speed and reliability they require.” 1414 1515 132. 128. When Redback announced the agreement with Qwest, Redback’s officers 1616 and directors (Barsema, Lamond, Kruep and others) deliberately and recklessly failed to disclose 1717 the “friends and family” stock bribes that had been provided to Lewis Wilks and other Qwest 1818 executives because Barsema, Lamond and Kruep wanted to create the appearance that there was 1919 a real demand by Qwest for Redback’s products to artificially inflate Redback’s stock price. 2020 These Individual Defendants and their affiliates collectively held millions of shares of Redback’

2121 stock and therefore stood to gain hundreds of millions of dollars by boosting Redback’s stock 2222 price. Redback’s total reported revenues in second quarter 1999 were only $11 million, and the 2323 announcement of a multi-million, multi-year agreement with Qwest caused the stock price to 2424 soar to over $125 per share by the end of June 1999. 2525 133. 129. In July 1999, with Redback’s stock trading in the range of $153 to $168 per 2626 share, Kruep sold over $6.3 million worth of Redback stock, and on the same two days in July, 2727 Barsema sold over $15.3 million. Likewise, within days of Kruep’s and Barsema’s sales, 2828 Lamond and his affiliates distributed 461,427 shares of Redback stock for an astronomical

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11 $77.68 million in proceeds. Subsequent to Redback’s IPO, company insiders had been restricted 22 from trading for 180 days, but the lock up was released to allow insiders to trade on July 27, 33 1999, which is when Barsema, Kruep and others started dumping their Redback holdings while 44 in possession of material non-public adverse information. By the end of November 1999, 55 Defendant Barsema had dumped over $47 million of Redback stock. 66 Defendants’ False And Misleading Statements During The Class Period 77 134. 130. On November 29, 1999, Redback issued a press release announcing its 88 merger with Siara. The press release valued the transaction at $4.3 billion and promised to 99 create an entity with a total market value of $11.2 billion. In the press release, Defendant 1010 Barsema was quoted as saying: 1111 We expect the combination of Siara Systems and Redback to 1212 create a powerful supplier in the communications industry, focused 1313 on serving the next generation access and service creation requirements of carriers and service providers. 1414 135. 131. In this same press release, Defendant Ragavan was quoted as saying: 1515 In this very competitive market, retaining a customer base and 1616 increasing revenue are the key business issues service providers and carriers are facing . . . Redback Networks has been extremely 1717 successful in developing and selling solutions that achieve those objectives for the broadband access market. Now, with the 1818 addition of Siara’s core technologies and products, Redback Networks expects to deliver next-generation and networking 1919 solutions our customers could leverage to define the transport and 2020 value-added services of the future. 136. 132. Afshin Mohebbi, Qwest’s Chief Operating Officer and President, was one of 2121 the chief architects of the Siara merger -- as well as the secret Siara Warrant Agreement, 2222 according to the Redback Sales VP. Mohebbi is quoted in the November 29 press release as 2323 stating: 2424 2525 Qwest is a leading edge broadband network provider, and needs vendors that are highly responsive and intimately understand our 2626 technical and market requirements . . . With the prospect of a powerful Redback-Siara combination, we would have a single 2727 supplier we could work with to obtain next generation platforms for combining all types of access, from the core all the way to the 2828

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1 1 subscriber, with creation and delivery of next generation broadband IP services. 22 33 137. 133. At the time the Siara merger was announced, Siara had no products, 44 customers or revenues. In fact, Siara’s first generation SmartEdge™ product was not available 55 for delivery until late in second quarter 2000. Thus, Qwest had not tested the SmartEdge™ 66 product in its labs in November 1999, and was not able to test the product, because the product 77 was not even out of production in November 1999. Qwest’s executive’s comments in the press 88 release touting the powerful prospects of the merger were bought (through lucrative stock bribes) 99 and sold (to unsuspecting investors). 1010 138. 134. On December 10, 1999, Redback filed a Form 8-K, signed by Defendant 1111 Gentner, with the SEC. The 8-K incorporated the November 29, 1999 press release and the Siara 1212 merger agreement. The 8-K stated in relevant part: 13 13 Upon consummation of the Merger, the holders of capital stock of 14 Siara will receive an aggregate of 31,341,986 shares of Common 14 Stock of the Company, representing approximately 38% of the 15 Company’s total Common Stock (including options, warrants and 15 other purchase rights exercisable for such Common Stock) outstanding immediately after the consummation of the Merger. 1616 1717 139. 135. The merger agreement, incorporated into the 8-K, stated in relevant part: 18 18 Pursuant to the Merger, among other things, and subject to the 19 terms and conditions of this Agreement, (iii) all [Siara] Warrants 19 then outstanding shall be converted into warrants to purchase shares of [Redback] Common Stock . . .. 2020

2121 140. 136. As noted above, immediately prior to the announcement of the 2222 Redback/Siara merger, Siara had entered into the Siara Warrant Agreement to obtain sales from 2323 Qwest in exchange for Warrants. At the time that Siara issued the warrant to Qwest executives, 2424 the exercise price of the warrant was $2 per share, and the stock issued under the warrant 2525 (100,000 shares of Siara stock that were exchanged for 119,000 shares of Redback’s stock at 2626 $136.50 per share) had a value of approximately $16 million. Within weeks of Redback’s 2727 merger with Siara, the stock issued under the Siara Warrant Agreement soared in value to 2828 approximately $45 million. The Individual Defendants knowingly or deliberately and recklessly

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11 failed to disclose in its press releases and SEC filings that Redback had provided stock, which 22 quickly rose in value to $45 million, to Qwest executives in exchange for promises of Qwest 33 business and the right to issue glowing press releases stating that Qwest was selecting Redback’s 44 products for its network. 55 141. 137. On December 1, 1999, Siara announced its very first contract, a $40 million 66 contract with Broadband to use “Siara’s next-generation platforms and network operations 77 software for deployment in [Broadband’s] new broadband backbone infrastructure.” Defendant 88 Ragavan is quoted in the press release: 99 10 Next-generation providers of bundled services like Broadband 10 Office will dramatically redefine local access options for 11 enterprises in multi-tenant buildings and office parks nationwide . . 11 . Broadband Office’s incredibly rapid start is being fueled by 12 market demand, the company’s depth in management, and the 12 backing of eight of the largest U.S. real estate companies. Siara 13 joins this powerhouse team to deliver the access platform for rapid, 13 multi-service delivery. 1414 142. 138. This press release had the intended effect. Business Wire reported that: 1515 16 Among the top analyst upgrades and downgrades covered included 16 Redback Networks Inc. (Nasdaq:RBAK). Siara Systems Inc., 17 which is being bought by Redback Networks said it received its 17 first contract. Siara, which develops equipment for the next 18 generation of communications networks that work in the Internet’s 18 backbone, said it has a contract from Broadband Office Inc. valued 19 at $40 million. Redback’s acquisition is valued at nearly $4.5 19 billion based on a Redback share price of $143-1/4. 2020 143. 139. The December 1, 1999 press release reminded the investing public that 2121 “Siara, conceived as the access market component of Kleiner Perkins’ telecommunications 2222 portfolio, recently announced plans to merge with Redback Networks.” Unknown to the 2323 investing public was the fact that the sale by Siara to Broadband Office was due to a quid pro 2424 quo deal among Broadband Office insiders, including Khosla, and Siara insiders, including 2525 Khosla (working both sides of the deal) and Ragavan, covertly to provide valuable Redback 2626 stock to Broadband Office, in exchange for Broadband Office issuing a press release stating that 2727 it was deploying Siara’s SmartEdge™ product (which was still under development and had not 2828 been tested by Broadband Office) in Broadband’s broadband network (which was still under

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11 development and had no customers). Ragavan knowingly failed to disclose that he and Khosla 22 and others had purchased Broadband Office’s business and the impressive press release with 33 undisclosed stock kickback payments. The Company also failed to disclose in press releases and 44 SEC filings that Ragavan, Khosla and others were using Redback’s merger with Siara as a 55 fraudulent device to disguise stock bribes to telecommunications customers, in exchange for 66 announcements that those customers were going to deploy the SmartEdge™ product. 77 144. 140. On news of the new Broadband Office multi-million dollar contract, 88 Redback’s stock price rose from a close of $139.95 on November 30, 1999 to $143.14 on 99 December 1, 1999, and to $153.02 by December 3, 1999. On December 9, 1999, Defendant 1010 Barsema sold 40,000 shares of Redback stock, reaping more than $6 million in illegal insider 1111 trading proceeds. 1212 145. 141. On December 7, 1999, Redback announced that “it will close 1999 with a 1313 client base of more than 120 provider customers.” The press release went on to tout its IPO as 1414 “one of the most successful IPOs in history” and stated that: 1515 16 [Redback] has dramatically expanded its market base in 1999, 16 extending operations globally and moving into the cable, wireless, 17 fiber-to-the-curb, dial offload, and multi-dwelling unit markets. 17 With its announced merger with Siara Systems, Redback will also 18 extend its service creation and management capabilities into the 18 optical and SONET markets. 19 19 * * * 20 During 1999, Redback announced many new large provider 20 customers standardizing on its SMS to deliver both wholesale and 21 retail broadband services. Carriers and network service providers 21 using Redback’s SMS to wholesale access downstream to ISPs 22 include Bell Canada, GTE, Qwest and UUNET. Providers 22 utilizing SMS to offer retail services include Concentric, Earthlink 23 and Verio. Today, Redback estimates that it owns in excess of 80 23 percent of the broadband subscriber and service management market worldwide. 2424 25 * * * 25 Redback’s announced merger with Siara Systems will expand the 26 company’s opportunities to offer integrated solutions across the 26 entire New Access Network, a network that will span all layers of 27 transport and services from the edge of the optical core to global 27 corporate networks and individual broadband subscribers. 28 Utilizing Siara’s expertise in optical, silicon, and IP technologies, 28 Redback expects to accelerate providers’ plans for leveraging the

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1 1 New Access Network to increase revenue and decrease operational costs. 22 33 146. 142. The Company failed to disclose in the press release that Ragavan, Khosla 44 and others were using Redback’s merger with Siara as a fraudulent device to disguise stock 55 bribes to Qwest and Broadband Office, and that Redback had provided additional secret “friends 66 and family” stock bribes to Qwest and Concentric and other telecommunications company 77 customers, in exchange for announcements that those customers were going to deploy Redback’s 88 products. The success of Redback’s IPO was possible because of the hype provided by Qwest 99 and other beneficiaries of Redback’s undisclosed stock bribes, but this information was 1010 knowingly and recklessly concealed from investors. 1111 147. 143. On February 2, 2000, Redback filed its Form S-4 Registration Statement and 1212 Joint Proxy Statement/Prospectus (“Redback/Siara Merger Prospectus”) relating to the merger of 1313 Redback and Siara. As in its IPO Registration Statement, Redback stated in the Redback/Siara 1414 Merger Prospectus that “competition in [its] market is intense,” but did not inform investors that 1515 Redback’s plan to succeed in this competitive environment was to simply pay bribes to obtain 1616 business from others. Redback also again disclosed that a “significant portion” of its revenues 1717 resulted from a small number of large orders and that sales were made on the basis of purchase 1818 orders. These statements were misleading, as a significant portion of the Company’s business 1919 and revenues depended on sales closed because bribes were paid to the buyer. While Redback 2020 disclosed certain risks and stated that it had “a limited operating history,” it did not disclose that

2121 the operating history that it did have was no indication of future business because a significant 2222 portion of its past sales were generated by commercial bribery in the form of millions of dollars 2323 worth of Redback’s stock. 2424 148. 144. On February 11, 2000, Redback filed its Form 10-K for the year ended 2525 December 31, 1999 (the “1999 10-K”). The 1999 10-K was signed by Defendants Barsema, 2626 Gentner, Kurtz and Lamond. The 1999 10-K held Qwest out as a significant customer and stated 2727 that Qwest had purchased “at least $200,000 worth of [Redback] products and services.” The 2828

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11 1999 10-K also summarized the terms of the Siara merger and a $25 million loan agreement to 22 Siara. It stated in relevant part: 33 4 On November 28, 1999, Redback entered into an agreement to 4 merge with [Siara] in a transaction to be accounted for as a 5 purchase. Siara stockholders, option holders and warrant holders 5 will receive an aggregate total of 31,341,986 shares of Redback 6 common stock and shares subject to options or warrants, as 6 applicable, in the merger. The aggregate purchase price of the Siara acquisition is estimated to be approximately $4.5 billion[.] 77 149. 145. The 1999 10-K was materially false and misleading because it failed to 88 disclose the multi-million agreement ($5 million over three years) obtained from Qwest in 99 exchange for “friends and family” pre-IPO stock or the stock provided under the Siara Warrant 1010 Agreement in exchange for Qwest’s commitment to buy $40 million of Redback’s products 1111 within two years. A commitment from Qwest to purchase at least $45 million of Redback’s 1212 equipment resulting from two separate bribes was material to Redback’s financial condition and 1313 business and should have been disclosed. Redback further should have disclosed that certain of 1414 its customers that had purchased more than $200,000 in products from the Company had been 1515 bribed with lucrative stock payments. 1616 150. 146. In the 1999 10-K, the Company disclosed net revenues of $9.2 million and 1717 $64.3 million for 1998 and 1999, respectively, and a net loss for those years of $9.8 million, and 1818 $7.9 million, respectively. The Company stated that “[s]ince inception, a substantial majority of 1919 their revenues have been generated through direct sales,” but did not mention that a substantial 2020 portion of those direct sales did not result from a genuine demand for Redback’s products but 2121 had been obtained through the payments of bribes. The Company stated that it employed a 2222 “variety of marketing and sales initiatives” without telling anyone that some of those 2323 “initiatives” were improper and in fact illegal. The Company also disclosed the following “Risk 2424 Factors”: 2525 26 • The business “is difficult to indicate because we have a limited operating 26 history.” This was misleading by failing to disclose that its operating history was dependent on business obtained from bribes. 2727 28 • Redback expected “to incur future losses.” This was false because the 28 Company failed to disclose that it would not be able to sell a substantial

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1 1 amount of its product, and would incur huge losses, if it stopped bribing Qwest. 22 3 • Redback is dependent on a “level of demand for broadband access services.” 3 What Redback should have disclosed was that it was also dependent on bribes to generate demand for its products. 44 5 • “Redback’s operating results are likely to fluctuate significantly” due to 5 fluctuations in demand for Redback’s products. Investors should have been 6 informed that operating results fluctuated with the deals struck by bribes to 6 Qwest. 7 7 • “Redback’s business may be adversely affected by class action litigation due 8 to stock price volatility.” This was false and misleading, as Redback did not 8 disclose that its business could be adversely affected by the disclosure (or 9 third party discovery) of the bribes paid to Qwest and others, or the cessation 9 of those bribes, and resulting shareholder class action litigation. 1010 151. 147. Redback’s statements in its 1999 10-K, were materially false and misleading 1111 because: the revenue, operating income, income before taxes, net income, basic net income per 1212 share, diluted net income per share figures, and pro forma figures were improperly inflated by 1313 revenue derived from Redback’s improper and undisclosed stock kickback payment schemes and 1414 quid pro quo transactions with Qwest. Redback misrepresented its prospects for 2000 and 1515 beyond because Redback failed to disclose that it engaged in improper undisclosed bribes and 1616 quid pro quo transactions with Qwest as a primary means to generate revenue and that such 1717 conduct could lead to severe civil and criminal liability. Redback’s reported results were false 1818 and misleading because the Company failed to reserve sufficient amounts to cover the cost of 1919 civil and criminal liabilities associated with its improper and undisclosed stock kickback 2020 payment schemes and quid pro quo transactions with Qwest.

2121 152. 148. Redback also misled investors by assuring the market that the Company’s 2222 1999 10-K was prepared in accordance with SEC rules and regulations and by failing to disclose 2323 that improper conduct, such as paying undisclosed bribes to material customers, was a key 2424 component to its business model. Further, the Company failed to disclose all material aspects of 2525 revenue earned from sales that were induced by bribes and quid pro quo transactions. Redback’s 2626 financial results in its 1999 10-K also were materially false and misleading as a result of GAAP 2727 violations. Redback also mislead investors by assuring the market that the Company’s annual 2828

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11 report was prepared in accordance with GAAP when, in reality, Redback violated GAAP as 22 discussed in Section V below. 33 153. 149. On March 8, 2000, Redback issued a press release that confirmed the 44 completion of the Siara merger and announced a two-for-one split (effective April 3, 2000) of 55 Redback’s outstanding common stock. 66 154. 150. A Form 8-K filed with the SEC on March 20, 2000 and signed by Gentner, 77 included the March 8, 2000 press release announcing the consummation of the Siara merger and 88 included a Certificate of Merger by and between Redback Networks Inc. and Siara Systems, Inc. 99 The Certificate of Merger was signed by Defendant Barsema. The 8-K stated: 1010 11 As a result of the Merger, Redback became the owner of all the 11 issued and outstanding shares of Siara common stock, and each 12 outstanding share of Siara common stock was converted to the 12 right to receive 1.1901347 shares of Redback’s common stock. 13 The holders of capital stock of Siara are entitled to receive an 13 aggregate of 31,341,986 shares of Redback, representing 14 approximately 38% of Redback’s total common stock (including 14 options, warrants and other purchase rights exercisable for such common stock) outstanding. 1515 155. 151. The 8-K was materially false and misleading because Redback failed to 1616 disclose that Ragavan, Khosla and others had purchased Qwest’s and Broadband Office’s 1717 business (and their glowing stamp of approval in press releases) with undisclosed stock kickback 1818 payments and 100,000 and 4,500 shares of Siara stock, respectively, that were converted into 1919 Redback stock in the merger. The Company also failed to disclose in the press releases and SEC 2020 filings that Ragavan, Khosla and others were using Redback’s merger with Siara as a fraudulent 2121 device to disguise stock bribes to telecommunications customers, in exchange for 2222 announcements that those customers were going to deploy the SmartEdge™ product. 2323 156. 152. On April 12, 2000, Redback issued a press release in which it reported record 2424 results for the quarter ending March 31, 2000. The April 12, 2000 press release and subsequent 2525 Form 8-K filed with the SEC stated, in relevant part, as follows: 2626 27 Net revenues for the first quarter of 2000 were $34.2 million, 27 compared with $6.5 million for the same period in the prior year, 28 an increase of 424 percent. Pro forma diluted net income for the 28 first quarter of 2000 was $5.6 million or $0.05 per share after giving effect to the Company’s two-for-one stock split effective FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 61 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 63 of 198

1 1 April 3, 2000, and excluding acquisition-related and stock 2 compensation charges and the research and development expense 2 related to Siara Systems’ operations. This compares to the first 3 quarter of 1999 pro forma net loss of $2.7 million or $(0.16) per 3 share on a post-split basis. Before pro forma adjustments, net loss 4 for the first quarter of 2000 was $85.2 million or $(0.96) per share 4 . . . . * * * 55 6 “The first quarter of 2000 was a period of expansion for Redback 6 in the subscriber management market,” said Dennis Barsema, chief executive officer at Redback. 77 * * * 88 9 “In addition to expanding our presence in the subscriber 9 management market, we executed on a major milestone by 10 announcing the SMS 10000, the third platform in our subscriber 10 management product line,” said Vivek Ragavan, president and 11 chief operating officer at Redback. “In the metropolitan optical 11 networking market, Redback took a major step forward by 12 completing its merger with Siara Systems on March 8. The merger 12 gives Redback a strong advantage in terms of developing products 13 and technologies for the New Access Network, including core 13 competencies in IP development, SONET and optical networking, and ASIC design.” 1414 157. 153. On May 15, 2000, Redback filed with the SEC its Form 10-Q for the first 1515 quarter of 2000 (the “May 2000 10-Q”), signed by Defendant Gentner. The May 2000 10-Q 1616 repeated the financial results reported by Redback in its April 12 press release. The Company 1717 also explained that it would use its stock as currency for future acquisitions. 1818 158. 154. The May 2000 10-Q also disclosed various “Risk Factors” disclosed in the 1919 1999 10-K, again omitting the material risk that it was subject to a huge undisclosed liability 2020 from its use of bribes to obtain business, and the undisclosed risk that its sales would drastically 2121 shrink if its improper sales practices were discovered or were terminated. Redback’s statements 2222 in its April press release and May 2000 10-Q were materially false and misleading because the 2323 revenue, operating income, income before taxes, net income, basic income per share, diluted net 2424 income per share figures and pro forma figures were improperly inflated by revenue derived 2525 from Redback’s improper and undisclosed stock kickback payment schemes and quid pro quo 2626 transactions with Qwest. Redback also failed to provide material information regarding multi- 2727 million agreements with Siara and Qwest, which had been obtained through the Siara merger, 2828 which would have a material impact on the Company’s reported revenues and earnings. The

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11 press releases and SEC filings issued in April and May 2000 were also materially false and 22 misleading because Ragavan announced the launch of the new SMS™10000 product as a “major 33 milestone” when in fact he and all of the other Redback executives knew that the product was 44 not operational and could not be deployed because the cards necessary to operate the equipment 55 would not support the capacity for which the product was designed. 66 159. 155. On May 30, 2000, Redback issued a press release introducing to the market 77 its new SmartEdge™ 800 product “for the fast-growing metropolitan optical market.” In order 88 to demonstrate the immediate success of this new product launch, Redback reported that Qwest 99 would be a significant purchaser of the SmartEdge™ 800, stating (and quoting a top Qwest 1010 executive) as follows: 1111 12 “Qwest is building tremendous momentum for our nationwide all- 12 optical network initiative,” said David Boast, executive vice 13 president of engineering and operations from Qwest. “To ensure 13 that our aggressive implementation proceeds at unprecedented 14 speed and quality, Qwest intends to use the SmartEdge 800 for 14 deployment in our network. Redback has been working with 15 Qwest for the past 18 months designing SmartEdge capabilities for 15 our next generation network.” 1616 160. 156. In response to this materially false and misleading press release, the 1717 Company’s stock jumped from $72.07 on May 26, 2000 to $82.32 by May 30, 2000, going to 1818 $83.88 the next day, and climbing throughout the month of June 2000 to finally close at $179.14 1919 on June 30, 2000. Redback omitted materially false and misleading information regarding the 2020 Siara Warrant Agreement and the fact that Redback had purchased Qwest’s commitment to 2121 purchase the SmartEdge™ equipment by bribing Qwest executives with 100,000 shares of 2222 Redback stock, which were worth over $45 million. Redback further failed to inform 2323 shareholders that Qwest had entered into a multi-million dollar purchasing agreement with 2424 Redback in exchange for lucrative “friends and family” pre-IPO stock, or that Redback had paid 2525 a secret stock kickback to Qwest executive Weisberg in connection with that transaction. 2626 Ragavan stated in the press release that carriers (i.e., Qwest) “are looking to migrate leased-line 2727 data traffic to more efficient packet architectures. Existing metro alternatives solve either one 2828 problem or the other -– leaving carriers and service providers at a dead end for a total solution.

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11 The SmartEdge is the first product that gives providers the boost they need to improve the 22 bottom line for SONET services while giving them a software-enabled migration path to IP.” As 33 Ragavan provided sound bites for the press release, he and other Redback executives had a duty 44 to fully disclose information regarding Qwest’s commitments to purchase the SmartEdge™ 55 equipment. 66 161. 157. On July 12, 2000, Redback issued a press release reporting record revenues 77 for the quarter ended June 30, 2000. In addition to providing detail on the financial results, the 88 press release and subsequent Form 8-K filed July 20, 2000, which incorporated the press release, 99 quoted Barsema, who boasted that Redback had received multi-million dollar orders for the 1010 SmartEdge™ equipment. The press release stated: 1111 12 Net revenues for the second quarter of 2000 were $48.7 million, 12 compared with $11.1 million for the same period in the prior year, 13 an increase of 340 percent. Pro forma net loss for the second 13 quarter of 2000 was $5.7 million or $(0.05) per share, which 14 excludes acquisition-related and stock compensation charges. This 14 compares to the second quarter of 1999 pro forma net loss of $2.6 15 million or $(0.06) per share. Before pro forma adjustments, net 15 loss for the second quarter of 2000 was $286.7 million or $(2.41) 16 per share compared to a net loss of $3.7 million or $(0.08) per 16 share for the same period in the prior year. All share and per share 17 amounts reflect the Company’s two-for-one stock split effective 17 April 3, 2000. 18 18 “The second quarter of 2000 was a period of strong execution for 19 Redback,” said Dennis Barsema, chief executive officer of 19 Redback Networks. “The company continued its momentum in the 20 metropolitan optical networking market with the launch and first 20 production shipments of the SmartEdge 800,” stated Barsema. 21 “The SmartEdge platform has been well received by Redback 21 customers and prospects, and we have received multi-million 22 dollar orders from both carriers and service providers.” (emphasis 22 added) 23 23 * * * 24 24 “Redback was buoyed by strong demand for our existing SMS 25 platforms, and also achieved a major milestone in shipping the first 25 production of SMS 10000 systems. . . . (emphasis added) 26 26 162. 158. Barsema omitted material adverse information when he touted Redback’s 27 27 multi-million orders from customers because he failed to inform shareholders and investors that 28 28 Redback had bribed Qwest, Concentric, Broadband Office and UUNET with lucrative stock

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11 kickback payments to purchase Redback’s equipment, or to commit to purchase multi-million 22 dollar orders so that the Individual Defendants could boast about the agreements and create a 33 buzz for Redback’s stock price. 44 163. 159. The numbers released in the July 20, 2000 Form 8-K and appended press 55 release were materially false and misleading because the revenue, operating income, income 66 before taxes, net income, basic income per share, diluted net income per share figures and pro 77 forma figures were improperly inflated by revenue derived from Redback’s improper and 88 undisclosed stock kickback payment schemes and quid pro quo transactions with Qwest. The 99 press release issued to report second quarter earnings also falsely stated that the shipment of the 1010 SMS™10000 product was a “major milestone” because the product was not even operational 1111 and was failing beta tests both at the labs of Redback’s, UUNET’s and other labsothers, 1212 according to the Redback Sales VP and the Redback Sales Director. 1313 164. 160. Also on July 12, 2000, Gentner, Ragavan and others held an earnings 1414 conference call with investors in which they discussed Redback’s financial performance and 1515 outlook. In that call, they alluded to an important agreement that Redback had reached with 1616 Qwest, but they failed to inform analysts and investors that Redback had purchased $40 million 1717 agreements with each of Broadband Office and Qwest to purchase SmartEdge™ equipment 1818 through stock kickback payments, or that Redback had provided “friends and family” pre-IPO 1919 shares to Qwest and to Weisberg in April and May 1999 when Weisberg was negotiating a 2020 multi-million dollar agreement for Qwest to purchase Redback’s equipment over the next three 2121 years. 2222 165. 161. Reiterating information from the earnings conference call, on July 13, 2000, 2323 research analyst First Security Van Kasper (“First Security”) issued a research report that 2424 increased Redback’s price target and reiterated its “Strong Buy” rating. First Security based its 2525 recommendations on revenue estimates that were ahead of First Security’s original estimate and 2626 Redback’s expected shipment of the SmartEdge™ 800 system to Qwest one quarter ahead of 2727 schedule. The report stated, in part, as follows: 2828

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1 1 The company noted that its recently introduced SMS 10000 . . . 2 shipped ahead of schedule. We believe that these solutions 2 position Redback ahead of the next technology transition in the 3 New Access markets and will establish the company as the 3 dominant NextGen access vendor. (emphasis added) 4 4 * * * 5 5 The company also stated that its recently introduced SMS 10000 6 and SmartEdge multi-service platform shipped and will generate 6 revenues in Q3. We believe that Redback’s SMS 10000, armed 7 with the industry’s most tested SMS software and highest capacity 7 solutions and supporting up to 100,000 users, will allow the 8 company to retain its 70%+ DSL North America market share 8 position and also to continue penetrating the cable and wireless markets. 99 10 More importantly, management reported very positive results for 10 the SmartEdge 800. The company announced that it has added 11 several new betas and has shipped one quarter ahead of schedule to 11 Qwest.. . . Release II of the SmartEdge (layer 0-4 solution) is on target to begin trials in 4Q00. (emphasis added) 1212 * * * 1313 14 Driven by the software-intensive SMS solution, the company 14 reported strong gross margins of 71.3%, ahead of our 70% 15 estimate. Going forward, we expect margins to decrease slightly 15 as the lower margins of the SmartEdge and service revenues 16 increase as a percentage of sales over the next year . . . . We are 16 also increasing our FY00 and FY01 EPS estimates to $0.10 and 17 $0.49, respectively. Redback’s balance sheet remained strong with 17 cash of $492 million and convertible debt of $500 million. 1818 166. 162. These statements by the Company were materially false and misleading 1919 because Barsema, Gentner and Ragavan (the Company spokesmen on the conference call) knew 2020 the SMS™ 10000 would not ship on schedule and therefore could not generate revenue in third

2121 quarter 2000. 2222 167. 163. On July 16, 2000, Lightreading.com, a widely-read Internet news source in 2323 the telecommunications industry, reported that the Qwest contract discussed in Redback’s July 2424 12, 2000 conference call “may be a bigger deal than people think.” The article went on to state: 25 25 Redback will shortly be announcing a deal with Qwest that 26 includes an initial purchase order of roughly $6 million of its 26 metropolitan optical product, the SmartEdge 800. More 27 importantly, however, the deal has the potential to reach hundreds 27 of millions of dollars over the next couple of years, according to Light Reading sources. 2828

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1 1 The SmartEdge 800 is Redback’s first optical product, which it gained in its acquisition of Siara last year. . . . 22 * * * 33 4 “Cerent will have a lot more revenue than Redback’s optical 4 product this year, but following that conference call we are a lot 5 more confident in [Redback’s] ability to become more prominent 5 in that market,” says Conrad Leifur, analyst with U.S. Bancorp Piper Jaffray. 66 7 “The [SmartEdge 800] was an interesting product from an 7 architectural perspective, but it had development risk,” said Leifur. “Now they’ve shown it’s being deployed in networks.” 88 9 Redback officials have raised their “guidance” numbers on the 9 SmartEdge product line with financial analysts, indicating they 10 foresee an increase in sales growth. They believe the company can 10 ship $10 million worth of SmartEdge products in the next quarter and $150 million during 2001, says Leifur. 1111 12 Redback officials confirmed that details about a Qwest purchase 12 order for a number of SmartEdge products are forthcoming. One 13 Redback spokesperson described the number of SmartEdge units 13 involved as “North of dozens but South of thousands.” The 14 product lists for between $70,000 and $150,000, depending on the 14 configuration. (emphasis added) 15 15 * * * 16 16 But Redback’s rising visibility at Qwest may mean the telecom 17 engineers are taking a closer look at the IP services promised for 17 the SmartEdge. The product is designed to include seven 18 application specific integrated circuits (ASICs), four of which 18 handle Sonet and TDM capabilities (available now) and three of 19 which will handle IP services (not yet available). The IP services 19 capabilities set the SmartEdge product apart from Cisco’s offering. (emphasis added) 2020 168. 164. As the Lightreading.com article demonstrated, the defendants’ fraud had its 2121 intended effect on the market. The stock-induced deals with Qwest had provided credibility to 2222 Redback and created the illusion of huge demand for and sales of Redback’s products. The 2323 comments provided on Redback’s conference call were materially false and misleading and 2424 caused research analysts and telecommunications industry analysts to repeat and disseminate the 2525 materially false and misleading information to the public. The Individual Defendants, including 2626 Gentner and Ragavan, knowingly or deliberately and recklessly caused Redback and analysts 2727 repeating information to falsely report that the SMS™10000 had shipped ahead of schedule, that 2828 it was generating revenues in third quarter 2000 and that its software had the highest capacity

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11 use and supported 100,000 users. In fact, the product was a failure and would not support 22 100,000 users as reported by Redback. The product’s software was malfunctioning and would 33 only support one-fourth of the capacity and speed that it was designed to support, according to 44 the Redback Sales Director, the Redback Sales VP and the Redback Sales Engineer. 55 169. 165. Redback’s forecasts regarding the SmartEdge™ equipment orders by Qwest 66 and its raised guidance were known to be materially false and misleading when made because 77 they omitted material information regarding the bribes paid to Qwest to obtain such purchase 88 orders. Because Qwest’s obligations to purchase $40 million of the SmartEdge™ equipment 99 was highly material to Redback’s reported sales and revenues, Redback had a duty to provide 1010 full disclosure regarding its agreement with Qwest when it announced an agreement with Qwest 1111 to purchase the SmartEdge™ equipment and the expected $10 million and $30 million in orders 1212 in late 2000 and in 2001, respectively. Redback also announced that the new release of the 1313 SmartEdge™ product would be available in the fourth quarter 2000, and later had a duty to 1414 correct this information when it was known to be incorrect by at least August 2000. 1515 170. 166. On August 14, 2000, Redback filed with the SEC its Form 10-Q for the 1616 second quarter of 2000 (the “August 2000 10-Q”), signed by Defendant Gentner. The August 1717 2000 10-Q repeated the financial results Redback reported in its July 12 press release and July 20 1818 Form 8-K. 1919 171. 167. The August 2000 10-Q also repeated the “Risks Factors” disclosed in prior 2020 filings, again keeping concealed its improper sales and accounting practices. 2121 172. 168. In response to the materially false and misleading statements contained in the 2222 Company’s August 2000 10-Q, and other false and misleading information provided by the 2323 Individual Defendants regarding the Company’s second quarter 2000 performance and prospects, 2424 the Company’s stock jumped from an August 14, 2000 close of $146.59, and on146.59 to an 2525 August 15, 2000 to a closing price of $150.09, adjusted for the Company’s two-for-one stock 2626 splits in August 1999 and April 2000. 2727 173. 169. From the beginning of the Class Period through the Company’s August 2000 2828 10-Q, the defendants misrepresented the terms of the Siara merger (by failing to disclose the

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11 provision requiring the transfer of warrants to Qwest executives) and falsely stated that Qwest 22 intended to buy and use Redback’s products, when the defendants knew that Qwest did not need 33 or want Redback’s products, but purchased them only because Redback had given Qwest 44 executives “friends and family” shares of Redback, and Siara warrants, as payments for Qwest’s 55 business. In another attempt to obtain orders from Qwest, Redback purchased services it did not 66 want or need from a Qwest affiliate to obtain Qwest’s reciprocal purchase of products from 77 Redback, which Qwest did not want or need. The defendants used this next facet of their 88 fraudulent scheme to report artificially inflated revenues at Redback, which, as the defendants 99 intended, resulted in an artificial inflation of Redback’s stock price. 1010 174. 170. Redback’s statements in its August 2000 10-Q were materially false and 1111 misleading because the revenue, operating income, income before taxes, net income, basic 1212 income per share, diluted net income per share figures and pro forma figures were improperly 1313 inflated by revenue derived from Redback’s improper and undisclosed stock kickback payment 1414 schemes and quid pro quo transactions with Qwest. The August 2000 10-Q also failed to 1515 disclose itsRedback’s potential liability for bribery and drastically reduced sales if the improper 1616 sales practices were discovered or terminated. 1717 175. 171. On September 25, 2000, Qwest announced that Qwest Cyber.Solutions LLC 1818 (“QCS”), deemed by Qwest to be the largest enterprise Application Service Provider (“ASP”), 1919 had been awarded a five-year contract worth $18 million from Redback. QCS is a joint venture 2020 between Qwest and KPMG Consulting. The press release quotes Ragavan: 2121 22 At Redback, our aggressive schedule for turning out product 22 requires us to have a system that keeps pace with our high 23 customer demand. So we chose QCS to provide our IT application 23 infrastructure because of their ability to respond quickly and 24 enable us to refocus on the business of satisfying our customers . . . 24 With today’s market becoming increasingly competitive, we 25 appreciate the value brought by QCS’ ASP services that will allow 25 us to further accelerate our business. 2626 176. 172. Defendants fraudulently concealed that Redback had no need for QCS’s 2727 services, but was purchasing them only to obtain Qwest’s reciprocal agreement to purchase $20 2828 million of Redback’s products. As Ragavan and the other defendants knew, Redback planned to

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11 report, and later did report, revenues based upon Qwest’s purchases from Redback made solely 22 in exchange for Redback’s agreement to purchase web-hosting services from QCS. 33 177. 173. Ragavan’s statements were materially false and misleading because Redback 44 had not chosen to purchase ASP services from QCS based upon any legitimate business need. 55 Indeed, according to the Redback Sales VP, Redback had not expressed anany interest in the 66 services or tested them when Qwest’s Senior Vice President of Engineering, Michael Perusse, 77 demanded that Redback purchase the ASP services in exchange for a $20 million purchase order 88 from Qwest for approximately 40 of the SMS™10000 units. The VP NA Sales stated that Qwest 99 did not need anywhere near 40 of the units (even if the units had worked), and the Redback Sales 1010 VP confirmed that Qwest had not even tested the SMS™10000 equipment, which had severe 1111 software and hardware problems and, as Perusse knew, was not operational when Redback 1212 shipped the units to Qwest. Nevertheless, Redback booked $20 million in revenues from the sale 1313 in third quarter 2000, which allowed Redback to meet its projected revenues and earnings 1414 according to the Redback Sales VP and the VP NA Sales. The Redback Sales VP further stated 1515 that Ragavan, Khosla, Patel and others were all aware that the SMS™10000 equipment that had 1616 been shipped to Qwest did not work because the equipment had failed lab tests at Redback and 1717 other beta tests, and the equipment’s OC-12 cards would only run at OC-3 speeds, which was 1818 one-fourth of the capacity that the product was designed to support, and further that the software 1919 problems created by the malfunctioning cards were completely debilitating for the SMS™10000 2020 equipment. 2121 178. 174. Defendants’ fraud was successful. Upon news of the sales to Qwest and the 2222 resulting multi-million dollar revenues, Redback’s stock price rose from a close on September 2323 25, 2000 of $156.83 to a close on September 28, 2000 of $169.83,169.83 which, adjusted for a 2424 two-for-one split in August 1999 and another two-for-one split in April 2000, represented a 2525 2854% increase from Redback’s $23 IPO price. In August and September 2000, Barsema sold 2626 in the open market over 262,000 shares of Redback stock worth more than $36 million, while he 2727 was in possession of material non-public adverse information. In August 2000, he also donated 2828 200,000 shares of Redback stock worth $30 million to his college alma mater, which named a

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11 building for Barsema to acknowledge the gift. In August and September, Kruep also sold 50,000 22 shares of Redback stock worth more than $7.5 million, while in possession of material non- 33 public adverse information. In addition, the venture capital affiliates of Lamond, Haque and 44 Khosla collectively distributed more than $1.7 billion of Redback stock to their partners and 55 investors in August and October 2000, which wasdistributions were well timed to take advantage 66 of material non-public adverse information possessed by these defendants. 77 179. 175. On October 11, 2000, the Company issued a press release signed by Gentner 88 announcing its financial results for the third quarter ended September 30, 2000. In the October 99 11, 2000 press release and subsequent Form 8-K, the Company reported huge increases in its 1010 revenues, stating as follows: 1111 12 Redback Networks, Inc., leading provider of advanced networking 12 solutions, today reported record revenues for the quarter ended 13 September 30, 2000, as well as its first profit on a pro forma basis 13 since closing its merger with Siara Systems. 14 14 Net revenues for the third quarter of 2000 were $80.6 million, 15 compared with $20.6 million for the same period in the prior year, 15 an increase of 291 percent. Pro forma net income for the third 16 quarter of 2000 was $3.2 million or 0.02 per share diluted, which 16 excludes acquisition-related and stock compensation charges. This 17 compares to the third quarter of 1999 pro forma net loss of 17 $569,000 or $(0.01) per share. Before pro forma adjustments, net 18 loss for the third quarter of 2000 was $308.1 million or $(2.50) per 18 share compared to a net loss of $1.6 million or $(0.02) per share for the same period in the prior year. 1919 2020 180. 176. Defendant Ragavan was quoted in the October 11 press release (filed with

2121 the SEC in an 8-K on October 13, 2000) as stating: 22 22 “The Company continued its momentum in the metropolitan 23 optical networking market with full production shipments of the 23 SmartEdge 800,” said Ragavan. The platform has been well 24 received by Redback customers and prospects, and the Company 24 continues to receive multi-million dollar orders from both carriers 25 and service providers, as well as a significant number of system 25 trials globally. “In the subscriber management market, Redback 26 was buoyed by strong demand across our complete line of SMS 26 platforms,” said Ragavan, “with particular demand and resulting deployments for the SMS 10000.” 2727 2828

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11 181. 177. Redback’s reported revenues and earnings were materially false and 22 misleading because the Company improperly booked at least $20 million of its $80.6 million in 33 revenues from a quid pro quo transaction with Qwest that had no valid business purpose, and 44 was for equipment that was not operational at the time it was shipped. Moreover, there was no 55 “strong demand” for Redback’s SMS™10000 equipment, and it had not been deployed by any 66 customers because the product would not work. Qwest stored the SMS™10000 units in a 77 warehouse and returned them to Redback to be rebuilt in 2002. In addition, the multi-million 88 orders for SmartEdge™ equipment were in part owing to an $8 million order by Broadband 99 Office, which was induced by an undisclosed stock bribe from the Individual Defendants, 1010 including Ragavan, who knew or with deliberate recklessness disregarded that the press release 1111 and Form 8-K were materially false and misleading. The materially false and misleading 1212 statements contained in the Company’s October 11, 2000 press release and its October 13, 2000 1313 Form 8-K drove up the Company’s stock price, as had other prior false statements by the 1414 Company and the Individual Defendants. Between October 10, 2000 and October 16, 2000, the 1515 Company’s stock price rose from $120.57 to $138.76. 1616 182. 178. The Motley Fool reported on the numbers in Redback’s October 11 press 1717 release and stated that Defendant Gentner: 1818 19 told analysts in a conference call that revenues should hit $100 19 million next quarter, and continue to grow 20% each quarter next 20 year. As a result, the company expects sales to hit $645 million in 20 2001. (emphasis added) 2121 183. 179. As someone who attended weekly executive meetings with Patel, Ragavan, 2222 Kruep, the VP NA Sales and others, Gentner knew (because he and all other Redback executives 2323 were told by Patel and because as CFO he had helped create Redback’s revenue forecasts) that 2424 Redback’s projected sales were based in part on sales of Redback’s new generation 2525 SmartEdge™ router equipment, which Patel had specifically stated would not be ready early in 2626 2001 as had been anticipated when sales and revenues targets had been forecasted. The VP NA 2727 Sales told Ragavan, Gentner and other Individual Defendants at weekly meetings in August 2000 2828 and thereafter (and later Lamond in early 2001 when Ragavan was ousted as CEO), that the

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11 Company could not meet the projected $645 million of revenues in 2001 without sales from the 22 new SmartEdge™ router equipment. Gentner knew that these sales and revenue forecasts were 33 false when he made the statements, and he knowingly or with deliberate recklessness provided 44 false projections to the public. 55 184. 180. On November 13, 2000, Redback filed with the SEC its Form 10-Q (the 66 “November 2000 10-Q”) for the third quarter of 2000 (the period ending September 30, 2000) 77 signed by Gentner in which it reported the financial results previously reported in the Company’s 88 October 11, 2000 press release. Redback also reported that during that quarter (the third quarter 99 of 2000), Qwest accounted for 24% of Redback’s total revenue. According to the Redback Sales 1010 VP, Kruep (as head of Worldwide Sales for Redback) provided and certified the sales revenue 1111 figures to be included in Redback’s press releases and SEC filings. 1212 185. 181. The November 2000 10-Q repeated the “Risk Factors” previously disclosed, 1313 including its “limited operating history,” that the demand for its products would fluctuate, and 1414 that its industry sector was “competitive,” but this was all false and misleading because the 1515 Company did not disclose that its operating history misrepresented the actual demand for its 1616 products inasmuch as a substantial amount of sales were obtained through bribes paid to the 1717 buyers, that demand for Redback’s products would fluctuate with the frequency with which 1818 bribes were paid and that Redback’s competitive edge resulted from improper sales and 1919 accounting practices. Two of the reported Risk Factors: i) unexpected delays in introducing 2020 new or enhanced products; and ii) including manufacturing delays, which were stated as likely to 2121 cause “quarterly fluctuations in revenues and operating results” were known to exist because the 2222 SMS™ 10000 product was not operational, and the new SmartEdge™ equipment router was 2323 significantly delayed in production. Gentner and other Individual Defendants knowingly or with 2424 deliberate recklessness omitted this material information in Redback’s SEC filing. 2525 186. 182. Redback’s statements in the November 2000 10-Q were materially false and 2626 misleading because the revenue, operating income, income before taxes, net income, basic 2727 income per share, diluted net income per share figures and pro forma figures were improperly 2828

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11 inflated by revenue derived from Redback’s improper and undisclosed stock kickback payment 22 schemes and quid pro quo transactions with Qwest. 33 187. 183. The Company also stated that it was “not aware of any pending legal 44 proceedings” against it, but kept concealed its future liability arising from its use of bribes and 55 deceptive accounting practices, including the shipment of material amounts of equipment to 66 improperly book revenues in third quarter 2000. The Company also failed to book a reserve 77 based upon known, probably adverse contingencies arising from its improper revenue 88 recognition and fraudulent business practices. 99 188. 184. In a November 13, 2000 press release, the Company announced that 1010 Defendant Gentner would retire in the first quarter of 2000 “due to family medical issues.” The 1111 Company also stated that “due to strong business demand” its financial figures released on 1212 October 11, 2000 “remain[ ] unchanged.” 1313 189. 185. On November 14, 2000, the Company filed a Form 8-K with the SEC 1414 attaching its “unaudited pro forma combined financial data for the nine months ended September 1515 30, 2000, that presents the effect of the merger between Redback and Siara . . . as if the merger 1616 occurred on January 1, 2000.” These reported results were materially false and misleading 1717 because they included improperly booked revenue from Redback’s SMS™10000 sale to Qwest, 1818 and failed to account for the fact that all of its financial data was false because of undisclosed 1919 stock kickback payments. 2020 190. 186. The Company also filed a Registration Statement on Form S-3 on November 2121 14, 2000 in which it registered 2,440,526 shares of its common stock for use in the acquisition of 2222 Abatis. The Company repeated statements contained in prior filings regarding the importance of 2323 the timing and amount of its sales to its reported revenues, and the concentration of sales in the 2424 hands of a few customers. Redback identified Qwest as contributing 24% to the Company’s 2525 revenues in its third quarter, more than any other customer. The Registration Statement was 2626 signed by defendants Ragavan, Barsema, Gentner, Haque, Lamond, Khosla, and Kurtz, and they 2727 knew or with deliberate recklessness disregarded that the Registration Statement was materially 2828 false and misleading because it failed to disclose: the secret stock bribes provided to Qwest in

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11 exchange for Qwest’s business; the quid pro quo transaction for ASP services that Redback did 22 not want or need; the non-operational nature of the $20 million worth of equipment shipped to 33 Qwest; or that Redback improperly booked material amounts of its reported revenue from its 44 transactions with Qwest. 55 191. 187. The Registration Statement also explained that Redback leased important 66 technology for its SmartEdge™ equipment from Qwest, as follows: 77 8 Cerent Corporation has granted Siara a non-exclusive license to 8 technology related to two ASICs and parts of Cerent'’s system-level 9 hardware technology that are used in the SmartEdge product. In 9 November 1999, Cerent was acquired by Cisco Systems, a provider 10 of networking products and a significant competitor of ours. 10 Although we believe we have sufficient rights to this Cerent 11 technology to conduct our business as currently conducted, we do 11 not have a business relationship with Cisco. Any loss of access to the 12 technology that is the subject of the agreement with Cerent would 12 seriously harm our business. 1313 The technology that Redback leased from Cisco also was incorporated in similar optical routing 1414 equipment that Qwest was purchasing from Cisco. In July 2000, a spokesperson for Cisco stated 1515 1616 in a LightReading.com article dated July 16, 2000,2000 that Qwest had purchased $70 million of 1717 this equipment from Cisco. The fact that Qwest had already purchased $70 million of equipment

1818 that was identical in material ways to Redback’s SmartEdge™ product indicates that Qwest had 19 19 no real need for Redback’s SmartEdge™ equipment. 2020 192. 188. The materially false and misleading statements contained in the November 2121 2000 10-Q, the November 14, 2000 Form 8-K, and the November 14, 2000 Registration 2222 Statement caused the Company’s stock price to rise from $72.76 on November 13, 2000 to 2323 $79.95 on November 15, 2000. 2424 193. 189. Again in the fourth quarter 2000, Redback sold approximately $20 million of 2525 equipment to Qwest. To fulfill part of its obligations under the warrant agreement (requiring 2626 Qwest to purchase $40 million on or before December 31, 2001), Qwest agreed to purchase $20 2727 million of Redback’s new SmartEdge™ equipment from Redback. The SmartEdge™ product 2828

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11 had been launched by Redback in second quarter 2000, but had been riddled with software and 22 hardware problems, and therefore Redback was desperate to report successful deployment of the 33 new product at an industry titan like Qwest. In fact, Redback reported in its Annual Report on 44 Form 10-K for 2000 that Qwest was one of only two customers that had purchased the 55 SmartEdge™ product in all of 2000. 66 194. 190. On January 17, 2001 the Company issued a press release announcing its 77 financial results for both the fourth quarter and year ending December 31, 2000. The press 88 release and subsequent 8-K incorporating the press release stated, in relevant part, as follows: 99 10 Redback Networks, Inc., leading provider of advanced networking 10 solutions today reported record revenues for the quarter ended 11 December 31, 2000, as well as a profit of $.05 per share diluted on 11 a pro forma basis. 12 12 Net revenues for the fourth quarter of 2000 were $114.6 million, 13 compared with $26.1 million for the same period in the prior year, 13 an increase of 339 percent. Pro forma net income for the fourth 14 quarter of 2000 was $7.8 million or $0.05 per share diluted, which 14 excludes acquisition-related and stock compensation charges. This 15 compares to the fourth quarter of 1999 pro forma net income of $2 15 million or $0.02 per share diluted. Before pro forma adjustments, 16 net loss for the fourth quarter of 2000 was $327.6 million or 16 $(2.47) per share compared to a net income of $1.2 million or $(0.01) per share for the same period in the prior year. 1717 18 For fiscal year 2000, net revenues were $278.0 million, an increase 18 of 333 percent from the $64.3 million posted in 1999. Pro forma 19 net income for the fiscal year was $6.8 million or $0.04 per share 19 diluted, which excludes acquisition-related and stock 20 compensation charges. Before pro forma adjustments, net loss for 20 fiscal 2000 was $1.0 billion or $(8.68) per share compared to net loss of $7.9 million or $(0.15) per share for the prior year. 2121 195. 191. The January 17, 2001 press release quoted Defendant Ragavan as boasting 2222 about the Company’s record revenue and net income as follows: 2323 24 “Redback continued to achieve key objectives during the fourth 24 quarter of 2000,” said Vivek Ragavan, chief executive officer and 25 president of Redback. “From a financial perspective, we delivered 25 another profitable quarter with record revenue and net income. 26 Equally important was the strong global demand for both our next 26 generation products, the SMS 10000 and SmartEdge 800, as well 27 as our industry-standard SMS 500 and SMS 1800 subscriber 27 management systems. We continue to consolidate our market position as a leading vendor of broadband subscriber management 2828

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1 1 systems and next-generation metro optical solutions.” (emphasis added) 22 3 “With global customer base and growing international presence, 3 our strong cash position and powerful product portfolio, we begin 4 2001 well positioned to capitalize on the coming migration to next 4 generation broadband and metro optical networks.” 55 196. 192. These materially false and misleading statements caused an artificial 66 inflation of the Company’s stock and further caused analysts to overvalue Redback’s stock. A 77 January 18, 2001 Research Report by Morgan Stanley rated Redback as “outperform,” in part 88 because of the Company’s new relationship with Qwest which generated “greater than 10% of 99 [Redback’s] quarterly revenues.” 1010 197. 193. All of the above statements by the defendants were false and misleading. 1111 Throughout third and fourth quarter 2000 and in the January 17, 2001 press release, the 1212 Individual Defendants, including Barsema, Ragavan, Kholsa, Lamand, Haque, Kruep, Gentner 1313 and Kurtz fraudulently concealed that Redback had no need for QCS’s services, but was 1414 purchasing them only to obtain Qwest’s reciprocal agreement to purchase $20 million of 1515 Redback’s products. As Ragavan, Kruep, Khosla and the other defendants knew, Redback 1616 planned to report, and later did report, revenues based upon Qwest’s purchases from Redback 1717 made solely in exchange for Redback’s agreement to purchase web-hosting services from QCS. 1818 198. 194. The purported “strong demand” for Redback’s products was an illusion, 1919 created by outright bribes to and contrived quid pro quo deals with Qwest and its executives that 2020 had no legitimate business purpose. In fact, Qwest did not perform its standard verification and 2121 laboratory tests on Redback’s products to determine if they worked and would be useful to 2222 Qwest, as Qwest had no intention of ever using those products. Indeed, the $20 million of 2323 SMS™10000 products shipped to Qwest in third quarter 2000 were not even operational. The 2424 defendants kept these facts concealed from investors. Also concealed was the fact that, as stated 2525 by a former Redback Sales VP, the SMS™ products that Qwest was “purchasing” were 2626 “unstable” and would not meet Qwest’s standards, had Qwest bothered to test the products. As 2727 the Individual Defendants and Qwest knew, Qwest was simply storing Redback’s products in a 2828 warehouse, and building inventory would likely lead to drastically reduced sales to Qwest. The

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11 Individual Defendants also knew that Redback’s new SmartEdge™ product had not been fully 22 developed and so would not be available for sale until late in 2001, and, therefore, that 33 Redback’s sales and revenues would be adversely affected. 44 199. 195. Finally, Redback’s financial reporting in the third quarter of 2000 and 55 throughout the Class Period was materially false because Redback was not properly accounting 66 for the stock and warrants it was giving Qwest executives, Broadband Office, Concentric and 77 others in exchange for sales contracts. As a result of the defendants’ fraud, Redback’s stock 88 price was artificially inflated, enabling the Individual Defendants to sell their Redback stock at 99 inflated prices, and enabling the Company to complete its acquisitions of Abatis and Siara. 1010 200. 196. The Individual Defendants continued to misrepresent Redback’s sales to 1111 Qwest and the Company’s revenues throughout 2001. 1212 201. 197. On January 18, 2001, research analysts at Morgan Stanley Dean Witter 1313 commented on Redback’s reported financial performance and repeated the Company’s 1414 statements of “strong revenue growth in Q4’00.” The research report stated that: “Last night 1515 Redback reported Q4:00 revenue growth of 42% sequentially, versus our estimate of 24%. . . 1616 We raised our FY01 revenue estimates from $644 million to $725 million, slightly below 1717 guidance.” The research analysts repeated information from Redback’s executives that 1818 “Redback will be running trials with IP-enabled SmartEdge™ products in Q1:01 and in the first 1919 half of Q2:01.” This was blatantly false. The report further listed Qwest as a new customer win 2020 for Redback in fourth quarter 2000. This research report further disseminated materially false 2121 and misleading information that was provided by Redback and the Individual Defendants on an 2222 earnings conference call. All of the Individual Defendants, including Ragavan, Khosla, Kruep, 2323 Haque, Lamond and Kurtz had refused to revise the Company’s materially false and misleading 2424 guidance for 2001. The VP NA Sales said Kruep had told all of these Individual Defendants in 2525 fourth quarter 2000, and the VP NA Sales again told Ragavan and Lamond in early 2001, that 2626 Redback could not meet its target revenues for 2001 because a large part of the revenues were 2727 based upon a product that would not be ready for deployment until late 2001. The Board 2828 members refused to revise the guidance issued to analysts and investors, and knowingly caused

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11 materially false and misleading information regarding the Company’s forecasted revenues and 22 product development to be disseminated to the public. 33 202. 198. On January 19, 2001, Redback filed its Form S-3/A with the SEC in which it 44 amended a previously-filed Registration Statement. Among the familiar refrain of “Risk 55 Factors,” the Company stated that its “operating results differ due to risks associated with 66 mergers and acquisitions generally.” What Redback failed to disclose was that any decline in 77 operating results would be associated with a decline or temporary halt in the use of bribes to pay 88 for business; such a decline would have little or nothing to do with mergers and acquisitions. 99 203. 199. On February 5, 2001, just days after announcing a “multi-year, multi-million 1010 dollar” agreement ($120 million) with Williams Communications Group (“Williams”), Redback 1111 announced that Qwest had agreed to yet another “multi-year, multi-million dollar purchase of the 1212 Redback SmartEdge 800.” The press release and subsequent Form 8-K incorporating the press 1313 release quoted Ragavan and stated, in part, as follows: 1414 15 Qwest plans to deploy the SmartEdge 800 multi-service optical 15 platform as part of its strategy to enhance and expand local 16 broadband services for businesses and consumers in key 16 metropolitan markets. 17 17 The SmartEdge 800 features high port densities to efficiently 18 aggregate Internet Protocol (IP) and traditional time division 18 multiplexing (TDM) traffic, delivering operational efficiencies for Qwest and simplifying the migration to IP for customers. 1919 20 “We’re pleased to extend our successful relationship with Redback 20 to accelerate the delivery and enhance the efficiency of our IP- 21 based metropolitan networks,” said Augie Cruciotti, Qwest’s 21 executive vice president of national local networks. “We look 22 forward to continuing our relationship with Redback to further 22 improve service for our customers.” 23 23 “Since embarking on the design of the SmartEdge 800, Redback 24 has strongly believed that a successful metropolitan optical device 24 must support providers delivering both TDM as well as IP-based 25 services,” said Vivek Ragavan, Redback’s president and chief 25 executive officer. As a result, we are very pleased to be a part of Qwest’s all-optical metro network initiative.” (emphasis added) 2626 2727 204. 200. A February 5, 2001 article on LightReading.com called the Qwest contract a 2828 “big deal for Redback, coming days after a $120 million contract with Williams.” The article

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11 also pointed out that “partly due to this Qwest announcement, Redback shares rose [10%].” 22 According to the article, “Redback officials have only given specific contract details on the 33 Williams deal and won’t say how much its SmartEdge™ platform contributes to the company’s 44 overall revenues or how many SmartEdge™ boxes it’s shipped to customers.” 55 205. 201. The press release announcing the purported new multi-million, multi-year 66 agreement with Qwest was materially false and misleading when issued by Redback and the 77 Individual Defendants. Kruep provided the information for the press release based upon the 88 “specifics” of the Siara Warrant Agreement, which he had negotiated with Weisberg. According 99 to the Redback Sales Manager and the Redback Sales VP, there was no new agreement with 1010 Qwest in February 2001. Qwest had simply provided Redback with a purchase order. The 1111 Redback Sales and Marketing Manager stated that the press releases regarding Qwest and other 1212 companies were strategically dribbled out by Redback to artificially boost its stock price. The 1313 Individual Defendants, including Kruep, Ragavan, and Khosla, all knowingly or with deliberate 1414 recklessness caused Redback to issue the press release, which omitted material information 1515 regarding the stock bribes provided to Qwest under the Siara Warrant Agreement and the true 1616 nature of Qwest’s obligations. The press release bogusly announcing a material multi-year, 1717 multi-year agreement with Qwest was completely devoid of reality. 1818 206. 202. The effect of this materially false and misleading information regarding the 1919 purported agreement with Qwest caused the Company’s stock price to rise from its February 2, 2020 2001 close of $40.25 to $44.25 by the close on February 5, 2001. 2121 207. 203. On February 9, 2001, the Company issued a press release announcing the 2222 departure of Kruep “who has accepted the position of CEO at a start-up company.” Kruep was 2323 replaced by Richard Bibb as the Senior Vice President of Worldwide Sales. Richard Bibb (and 2424 Kruep before him) reported directly to Defendant Ragavan. Subsequent to Ragavan’s ouster, 2525 Bibb reported directly to Lamond when Lamond was interim CEO, and subsequently to 2626 DeNuccio when DeNuccio was hired as CEO. According to the VP NA Sales, each of the CEOs 2727 at Redback during each of their tenures was well informed of the true nature of Qwest’s business 2828

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11 dealings with Redback, including the non-public stock and sales incentives and the quid pro quo 22 transactions. 33 208. 204. On February 6, 2001, the Company filed a Form S-8 with the SEC. The 44 Registration Statement was signed by Defendants Ragavan, Wolf, Barsema, Garg, Lamond, 55 Khosla and Kurtz. The Registration Statement incorporated all of the materially false and 66 misleading statements in the May, August and November 2000 10-Qs, and the Company’s 77 Forms 8-K filed with the SEC on March 20, 2000, July 20, 2000, August 2, 2000, October 12, 88 2000, October 13, 2000, January 18, 2001 and January 25, 2001. The Registration Statement 99 was false for the same reasons the statements in the forms 8-K were false. 1010 209. 205. On April 2, 2001, Redback filed a Proxy Statement, which stated, in relevant 1111 part, as follows: 1212 13 In the fiscal year ended December 31, 2000, we sold an aggregate 13 of approximately $8.0 million of goods and services to Broadband 14 Office, Inc. Vinod Khosla, a director of the Company, is a general 14 partner of Kleiner Perkins Caufield & Byers, which owns more than 10% of the outstanding stock of Broadband Office, Inc. 1515 210. 206. The Proxy Statement was materially false and misleading because it only 1616 partially disclosed the related-party transactions between Redback, Khosla and Broadband 1717 Office. The Proxy Statement omitted material information that Redback (through Siara after the 1818 merger had been announced) had issued a lucrative stock-kickback payment to Broadband Office 1919 to induce it to purchase equipment from Redback, and further to allow Redback to issue a 2020 materially false and misleading press release announcing another purported “multi-year, multi- 2121 million” dollar agreement that was designed to and did artificially inflate Redback’s stock price. 2222 The Proxy Statement also was materially false and misleading because it further created the false 2323 illusion of demand and deployment of Redback’s products at Broadband Office. 2424 211. 207. On April 2, 2001, Redback filed its Form 10-K for the year ended December 2525 31, 2000 (the “2000 10-K”). The 2000 10-K repeated the financial results for the fourth quarter 2626 of 2000 and for the fiscal year ended December 31, 2000 first reported in Redback’s January 17, 2727 2001 press release. Defendants Ragavan, Wolf, Barsema, Garg, Haque, Khosla, Lamond and 2828 Kurtz signed the 2000 10-K.

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11 212. 208. Redback explained in the 2000 10-K that in the fourth quarter of 2000 and 22 for the entire 2000 fiscal year, Qwest accounted for 18% and 15%, respectively, of Redback’s 33 total revenue, more than any other company. 44 213. 209. The 2000 10-K contained a Report of Independent Accountants, signed by 55 Defendant PwC, stating that: 66 7 In our opinion, the consolidated financial statements listed in the 7 accompanying index present fairly, in all material respects, the 8 financial position of Redback Networks Inc. and its subsidiaries at 8 December 31, 2000 and 1999 and the results of their operations 9 and their cash flows for each of the three years in the period ended 9 December 31, 2000 in conformity with accounting principles 10 generally accepted in the United States of America. In addition, in 10 our opinion, the financial statement schedule listed in the 11 accompanying index presents fairly, in all material respects, the 11 information set forth therein when read in conjunction with the 12 related consolidated financial statements. These financial 12 statements and financial statement schedule are the responsibility 13 of the Company’s management; our responsibility is to express an 13 opinion on these financial statements and financial statement 14 schedule based on our audits. We conducted our audits of these 14 statements in accordance with auditing standards generally 15 accepted in the United States of America, which require that we 15 plan and perform the audit to obtain reasonable assurance about 16 whether the financial statements are free of material misstatement. 16 An audit includes examining, on a test basis, evidence supporting 17 the amounts and disclosures in the financial statements, assessing 17 the accounting principles used and significant estimates made by 18 management, and evaluating the overall financial statement 18 presentation. We believe that our audits provide a reasonable basis for our opinion. 1919 214. 210. The 2000 10-K stated that itRedback sold “products through a direct sales 2020 force” and that “substantially all of [its] revenues have been derived from sales to providers of 2121 digital subscriber line services,” omitting the fact that it closed the sales through secret payoffs 2222 to Qwest and its executives. For the fourth quarter 2000, Redback reported “record” revenues of 2323 $114 million and a pro forma net profit of $7.8 million. Reporting “strong global demand” for 2424 the SMS™10000 and SmartEdge™ products, the Individual Defendants heralded Qwest as a 2525 marquee customer that had purchased both products and generated over $41 million in revenues 2626 for Redback in 2000. These revenues generated by Qwest’s purchases were highly material to 2727 Redback’s business and reported financial performance. The Individual Defendants knowingly 2828 or, deliberately and recklesslywith extreme recklessness caused Redback to overstate its reported

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11 revenues and earnings by failing to properly account for the undisclosed stock bribes issued to 22 Qwest’s executives, and the quid pro quo ASP services and $7 million IRU transactions with 33 Qwest. PwC also failed to require Redback to properly book the cost of the $7 million IRU, 44 which PwC knew was anomalous to Redback’s business and purchased only to obtain Qwest’s 55 $30 million order in first quarter 2001. PwC also should have required Redback to produce a 66 copy of its purported multi-million, multi-year agreement with Qwest as part of PwC’s annual 77 audit procedures, and by failing to obtain this agreement PwC deliberately and recklessly 88 certified materially false and misleading financial statements that failed to account for the stock 99 bribes provided to Qwest’s executives. 1010 215. 211. Redback’s statements in its 2000 10-K, were materially false and misleading 1111 because: the revenue, operating income, income before taxes, net income, basic net income per 1212 share, diluted net income per share figures, and pro forma figures were improperly inflated by 1313 revenue derived from Redback’s improper and undisclosed stock kickback payment schemes and 1414 quid pro quo transactions with Qwest. Redback misrepresented its prospects for 2000 and 1515 beyond because Redback failed to disclose that it engaged in improper undisclosed bribes and 1616 quid pro quo transactions with Qwest as a primary means to generate revenue and that such 1717 conduct could lead to severe civil and criminal liability. Redback’s reported results were false 1818 and misleading because the Company failed to reserve sufficient amounts to cover the cost of 1919 civil and criminal liabilities associated with its improper and undisclosed stock kickback 2020 payment schemes and quid pro quo transactions with Qwest. 2121 216. 212. Redback also misled investors by assuring the market that the Company’s 2222 2000 10-K was prepared in accordance with SEC rules and regulations and by failing to disclose 2323 that improper conduct, such as paying undisclosed bribes to material customers, was a key 2424 component to its business model. Further, the Company failed to disclose all material aspects of 2525 revenue earned from sales that were induced by bribes and quid pro quo transactions. Redback’s 2626 financial results in its 2000 10-K also were materially false and misleading as a result of GAAP 2727 violations. Redback also misled investors by assuring the market that the Company’s annual 2828

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11 report was prepared in accordance with GAAP when in reality Redback violated GAAP as 22 discussed in Section V below. 33 217. 213. The 2000 10-K also falsely stated that the SMS™ 10000 supported 44 technologies and speeds such as “the faster data connection technologies and speeds commonly 55 known as OC-12, asynchronous transfer mode, or ATM, and Gigabit Ethernet.” This statement 66 was materially false and misleading because the SMS™10000 product was not able to support 77 an OC-12 data connection in 2000 or 2001 or by the summer of 2002 when the Redback Sales 88 Engineer left the Company after working on the 40 SMS™10000 units that had been returned by 99 Qwest to be “rebuilt” in late 2001, according to the Redback Sales Engineer. 1010 218. 214. Once again, Redback disclosed various “Risk Factors” while omitting the 1111 biggest risks of all: (1) that its products were not properly functioning; (2) that its new 1212 SmartEdge™ equipment was significantly delayed in production with faulty technology; (3) that 1313 it was subject to a huge contingent liability from its scheme to bribe others to obtain their 1414 business; and (4) that its sales would plummet once it terminated its scheme or it was discovered. 1515 Redback attempted again to blame any downturn in its business on a downturn in the economy 1616 and in the telecommunications sector generally, but that was a lie, as any downturn was 1717 experienced only when Redback stopped paying bribes to its biggest customers. Once again, the 1818 companyCompany gave itself a clean bill of health, stating that it was not aware of any legal 1919 proceedings against it which “would have a material adverse effect on its business,” through it 2020 knew its fraudulent bribery scheme presented an undisclosed potential liability that would, upon 2121 discovery, adversely effect its business. 2222 219. 215. On April 2, 2001, armed with the knowledge that Redback had not inked any 2323 new deals with Quest since the early 2001 SmartEdge™ equipment sale (and that that sale was 2424 actually pursuant to the undisclosed Siara Warrant Agreement in November 1999), Ragavan, 2525 Wolf and the other Individual Defendants began to condition the market to an absence of new 2626 deals and a loss of revenue from the Company’s biggest customer, so they caused Redback to 2727 foreshadow that the Company expected lower first quarter revenues. Citing a weakened global 2828 telecommunications market, Redback announced that it expected revenues of $85 to $90 million

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11 and that it was writing off $24 million in excess inventory. Redback hid the true reasons behind 22 the anticipated revenue decline, which were that Redback’s fraudulent scheme with Qwest was 33 coming to a close as Qwest had fulfilled its purchase obligations under the friends and family 44 agreement and the Siara Warrant Agreement and would not be purchasing any more of the 55 SMS™10000 or SmartEdge™ 800 products; that the new SmartEdge product was seriously 66 delayed in production; and that the excess inventory write-off was for SMS™ 10000 equipment 77 that was inoperable and not saleable. Nevertheless, as the partial truth became known regarding 88 Redback’s stagnant sales, lack of hard sales to back up previously-announced multi-million 99 dollar agreements, excess equipment and declining revenues, Redback’s stock price to fell from 1010 a close of $13.08 on March 30, 2001 to $11.07 on April 2, 2000 and then to $9.77 the next day. 1111 220. 216. On April 11, 2001, the Company issued a press release announcing its 1212 financial results for its first quarter ended March 31, 2001. The press release and subsequent 1313 Form 8-K stated, in relevant part, as follows: 1414 15 Net revenue for the first quarter of 2001 was $90.9 million, 15 compared with $34.2 million for the same period in the prior year, 16 an increase of 166 percent. Pro forma net loss for the first quarter 16 of 2001 was $18.4 million or $0.13 per share, which excludes 17 acquisition-related charges, stock compensation charges, 17 restructuring and certain inventory charges. This compares to pro 18 forma diluted net income of $0.05 per share for Q4 2000 and $0.01 18 per share for the same period one year ago. Before pro forma 19 adjustments, net loss for the first quarter of 2001 was $400.5 19 million or $2.92 per share compared to a net loss of $85.2 million or $0.96 per share for the same period in the prior year. 2020 221. 217. The materially false and misleading statements contained in the April 11, 2121 2001 press release caused the Company’s stock price to rise from $15.84 to $17.70, an increase 2222 of $1.86, or 12%, between April 11, 2001 and April 12, 2001, which was caused by Redback’s 2323 reported results that exceeded lowered expectations announced weeks earlier. 2424 222. 218. Not only was the investing public misled, so were analysts. Wells Fargo Van 2525 Kasper (“Wells Fargo”) maintained its “Strong Buy” rating on Redback in its April 12, 2001 2626 research report, in part, because of the addition of Qwest as a customer. Although the research 2727 report pointed out that “[m]anagement noted that several of its larger customers delayed 2828 deployments for both SMS™ and SmartEdge™ products,” defendants knew that there was no

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11 delay on the part of Qwest because, in fact, Qwest would not be purchasing any Redback 22 products whatsoever. Moreover, defendants failed to disclose that Redback had not developed 33 certain router capabilities for the SmartEdge™ product that had been promised to customers. 44 Redback’s Board and senior executives, including Kruep, Garg, Lamond, Ragavan and Kurtz, 55 had known since August or September 2000, that the product would not be available and 66 intentionally or with deliberate recklessness failed to revise Redback’s sales and revenue 77 forecasts for 2001, which included hundreds of millions of dollars in revenues based on the new 88 product. 99 223. 219. On April 17, 2001, the Company filed a Form S-3/A Registration Statement 1010 and Prospectus for a secondary offering of 2,440,526 shares of the Company’s common stock. 1111 The Prospectus stated that Qwest accounted for 18% of the Company’s revenue, more than any 1212 other Company, and failed to disclose the stock kickback bribes and quid pro quo transactions 1313 that had induced the sales to Qwest. Defendants Wolf, Ragavan, Barsema, Garg, Haque, Khosla, 1414 and Lamond signed the Registration Statement filed in connection with the offering. 1515 224. 220. Again, the Company’s disclosure of “Risk Factors” and liabilities did not 1616 include any disclosure of its biggest risk and liability arising from its use of commercial bribery 1717 to operate sales and revenues. 1818 225. 221. The April 17, 2001 Registration Statement contained the consent of PwC to 1919 the incorporation of the Company’s 2000 10-K and the reference to PwC as “Experts”. 2020 226. 222. The Company’s share price rose from $18.80 on April 17, 2001 to $19.93 on 2121 April 18, 2001, a gain of $1.13, or 6%, as a result of the materially false and misleading 2222 statements contained in the Company’s April 17, 2001 filings. 2323 227. 223. On May 15, 2001, the Company filed with the SEC a Form 10-Q for the 2424 quarter ended March 31, 2001 (the “May 2001 10-Q”). The May 2001 10-Q was signed by 2525 Defendant Wolf. It reiterated the financial results previously announced on April 11, 2001, and 2626 acknowledged: 2727 28 In each of the periods presented, we have had at least one customer 28 that accounted for 10% or more of our total revenue in the quarter. In the first quarter of 2001, Qwest Communications International FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 86 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 88 of 198

1 1 Inc. . . . accounted for 28% . . . of our total revenue. For the twelve 2 months ended December 31, 2000, sales to Qwest 2 Communications International Inc. . . . accounted for 15% of our total revenue. 33 228. 224. Wolf was keenly aware of the $7 million IRU purchase demanded by Qwest, 44 and he knowingly signed the materially false and misleading SEC filing, without disclosing the 55 quid pro quo nature of Redback’s sales to Qwest, and without requiring the Company to reduce 66 its reported revenues and earnings to account for the cost of the economically worthless IRU. 77 229. 225. The filing of the May 2001 10-Q drove the Company’s stock price higher – it 88 rose $3.40 between May 15, 2001 and May 21, 2001, going from $15.60 to $19.00, a 22% 99 increase. 1010 230. 226. The May 2001 10-Q and April 11, 2001 8-K and press release were 1111 materially false and misleading because the revenue, operating income, income before taxes, net 1212 income, basic income per share, diluted net income per share figures and pro forma figures were 1313 improperly inflated by revenue derived from Redback’s improper and undisclosed stock 1414 kickback payment schemes and quid pro quo transactions with Qwest. 1515 231. 227. On May 21, 2001, Redback announced that Defendant Ragavan had resigned 1616 from the Company and that Lamond would temporarily take the CEO spot. In the press release, 1717 Defendant Lamond confirmed that “[t]he current business and the product schedules continue to 1818 be on track with the guidance that we have previously given.” 1919 232. 228. Ragavan’s departure and Redback’s analyst conference report waswere 2020 widely reported in the media. A May 22, 2001 report on Forbes.com reported that Lamond 2121 reassured investors that product schedules remain on track, yet Redback’s newest SmartEdge™ 2222 product willwould hit the market one quarter later than expected. The acceptance of this new 2323 product by carriers “is particularly critical to the company’s intermediate-term revenue and gross 2424 margin prospects,” said the analyst, who cut Redback to “neutral.” Lamond provided materially 2525 false and misleading information regarding the new SmartEdge™ product, which he had known 2626 since August 2000 was terminally delayed in production. In May 2001, Lamond knew through 2727 meetings with Patel and others and the weekly executive meetings that the product would not be 2828 ready to ship until fourth quarter 2001, at the earliest, and that Redback could not meet its

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11 forecasted revenues without sales of that product, according to the VP NA Sales, and the 22 Redback Sales VP. The stock promptly fell 10.3%, to $17.05, during the midday trading. 33 233. 229. Ragavan’s departure, coupled with the relatively recent departure of Wolf 44 and Kruep, waswere viewed by most analysts as a sign of turmoil within Redback. However, the 55 continued reassurances by Lamond that product deployments would be back-end loaded in the 66 quarter and that these departures would not affect the continued deployment of Redback’s 77 products, lulled investors into a false sense of security. Not only was the new SmartEdge™ 88 product delayed, but also analysts at Dain Rauscher Wessels on May 23, 2001,2001 reported that 99 Qwest had begun to order less product than expected. The Dain Rauscher’ analyst stated that he 1010 believed that the reason for the decrease in orders was that Qwest was working through some 1111 inventory it already had on hand. The truth, as Lamond well knew, was that Qwest did not need 1212 the equipment that it had purchased; the SMS™ 10000 equipment was inoperable; and Qwest’s 1313 obligations under the secret stock-induced agreements had been fulfilled. Therefore, Redback 1414 could no longer count on its illicit deals with Qwest and had to find other ways to pump up the 1515 stock. In reaction to the news that Qwest was not ordering as much product as expected, 1616 Redback’s stock dropped from a close of $17.31 per share on May 22, 2001 to a close of $16.05 1717 the next day and continued to decline to $15.71 by the end of the week on May 29, 2001. 1818 234. 230. On June 27, 2001, not even three months after issuing its first-quarter 1919 warning about lower revenues, Redback announced lower expected revenues in the second 2020 quarter 2001 of approximately $55 to $60 million and additional write-offs for excess and 2121 obsolete inventory. Again Lamond, Wolf and other Individual Defendants caused the Company 2222 to attribute the lower revenues to an “unprecedented downturn in the telecommunications 2323 marketplace” and “back end loading of [Redback’s] quarterly sales.” Redback failed to inform 2424 shareholders and investors that neither Qwest nor Williams were ordering any equipment from 2525 Redback in second quarter 2001 because Redback’s fraudulent scheme with Qwest had come to 2626 an end as Qwest had fulfilled its obligations to Redback under secret stock-induced agreements 2727 and further because Williams was on the brink of bankruptcy and would not be ordering any 2828 equipment from Redback. Even though the Company misled investors and shareholders as to the

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11 true reasons behind the significant decline in revenues and the write-offs, as the truth started to 22 become known regarding Redback’s stagnant sales, lack of hard sales to back up previously- 33 announced multi-million dollar agreements with Qwest and Williams, excess equipment and 44 declining revenues, Redback’s stock price to fell from a close of $11.31 per share on June 27, 55 2001 to a close of $8.64 the next day. 66 235. 231. On July 11, 2001, the Company issued a press release announcing its 77 financial results for its second quarter ended June 30, 2001. The press release and subsequent 88 Form 8-K stated, in relevant part, as follows: 99 10 Net revenue for the second quarter of 2001 was $59.4 million, 10 compared with $48.7 million for the same period in the prior year. 11 Pro forma net loss for the second quarter of 2001 was $37.0 11 million or $0.26 per share, compared to pro forma net loss of $0.13 12 per share for Q1 2001 and $0.05 per share loss for the same period 12 one year ago. The Q2 GAAP loss, which includes acquisition- 13 related charges, stock compensation charges, restructuring charges 13 and charges for inventory and other impairments, was $460 million 14 or $3.26 per share. During Q2 the Company determined that based 14 on the current business outlook, the carrying value of certain assets 15 would not be recoverable and should be adjusted. As a result, the 15 Company recorded GAAP reserves and write-offs that totaled 16 $74.9 million for inventory and related claims and commitments in 16 excess of projected demand, as well as investment impairments. In 17 addition, under a headcount reduction program announced in April 17 2001, the Company recorded a charge of $3.9 million for severance and related benefits. 1818 236. 232. The Company’s stock, which had traded at $19.00 on May 21, 2001, closed 1919 at $6.66 on July 12, 2001. The Company’s stock price dropped in response to recent 2020 announcements of declining revenues, losses, reserves and write-downs, which had been masked 2121 by the Defendants’ fraud. The Company did not disclose that its poor financial performance 2222 resulted from its inability to continue to generate revenues from the fraudulent deals with Qwest 2323 and other telecommunication companies. Redback’s fraudulent scheme ended, and therefore its 2424 revenues from that scheme dried up. As Redback’s true financial picture began to come into 2525 focus, Redback’s stock price fell. 2626 237. 233. On July 12, 2001, Morgan Stanley Dean Witter research analysts issued a 2727 research report recapping information provided by Redback the night before. Without the surge 2828 of big orders from Qwest, Redback’s revenues fell 35% from first to second quarter 2001, with

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11 reported revenues of $55 million. The report stated that delays from Williams and other 22 telecommunications companies compounded Redback’s problems, but Redback knew as early as 33 May 2001 that Williams would not be placing any orders with Redback because it was on the 44 brink of bankruptcy, according to the Redback Sales VP. He further stated that he told Wolf that 55 Williams would not be ordering any product, and therefore, the Company would not meet its 66 second quarter 2001 targeted sales and revenues, but he said that Lamond and Wolf refused to 77 revise the Company’s guidance. The report stated that Redback’s new version of the 88 SmartEdge™ product was “in trials with 5 customers,” but the Redback Sales VP stated that he 99 was not aware of any trials of the product in July 2001, and that he knew that the new product 1010 remained delayed in production at that time. 1111 238. 234. On August 14, 2001, the Company filed with the SEC a Form 10-Q for its 1212 second quarter ended June 30, 2001 (the “August 2001 10-Q”). The August 2001 10-Q, which 1313 was signed by Defendant Wolf, reiterated the financial results previously announced on July 11, 1414 2001,2001 and, as in prior filings, noted the importance of Redback’s sales to key customers. 1515 The filing stated that Qwest accounted for 27% of the Company’s total revenue for the first six 1616 months of 2001 and 15% of Redback’s revenue for all of 2000. Redback’s stock, which had 1717 closed on July 11, 2001 at $6.53, closed on August 14, 2001 at $6.05, a 7.3% drop. Redback’s 1818 stock was dropping because of the revelation that the Company’s revenues were declining as a 1919 result of Redback’s failure to obtain any business from Qwest. This inevitable result, once the 2020 bribes had stopped being paid, was hidden from investors. 2121 239. 235. Redback’s statements in its August 2001 10-Q and prior press release 2222 contained in its Form 8-K were materially false and misleading because the revenue, operating 2323 income, income before taxes, net income, basic income per share, diluted net income per share 2424 figures and pro forma figures were improperly inflated by revenue derived from Redback’s 2525 improper and undisclosed stock kickback payment schemes and quid pro quo transactions with 2626 Qwest. 2727 240. 236. Wolf and the other Individual Defendants caused Redback falsely to attribute 2828 a fall off in the Company’s revenues and decreased gross margins to: “a shift in product mix

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11 from the higher margin, SMS™ products, to the lower margin, SmartEdge product.” In addition, 22 the Company falsely reported that: “gross margin will fluctuate in the future based on several 33 factors, which include our ability to: 1) Control the mix of sales between our SMS™ and 44 SmartEdge™ product families, 2) Introduce competitive product enhancements and upgrades, 3) 55 Introduce new products, 4) Successfully integrate the Service Management products into our 66 current SMS™ and SmartEdge™ product lines, 5) Control inventory costs, and 6) Maintain 77 current price levels in an increasingly competitive environment.” Wolf and the other Individual 88 Defendants omitted material information regarding a fall-off in revenues from sales to Qwest and 99 the fact that Qwest’s quid pro quo obligations under the “friends and family” and Siara Warrant 1010 Agreement stock bribes had been fulfilled. They also knew that Qwest had not deployed the 1111 SMS™10000 product and was storing the unwanted Redback products in a warehouse. While 1212 the Company told investors that Redback’s business was suffering, Redback did not disclose that 1313 the reason for the poor performance was that the Company could no longer generate revenues 1414 from fraudulent deals that had in prior quarters sustained the Company. 1515 241. 237. On August 17, 2001, the Company offered former senior Cisco executive 1616 Kevin DeNuccio employment with the Company. The offer letter revealed that the Company 1717 provided Defendant DeNuccio with a base salary of $500,000 as well as $2.1 million in 1818 restricted stock, 6.5 million options to buy shares at $4.17 each, and a $3 million signing bonus. 1919 These terms were confirmed in Redback’s 2001 10-K. On August 29, 2001, Redback announced 2020 that DeNuccio had joined Redback as President and Chief Executive Officer. DeNuccio also 2121 became a member of Redback’s Board, while Pierre Lamond remained Chairman of the Board. 2222 242. 238. In an August 30, 2001 article, Light Reading.com reported on Redback’s 2323 August 29, 2001 conference call. In it, DeNuccio said new products were finished and in trials 2424 with 10 customers. He further stated: 2525 26 “One of the most exciting things we have in the company is the IP 26 router coming to market now. . . Cisco’s virtually the only player 27 in that space right now, and there’s plenty of room for 27 competition.” DeNuccio also commented briefly on how he views 28 Redback’s product after having helped sell Cisco’s ONS 15400 28 next-generation Sonet add/drop multiplexer. DeNuccio then called

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1 1 “the [Redback SmartEdge] a very competitive product in its space. . . It’s a more intelligent platform, in my opinion.” 22 243. 239. According to the Redback Sales VP, the new SmartEdge™ product’s 33 hardware and software were both not performing properly in August 2001, and Redback 44 continued to try to correct the problems. He further stated that he was not aware of, and would 55 have been aware if there had been, 10 customers of Redback that had the new product in trials in 66 August 2001. DeNuccio’s comments were materially false and misleading, and he deliberately 77 and recklessly disregarded material problems with the new SmartEdge™ router product when he 88 touted the equipment to the public. 99 244. 240. In third quarter 2001, Redback’s sales to Qwest completely dried up. With 1010 paltry revenues, inventory write-offs and no sales or announcements of agreements with Qwest, 1111 Redback’s stock fell from $9.05 per share at the beginning of July 2001 to $1.45 per share at the 1212 end of September 2001. Although the disclosure of the fact that Qwest stopped buying product 1313 drove Redback’s stock price down, Redback and the Individual Defendants still never disclosed 1414 the reasons why Qwest stopped purchasing Redback’s products. Later on in March 2002, word 1515 of Qwest’s SEC, Justice Department and criminal investigations unfolded, and the truth 1616 regarding Qwest’s, Weisberg’s and Perusse’s improper and illegal activities came out. 1717 245. 241. Also, Onon October 10, 2001, the Company issued a press release 1818 announcing its financial results for its third quarter ended September 30, 2001. The press release 1919 and subsequent Form 8-K stated, in relevant part, that: 2020 21 Net revenue for the third quarter of 2001 was $37.0 million, 21 compared with $59.4 million in the prior quarter and $80.6 million 22 for the same period in the prior year. Pro forma net loss for the 22 third quarter of 2001 was $40.9 million or $0.28 per share, 23 compared to pro forma net loss of $0.26 per share for Q2 2001 and 23 $0.02 per share net income, using fully diluted shares, for the same period one year ago. 2424 246. 242. On October 10, 2001, the Company filed a Form S-8 Registration Statement 2525 with the SEC, signed by Defendants DeNuccio, Wolf, Garg, Haque, Khosla, Lamond and Kurtz. 2626 The Registration Statement incorporated by reference the Company’s prior May 2001 and 2727 August 2001 10-Qs and it registered 10.7 million shares of Redback stock, including 6,500,000 2828 shares at $1.675 by Defendant DeNuccio pursuant to a Stock Option Agreement.

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11 247. 243. On October 11, 2001, research analysts at CIBC World Markets reported that 22 Redback’s new SmartEdge™ router product was “targeted for launch within the next several 33 weeks,” which as had been known by the Individual Defendants was a significant delay from the 44 Company’s earlier promised first quarter 2001 launch. Lamond, Wolf and other Individual 55 Defendants never disclosed the true target launch date in early 2001, and knowingly forecasted 66 revenues based upon sales of a product that they knew was moribund in production. In reaction 77 to the news of the new SmartEdge™ product release, Redback’s stock price increased from a 88 close of $1.64 on October 10, 2001 to $2.46 on October 11, 2001, and steadily climbed to $3.60 99 per share by October 15, 2001, after Wolf announced in a press release that a fourth-quarter sales 1010 increase would “reverse a decline in the third-quarter from the previous and year-earlier 1111 periods.” Analysts were quoted in an October 11, 2001 press release as interpreting Wolf’s 1212 comments as a “signal” that “demand will increase for [Redback’s] products.” Wolf knowingly 1313 or with deliberate recklessness omitted material information regarding the true reasons for the 1414 decline in demand for Redback’s products by Qwest, Williams, UUNET and others. 1515 248. 244. On November 13, 2001, Redback filed its Form 10-Q (the “November 2001 1616 10-Q”) with the SEC. The Company’s November 2001 10-Q was signed by Defendant Wolf and 1717 repeated the Company’s financial results announced on October 10, 2001. The November 2001 1818 10-Q stated that Qwest accounted for 22% of the Company’s revenues for the first nine months 1919 of 2001 and 15% of its revenues for all of 2000, more than any other company. The November 2020 2001 10-Q revealed that the Company’s impressive sales and revenue growth, the hallmark of its 2121 early Class Period quarters, had ended, as Redback was now reporting decreasing net revenue. 2222 While investors were left to assume that this poor financial performance was caused by various 2323 business reasons proffered by Wolf and the other Individual Defendants, the real reason was that 2424 Redback and the Individual Defendants could no longer count on buying Qwest’s business 2525 through quid pro quo or secret stock-induced deals. These decreasing revenues, which were 2626 covered up by Defendants’ fraud, caused a sharp decline in Redback’s stock price.Redback’s 2727 stock price started to rise, reaching more than $6 per share in January 2002. 2828

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11 249. 245. All of the above statements by the defendants were false and misleading. 22 From Redback’s February 5, 2001 announcement of its “multi-year, multi-million dollar” 33 agreement with Qwest, through the rest of 2001, the defendants fraudulently misrepresented the 44 Company’s business deals with Qwest (and the Company’s revenues), and falsely concealed that 55 Qwest had no plans to purchase Redback’s Smart Edge™ 800 product or any other Redback 66 product absent Redback’s reciprocal agreement to pay $7 million for IRU bandwidth on Qwest’s 77 network which Redback did not want or need and which it could not even unload on any third 88 parties. All of the above statements in 2001, like the Company’s previous filings in the Class 99 Period, were false and misleading, principally in their failure to disclose that the Company was, 1010 in effect, paying for Qwest’s business, through Redback’s transfers of securities (of Redback and 1111 Siara) to Qwest, and Redback’s purchases of web-hosting services and Qwest products that 1212 Redback would not have purchased but for Qwest’s agreement to purchase Redback products in 1313 exchange. In disclosing that a large portion of the Company’s revenues were from sales to 1414 Qwest, Redback was obliged to disclose that Qwest had no demand for Redback’s products, and, 1515 in fact, Redback’s products were not functioning properly, and were not even being tested by 1616 Qwest pursuant to its customary business practices. Unbeknownst to investors, Qwest was 1717 “purchasing” useless and “unstable” Redback products and storing them in a warehouse, because 1818 Redback had agreed to buy certain Qwest products and services, or because Redback had simply 1919 paid Qwest executives for their allegiance. The statements were materially false and misleading 2020 because the revenue, operating income, income before taxes, net income, basic income per share, 2121 diluted net income per share figures and pro forma figures were improperly inflated by revenue 2222 derived from Redback’s improper and undisclosed stock kickback payment schemes and quid 2323 pro quo transactions with Qwest. 2424 250. 246. As a result of Redback’s secret and illicit scheme with Qwest, Redback’s 2525 stock price was artificially inflated. Additionally, the Company’s financial statements were not 2626 prepared in accordance with GAAP, as represented by PwC, nor had PwC completed its audit in 2727 accordance with GAAS. Had PwC properly audited Redback’s books and records, it would have 2828 investigated the Company’s largest sales accounts – to Qwest – and discovered that these sales

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11 were not the result of a real demand for Redback’s products, but rather, the sales had been 22 purchased by Redback through payments of securities to Qwest executives, or payments to 33 Qwest and Qwest affiliates. 44 251. 247. Throughout the remainder of the Class Period, Defendant Lamond and the 55 other Board members and executives failed to disclose to shareholders and investors that router 66 capabilities for the Company’s SmartEdge™ product had been significantly delayed in 77 development and production, and consequently, Redback had no ability to meet its announced 88 target sales and revenues. Furthermore, the effects of the illegal quid pro quo deals with Qwest 99 and others continued to roll forward throughout the financial statements and SEC filings in the 1010 rest of the Class Period. 1111 252. 248. In January 2002, Redback hired Arnold. Prior to joining Redback, Arnold 1212 held several positions at Qwest, including Senior Vice President of Global Business Markets, 1313 Senior Vice President of General Business and Regional Vice President of National Accounts, in 1414 which capacities Arnold structured and negotiated sales of Qwest products that would later be 1515 found to be improper. Defendants failed to disclose that Arnold at that time was the subject of 1616 an SEC investigation into allegations that he and others at Qwest improperly inflated Qwest’s 1717 revenues by approximately $144 million in 2000 and 2001, through improper sales in order to 1818 meet earnings projections and revenue expectations. 1919 253. 249. On January 16, 2002, the Company issued a press release announcing its 2020 financial results for its fourth quarter of fiscal year 2001 and year ended December 31, 2001. The 2121 press release and subsequent Form 8-K reported, in relevant part, as follows: 2222 23 Net revenue for the fourth quarter of 2001 was $40.2 million, 23 compared with $37.0 million in the prior quarter. For the full fiscal 24 year 2001 net revenue was $227.5 million compared to $278.0 24 million in fiscal year 2000. 25 25 The GAAP net loss for the fourth fiscal quarter was $0.67 per 26 share compared to a loss of $21.71 in Q3 2001. For fiscal 2001 the 26 GAAP loss was $28.78 per share compared to an $8.68 loss in 27 fiscal 2000. The GAAP loss in fiscal Q3 2001 included a write 27 down of goodwill aggregating $2.7 billion. 28 28 Pro-forma loss for the quarter was $0.20 per share compared to a loss of $0.28 in fiscal Q3. Pro forma results exclude certain FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 95 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 97 of 198

1 1 impairment charges, restructuring charges, stock and other 2 compensation related charges, amortization of intangibles and 2 other items . . . . 33 The press release showed the effect of the cessation of the fraudulent sales to Qwest – Redback’s 44 net revenues were declining – but there was no disclosure of the fraud or that it had ended. 55 Investors were not aware that the Company’s poor financial performance resulted from improper 66 or illegal activities. 77 254. 250. On March 11, 2002, Qwest issued a press release acknowledging that the 88 SEC was investigating its revenue recognition practices, including its sales of IRUs and the sale 99 of equipment by Qwest to customers from which Qwest bought services or to which it 1010 contributed equity financing. Because Qwest was Redback’s largest customer, PwC knew or 1111 with deliberate recklessness disregarded (because it failed to investigate) that Qwest’s IRU sale 1212 to Redback in 2001 was an improper reciprocal transaction of the kind being investigated by the 1313 SEC. 1414 255. 251. On March 27, 2002, the Company filed its 2001 10-K, which was signed by 1515 Defendants DeNuccio, Wolf, Garg, Haque, Khosla, Lamond and Kurtz. The 2001 10-K 1616 reiterated the financial numbers contained in the January 16, 2002 press release, and reported 1717 that during 2001, Redback sold $41.5 million of goods and services to Qwest, representing 18% 1818 of the Company’s revenue that year. 1919 256. 252. The 2001 10-K contained a Report of Independent Accountants signed by 2020 Defendant PwC. The audit opinion contained substantially the same language as in the audit

2121 report contained in the 2000 10-K, noting, in particular, that Redback’s financial statements had 2222 been prepared in accordance with accounting principles generally accepted in the United States 2323 (or GAAP) and audited by PwC in accordance with auditing standards generally accepted in the 2424 United States (or GAAS). 2525 257. 253. The 2001 10-K also reported that: 26 26 In 2000, we sold an aggregate of approximately $8 million of 27 goods and services to Broadband Office, Inc. One of our directors 27 is a partner in an entity that owns more than 10% of Broadband’s 28 outstanding stock. In 2001 and 2000, we sold an aggregate of 28 approximately $41.5 million and $41 million, respectively, of goods and services to Qwest Communications, Inc. (“Qwest”) and FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 96 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 98 of 198

1 1 purchased an aggregate of approximately $10.5 million and $3 2 million, respectively, of goods and services from Qwest. A 2 director of Redback is also a director of Qwest. 33 258. 254. The 2002 10-K contained a Report of Independent Accountants signed by 44 Defendant PwC. The audit opinion contained substantially the same language as in the audit 55 report continuedcontained in the 2000 10-K, noting that Redback’s financial statements had been 66 prepared in accordance with GAAP and audited by PwC in accordance with GAAS. The 2002 77 10-K also included false and misleading financial data from 1997 to 2001. 88 259. 255. The 2002 10-K stated: 99 10 These revenues were substantially lower than the sales we had 10 anticipated coming into 2001 as a result of lower than anticipated 11 deployments of our products by our customers, as the networking 11 business specifically, and the economy generally, slowed down in 2001. 1212 260. 256. Redback’s statements in its 2002 10-K, were materially false and misleading 1313 because: the revenue, operating income, income before taxes, net income, basic net income per 1414 share, diluted net income per share figures, and pro forma figures were improperly inflated by 1515 revenue derived from Redback’s improper and undisclosed stock kickback payment schemes and 1616 quid pro quo transactions with Qwest. Redback misrepresented its prospects for 2000 and 1717 beyond because Redback failed to disclose that it engaged in improper undisclosed bribes and 1818 quid pro quo transactions with Qwest as a primary means to generate revenue and that such 1919 conduct could lead to severe civil and criminal liability. Redback’s reported results were false 2020 and misleading because the Company failed to reserve sufficient amounts to cover the cost of 2121 civil and criminal liabilities associated with its improper and undisclosed stock kickback 2222 payment schemes and quid pro quo transactions with Qwest. Furthermore, the decline in SMS™ 2323 revenue was not due to a downturn in the market, but instead was because Redback and the 2424 Individual Defendants could no longer rely on quid pro quo deals with Qwest and other insiders. 2525 261. 257. Redback also misled investors by assuring the market that the Company’s 2626 2001 10-K was prepared in accordance with SEC rules and regulations and by failing to disclose 2727 that improper conduct, such as paying undisclosed bribes to material customers, was a key 2828 component to its business model. Further, the Company failed to disclose all material aspects of

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11 revenue earned from sales that were induced by bribes and quid pro quo transactions. Redback’s 22 financial results in its 2001 10-K also were materially false and misleading as a result of GAAP 33 violations. Redback also mislead investors by assuring the market that the Company’s annual 44 report was prepared in accordance with GAAP when in reality Redback violated GAAP as 55 discussed in Section V below. 66 262. 258. Additionally, the Company’s financial statements were not prepared in 77 accordance with GAAP, as represented by PwC, nor had PwC completed its audit in accordance 88 with GAAS. Had PwC properly audited Redback’s books and records, it would have used 99 professional skepticism auditing the Company’s largest sales accounts – to Qwest – and 1010 discovered that these sales were not the result of a real demand for Redback’s products, but 1111 rather, the sales had been purchased by Redback through payments of securities to Qwest 1212 executives, or payments to Qwest and Qwest affiliates. 1313 263. 259. On April 10, 2002, the Company issued a press release announcing its 1414 financial results for its first quarter of 2002. The press release and subsequent Form 8-K 1515 reported, in relevant part, as follows: 1616 17 Net revenue for the first quarter of 2002 was $40.6 million, 17 compared to $40.2 million in the prior fiscal quarter and $90.9 million for the same quarter in the prior year. 1818 19 The GAAP net loss for the quarter ended March 31, 2002 was 19 $0.23 per share compared to a loss of $0.67 in fiscal Q4 2001 and $2.92 in fiscal Q1 2001. 2020 21 Pro-forma loss for the quarter was $0.19 per share compared to a 21 loss of $0.20 in Q4 2001 and a loss of $0.13 in the first fiscal 22 quarter of 2001. Pro forma results exclude certain impairment 22 charges, restructuring charges, stock and other compensation related charges, amortization of intangibles and other items . . . . 2323 264. 260. Without the benefit of sales to Qwest, Redback’s revenues had fallen by 2424 more than 50% from first quarter 2001 to first quarter 2002. 2525 265. 261. On April 10, 2002, Wells Fargo Securities, LLC issued a research report in 2626 which it reiterated its strong buy rating on Redback based, in part, on the fact that “Redback has 2727 now stabilized its dominant position in the SMS™ industry.. . . [T]hree of the four domestic 2828 ILECs (Verizon, Qwest, and SBC) . . . have now bought into the SMS™ 10000.” According to

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11 the Redback Sales Engineer, the SMS™10000 product was still not operational and would not 22 support an OC-12 card in April 2002. The purported success of the product was hyped in large 33 part from Redback’s early sale to Qwest, which was a bogus transaction that Redback entered in 44 order to fraudulently book $20 million in revenue. Redback never disclosed that Qwest and 55 UUNET had returned to Redback all of the SMS™10000 products that they had purchased in 66 third and fourth quarter 2000. 77 266. 262. On April 22, 2002, Redback filed with the SEC a Form 10-Q for the period 88 ended March 31, 2002 (the “April 2002 10-Q”). The April 2002 10-Q, which was signed by 99 Defendant Wolf, reiterated the financial results previously announced on April 10, 2002 and 1010 failed to disclose that Redback no longer had the benefit of secret sales deals with Qwest, which 1111 were induced by illegal stock bribes and used to artificially inflate Redback’s revenues and stock 1212 price. 1313 267. 263. On July 10, 2002, Qwest announced that the SEC had begun a criminal probe 1414 of Qwest. 1515 268. 264. OnAlso on July 10, 2002, the Company issued a press release announcing its 1616 financial results for its second quarter of 2002. The press release and subsequent Form 8-K 1717 reported, in relevant part, as follows: 1818 19 Net revenue for the second quarter of 2002 was $40.1 million, 19 compared to $40.6 million in the prior fiscal quarter and $59.4 million for the same quarter in the prior year. 2020 21 Pro-forma net loss for the quarter was $0.16 per share compared to 21 a loss of $0.19 in Q1 2002 and a loss of $0.26 in the second fiscal quarter of 2001. 2222 23 The GAAP net loss for the quarter ended June 30, 2002 was $0.40 23 per share compared to a loss of $0.23 in fiscal Q1 2002 and $3.26 in fiscal Q2 2001. 2424 269. 265. During the July 10, 2002 Redback earnings conference call, Defendant Wolf 2525 stated that the Company “had basically doubled the revenue from [the SMS] 10000 this quarter 2626 from two quarters ago.” The product breakout for revenues for the Company was “roughly 6 2727 million for service, 6 million for SmartEdge™ products and 28 million for SMS.” The SMS™ 2828 10000 made up approximately 60 percent of the sales of SMS™ products, but the Company

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11 failed to disclose that the SMS™10000 product would not support OC-12 speeds and capacity as 22 repeatedly reported by Redback in its SEC filings. 33 270. 266. On August 14, 2002, Redback filed with the SEC a Form 10-Q for the period 44 ended June 30, 2002 (the “August 2002 10-Q”). The August 2002 10-Q, which was signed by 55 Defendant Wolf and Defendant DeNuccio, repeated the financial results previously announced 66 on July 10, 2002. The August 2002 10-Q falsely attributed Redback’s decrease in revenues to a 77 “current downturn in economic activity [that] is continuing into 2002.” DeNuccio and Wolf and 88 the other Individual Defendants falsely reported in the 10-Q that “we currently have limited 99 visibility into our business prospects. On a forward-looking basis, we are planning our business 1010 on the assumption that annual revenue in 2002 will be lower than in 2001.” DeNuccio, Wolf and 1111 the other Individual Defendants did not wish to admit that the Company’s prior growth and 1212 business success had resulted from a fraudulent scheme which could no longer continue due in 1313 part to the SEC criminal probe of Qwest and market scrutiny of that company. Instead of 1414 disclosing the fraud, they rationalized Redback’s poor financial performance as caused by a 1515 general “downturn in economic activity,” when they knew that was not true. They failed to 1616 disclose that a material decline in Redback’s revenues had resulted in large part from the loss of 1717 its fraudulent business partner Qwest, and from the decline of other companies like Broadband 1818 Office and Williams, to whom the Individual Defendants had provided secret stock kickback 1919 payments in return for their promise of business. Williams had filed bankruptcy in April 2002 2020 after negotiating a restructuring with its creditors in November 2001. Broadband Office 2121 similarly filed bankruptcy and failed to pay millions in outstanding accounts receivable to 2222 Redback for equipment purchases in 2001. 2323 271. 267. On September 26, 2002, the Company announced that it expected lower third 2424 quarter 2002 results. The press release stated, in relevant part, that: 2525 26 [The Company] expects revenue in the current fiscal quarter 26 ending September 30, 2002 will be approximately, $15 to $20 27 million and a pro forma net loss of between $0.23 and $0.25 per 27 share. 2828

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11 272. 268. During the September 26, 2002 Redback conference call, Defendant 22 DeNuccio stated, in relevant part, that: 33 4 [O]ur Q3 shortfall was compounded by the pending transition to 4 the Next Generation SMS 10000 product, which we call Streamliner, which is scheduled for delivery in Q4. 55 6 After working with our customers over the last couple weeks, and 6 realizing the cost and margin impact to continue SMS 10000 7 deployment in Q3, we decided to preserve our long-term pricing 7 model and gross margins and wait for the Next Generation 8 delivery of the SMS product, which is expected to be delivered in 8 Q4. With current SMS 10000 sales now accounting for 9 approximately 70 percent of overall SMS sales, some customers 9 delayed orders and/or delivery of current SMS 10000s, deciding to wait for the new technology. 1010 273. 269. Defendants knew the statements in the September 26, 2002 conference call 1111 were false and misleading because they knew the SMS™ 10000 was not capable of sustaining 1212 the speeds and capacity that Redback had touted in 2000 and 2001. DeNuccio knew or 1313 deliberately and recklessly disregarded that the product was not operational and that material 1414 customers had returned material amounts of the equipment to Redback. He and other Individual 1515 Defendants failed to correct prior disclosures regarding the product’s capabilities and the truth 1616 regarding Qwest’s returned purchases of non-operational units. 1717 274. 270. On October 9, 2002, the Company issued a press release announcing its 1818 financial results for its third quarter of 2002. The press release reported, in relevant part, as 1919 follows: 2020 21 Net revenue for the third quarter of 2002 was $17.4 million, 21 compared to $40.1 million in the prior fiscal quarter and $37.0 million for the same quarter in the prior year. 2222 23 Pro forma net loss for the quarter was $0.20 per share, compared to 23 a loss of $0.16 in fiscal Q2 2002 and a loss of $0.28 in the third 24 fiscal quarter of 2001. Pro forma results exclude certain 24 impairment charges, excess and obsolete inventory charges, 25 restructuring charges, stock and other compensation related 25 charges, amortization of intangibles and other items . . .. 26 26 The GAAP net loss . . . for the quarter ended September 30, 2002 27 was $0.30 per share, compared to a loss of $0.40 in fiscal Q2 2002 27 and $21.71 in the third fiscal quarter of 2001. 2828

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11 275. 271. During the October 9, 2002 Redback earnings conference call, Defendant 22 DeNuccio stated: 33 4 We do not believe these numbers reflect a new trend in business 4 activity for Redback. The revenue shortfall was driven by 5 significantly lower SMS sales, which resulted in only seven 5 million in revenue for the quarter, versus our projected 28 million. 6 6 * * * 7 7 The Redback Board of Directors and management team remain 8 fully committed to achieving cash flow break even in the first half 8 of 2003. . . . Let me reiterate our conviction – number one, we 9 have enough cash to sustain us through the industry downturn; 9 number two, we have a strategy to reach cash flow break even in 10 the first half of 2003 through revenue growth, gross margin 10 improvement and cost-cutting. Number three – we are the only 11 router vendor in the top three that have optimized its product 11 portfolio and operating system with a user to network focus for the 12 network edge, which positioned us right in the sweet spot for being 12 the router vendor of choice to build next generation edge networks 13 for service providers. Finally, that our incumbent customer base 13 continues to be delighted with our quality, our product design and 14 our technical capability and is moving forward with us on both 14 SMS and SmartEdge technology. 1515 This was patently false, and DeNuccio knew it, as Qwest was not, as DeNuccio represented, 1616 “delighted with [Redback’s] quality.” 1717 276. 272. On November 14, 2002, Redback filed with the SEC a Form 10-Q for the 1818 period ended September 30, 2002 (the “November 2002 10-Q”). The November 2002 10-Q, 1919 which was signed and certified by Defendants DeNuccio and Wolf, repeated the financial results 2020 previously announced on October 9, 2002. DeNuccio and the other Individual Defendants 2121 falsely reported in the 10-Q that Redback’s reported sales and revenues declined because of a 2222 “current downturn in economic activity [that] is continuing into the latter half of 2002.” They 2323 further falsely stated that they “currently have limited visibility into our business prospects,” but 2424 DeNuccio and other defendants knew that the Company would no longer be reporting any 2525 revenues from Qwest, and they failed to disclose the truth behind bribes paid to Qwest’s 2626 executives in exchange for Qwest’s business and false and misleading press releases stating that 2727 Qwest was deploying Redback’s products, when in fact it was not. 2828

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11 277. 273. On January 15, 2003, the Company issued a press release announcing its 22 financial results for its fourth quarter of 2002 and fiscal 2002. The press release and subsequent 33 Form 8-K reported, in relevant part, as follows: 44 5 Net revenue for the fourth quarter of 2002 was $27.6 million, 5 compared with $17.4 million in the prior quarter. For the fiscal 6 year 2002, net revenue was $125.6 million compared to $227.5 6 million in fiscal year 2001. The company also announced the 7 restructuring of Redback’s executive team to more appropriately 7 reflect the size and direction of the company. 8 8 The GAAP net loss for the fourth quarter of 2002 was $0.20 per 9 share compared to a net loss of $0.30 in the prior quarter. For fiscal 9 year 2002 the GAAP net loss was $1.13 per share compared to a 10 $28.78 net loss in fiscal year 2001. The GAAP net loss in fiscal 10 year 2001 included a write down of good will aggregating $ 2.7 billion. 1111 12 Pro-forma net loss for the fourth quarter was $ 0.15 per share 12 compared to a net loss of $0.20 in the prior quarter. 1313 278. 274. During the January 15, 2003 Redback earnings conference call, Defendant 1414 DeNuccio stated that he was “especially pleased with the company’s cash management. The 1515 cash burn during the quarter was 21 million, brings our total cash to 118 million, higher than the 1616 range we had forecasted during the last call.” Defendant DeNuccio also announced the 1717 imminent departure of Defendant Wolf from Redback. 1818 279. 275. The above statements were materially false and misleading because the 1919 defendants knew Redback’s SMS™ 10000 product was not functioning properly and the 2020 reduction in customer orders resulted from problems with the SMS™ 10000 and new 2121 SmartEdge™ product, and not with delayed orders. Additionally, the defendants knew that, as 2222 the SEC was investigating Qwest’s deals with equipment vendors, defendants could no longer 2323 purchase Qwest’s business with illicit stock transfers and other schemes. DeNuccio, Lamond, 2424 Garg, Kurtz and the other Individual Defendants knowingly or with deliberate recklessness 2525 overstated the Company’s reported revenues and earnings because they were aware of significant 2626 contingent liabilities arising from Redback’s secret stock bribes and improper quid pro quo deals 2727 with Qwest, which were then currently under investigation. 2828

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11 280. 276. On February 25, 2003, the SEC filed civil fraud charges against Arnold, 22 among other executives at Qwest, charging him with violations of the federal securities laws. 33 The SEC’s complaint charged Arnold with artificially inflating Qwest’s revenue. The SEC civil 44 suit against Arnold specifically addressed transactions involving sales of Internet equipment and 55 services to the Arizona School Facilities Board and Genuity Inc. Surprisingly, DeNuccio and 66 Redback’s Board of Directors did not place Arnold on administrative leave until the SEC 77 charges were resolved, or if they did place Arnold on leave, they did not disclose the action to 88 the public. 99 281. 277. The Company filed its Form Def 14A Proxy Statement (the “2002 Proxy 1010 Statement”) on March 28, 2003, which stated, in relevant part, as follows: 1111 12 In 2001, Broadband Office, Inc. went into bankruptcy. Kleiner 12 Perkins Caufield & Byers, of which Vinod Khosla, a director of 13 the company is a general partner, owns more than 10% of the 13 outstanding stock of Broadband Office, Inc. Redback is currently a creditor of the bankruptcy estate in the amount of $1.9 million. 1414 15 In 2001, Redback sold an aggregate of approximately $41 million 15 of goods and services to Qwest Communications and purchased an 16 aggregate of approximately $8 million of goods and services from 16 Qwest Communications. Vinod Khosla, a director of Redback, is also a director of Qwest Communications. 1717 282. 278. The Proxy Statement was materially false and misleading because it only 1818 partially disclosed the related-party transactions between Redback, Khosla, Qwest and 1919 Broadband Office. The Proxy Statement omitted material information that Redback (through 2020 Siara after the merger had been announced) had issued a lucrative stock-kickback payment to 2121 Broadband Office and to Qwest to induce each of them to purchase equipment from Redback, 2222 and further to allow Redback to issue materially false and misleading press releases announcing 2323 additional purported “multi-year, multi-million” dollar agreements that were designed to and did 2424 artificially inflate Redback’s stock price. The Proxy Statement also was materially false and 2525 misleading because it further created the false illusion of demand and deployment of Redback’s 2626 products at Broadband Office and Qwest. 2727 283. 279. On March 31, 2003, the Company filed with the SEC a Form 10-K for the 2828 year 2002 (the “2002 10-K”), which was signed and certified by Defendants DeNuccio and

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11 Cronan, reaffirming the financial results released on January 15, 2003. The 2002 10-K was also 22 signed by Defendants DeNuccio, Cronan, Garg, Haque, Lamond and Kurtz. The 2002 10-K 33 reaffirmed that “[d]uring 2001, revenue from Qwest Communications . . . accounted for 18% . . . 44 of our revenue . . . [and d]uring 2000, revenue from Qwest . . . accounted for 15% . . . of our 55 revenue.” 6 6 The 2002 10-K reaffirmed that “[d]uring 2001, revenue from 7 Qwest Communications . . . accounted for 18% . . . of our revenue 7 . . . [and d]uring 2000, revenue from Qwest . . . accounted for 15% . . . of our revenue.” 88 99 284. 280. Redback’s statements in its 2002 10-K, were materially false and misleading 1010 because: the revenue, operating income, income before taxes, net income, basic net income per 1111 share, diluted net income per share figures, and pro forma figures were improperly inflated by 1212 revenue derived from Redback’s improper and undisclosed stock kickback payment schemes and 1313 quid pro quo transactions with Qwest. Redback misrepresented its prospects for 2000 and 1414 beyond because Redback failed to disclose that it engaged in improper undisclosed bribes and 1515 quid pro quo transactions with Qwest as a primary means to generate revenue and that such 1616 conduct could lead to severe civil and criminal liability. Redback’s reported results were false 1717 and misleading because the Company failed to reserve sufficient amounts to cover the cost of 1818 civil and criminal liabilities associated with its improper and undisclosed stock kickback 1919 payment schemes and quid pro quo transactions with Qwest. 2020 285. 281. Redback also misleadmisled investors by assuring the market that the

2121 Company’s 2002 10-K was prepared in accordance with SEC rules and regulations and by 2222 failing to disclose that improper conduct, such as paying undisclosed bribes to material 2323 customers was a key component to its business model. Further, the Company failed to disclose 2424 all material aspects of revenue earned from sales that were induced by bribes and quid pro quo 2525 transactions. Redback’s financial results in its 2002 10-K also were materially false and 2626 misleading as a result of GAAP violations. Redback also mislead investors by assuring the 2727 market that the Company’s annual report was prepared in accordance with GAAP when in 2828 reality Redback violated GAAP as discussed in Section V below.

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11 286. 282. The 2002 10-K contained a Report of Independent Auditors, signed by 22 Defendant PwC. The audit opinion was unqualified and in substantially the same form as the 33 2000 and 2001 10-Ks. 44 287. 283. The 2002 10-K stated that Arnold was no longer a Redback director, and also 55 stated, in relevant part, as follows: 66 7 One of our officers is facing a civil SEC lawsuit related to his 7 previous employment. 8 8 On February 25, 2003, the SEC filed a civil lawsuit against eight 9 current and former officers and employees of Qwest 9 Communications, regarding activities that occurred while each was 10 employed at Qwest. One of the individuals named is Joel Arnold, 10 our Senior Vice President of Field Operations, who was formerly 11 Executive Vice President of Qwest’s Global Business Unit. The 11 SEC is seeking, among other remedies, that Mr. Arnold and four 12 other defendants be permanently barred from serving as an officer 12 or director of any public company. 13 13 Although it is expected that such a civil procedure will take two to 14 three years or longer to be adjudicated, an unfavorable result at the 14 end of such action against Mr. Arnold may result in him being 15 unable to serve as an officer. In addition, Mr. Arnold may be 15 distracted while defending against the allegations. 1616 288. 284. Although the SEC investigation was ongoing, the 2002 10-K failed to 1717 mention any investigation, informal or otherwise, by the SEC into Redback’s dealings with 1818 Qwest although, as Arnold knew, that was, in fact, a subject of the SEC investigation. 1919 289. 285. On April 16, 2003, the Company issued a press release announcing its 2020 financial results for the first quarter of 2003. The press release reported, in relevant part, as

2121 follows: 22 22 Net revenues for the first quarter of 2003 were $29.5 million, 23 compared with $27.6 million for the fourth quarter of 2002 and 23 $40.6 million for the first quarter of 2002. 24 24 GAAP net loss for the first quarter of 2003 was $24.9 million or 25 $0.14 per share compared to a net loss of $34.7 million or $0.23 25 per share in the first quarter of 2002. Non-GAAP net loss for the 26 first quarter of 2003 was $23.2 million or $ 0.13 per share 26 compared to $29.0 million or $0.19 per share in the first quarter of 27 2002. Non-GAAP results exclude amortization of intangible assets, 27 stock-based compensation, and realized gain on certain investments. 2828

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11 290. 286. During Redback’s April 16, 2003 Financial Release Conference Call, 22 Defendant DeNuccio stated as follows: 33 4 First of all, gross margins improved to 46 percent, which 4 represents a 10 percent sequential improvement from Q4. And 5 second, the important improvement in our cash management. We 5 reduced our cash use to only 16 million this quarter, also our lowest in two years leaving our cash balance at 103 million. 66 291. 287. All of the above statements, beginning with the January 16, 2002 press 77 release, and continuing through the 2001 and 2002 10-Ks and interim quarterly reports, and the 88 Company’s other filings, press releases and public statements, were false and misleading, and the 99 defendants knew it, as those filings failed to disclose that: 1010 a. Qwest did not need or want the products it purchased from Redback, and only 1111 purchased the products because Redback had transferred securities to Qwest 1212 executives, or because Redback agreed to purchase services or products from 1313 Qwest (or QCS) that Redback did not want or need; 1414 b. The SMS™10000 units that Qwest had purchased for $20 million in third quarter 1515 2000 had been returned to Redback, but the revenue from the sale was not 1616 debooked; 1717 c. Qwest was not using the products sold by Redback, but was simply storing them 1818 in a warehouse; 1919 d. Qwest’s buildup of its inventory of unwanted Redback products would likely lead 2020 to drastically reduced sales to Qwest, no sales at all, or decreased demand if 2121 Qwest sold the products on the gray market as it sometimes did with excess 2222 equipment, which would materially impact Redback’s revenues and earnings; 2323 e. Redback’s financial reporting was materially false because Redback was not 2424 properly accounting for the securities it gave the Qwest insiders in exchange for 2525 sales contracts, and was not properly accounting for Redback’s reciprocal 2626 agreements to purchase Qwest products and services; and 2727 2828

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11 f. The Company failed to reserve sufficient amounts to cover the cost of civil and 22 criminal liabilities associated with its improper and undisclosed stock/ kickback 33 payment schemes and quid pro quo transactions with Qwest. 44 292. 288. Each of the defendants knew that but for their false and misleading 55 statements and fraudulent scheme, Redback’s stock price would have been much lower and Lead 66 Plaintiffs, and other members of the Class, would not have purchased Redback’s stock which, at 77 the time of each purchase, was artificially inflated by defendants’ fraud and false and misleading 88 statements. 99 293. 289. When the true performance of Redback began to be known by investors, 1010 Redback’s stock price sank. Although investors may not have known about who was lying or 1111 what the specific lies were, they learned that Redback was not what it was represented to be. As 1212 that realization became evident to more and more investors, Redback’s stock price dropped. 1313 14 Without the Sales From Bribery and Quid Pro Quo Transactions with Qwest, 14 Redback Descends Into Bankruptcy and Investors Begin to Learn Why 1515 294. 290. On May 15, 2003, the Company filed its Form 10-Q for the first quarter 2003 1616 (the “May 2002 10-Q”). The May 2003 10-Q was signed by Defendants Cronan and DeNuccio. 1717 It reaffirmed the financial results announced on April 16, 2003. 1818 295. 291. The May 2003 10-Q informed the investing public for the first time that the 1919 SEC was examining certain Qwest transactions involving Redback, stating, in relevant part, as 2020 follows: 2121 22 The Company has been informed that the SEC is examining 22 various transactions involving Qwest Communications, some of 23 which were entered into between the Company and Qwest. The 23 Company is fully cooperating with the SEC regarding this matter. 24 The transactions of which the Company is aware that are being 24 reviewed were entered into prior to fiscal year 2002. The 25 Company cannot predict the duration or outcome of the SEC’s 25 examination. 2626 296. 292. On July 7, 2003, the Company announced that on June 23, 2003 it received a 2727 decision from the NASDAQ’s Listing Qualifications Panel (“Panel”) granting Redback’s request 2828 for an exception to the National Market’s minimum bid price requirement, as set forth in

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11 NASDAQ Marketplace Rule 4450(a)(5). According to the press release, the Panel decided to 22 provide Redback with additional time to allow for developments in the SEC’s rulemaking 33 process and that, accordingly, Redback had until August 23, 2003 to regain compliance with 44 NASDAQ’s minimum bid price requirement. 55 297. 293. The Company also announced on July 7, 2003 that it had “entered into a 66 lock-up agreement with holders of 67% of Redback’s 5% Convertible Subordinated Notes due 77 2007 (“Notes”) relating to a proposed recapitalization transaction involving a debt for equity 88 exchange.” The press release further stated, in relevant part, that: 99 10 “We’re very excited that this restructuring will significantly 10 improve Redback’s balance sheet and cash flows, therefore 11 creating financial stability,” said Kevin A. DeNuccio, President 11 and CEO of Redback Networks. “This new financial model will increase our ability to innovate and grow.” 1212 13 As part of the recapitalization, the Notes will be exchanged for 13 common stock. If all of the Notes are exchanged, the noteholders 14 will receive approximately 95% of the issued and outstanding 14 common stock immediately following completion of the 15 transaction and the existing holders of common stock will initially 15 retain approximately 5% of the issued and outstanding common 16 stock of the company. In addition, Redback’s existing common 16 stockholders will receive the right to increase their ownership by 17 approximately an additional 10% of the company’s outstanding 17 common stock through the issuance of two types of seven-year 18 warrants: one for up to approximately 5% of the issued and 18 outstanding common stock at an exercise price based on a 19 company enterprise value of $250 million and one for up to 19 approximately an additional 5% of the issued and outstanding 20 common stock at an exercise price based on a company enterprise 20 value of $500 million. 21 21 * * * 22 22 Completion of the transaction is subject to the completion of the 23 note exchange offer, which requires a minimum tender of 98% of 23 the outstanding principal amount of the Notes, approval of existing stockholders, regulatory approval and other customary conditions. 2424 298. 294. In Redback’s July 7, 2003 Conference Call, Defendant DeNuccio pointed out 2525 that “the Lock-up Agreement . . . provides for the exchange of $467 million in outstanding debt 2626 for common equity.” Defendant DeNuccio further stated, in relevant part, that: 2727 28 All in all, by accepting this deal, noteholders will receive common 28 equity and can now participate in the upside of the company as we grow and regain our market leadership. These noteholders have FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 109 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 111 of 198

1 1 given us a strong vote of confidence by agreeing to take common equity in return for the elimination of our debt obligations. 22 3 Stockholders will no longer have $467 million in debt senior to 3 their interest, and take a long-term view of the company, and once again begin to grow long-term value in our equity. 44 299. 295. During the July 7, 2003 conference call, Defendant Cronan pointed out that 55 the lock-up agreement, combined with a reverse stock split shortly thereafter, maintained the 66 Company’s eligibility to list on the NASDAQ. 77 300. 296. During this same conference call, Defendant Cronan stated that: “[w]ith 88 two-thirds having agreed to the deal, we could go into a prepackaged reorganization plan if [the 99 note exchange] fails to obtain adequate support.” 1010 301. 297. On July 16, 2003, the Company issued a press release announcing its 1111 financial results for the second quarter of 2003. The press release and subsequent Form 8-K 1212 reported, in relevant part, as follows: 1313 14 Net revenue for the second quarter of 2003 was $22.2 million, 14 compared with $29.5 million for the first quarter of 2003 and $40.1 million for the second quarter of 2002. 1515 16 GAAP net loss for the second quarter of 2003 was $51.0 million or 16 $0.28 per share compared to a GAAP net loss of $65.1 million or $ 17 0.40 per share in the second quarter of 2002. Non-GAAP net loss 17 for the second quarter of 2003 was $26.3 million or $0.15 per 18 share compared to a non-GAAP net loss of $26.4 million or $0.16 18 per share in the second quarter of 2002. Non-GAAP results 19 exclude amortization of intangible assets, restructuring charges, 19 stock-based compensation, realized gain and write-off of certain investments and certain impairment and inventory charges. 2020 302. 298. During Redback’s July 16, 2003 Earnings Conference Call, Defendant 2121 Cronan stated, in relevant part, that the Company’s “quarter-end cash stood at $69.2 million, 2222 down $33.5 million from the previous quarter.” Defendant Cronan further stated that “of the 2323 $33.5 million, about $7.6 million was working capital. About $10.4 was loss from operations, 2424 $2 million for capital purchases and $13.5 for the interest payments and restructuring.” 2525 303. 299. On August 6, 2003, the Company filed a Form S-4 Registration Statement 2626 containing an offer to exchange up to 47,500,000 post-reverse split shares of common stock for 2727 $467,500,000 aggregate principal amount of 5% convertible subordinated notes due 2007 and 2828 related accrued interest.

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11 304. 300. On August 14, 2003, the Company filed its Form 10-Q for the second quarter 22 of year 2003 (the “August 2003 10-Q”). The August 2003 10-Q reaffirmed the financial 33 information released on July 16, 2003, and was signed and certified by Defendants DeNuccio 44 and Cronan. 55 305. 301. On August 27, 2003, the Company announced that it had received another 66 extension from the NASDAQ Listing Qualifications Panel to October 11, 2003. 77 306. 302. On October 1, 2003, Redback launched an exchange offer for all outstanding 88 debt set to expire at 12:00 midnight, Eastern Standard Time, on October 30, 2003. Under the 99 terms of the offer, “[h]olders of notes will receive approximately 101.6 shares of common stock, 1010 after giving effect to an approximate 73.39:1 reverse stock split, for each $1,000 of principal 1111 amount of notes and related accrued interest exchanged.” 1212 307. 303. As reported on the website Lightreading.com on October 2, 2003, the SEC 1313 commenced an investigation into Redback’s past involvement with Qwest. The article, entitled 1414 “SEC Digging Deeper at Redback?” states as follows: 1515 16 In a filing with the SEC on Wednesday, [October 1, 2003,2003], 16 Redback said the SEC was looking at “the sale of products by 17 Redback to Qwest, the purchases of certain products and services 17 by Redback from Qwest, and certain equity investments.” 18 18 Redback senior VP Joel Arnold, who was an executive VP at 19 Qwest until joining Redback in early 2002, is accused by the SEC 19 of helping artificially accelerate Qwest’s recognition of revenue in 20 two transactions, one of which involved reselling telecom 20 equipment. “The SEC is seeking, among other remedies, that Mr. 21 Arnold and four other defendants be permanently barred from 21 serving as an officer or director of any public company,” Redback’s filing says. 2222 23 Redback notes in the filing that the SEC’s civil suit against Arnold 23 might cause some “distraction.” . . . In this latest filing, however, 24 Redback says the suit “may affect [Arnold’s] ability to serve as an 24 officer of our company.” 25 25 * * * 26 26 Four former Qwest officials have been indicted this year for 27 helping the carrier falsely recognize more than $33 million in 27 revenues in 2001. And at least one government agency has considered barring Qwest from future government business. 2828

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11 308. 304. The October 2, 2003 article further stated, in relevant part, as follows: 22 3 The filing may raise some eyebrows, as it looks as if the SEC is 3 taking a more particular interest in the Redback/Qwest 4 relationship. Qwest was a big player in Redback’s rise as a 4 startup, and the companies had several common ties that predate [Joel] Arnold’s arrival at Redback. 55 6 In 2000, Redback’s sales to Qwest accounted for 15 percent of its 6 annual revenues, or about $42 million. In 2001, Qwest sales 7 accounted for 18 percent of Redback’s revenues, or about $40.8 7 million. For a time, the two companies shared a board member in 8 Kleiner Perkins Kaufield & Byers partner Vinod Khosla, who was 8 an investor in Redback. SEC filings and sources say that under 9 Khosla’s watch, several of Qwest’s startup equipment suppliers 9 gave top Qwest executives chances to buy their stock at dirt cheap prices. 1010 11 Shortly after Redback began supplying Qwest with equipment, in 11 late 2000, Qwest’s Cyber Solutions group announced a five-year, 12 $18 million contract with Redback to help the vendor with 12 enterprise resource planning, customer relationship management, and manufacturing operations. 1313 14 The revelation that the SEC is snooping into Redback’s past came 14 buried in the vendor’s latest filing, which outlined to shareholders 15 its proposed financial restructuring. Under terms of the plan, 15 Redback needs its shareholders to approve a $467 million debt-for- 16 equity swap that will leave them with only 5 percent of the 16 company. If shareholders don’t accept the deal, Redback would likely file for bankruptcy protection. 1717 1818 309. On October 10, 2003, the Company filed a SEC Form S-4, which was signed and 1919 certified by Defendants DeNuccio and Cronan, stating in pertinent part: 20 20 We have been informed that the SEC is examining various 21 transactions involving Qwest Communications, some of which 21 were entered into between us and Qwest. We are fully cooperating 22 with the SEC regarding this matter and have provided relevant 22 information to the SEC in response to its requests. The transactions 23 with respect to which the SEC has requested information from us 23 were all entered into prior to fiscal year 2002 and involve the sale 24 of products by Redback to Qwest, the purchases of certain 24 products and services by Redback from Qwest and certain equity 25 investments. We cannot predict the duration or outcome of the 25 SEC’s examination, and to date, the SEC has not informed us of 26 their intent to pursue enforcement or any other action against us. 26 If, however, the SEC determines to pursue enforcement or other 27 action against us, our management could be distracted, we could 27 incur substantial costs and there could be a material adverse effect on our business. 2828

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11 Redback’s stock closed at $0.55 on October 10, 2003. 22 310. 305. An article published on Broadbandlog.com on October 14, 2003 titled “All 33 Eyes on Qwest?” states in relevant part as follows: 44 5 As you might already know companies like CoSine and Redback 5 are under the microscope for giving stock options and other 6 benefits to some Qwest executives in exchange for hefty 6 equipment orders. 7 7 And that is not all. The Post reports that a “top Redback executive 8 and a former Redback director have ties to Qwest.” And they 8 would be Joel Arnold, a former Qwest sales manager who left the 9 company in December 2001 and was sued by the SEC in February, 9 joined Redback in 2002. Vinod Khosla, a director at Qwest, served on Redback’s board until last year. 1010 311. 306. A Wall Street Journal article published on October 15, 2003 also reported on 1111 the SEC investigation into Redback as follows: 1212 13 Regulatory filings by Redback said the Securities and Exchange 13 Commission is looking into “certain equity investments” by 14 Qwest. Redback, based in San Jose, California, sold $81.5 million 14 of goods and services to Qwest in 2000 and 2001, and bought 15 about $13.5 million in services from Qwest, according to the 15 filings. A federal grand jury is investigating business transactions 16 between Denver-based Qwest and 11 of its vendors [including 16 Redback] ....The grand jury is investigating whether former Qwest 17 executives took discounted stock from some vendors in exchange 17 for giving them business, some of which Qwest may not have needed. 1818 312. 307. On November 3, 2003, Redback filed for Chapter 11 bankruptcy protection. 1919 After trading as high as $179 during the Class Period, Redback’s stock closed at $0.36 per share. 2020 The prepackaged bankruptcy plan was approved and became effective on January 2, 2004. 2121 313. 308. A November 24, 2003 investigation by The Denver Post reported that 2222 Michael Perusse, “Qwest’s former top vendor-relations executive,” was described by former 2323 employees of two Qwest suppliers – Redback and Corvis – as “Qwest’s point man for deals in 2424 which Qwest pressured those companies to buy unneeded services from it before it would 2525 complete orders for their telecommunications equipment.” The article described the secret quid 2626 pro quo deal between Qwest and Redback as follows: 2727 2828 Perusse approached Redback Networks in late March 2001 with a surprise demand: Before Qwest would complete its $30 million

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1 1 order for Redback gear, Redback had to buy something from Qwest. 22 3 Perusse wanted Redback to buy $7 million worth of transmission 3 rights on Qwest’s fiber-optic network, according to two former Redback employees familiar with the talks. 44 5 Redback, a small maker of telecom gear, had no use for the rights, 5 which most often were sold to much larger companies. But 6 Redback gave in to Qwest’s demands anyway as a way to get 6 Qwest to close its purchase. 7 7 * * * 8 8 After relenting to Qwest’s pressure, Redback tried to recoup its 9 money by unloading the network rights – also called indefeasible 9 rights of use, or IRUs – but found no takers, even at auction. 10 10 It wasn’t Qwest’s only swap with Redback. In the third quarter of 11 2000, . . . Redback bought roughly $14 million of Web-hosting 11 services from Qwest, the Redback veterans said. 12 12 In return, Qwest bought $20 million of a Redback product called 13 SMS 10,000, which Qwest had not tested in its labs before the 13 deal, the two said. Big telecom firms rarely, if ever, buy equipment without extensive testing. 1414 314. It was not until this news article exposed Redback’s fraudulent course of business 1515 and quid pro quo transactions with Qwest that investors had reason to know why Redback’s 1616 stock price had been artificially inflated. 1717 V. REDBACK’S FRAUDULENT ACCOUNTING PRACTICES 1818 1919 Generally Accepted Accounting Principles (“GAAP”) 2020 315. 309. GAAP consists of those principles recognized by the accounting profession

2121 as the conventions, rules, and procedures necessary to define accepted accounting practice. 2222 Those principles are the official standards adopted by the American Institute of Certified Public 2323 Accountants (the “AICPA”), a private professional association, through three successor groups it 2424 established: the Committee on Accounting Procedure, the Accounting Principles Board (the 2525 “APB”), and the Financial Accounting Standards Board (the “FASB”). GAAP includes various 2626 authoritative pronouncements and literature, including Statements of Financial Accounting 2727 Standards (“FAS”), APB Opinions and Statements of Financial Concepts (“CON”). 2828

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11 316. 310. Management is responsible for preparing financial statements that conform 22 to GAAP. As noted by the AICPA Auditing Standards (“AU”), Section 110.03: 33 Management is responsible for adopting sound accounting policies 44 and for establishing and maintaining internal controls that will, among other things, record, process, summarize, and report 55 transactions (as well as events and conditions) consistent with management’s assertions embodied in the financial statements. 66 The entity’s transactions and the related assets, liabilities and equity are within the direct knowledge and control of management 77 . . . Thus, the fair presentation of financial statements in conformity with Generally Accepted Accounting Principles is an 88 implicit and integral part of management’s responsibility. 99 SEC Regulations 317. 311. SEC Regulation S-X sets forth the form and content of and requirements for 1010 financial statements required to be filed as part of annual reports under Sections 13 and 15(d) of 1111 the Exchange Act. The Company, as a registrant under the Exchange Act, is subject to 1212 Regulation S-X and its accompanying rules. As set forth in SEC Rule 4-01 (a) of SEC 1313 Regulation S-X, “financial statements filed with the [SEC] which are not prepared in accordance 1414 with [GAAP] will be presumed to be misleading or inaccurate.” 17 C.F.R. § 210.4-01(a) (1). 1515 SEC Regulation S-K states the requirements of non-financial statement portions of annual 1616 reports under Section 13 or 15(d) of the Exchange Act. The financial and non-financial 1717 information required to be disclosed in accordance with Regulations S-X and S-K are reported 1818 within Form 8-K, Form 10-Q and Form 10-K, among others. 1919 318. 312. The SEC regulates statements by companies “that can reasonably be 2020 expected to reach investors and the trading markets, whoever the intended primary audience.” 2121 SEC Release No. 33-6504, 3 Fed. Sec. L. Rep. (CCH) ¶ 23,120, at 17,095-3, 17 C.F.R. § 2222 241.20560 (Jan. 13, 1984). In addition to the periodic reports required under the Exchange Act, 2323 management of a public company has a duty promptly “to make full and prompt announcements 2424 of material facts regarding the company’s financial condition.” SEC Release No. 34-8995, 3 2525 Fed. Sec. L. Rep. (CCH) ¶ 23,120A, at 17,095, 17 C.F.R. § 241.8995 (Oct. 15, 1970). The SEC 2626 has emphasized that “[i]nvestors have legitimate expectations that public companies are making, 2727 and will continue to make, prompt disclosure of significant corporate developments.” SEC 2828

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11 Release No. 18271, [1981-1982 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 83,049, at 84,618 22 (Nov. 19, 1981). 33 319. 313. In Accounting Series Release 173, the SEC reiterated the duty of 44 management to present a true representation of a company’s operations: 55 6 [I]t is important that the overall impression created by the financial 6 statements be consistent with the business realities of the company’s financial position and operations. 77 320. 314. Item 7 of Form 10-K and Item 2 of Form 10-Q, Management’s Discussion 88 and Analysis of Financial Condition and Results of Operations (“MD&A”) require the issuer to 99 furnish information required by Item 303 of Regulation S-K [17 C.F.R. §229.303]. In discussing 1010 results of operations, Item 303 of Regulation S-K requires the registrant to: 1111 12 [d]escribe any known trends or uncertainties that have had or that 12 the registrant reasonably expects will have a material favorable or 13 unfavorable or unfavorable impact on net sales or revenues or 13 income from continuing operations. 1414 321. 315. The Instructions to Paragraph 303(a) further state: 15 15 [t]he discussion and analysis shall focus specifically on material 16 events and uncertainties known to management that would cause 16 reported financial information not to be necessarily indicative of future operating results . . . 1717 322. 316. The MD&A requirements are intended to provide, in one section of a filing, 1818 material historical and prospective textual disclosure enabling investors and other users to assess 1919 the financial condition and results of operations of the registrant, with particular emphasis on the 2020 registrant’s prospects for the future. As Securities Act Release No. 33-671 states: 2121 22 The Commission has long recognized the need for a narrative 22 explanation of the financial statements, because of a numerical 23 presentation and brief accompanying footnotes alone may be 23 insufficient for an investor to judge the quality of earnings and the 24 likelihood that past performance is indicative of future 24 performance. MD&A is intended to give the investor an 25 opportunity to look at the company through the eyes of 25 management by providing both a short and long-term analysis of the business of the company. 2626 Redback’s Financial Disclosures Violated GAAP And SEC Regulations 2727 323. 317. During the Class Period, Redback at the direction of Defendants Barsema, 2828 Ragavan, Khosla, Lamond, Kruep, Wolf, DeNuccio and certain of the other Individual

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11 Defendants, engaged in improper accounting practices and other improper disclosure practices in 22 order to inflate the Company’s reported revenues and overstate income from operations in 33 violation of GAAP and SEC Regulations. All of the Individual Defendants and Defendant PwC 44 knew or, with deliberate recklessness, disregarded that Redback and Qwest engaged in a scheme 55 and fraudulent course of business to materially misrepresent Redback’s financial results and 66 prospects, as well as its compliance with applicable accounting rules and regulations requiring 77 proper disclosures. The illicit practices were undertaken with the knowledge OF Redback’s 88 Board of Directors and at the direction and approval of Redback’s top management, including 99 defendants Barsema, Ragavan, Khosla, Lamond, Gentner, Kruep and Wolf, and were knowingly 1010 participated in by Perusse and Weisberg of Qwest. Defendant PwC also knew or with deliberate 1111 recklessness disregarded that Redback and Qwest were entering into undisclosed quid pro quo 1212 arrangements and providing undisclosed material sales incentives to Qwest and other customers 1313 to artificially inflate Redback’s revenues and misrepresent the demand for and sales of 1414 Redback’s products. 1515 324. 318. Regulation S-K, paragraph 229.101, required Redback to disclose the quid 1616 pro quo arrangements and sales incentives that Redback provided to Qwest and others. That 1717 regulation requires the following matters to be disclosed within the narrative description of the 1818 business: “The dependence of [the Company] upon a single customer, or a few customers, the 1919 loss of which would have a material adverse impact on the [Company]. The name of the 2020 customer and its relationship, if any, with the registrant or its subsidiaries shall be disclosed if 2121 sales to the customer…are made in an aggregate amount equal to 10 percent or more of the 2222 registrant’s consolidated revenues….” Redback was required to fully disclose the nature of its 2323 relationship with Qwest, including the undisclosed inducements and sales pacts with Qwest and 2424 Qwest’s executives. 2525 325. 319. In each quarter during the one-year period from July 2000 through June 2626 2001, Redback’s sales to Qwest generated between 18 and 24 percent of Redback’s reported 2727 revenues. Beginning in 1999 and continuing through the Class Period, Redback repeatedly 2828 announced multi-million, multi-year agreements with Qwest and reported that Qwest was one of

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11 Redback’s largest customers, and that Qwest had selected Redback’s SMS™ and SmartEdge™ 22 products to deploy in Qwest’s vast network. Redback’s senior executives and Board members 33 knowingly or with deliberate recklessness caused Redback to create the false illusion that Qwest 44 was a loyal customer with long-term commitments to purchase Redback’s equipment. Through 55 Defendants’ fraudulent scheme and course of business, Redback generated more than $80 66 million in reported revenues from sales to Qwest, but the Company concealed from shareholders 77 and investors that Redback had bought and induced its sales through multi-million dollar 88 agreements and bribes to Qwest’s executives. Defendants Barsema, Ragavan, Khosla, Lamond, 99 Kruep, DeNuccio, Wolf and Gentner also concealed that Redback purchased $25 million in 1010 products and services from Qwest that it did not really want or need to induce purchases under 1111 another undisclosed agreement that obligated Qwest to purchase $40 million of Redback’s 1212 equipment before December 31, 2001. 1313 a. Improper Purchase Accounting And Abuse Of Goodwill 1414 326. 320. In March 2000, Redback purchased Siara for $4.5 billion in stock, of which 1515 $4.4 billion of the purchase price was allocated to goodwill, and in September 2000, Redback 1616 purchased Abatis for $655 million in stock, of which $567 million of the purchase price was 1717 allocated to goodwill. In less than one year, in the quarter ended September 30, 2001, Redback, 1818 in essence, admitted that it had overpaid for Siara and Abatis and wrote-off $2.7 billion or 85% 1919 of the remaining unamortized amount of goodwill. In other words, Redback overpaid for these 2020 two companies by $2.7 billion, meaning that Redback paid two times more for these two 2121 companies than they were worth. Using its artificially-inflated stock as currency, Redback paid 2222 $5.1 billion for two companies that were only worth $2.4 billion. 2323 327. 321. Under GAAP, specifically SFAS 121, Accounting for the Impairment of 2424 Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, goodwill should be reviewed 2525 for impairment whenever events or changes in circumstances indicate that the carrying amount 2626 of goodwill may not be recoverable. At the end of 2000, Redback knew that the new 2727 SmartEdge™ product would not be available to sell and generate significantly less revenue than 2828 when it had purchased Siara only nine months earlier. Therefore, in compliance with GAAP,

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11 Redback should have estimated the future cash flows expected to result from the sales of 22 SmartEdge™ equipment. Because the expected future cash flows from SmartEdge™ sales were 33 far less than the carrying amount of goodwill, an impairment loss should have been recognized 44 in the fourth quarter of 2000 rather than during the third quarter of 2001. Until the Siara 55 goodwill was written down, Redback was reporting in its balance sheets overstated assets and 66 stockholders’ equity and overstating earnings in its operating statement. At December 31, 2000, 77 Redback overstated its assets and stockholders’ equity by approximately $3 billion, or 174% 88 and 269%, respectively, and its net loss for the year-ended December 31, 2000 was understated 99 by $3 billion or 300% as a result of delaying the write down of goodwill in violation of GAAP. 1010 328. 322. In connection with the Company’s acquisitions, Redback also further 1111 violated GAAP through improper purchase accounting. Under APB 16, Business Combinations, 1212 the purchase price paid to acquire a company should be allocated to all identifiable assets and 1313 liabilities based on their fair market values. FAS 2, Accounting for Research and Development 1414 Costs, provides that research and development costs should be charged to expense when incurred 1515 unless they have an alternative future use. Redback’s improper accounting techniques for 1616 IPR&D in the Company’s acquisitions enabled Redback to acquire valuable research projects 1717 and technology from Siara and Abatis that would generate future revenue without incurring any 1818 associated costs, thus resulting in artificially inflated earnings. By shifting $40.4 million from 1919 goodwill to one-time charge-offs in violation of GAAP, Redback was able to increase annual 2020 earnings by more than $10 million for each of the next 4 years. 2121 b. Hidden Revenue-Generating Inducements 2222 329. 323. By hiding revenue-generating inducements to Qwest, Redback materially 2323 misstated its financial statements during the Class Period. In an ongoing scheme to inflate 2424 revenue, earnings and its stock price, Redback routinely purchased unneeded services from 2525 Qwest and gave a valuable warrant for Redback’s stock to Qwest to obtain Qwest’s commitment 2626 to buy equipment from Redback. Without Redback giving “friends and family” stock and the 2727 Siara Warrant kickback (valued initially at $16 million and ballooning to $45 million) to Qwest 2828 insiders, and agreeing to purchase $25 million of unneeded services from Qwest, Redback would

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11 have been unable to sell any equipment to Qwest. Qwest used several vendors to supply its 22 equipment needs, and without these lucrative inducements Qwest refused to purchase equipment 33 from Redback. These events, which provided a material favorable impact on Redback’s net 44 sales, revenues and income, should have been disclosed. 55 330. 324. On November 27, 1999, one day before Redback’s acquisition of Siara, 66 Qwest agreed to purchase $40 million of equipment over the next two years in exchange for a 77 warrant for 100,000 shares of Siara stock, which was exchanged for Redback stock. The 88 agreement allowed Qwest to exercise the warrant at $2 per share. Under the agreement, Qwest 99 was required to purchase “currently under development” equipment from Siara or its successors 1010 (which was known to be Redback) over the next two years. The equipment price to be paid by 1111 Qwest was to be the same price as offered to third-parties. The type of equipment was not 1212 defined in the agreement, and the warrant vested immediately and was not based on Qwest 1313 performing its part of the agreement. The Siara Warrant Agreement constituted a material event 1414 that Redback’s management knew would have a favorable impact on net sales and revenues, and 1515 they further knew that the consequential Qwest sales would not necessarily be indicative of 1616 future operating results because of the limited time frame of Qwest’s obligations under the 1717 agreement (2 years) and the fixed value of the sales ($40 million). Thus, the terms of the 1818 agreement should have been fully disclosed. 1919 331. 325. Because the Redback and Siara merger was imminent the value of the stock 2020 issued under the warrant was at least $16 million on November 27, 1999 and within a few 2121 months the value of the stock soared to over $45 million. This meant that before Qwest 2222 purchased anything, the value of the warrant exceeded what Qwest was going to purchase from 2323 Redback. Based on the lack of equipment specifications and preferential pricing in the 2424 agreement, the equipment purchase was clearly not important to Qwest, whereas the overall deal 2525 was extremely important to Barsema, Ragavan, Khosla and Kruep, who purposefully engineered 2626 the transaction in order to inflate Redback’s revenue and earnings. 2727 332. 326. Redback engineered the Siara Warrant Agreement and equipment transaction 2828 to make it extremely valuable to Qwest. Without Redback’s secret bribes to Qwest and its

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11 executives which added value to the transaction, Qwest would have had little motivation to enter 22 into the transaction to purchase unspecified, “under development” equipment. The transaction 33 did not provide Qwest with any preferential pricing or any other benefits other than the huge 44 incentive of obtaining stock with an initial value of $16 million, and the potential of increasing 55 in value (through Qwest’s $40 million revenue-generating purchases), which the stock did within 66 a few months to an excess of $45 million. The substance of the Siara Warrant Agreement was an 77 agreement between Redback and Qwest, rather than between Siara and Qwest, and should have 88 been accounted for accordingly. 99 333. 327. Under GAAP, specifically EITF 96-18, Accounting for Equity Instruments 1010 That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods 1111 or Services, Redback should have accounted for the stock issued to Qwest as a sales incentive. 1212 The initial value of the stock was $16 million on November 27, 1999, and then increased to $45 1313 million within a few months. Under GAAP, the value of the warrant should have been 1414 accounted for as a sales incentive which should have reduced the selling price of Redback’s 1515 equipment sales to Qwest. The value of the warrant should have been recorded as a reduction of 1616 revenue in the operating statement at the time of the related Qwest sales. 1717 334. 328. In the Company’s Consolidated Financial Statements in its 2000 and 2001 1818 10-Ks, Redback reported that it had “issued 18,400 …shares of common stock to consultants 1919 [and other non-employees] in 1999. Grants to non-employee service providers and other non- 2020 employees were vested at the date of issuance…No shares were issued to consultants [and other 2121 non-employees] in 2001 or 2000.” These disclosures were inadequate and violated both FAS 2222 123 and SEC Regulation S-X. 2323 335. 329. FAS 123, Accounting for Stock-Based Compensation, governs the 2424 accounting and disclosure requirements for transactions that involve the issuance of equity 2525 instruments such as stock, options and warrants to employees and non-employees. FAS 123, 2626 paragraph 8, states that, “[e]xcept for transactions with employees that are within the scope of 2727 [APB] Opinion 25, all transactions in which goods or services are the consideration received for 2828 the issuance of equity instruments shall be accounted for based on the fair value of the

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11 consideration received or the fair value of the equity instruments issued, whichever is more 22 reliably measurable.” 33 336. 330. In addition, FAS 123, paragraph 46 states that “an entity [that issues stock to 44 employees and non-employees] shall provide a description of the [reason the shares were issued] 55 including the general terms of the [stock] awards, such as vesting requirements, the maximum 66 term of options granted, and the number of shares authorized for grants of options or other equity 77 instruments.” Redback’s failure to disclose the transfer of 100,000 shares of Redback’s stock 88 under the Siara Warrant Agreement and unknown quantities of “friends and family” stock to 99 Qwest and its executives violated FAS 123 and SEC Regulation S-X. 1010 337. 331. In violation of Regulation S-K, the Individual Defendants also knowingly or 1111 with deliberate recklessness failed to disclose the uncertainties that they knew or reasonably 1212 expected to have a material unfavorable impact on Redback’s net sales, revenues and income 1313 from Qwest’s reported multi-year, multi-million dollar sales contracts. In reality, Qwest made 1414 no commitment to purchase Redback’s products and refused to honor its obligations unless 1515 Redback met Qwest’s demands to purchase products and services from Qwest and its affiliates 1616 that had no value to Redback. Further, in violation of Regulation S-K, the Individual Defendants 1717 also knowingly or with deliberate recklessness disregarded and failed to disclose Qwest’s 1818 demands that Redback transfer securities to Qwest executives or purchase products or services 1919 from Qwest and QCS, in order for Qwest to purchase products from Redback. 2020 c. Material Quid Pro Quo Transactions Artificially Inflated Revenues 2121 338. 332. In fiscal year 2000, Redback agreed to purchase $18 million of unneeded 2222 ASP services from Qwest as an inducement for Qwest to purchase $20 million of SMS™ 10000 2323 equipment. Then the following year, in fiscal year 2001, Redback agreed to purchase $7 million 2424 of useless telecommunication transmission capacity from Qwest as an incentive for Qwest to 2525 complete its $40 million purchase of SmartEdge equipment. 2626 339. 333. Through these transactions with Qwest, Redback was in essence 2727 “purchasing” its own revenue. In order to generate $65 million of revenue from Qwest during 2828 the period from July 1, 2000 to March 31, 2001 Redback gave a warrant for 100,000 shares of

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11 stock to Qwest valued at $16 million and purchased $25 million of useless services from Qwest. 22 Therefore, during this nine month period, Redback paid Qwest $41 million to get $65 million of 33 revenue. Redback was improperly paying $2 for every $3 of revenue generated from Qwest, and 44 failing to account for the transactions in accordance with GAAP. 55 340. 334. GAAP pronouncements prohibit a company’s attempts to structure 66 transactions in order to circumvent accounting principles and present better operating results 77 than actually exist. In CON 5, Recognition and Measurement in Financial Statements of 88 Business Enterprises, GAAP requires that transactions are recorded in financial statements based 99 on what GAAP refers to as their “representational faithfulness.” Representational faithfulness is 1010 the correspondence or agreement between a measure or description of the transaction and the 1111 event it purports to represent. Representational faithfulness leaves no room for accounting that 1212 presents form and not substance. GAAP emphasizes the economic substance of events even 1313 though the legal form may differ from the economic substance. GAAP requires accounting for 1414 the substance of transactions, rather than their form, so that the information provided in financial 1515 statements fairly reflects the economic activities of the company. 1616 341. 335. The $25 million of products and services that Redback purchased from 1717 Qwest should have been recorded as a reduction of revenue in the operating statement at the time 1818 of the related Qwest sales. Although the form of the agreements between Redback and Qwest 1919 may have the appearance of separate sale and purchase agreements, the simultaneous timing of 2020 the agreements coupled with the useless nature of the ASP services and IRU that Redback 2121 received from Qwest demonstrates that Redback’s purchases were nothing more than 2222 inducements to have Qwest fulfill its part of the fraudulent scheme. 2323 342. 336. Redback should have accounted for the quid pro quo transactions in 2424 accordance with EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer 2525 (which includes the codification of EITF 00-14, Accounting for Certain Sales Incentives). In 2626 compliance with GAAP, the quid pro quo purchases made by Redback from Qwest should have 2727 been accounted for as a reduction of revenue with a corresponding reduction in earnings when 2828 the sales to Qwest were recognized in Redback’s consolidated statements of operations.

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11 d. Improper Revenue Recognition 22 343. 337. Shipments of $20 million of SMS™ 10000 equipment to Qwest were 33 recorded by Redback as sales in the third quarter of 2000 even though the equipment was not 44 operational. To enable Redback to meet its revenue and earnings targets in third quarter 2000, 55 Qwest agreed to take delivery of $20 million of non-operational equipment but later (after 66 Redback reported revenue from the sale) returned the equipment to Redback to be rebuilt. Under 77 GAAP, specifically, CON 5, Recognition and Measurement in Financial Statements of Business 88 Enterprises, revenues are not to be recorded until goods are exchanged for cash and after the 99 goods have substantially satisfied the terms of the sales agreement with the customer. 1010 Furthermore, SAB 101, Revenue Recognition in Financial Statements, provides that there are 1111 four additional requirements before revenue can be recorded which are: 1212 i. Persuasive evidence of an arrangement exists; 1313 ii. ii. Delivery has occurred; 1414 iii. iii. Fee is fixed or determinable; and 1515 iv. iv. Collectibility is probable. 1616 344. 338. In connection with the $20 million sales to Qwest during the third quarter of 1717 2000 Redback should have deferred recognition of any revenue until these criteria were met and 1818 until after the equipment was made ready for use by Qwest in order to be in compliance with 1919 GAAP. As a result of violating GAAP, Redback materially overstated revenue in the third 2020 quarter 2000 by $20 million or 24%. Similarly, Redback overstated revenue in fourth quarter 2121 2000 by at least $4 million from sales of inoperable SMS™10000 units to UUNET. In total, 2222 Redback materially overstated revenues by at least $24 million in the second half of fiscal year 2323 2000. 2424 e. Material Overstatement Of Revenues And Gross Profit 2525 345. 339. Under GAAP, specifically CON 2, Qualitative Characteristics of Accounting 2626 Information, the omission or misstatement of an item in financial statements is material if, in the 2727 light of surrounding circumstances, the magnitude of the item is such that it is probable that the 2828 judgment of a reasonable person relying upon the financial statements would have been changed

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11 or influenced by the inclusion or correction of the item. Further, APB 22, Disclosure of 22 Accounting Policies, states that a company should disclose the specific accounting principles and 33 the methods of applying those principles that are judged by management to be the most 44 appropriate in the circumstances to present fairly financial positions and results of operations in 55 accordance with GAAP. The usefulness of financial statements for purposes of making 66 economic decisions about a company depends significantly upon the reader’s understanding of 77 the accounting policies followed by the company. Disclosure of accounting policies should 88 identify and describe the accounting principles followed by a company and the methods of 99 applying those principles that materially affect the determination of financial position and results 1010 of operations. Disclosure should encompass important judgments as to appropriateness of 1111 principles relating to recognition of revenue. 1212 346. 340. Furthermore, under SAB 99, Materiality, considerations of materiality 1313 should include the effects on: 1414 1. Trend in earnings; 1515 2. Meeting analysts’ consensus expectations [revenue]; and 1616 3. Stock price volatility to certain disclosures. 1717 Sales to Qwest generated revenues of approximately $20 million or 24% of all revenue in the 1818 quarter ended September 30, 2000, $21 million or 26% of all revenue during in the quarter ended 1919 December 31, 2000, and $25 million or 28% of all revenue in the quarter ended March 31, 2001. 2020 All of these sales were dependent upon at least $41 million of sales incentives and quid pro quo 2121 purchases by Redback to generate the revenue. Because the Qwest transactions were obviously 2222 material, the amounts and nature of the transactions should have been fully disclosed. 2323 Furthermore, because Redback was accounting for the sales incentives and quid pro quo 2424 purchases in violation of GAAP, Redback was overstating revenue by at least 29% in third 2525 quarter 2000, 8% in fourth quarter 2000 and by 15% in first quarter 2001. Clearly, the Qwest 2626 sales incentives and quid pro quo purchase transactions were material to the operating results of 2727 Redback and should have been fully disclosed and recorded correctly in order for Redback to 2828 have been in compliance with GAAP.

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11 2 f. Redback’s Earnings Were Overstated By Unrecorded Loss 2 Contingencies 33 347. 341. Redback’s revenue, operating income, income before taxes, net income, 44 basic net income per share and diluted net income per share were improperly inflated by revenue 55 derived from Redback’s improper and undisclosed stock kickback payment schemes and quid 66 pro quo transactions with Qwest. Redback failed to disclose that it engaged in improper 77 undisclosed bribes and quid pro quo transactions with Qwest as a primary means to generate 88 revenue and that such conduct could lead to severe civil and criminal liability. Redback failed to 99 reserve sufficient amounts to cover the cost of civil and criminal liabilities associated with its 1010 improper and undisclosed stock kickback payment schemes and quid pro quo transactions with 1111 Qwest. Under GAAP, specifically FAS No. 5, Accounting for Contingencies, Redback was 1212 required to disclose the possibility of a loss contingency because there was at least a reasonable 1313 possibility that a loss may have been incurred. The disclosure in the financial statements should 1414 have indicated the nature of the contingency and an estimate of the possible loss or range of loss, 1515 or state that such an estimate could not be made. As a result of the potential loss from these 1616 contingencies, Redback’s earnings during the Class Period were overstated by at least $80 1717 million. 1818 The Overall Impact Of The GAAP And SEC Rules Violations 1919 348. 342. As a result of accounting for the sales incentives and quid pro quo purchase 2020 transactions in violation of GAAP, Redback’s financial statements were materially misstated: 2121 · For the quarter ended September 30, 2000 revenue and gross profit were each 2222 overstated by $18 million, or 29% and 61%, respectively; 2323 · For the quarter ended December 31, 2000 revenue and gross profit were each 2424 overstated by $8 million, or 8% and 15%, respectively; and 2525 · For the quarter ended March 31, 2001 revenue was overstated by $15 million, 2626 or 15% and gross profit was dramatically altered from an actual gross loss of 2727 $2 million to a reported gross profit of $13 million. 2828

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11 349. 343. Also materially overstated during the Class Period as a result of Redback’s 22 fraudulent sales pacts with Qwest were Redback’s net income, earnings per share, stockholder’s 33 equity, and accounts receivable, current assets and total assets. In addition, Redback’s 44 accumulated deficit as reported within the Company’s Balance Sheet in all Forms 10-Q and 55 Forms 10-K filed with the SEC subsequent to December 31, 2001 was materially understated to 66 the extent of the net income derived from the $41 million in revenue from the Qwest fraudulent 77 sales pacts. 88 350. 344. Furthermore, and equally as misleading as the above misstatements of 99 revenues, is the fact that the sales incentives and quid pro quo transactions were not disclosed, 1010 leaving shareholders and investors unaware that Redback paid Qwest over $45 million so that 1111 Qwest would become Redback’s largest customer. The omission in the financial statements of 1212 the nature of the transactions with Qwest is material, as the undisclosed facts would have 1313 impacted the judgment of investors relying upon the financial statements; that is, investors would 1414 not have purchased, or would only have purchased Redback stock at substantially lower prices, 1515 had they known that Redback paid $45 million worth of stock (not even including the unknown 1616 quantity and value of “friends and family” shares) to Qwest to get $65 million of revenue from 1717 Qwest in a nine-month period from July 1, 2000 to March 31, 2001. Consequently, in violation 1818 of GAAP and SEC Regulations, the overall impression created by Redback’s financial 1919 statements was not consistent with the business realities of the Company’s financial position and 2020 operations. 2121 VI. SCIENTER 2222 351. 345. As alleged herein, the Individual Defendants acted with scienter. They each 2323 and in concert knowingly or with extreme or deliberate recklessness engaged in acts, practices 2424 and a scheme and course of business that artificially inflated Redback’s stock price beginning in 2525 May 1999 at the time of Redback’s IPO, and continuing during the Class Period. Defendants 2626 also knew or recklessly disregarded that the public documents and statements issued or 2727 disseminated in the name of the Company were materially false and misleading and that such 2828 statements or documents would be issued to the public. As alleged above, the Individual

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11 Defendants each participated in the fraudulent scheme, and knowingly or with deliberate 22 recklessness caused Redback to issue the materially false and misleading statements, or 33 knowingly or with deliberate recklessness substantially participated in the drafting, or 44 acquiesced in the issuance or dissemination of such statements or documents in violation of the 55 federal securities laws. As set forth elsewhere herein in detail, the Individual Defendants, by 66 virtue of their acts, practices, and course of business, including receipt of information reflecting 77 the true facts regarding Redback, their control over and/or receipt of information of Redback’s 88 materially misleading misstatements and/or their associations with the Company that made them 99 privy to confidential proprietary information concerning Redback, participated in the fraudulent 1010 scheme alleged, the principal purpose and effect of which was to create the false appearance of 1111 demand and revenue intending to deceive investors. 1212 352. 346. Each of the defendants knew that Redback’s “agreements” with and 1313 “revenues” from Qwest were fraudulently induced through bribes and quid pro quo transactions 1414 that had no valid business purpose and were designed to create a false impression of demand for 1515 Redback’s products and false revenues, which were recorded by Redback during the Class 1616 Period. Defendants Barsema, Ragavan, Kruep, Khosla, Lamond and Garg solicited, negotiated 1717 and authorized the deals with and attendant undisclosed bribes and sales incentives paid to 1818 Qwest and to other material customers described herein, and each and all of the Individual 1919 Defendants with deliberate recklessness allowed those deals and bribes to occur. Each of the 2020 defendants was well aware or with deliberate recklessness disregarded the fact that the purpose 2121 and effect of those fraudulent deals was to: (i) create the false impression that Qwest and other 2222 prominent telecommunications companies were purchasing and deploying Redback’s products, 2323 and (ii) to inflate artificially Redback’s revenues and thereby artificially inflate the Company’s 2424 stock price. All of the defendants were aware (or with extreme or deliberate recklessness 2525 disregarded) that the SMS™ 10000 equipment being touted as part of the Qwest deals was not 2626 even operational at the time that Redback sold $20 million worth of the equipment to Qwest, and 2727 $4-5 million of the equipment to UUNET. The defendants also knew when they touted the 2828 strong demand for the SmartEdge™ product that the product had unstable software and hardware

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11 that prevented the product from properly functioning, and that at least as early as mid-2000, the 22 advanced features for the SmartEdge™ equipment were not going to be ready for production or 33 sales in 2001. The defendants’ therefore knew that their predicted revenues from sales of the 44 SmartEdge™ product in 2001(and consequently overall revenues) would not be possible to 55 obtain. 66 353. 347. Furthermore, the Individual Defendants had the motive to commit the fraud 77 as they enjoyed rich compensation packages, which depended in large part on the Company’s 88 stock price. In fact, the bulk of the Individual Defendants compensation was dependent on the 99 price of Redback’s stock. The Individual Defendants also received numerous options on 1010 Redback’s stock. As Redback’s stock increased in price, so did the value of the options granted 1111 to the Individual Defendants. 1212 354. 348. The Individual Defendants negotiated and approved, or with deliberate 1313 recklessness allowed to occur, the quid pro quo transactions with Qwest and the falsifications of 1414 Redback’s financial results, in order to book revenues and convey the impression that there was 1515 a sustained demand for Redback’s products by Qwest. The Individual Defendants engaged in 1616 the fraud to maintain the illusion of growth and profitability at Redback, and to artificially 1717 inflate, and then maintain, Redback’s stock price. Throughout the Class Period, the Individual 1818 Defendants shared an overriding motive to enrich themselves through sales of Redback stock at 1919 prices inflated by this fraud. 2020 Pierre R. Lamond 2121 355. 349. Defendant Lamond served as Chairman of Redback’s Board from November 2222 1996 through May 2003. As Chairman, Lamond signed Redback’s 2000, 2001and 2002 10-Ks, 2323 as well as several Registration Statements. He also served as CEO during May to August 2001. 2424 356. 350. As a member of the Audit Committee, Lamond was responsible for ensuring 2525 that Redback properly reported its financial statements in accordance with GAAP and properly 2626 reported revenues and the true nature of the Company’s material contracts, such as its large 2727 contracts with Qwest during the Class Period. This responsibility includes determining that the 2828

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11 auditors had completed their audit in accordance with GAAS. As stated in Redback’s 2001 22 Proxy Statement: 33 4 The audit committee reviews, acts on and reports to the Board of 4 Directors with respect to various auditing and accounting matters, 5 including the selection of Redback’s accountants, the scope of the 5 annual audits, fees to be paid to Redback’s accountants, the 6 performance of Redback’s accountants and the accounting 6 practices of Redback. The audit committee meets independently 7 with our independent accountants and our senior management and 7 reviews the general scope of our accounting, financial reporting, 8 annual audit and the results of the annual audit, interim financial 8 statements, auditor independence issues, and the adequacy of the Audit Committee Charter. 99 357. 351. As alleged herein, Lamond participated in Redback’s fraudulent acts, 1010 practices, scheme and course of business. Therefore, he knew or deliberately and recklessly 1111 disregarded that the Company’s financial statements did not comply with GAAP and that 1212 Redback was overstating its revenues in material amounts. According to the VP NA Sales, 1313 Lamond understood the extortionistic tactics used by Qwest to generate revenues, and Lamond 1414 approved Redback’s improper recognition of revenue from quid pro quo sales to Qwest and 1515 signed SEC filings that he knew omitted material information regarding Redback’s sales, 1616 revenues and earnings. Lamond also breached his duty (both as a member of the audit 1717 committee and chairman of the Board) to make sure that PwC properly audited Redback’s 1818 financial statements, including verification that operational equipment was shipped to Qwest, 1919 UUNET and other material customers and that Redback’s financial statements presented a true 2020 picture of the Company’s operations and financial condition, which they did not because of the 2121 undisclosed stock payment kickbacks and quid pro quo agreements that were endemic to 2222 Redback’s business. 2323 358. 352. Also, according to the VP NA Sales, Lamond frequently interacted with PwC 2424 when Qwest refused to pay for $30 million of SmartEdge™ products during the first half of 2001 2525 when Lamond assumed the position of CEO of Redback (in addition to his position as Chairman 2626 of the Board), and he discussed Redback’s quid pro quo agreements and outstanding accounts 2727 receivables from Qwest with the VP NA Sales and other executives at Redback’s weekly 2828 executive meetings in the first half of 2001. The VP NA Sales said that he reported on the true

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11 nature of Redback’s agreements with Qwest at Board meetings (while Lamond was present), and 22 he said that the Board members (including Lamond) were all aware of Qwest’s $40 million 33 obligations under the Siara Warrant Agreement. The VP NA Sales said that Lamond discussed 44 with PwC the true facts surrounding Qwest’s IRU sale to Redback and was present when PwC 55 questioned Lamond and others regarding whether the $7 million IRU purchase should be 66 charged against revenues recognized on the sale. Lamond clearly understood the undisclosed 77 fraudulent nature of Redback’s reported sales to Qwest and knowingly or with deliberate 88 recklessness caused Redback to issue materially false and misleading statements regarding such 99 sales and the material revenues improperly recognized therefrom. 1010 359. 353. Lamond personally signed SEC filings that he knew or deliberately and 1111 recklessly disregarded were false and misleading statements and omitted material information 1212 that was necessary under the circumstances to avoid making statements that were misleading. 1313 Lamond also participated in a conference call in May 2001, and sat idly by when Wolf denied 1414 that customers were returning equipment to Redback. Lamond had had a duty to speak truthfully 1515 on the call and correct any false or misleading information provided to analysts, investors and 1616 the public, especially when he assumed the helm of Redback in May 2001, and he breached this 1717 duty from the inception of his role as CEO. 1818 360. 354. Lamond was a general partner of Sequoia, a venture capital firm that held a 1919 large stake in Redback during the Class Period, and Sequoia designated Lamond as its 2020 representative on Redback’s Board member at Redback. Sequoia is reported to be the most 2121 successful Silicon Valley venture capital fund, and the distribution of 6.8 million artificially- 2222 inflated shares of Redback stock worth over $877 million to Sequoia partners (including 2323 Lamond) and investors in 1999 was a significant boost to the fund’s performance. On August 7, 2424 2000, Sequoia distributed approximately 1.6 million shares (which was almost one-third of its 2525 holdings) of artificially-inflated Redback stock worth more than $226 million to the Sequoia 2626 partners (including Lamond) and investors. Venture capital firms like Sequoia demand 2727 compensation of approximately 20% of the profit that they make for their limited partners. This 2828 compensation is known as the “carry.” Sequoia’s “carry” for the Redback investment was

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11 between $220 and $330 million, which was shared by Lamond and other general partners of 22 Sequoia. 33 361. 355. With the benefit of Lamond’s material non-public information (including 44 information regarding Redback’s inability to timely bring a new SmartEdge™ router to the 55 market), Sequoia was able to execute the distribution near the height of the Class Period’s 66 artificial price inflation. It was Sequoia’s only distribution of Redback’s stock to its partners 77 during the Class Period. 88 362. 356. As Chairman of Redback’s Board, and at certain times as the CEO of 99 Redback, Lamond knew or with deliberate recklessness disregarded the truth about Redback’s 1010 fraudulent course of business with Qwest. Lamond knowingly or with deliberate recklessness 1111 signed Redback’s materially false and misleading Annual Reports on Form 10-K, including the 1212 2002 10-K filed in March 2003, which stated that sales to Qwest in 2000 and 2001 generated 18 1313 percent ($41.7 million) and 15 percent ($40.95 million) of Redback’s revenues in 2000 and 1414 2001, respectively. Through the Class Period, Lamond knew or deliberately and recklessly 1515 disregarded that the overall impression created by Redback’s financial statements was not 1616 consistent with the business realities of the Company’s financial position and operations. 1717 Vinod Khosla 1818 363. 357. As stated in the 2001 Proxy Statement, defendant Khosla, along with 1919 defendants Ragavan and Lamond, collectively controlled, either directly or through beneficial 2020 ownership, at least 11% of Qwest’s outstanding common stock. Khosla was KPCB’s designated 2121 representative on Redback’s Board. 2222 364. 358. On August 11, 2000 and October 17, 2000, when (during the Class Period) 2323 Redback’s stock traded at its highest levels (and before the price began to decline), affiliates of 2424 KPCB (where Khosla was a general partner) distributed to their investors over $941.2 million in 2525 Redback stock. This was a major coup for KPCB and caused its funds to achieve extraordinary 2626 performance. Khosla’s firm, KPCB, received compensation from the Redback investment in the 2727 form of a “carry” of approximately 20 percent from the distribution in August and October 2000, 2828 which amounted to between $188 and $282 million. This was KPCB’s only distribution during

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11 the Class Period, and with the benefit of Khosla’s material non-public information (including 22 information regarding Redback’s inability to timely bring a new SmartEdge™ router to the 33 market), KPCB was able to execute the distribution near the height of the Class Period’s 44 artificial price inflation. It was KPCB’s only distribution of Redback’s stock to its partners and 55 investors during the Class Period. 66 365. 359. As a director of both Redback’s Board and Qwest’s Board, on which he also 77 was KPCB’s designated representative, Khosla knew or with deliberate recklessness disregarded 88 the truth about Redback’s fraudulent and material relationship with Qwest. In fact, as Khosla 99 had positions on both sides of the transactions, he was in a unique position to know the true 1010 nature of Redback’s and Qwest’s fraudulent business relationship, and he fostered that 1111 relationship by arranging meetings between executives of Redback and Qwest. Additionally, 1212 Khosla was on Siara’s board of directors at the time that Siara transferred the warrant for 1313 100,000 share of Siara’s stock (which was to be exchanged for Redback stock) to Qwest 1414 executives in exchange for Qwest’s commitment to purchase Redback’s products. Also, at the 1515 time that Siara transferred a warrant to Broadband Office, Khosla similarly was on the Board of 1616 Directors for Broadband Office (and Qwest). Siara transferred a warrant for 4,500 shares of 1717 Redback stock (which was to be exchanged for Siara stock) to Broadband Office. The 1818 Broadband Office deal was touted as valued at $40 million, even though Broadband Office had 1919 no products, clients or business at the time, and Khosla knew or recklessly disregarded that the 2020 deal between Broadband Office and Siara (which was going to merge into Redback within 2121 months) was induced by bribes and lucrative stock payments. Redback’s improper deals with 2222 Qwest and Broadband Office were known to and facilitated by Khosla, both before and after the 2323 time he joined the Redback Board following the Siara merger. 2424 366. 360. Khosla did not confine his improper activities to Redback, as he served on 2525 the boards of other equipment vendors who are charged with paying Qwest and Qwest insiders 2626 for Qwest’s business. In addition to representing KPCB’s financial investments as a director of 2727 Redback and Qwest, Khosla also represented KPCB on the boards of Corvis Corp., Siara, 2828 CoSine Communications Inc., Cerent and Juniper Networks Inc., while each of these equipment

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11 vendors negotiated deals with Qwest. Khosla similarly was on Concentric’s Board of Directors 22 at the time that it accepted an undisclosed stock kickback payment in exchange for committing to 33 purchase Redback’s equipment, and for allowing Redback to announce that Concentric had 44 selected Redback’s products to deploy in its network. 55 367. 361. Khosla has admitted that he has helped set up deals between carriers and 66 equipment startups. In a June 1, 2000 article in Lightreading.com, entitled “The Spotlight: 77 Vinod Khosla,” Khosla explained how he provided what he called “venture assistance” in 88 arranging deals where a vendor agreed to ship products that it had not even developed. Khosla 99 also stated that it would be “ethical” for an equipment startup to issue its equity to individuals at 1010 its carrier customers, so long as the decision-maker at the carrier was “not the one getting the 1111 equity” and as long as there was “full disclosure.” 1212 368. 362. Khosla knowingly or with extreme recklessness signed each of Redback’s 1313 materially false and misleading Registration Statements and Annual Reports on Form 10-K 1414 during the Class Period following Siara’s merger with Redback when he joined the Board. 1515 Khosla knew that Redback had not fully disclosed – or disclosed at all – the covert warrants that 1616 he and Ragavan caused Siara to issue in exchange for future commitments of purchase orders 1717 (and the right to issue press releases announcing multi-million, multi-year agreements) from 1818 Qwest and other companies. He also authorized Redback’s improper and undisclosed quid pro 1919 quo transactions with Qwest, which he knew (or deliberately and recklessly disregarded) had 2020 caused Redback to materially overstate its sales, revenues and earnings. Khosla also knew or 2121 recklessly and deliberately disregarded that Redback’s IRU purchase and ASP services purchase 2222 from Qwest and its affiliates had no valid business purpose because Khosla was on the Board of 2323 numerous telecommunications companies, including Qwest, and was intimately familiar with 2424 Qwest’s business, and therefore knew that Redback would never have any valid business 2525 purpose for an IRU to support DS-3 capacity. Khosla knew that the quid pro quo transactions 2626 with Qwest were simply devices to artificially inflate Redback’s revenues, earnings and stock 2727 price. 2828

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11 369. 363. Like all of the other Board members, Khosla also knew that Redback’s 22 SMS™10000 product did not work when Redback shipped $20 million to Qwest in third quarter 33 2000, and he also was aware that the SmartEdge™ product that Redback shipped to Qwest 44 would not support DS-3 capacity as was needed by Qwest. Khosla personally authorized 55 Redback’s IRU and ASP services purchases from Qwest, and he knew or deliberately 66 disregarded that Redback’s reported revenues from quid pro quo sales to Qwest in exchange for 77 Redback’s purchases of the IRU and ASP Services were improper and overstated revenues and 88 earnings at Redback because the products that were shipped were not operational and did not 99 meet Qwest’s requirements. 1010 370. 364. Khosla has been linked directly to the improper activities at Qwest. 1111 Lightreading.com reported on October 2, 2003 that, under Khosla’s watch, several of Qwest’s 1212 startup equipment suppliers offered their stock to top Qwest executives at prices far below the 1313 prevailing market prices on those stocks. He knew also that Qwest was being investigated 1414 beginning in 2001 for previous improper IRU sales, and nevertheless he knowingly signed off on 1515 all of Redback’s materially false and misleading reported financial results for 2001 and 1616 thereafter, which included improper revenue generated from the worthless IRU purchase and 1717 other improper transactions with Qwest, and which he knew created an overall impression that 1818 was not consistent with the business realities of the Company’s financial position and operations. 1919 Promod Haque 2020 371. 365. Haque obtained his seat on the Redback Board due to the substantial 2121 investment of Norwest Venture Partners VII L.L.P. (“Norwest”) in Siara, and subsequent to the 2222 Siara/Redback merger, he became Norwest’s designated representative on Redback’s Board. 2323 Haque is a managing general partner of Itasca VC Partners VII L.L.P., the general partner of 2424 Norwest. During the Class Period, Norwest held as much as 4.76%, of Redback’s common 2525 stock. 2626 372. 366. On August 15, 2000 and October 17, 2000, Norwest distributed 4 million 2727 shares of Redback's common stock to its partners, disposing of nearly 60% of its holdings. 2828 Based on the closing prices of $150.09 and $135.26 per share on the dates of the distribution,

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11 respectively, the total value of the stock distribution was $571.8 million. Norwest was able to 22 execute the distribution near the height of the Class Period’s artificial price inflation. The 33 August and October 2000 distributions were Norwest’s and its affiliates’ only distribution of 44 Redback’s stock to its partners during the Class Period. Norwest’s and its affiliates’ general 55 partners were compensated with a “carry” of approximately 20 percent of Norwest’s 66 distributions, which amounted to between $114.36 and $171.54 million in August-October 2000. 77 This was a major coup for Norwest and caused its funds to achieve extraordinary results. The 88 distributions were suspiciously timed to take advantage of Haque’s material non-public 99 information regarding the delay in the new SmartEdge™ router, which Haque along with all of 1010 the other Board members knew would not be available for distribution until late in 2001. The 1111 distributions were also suspiciously identical in timing as the distributions of KPCB and Sequoia 1212 during the Class Period. Nevertheless, Haque and the other Board members refused to revise the 1313 Company’s forecasted revenues for 2001, which they knew were impossible to reach without the 1414 new product, and they delayed disclosure of the product’s production problems until two 1515 quarters after they had unloaded their Redback’s stock holdings. 1616 373. 367. Haque was member of the Audit Committee of Redback’s Board. As a 1717 member of the Audit Committee, Haque was responsible for ensuring that Redback properly 1818 reported its financials in accordance with GAAP and that the financials had been audited in 1919 accordance with GAAS. This responsibility includes determining that the auditors had 2020 completed their audit in accordance with GAAS. As stated in Redback’s 2001 Proxy Statement: 2121 22 The audit committee reviews, acts on and reports to the Board of 22 Directors with respect to various auditing and accounting matters, 23 including the selection of Redback’s accountants, the scope of the 23 annual audits, fees to be paid to Redback’s accountants, the 24 performance of Redback’s accountants and the accounting 24 practices of Redback. The audit committee meets independently 25 with our independent accountants and our senior management and 25 reviews the general scope of our accounting, financial reporting, 26 annual audit and the results of the annual audit, interim financial 26 statements, auditor independence issues, and the adequacy of the Audit Committee Charter. 2727 374. 368. As alleged herein, Haque participated in Redback’s fraudulent acts, 2828 practices, scheme and course of business by knowingly or deliberately and recklessly signing all

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11 of the Company’s materially false and misleading Registration Statements and Annual Reports 22 on Form 10-K during the Class Period. He knew or deliberately and recklessly disregarded that 33 the Company’s financial statements did not comply with GAAP and that Redback was 44 overstating its revenues in material amounts through improper recognition of revenue from quid 55 pro quo sales to Qwest and also breached his duty as a member of the Audit Committee to make 66 sure that PwC properly audited Redback’s financial statements, including verification that 77 operational equipment was shipped to Qwest, UUNET and other material customers and that 88 Redback’s financial statements presented a true picture of the Company’s operations and 99 financial condition, which they did not because of the undisclosed stock payment kickbacks and 1010 quid pro quo agreements that were endemic to Redback’s business. 1111 375. 369. Haque knew or with deliberate recklessness disregarded the truth about 1212 Redback's fraudulent and material relationship with Qwest. He knowingly signed off on all of 1313 Redback’s materially false and misleading reported financial results for 2000 and thereafter, 1414 which created an overall impression that was not consistent with the business realities of the 1515 Company’s financial position and operations. 1616 376. 370. Below is a chart listing the Class Period distributions of over 12.1 million 1717 shares of Redback stock by the venture capital firms associated with defendants Khosla, Lamond 1818 and Haque during 2000: 1919 2020

2121 2222 2323 2424 2525 2626 2727 2828

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1 1 VENTURE CAPITAL FIRMS’ REDBACK STOCK DISTRIBUTIONS DURING CLASS PERIOD 22 3 Director/ Venture Dividend Shares Closing Value of 3 Partner Capital Firm Date Paid in Share Transaction on Dividend Price Dividend Date 44 Vinod KPCB 55 Khosla KPCB Entities 8/11/2000 3,299,964 $149.89 494,631,604 66 KPCB Entities 10/17/2000 3,299,964 $135.26 446,353,131 Sub Total: 6,599,928 $940,984,735 77 Pierre Sequoia Lamond Capital 88 Sequoia 8/7/2000 1,504,112 $142.14 213,794,479 Capital VII 99 Sequoia Tech. 8/7/2000 87,044 $142.14 12,372,434 Partners VII 1010 Sub Total: 1,591,156 $142.14 $226,166,913 Promod Norwest 1111 Haque Venture Partners VII 1212 Itasca VC 8/8/2000 2,000,000 $150.09 300,180,000 Partners 1313 Itasca VC 10/17/2000 2,000,000 $135.26 270,520,000 1414 Partners

1515 Sub Total: 4,000,000 $570,700,000 GRAND $1.7 Billion 1616 TOTAL: 12,191,084 1717 Kevin DeNuccio 1818 377. 371. On August 17, 2001, the Company offered Defendant DeNuccio employment 1919 with the Company. Redback’s 2001 10-K stated that the terms of his employment included a 2020 $500,000 base salary, 2.1 million in restricted stock, 6.5 million options to buy shares at $4.17

2121 each and a $3 million signing bonus. His stock grant restricted 4.875 million of the shares 2222 subject to the option in equal monthly installments of 2.777 percent over DeNuccio’s first 36 2323 months of his employment. Within six months of his employment, all of DeNuccio’s options for 2424 Redback stock were “out of the money” and therefore he was unable to unload his Redback 2525 stock during the Class Period. 2626 378. 372. Prior to joining Redback, Defendant DeNuccio was the Senior Vice 2727 President of Worldwide Service Provider Sales at Cisco. He joined Redback in part because of 2828 his relationship with Defendant Lamond, a partner at Sequoia. According to an August 24, 2001

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11 Lightreading.com article, “Sequoia funded Cisco in its early days and, later, it backed several of 22 the companies Cisco has acquired. Sequoia is also a backer of Callisma Inc., where DeNuccio 33 holds a board seat. DeNuccio also holds board seats at Salesnet Inc., BroadRiver 44 Communications, Netpliance, and consultancy KPMG, where Cisco has an investment.” 55 379. 373. As CEO and President of Redback, DeNuccio is (and was throughout the 66 Class Period) responsible for approving major contracts. Accordingly, the granting of stock to 77 Qwest insiders, and the purchases of Qwest products made as part of the quid pro quo deals to 88 obtain Qwest’s business, could not have been made without DeNuccio’s knowledge and/or 99 approval, or his deliberate reckless disregard that those fraudulent actions were taking place. 1010 380. 374. In fact, when Defendant DeNuccio joined the Company in August 2001, the 1111 NA VP Sales stated that he brought DeNuccio up to speed regarding the past-year’s dealings 1212 with Qwest, including the faulty SMS™10000 equipment sale and concomitant quid pro quo 1313 purchase of ASP services; the Siara Warrant Agreement and Qwest’s SmartEdge™ equipment 1414 purchases to fulfill its $40 million contractual obligation; and of course the IRU, which the NA 1515 VP Sales told DeNuccio had been purchased because of Qwest’s extortionary tactics. DeNuccio 1616 knowingly or with deliberate recklessness signed Redback’s false and misleading 2001 and 2002 1717 10-Ks, which reported material sales to Qwest and included fraudulently booked revenue and 1818 failed to disclose the stock kickback payments and quid pro quo deals with Qwest. He also 1919 repeatedly touted the advantages of Redback’s SMS™10000 and new SmartEdge™ router 2020 product as being better than Cisco’s well-developed competing products, although he knew (as 2121 did all executives and Board members) that the products were not properly functioning. 2222 DeNuccio also deliberately and recklessly falsely stated that the new SmartEdge™ router 2323 equipment was in trials with 10 customers in August 2001, when in fact this was not true. 2424 Vivek Ragavan 2525 381. 375. Redback’s 2002 Proxy Statement states that Ragavan was paid $413,000 in 2626 salary and bonus in 2000 and $194,124 in salary and $250,000 in severance in 2001. 2727 382. 376. On May 1, 2001, Ragavan transferred 1,188,835 Redback shares, valued at 2828 the time of the transaction at over $23 million, to the Ragavan Family 2000 Living Trust. The

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11 trustees are Defendant Ragavan and his wife, Nilima Ragavan. On May 21, 2001, the date of 22 Ragavan’s sudden ouster from Redback, the Company repurchased 624,820 common stock 33 shares from the Ragavan Family 2000 Living Trust at an undisclosed price. Based upon the 44 closing price of Redback stock on that date, the market value of the transaction was almost $11.9 55 million. 66 383. 377. During February through May 2001, Ragavan also sold 100,000 shares of 77 Redback stock, reaping more than $2.4 million. These sales were Ragavan’s only open market 88 sales during the Class Period and were suspiciously timed to take advantage of non-public 99 material information regarding Redback’s new SmartEdge™ equipment production problems 1010 and the Company’s undisclosed stock kickback payments and quid pro quo deals with Qwest, 1111 which Ragavan had personally authorized. Ragavan and other Siara insiders exchanged their 1212 stock for Redback stock in the Siara/Redback merger and they were restricted from selling their 1313 new Redback shares for 180 days after the merger. Therefore, Ragavan’s significant holdings 1414 were not available for sale until September 2000. After Qwest had fulfilled its obligations under 1515 the Siara Warrant Agreement in first quarter 2001, Ragavan knew that Qwest would not be 1616 purchasing material amounts of Redback’s equipment because the equipment did not meet 1717 Qwest’s requirements (especially because the SMS™10000 product was not operational when it 1818 was shipped) and was not needed or wanted by Qwest. He also knew that the new SmartEdge™ 1919 router equipment was not going to be available until late in 2001 and therefore the Company 2020 would not be able to meet its forecasted revenues and earnings, and consequently he cashed out 2121 over $37 million of Redback stock from February to May 2001. 2222 384. 378. Ragavan signed the Siara Warrant Agreement in late November 1999 after 2323 he and other Siara Board members had approved Siara’s acquisition by Redback. Therefore, he 2424 knew that the Siara Warrant Agreement was actually an undisclosed agreement for Qwest to 2525 purchase $40 million of equipment from Redback by December 31, 2001, which he knew would 2626 generate material amounts of sales and revenues for Redback. The fact that the warrant was 2727 issued by Siara in late November 1999 when Siara was on the brink of its merger with Redback, 2828 and the fact that it was issued to U.S. Telesource and not Qwest, but was expressly provided in

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11 exchange for an undisclosed agreement with Qwest, demonstrates the intentionally covert nature 22 of the agreement and Ragavan’s scienter in connection with all announced sales to Qwest during 33 the Class Period. 44 385. 379. Clearly, Ragavan should have caused, and knowingly failed to cause, 55 Redback to disclose the Siara Warrant Agreement when quarter after quarter, Redback held 66 Qwest out as a material customer that entered into several multi-million, multi-year agreements 77 with Qwest. Ragavan knew or with extreme and deliberate recklessness disregarded that 88 Redback’s purported multi-million, multi-year agreement with Qwest in February 2001 was not 99 in fact a new agreement, but was the Siara Warrant Agreement that he and other Individual 1010 Defendants intentionally had failed to disclose since 1999. Ragavan also knew that Siara’s 1111 warrant to Broadband Office was not and should have been disclosed when Siara announced a 1212 multi-million, multi-year agreement with Broadband Office in December 1999, and later in 2000 1313 when Broadband Office purchased over $8 million of equipment from Redback. 1414 386. 380. Ragavan also knowingly or deliberately and recklessly authorized the IRU 1515 and ASP services quid pro quo transactions with Qwest, which both were used to artificially 1616 inflate Redback’s reported revenues and stock price. Throughout 2000 and until his ouster in 1717 May 2001, Ragavan repeatedly signed materially false and misleading Registration Statements 1818 and Annual Reports on Forms 10-K that he and other Individual Defendants caused Redback to 1919 issue to the public. Ragavan knowingly and recklessly failed to disclose the bribes that had been 2020 paid to Qwest and other material customers when he announced sales and revenues generated by 2121 these customers and created a buzz that artificially inflated Redback’s stock during the Class 2222 Period. The transfers of securities to Qwest insiders and Redback’s purchases of products and 2323 services from Qwest and QCS that Redback did not want or need, as part of the illicit quid pro 2424 quo deals with Qwest, would not have occurred without Ragavan’s execution of the Siara 2525 Warrant Agreement and authorization of the quid pro quo transactions, or his deliberate reckless 2626 disregard for the propriety of those actions. 2727 387. 381. During the Class Period, Ragavan also repeatedly emphasized that the 2828 Company’s release of the SMS™ 10000 product was a “major milestone” when he and all of the

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11 other Redback executives and Board members knew that the product was not operational and 22 would not support the bandwidth capacities that Redback claimed. Each quote and “sound bite” 33 that Ragavan provided for Redback’s earnings releases and conference calls, SEC filings and 44 press releases was materially false and misleading, and Ragavan knowingly or with extreme and 55 deliberate recklessness issued the statements, which he knew created an overall impression that 66 was not consistent with the business realities of the Company’s financial position and operations. 77 Dennis Barsema 88 388. 382. Barsema was Redback’s CEO at the time of the Company’s IPO in May 99 1999 and continuing through early 2000, when Ragavan assumed the position in connection with 1010 Redback’s merger with Siara. As alleged herein, Barsema participated in Redback’s fraudulent 1111 scheme and was aware that Redback and Siara paid undisclosed stock kickbacks to Qwest 1212 executives and others to induce Qwest and other companies to purchase Redback’s products, or 1313 at least to allow Redback to issue a press release announcing that these prominent 1414 telecommunications companies had entered agreements to purchase and deploy Redback’s 1515 products. 1616 389. 383. Barsema signed Redback’s SEC filings, including the 1999 and 2000 10-Ks 1717 and knew or with deliberate recklessness disregarded that the information therein was materially 1818 false and misleading. In fact, Barsema obtained the “friends and family” stock deal from Qwest 1919 (through Weisberg) and knew that Redback failed to disclose the agreement when the Company 2020 reported multi-million, multi-year agreements with Qwest and held Qwest out as a material 2121 customer even though Qwest had purchased no material amounts of Redback’s equipment or 2222 deployed the equipment in Redback’s network. 2323 390. 384. Barsema left the Company in May 2001, and he cashed out over 1 million 2424 shares reaping more than $134 million in Redback stock from July 1999 through December 2000 2525 at artificially-inflated prices. During the Class Period, Barsemo sold more than 677,00 shares of 2626 Redback stock worth more than $86 million, which was more than 23 percent of his Redback 2727 holdings. In March 2000, Redback’s stock traded at its highest price during the Class Period, 2828 and Barsema sold almost $23 million during the first week of March 2000. Again, in August

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11 through September 2000, Barsema sold more than $35 million of Redback’s stock when the 22 stock price hit a post-split high of approximately $150 per share. All of Barsema’s trades were 33 suspiciously timed to take advantage of defendants’ artificial inflation of Redback’s stock as 44 alleged herein, as well as non-public material information regarding Redback’s product failures 55 and undisclosed stock bribes to Qwest and other customers. 66 391. 385. Redback’s 2001 Proxy Statement stated that in 1999, Defendant Barsema’s 77 last full year as CEO of Redback, Barsema was paid $325,000 in salary and bonus. In 2000, he 88 was paid $150,801 and received 180,000 Redback options, which had an exercise price between 99 $53 and $163.62 and became vested only after one year from the date of the grants in February 1010 and July 2000. By February 2001, all of these options were “out of the money.” 1111 392. 386. Barsema knew or with deliberate recklessness disregarded the truth about 1212 Redback's fraudulent and material relationship with Qwest. From 1999 through May 2001 when 1313 he resigned from the Board, Barsema knowingly signed off on all of Redback’s materially false 1414 and misleading reported financial results for 1999, 2000 and 2001, which created an overall 1515 impression that was not consistent with the business realities of the Company’s financial position 1616 and operations. 1717 Gaurav Garg 1818 393. 387. Garg was a Redback Director during the Class Period and was the 1919 Company’s Senior Vice President of Corporate Strategy and Business Development. In 2020 December 2000, Garg took charge of Redback’s Product Management to try to resolve some of 2121 Redback’s problems. Garg attended weekly executive meetings and was aware in at least 2222 August 2000 that Redback’s new SmartEdge™ router problem would not be ready to sell until 2323 late 2001. Consequently, Garg began dumping his Redback stock in October 2000, which was 2424 suspicious in timing because he, along with all Redback executives and Board members, knew 2525 that Qwest and other customers had no commitment to Redback’s products, and because that is 2626 when Qwest’s stock-induced and quid pro quo purchases from Redback dried up. Redback’s 2727 promising new SmartEdge™ router was delayed in production and consequently Redback’s 2828

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11 revenues were going to fall woefully short of the Company’s guidance and the stock price would 22 fall precipitously. 33 394. 388. Redback’s 2001 Proxy Statement stated that in 2000, Defendant Garg was 44 paid $170,000 in salary and received 240,000 options, which had an exercise price between 55 $53.00 and $163.62 and became vested after one year from the date of the grant. The next year, 66 these options were “out of the money.” Between October 2000 and August 2003, Garg sold 77 2,206,538 shares of Redback stock for $43 million. The shares sold constituted 12 percent of his 88 Redback holdings in 2000 and 34 percent in 2001. The timing of Garg’s sales was suspicious 99 because he, along with all Redback executives and Board members, knew that Redback’s 1010 promising new SmartEdge™ router was delayed in production and intentionally or with 1111 deliberate recklessness failed to revise Redback’s sales and revenue forecasts for 2001, and 1212 consequently that Redback’s revenues were going to fall woefully short of the Company’s 1313 guidance and the stock price would fall precipitously. 1414 395. 389. As alleged herein, Garg participated in Redback’s fraudulent acts, practices, 1515 scheme and course of business. Therefore, he knew or deliberately and recklessly disregarded 1616 that the Company’s financial statements did not comply with GAAP and that Redback was 1717 overstating its revenues in material amounts. He was aware that Redback paid undisclosed stock 1818 kickbacks to Qwest’s executives to induce Qwest to purchase Redback’s products and to allow 1919 Redback to issue press releases falsely announcing that Qwest was deploying Redback’s 2020 equipment. Garg signed all of Redback’s 10-K’s issued during the Class Period, although he 2121 knew or recklessly disregarded that the Company omitted in the SEC filings material, non-public 2222 information regarding Redback’s fraudulent course of business and deceptive acts and practices. 2323 Garg personally signed SEC filings that he knew or deliberately and recklessly disregarded were 2424 false and misleading statements and omitted material information that was necessary under the 2525 circumstances to avoid making statements that were misleading. 2626 396. 390. Garg knew that Redback had provided stock bribes to Qwest and that Qwest 2727 had promised orders for Redback’s equipment in return, and he sold material amounts of 2828

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11 Redback stock while in possession of this material non-public information, which he knowingly 22 and recklessly failed to disclose in order to prop up Redback’s revenues and stock price. 33 William H. Kurtz 44 391. Defendant Kurtz became a Redback Director in 1999 and remained on the Board 55 through 2002. In that capacity, he signed all of Redback’s materially false and misleading Forms 66 397. Defendant Kurtz became a Redback Director in 1999 and remained on the Board 77 through 2002. In that capacity, he signed all of Redback’s materially false and misleading Forms 88 10- K during the Class Period, which he knew or with deliberate recklessness disregarded were 99 false and misleading. Kurtz also signed Redback’s materially false and misleading Registration 1010 Statements during those same years. 1111 398. 392. As a member of Redback’s Audit Committee from 2000 through 2003 and a 1212 certified public accountant (“CPA”) with expertise in financial management, Kurtz was aptly 1313 qualified to understand that Redback failed to properly disclose material information about the 1414 Company’s financial condition and prospects, and its reported sales to Qwest. Kurtz signed each 1515 Form 10-K and Registration Statement Redback filed with the SEC during the Class Period in 1616 those same years. 1717 399. 393. As a member of the Audit Committee, Kurtz was responsible for ensuring 1818 that Redback properly reported its financial statements in accordance with GAAP and properly 1919 reported revenues and the true nature of the Company’s material contracts, such as its large 2020 contracts with Qwest during the Class Period. This responsibility includes determining that the 2121 auditors had completed their audit in accordance with GAAS. 2222 400. 394. Kurtz had one suspiciously-timed stock sale during the Class Period; for the 2323 majority of the Class Period, his Redback options were under water. In October 2000, Kurtz 2424 sold 35,000 shares of artificially-inflated Redback stock, at a peak price reaping almost $2.5 2525 million in illicit proceeds. This sale represented approximately seventy percent of his Redback 2626 shares at the time and was suspiciously timed to take advantage of the undisclosed material facts 2727 and information described herein. 2828

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11 401. 395. As alleged herein, Kurtz participated in Redback’s fraudulent acts, practices, 22 scheme and course of business. Therefore he knew or deliberately and recklessly disregarded 33 that the Company’s financial statements did not comply with GAAP and that Redback was 44 overstating its revenues in material amounts. As a CPA, Kurtz understood that the extortionist 55 tactics used by Qwest to report sales and revenues caused Redback’s improperly recognize 66 revenue from quid pro quo sales transactions that had no legitimate business purpose, and he 77 signed SEC filings that he knew or deliberately and recklessly disregarded that omitted material 88 information regarding Redback’s sales, revenues and earnings. Kurtz also breached his duty as a 99 member of the Audit Committee and a Director to make sure that PwC properly audited 1010 Redback’s financial statements, including verification and operational equipment that was 1111 shipped to Qwest, UUNET and other material customers and that Redback’s financial statements 1212 presented a true picture of the Company’s operations and financial condition, which they did not 1313 because of the undisclosed stock payment kickbacks and quid pro quo agreements that were 1414 endemic to Redback’s business. 1515 Craig Gentner 1616 402. 396. Gentner was a Redback director. Redback’s 2001 Proxy Statement stated 1717 that in 1999, Defendant Gentner received $45,000 in salary ($200,000 annualized) and 500,000 1818 options. In 2000, he received $300,000 in salary and bonus and an additional 50,000 options. 1919 During the Class Period, Gentner sold 120,000 shares of Redback stock on October 16 and 2020 October 19, 2000, which was his only sale and was suspiciously timed to take advantage of 2121 material non-public information. His options were also restricted for one year from the date of 2222 the grants, and then vested 25 percent each year thereafter. During the Class Period, most of 2323 Gentner’s options were under water. 2424 403. 397. Prior to resigning in January 2001, Gentner knowingly or deliberately and 2525 recklessly signed materially false and misleading SEC filings, which he knew were false because 2626 he attended all of the Company’s Board meetings and was aware that Redback was paying 2727 undisclosed stock kickback payments; generating artificially-inflated revenues from quid pro 2828 quo transactions with Qwest that had no valid business purpose; failing to revise guidance that

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11 was known to be false and shipping non-operational equipment to fraudulent book revenues and 22 artificially inflate Redback’s stock price. 33 44 Randall Kruep 55 404. 398. As Redback’s Vice President of Worldwide Sales, Kruep personally 66 negotiated quid pro quo transactions with Qwest. Kruep communicated directly with Weisberg 77 and worked out the “specifics” of Qwest’s product orders that were provided in exchange for 88 Redback’s lucrative undisclosed sales incentives. He also attended weekly sales meetings in 99 August 2000 and thereafter, in which Patel admitted that the new SmartEdge™ technology 1010 capabilities that were then under development would not be ready to deploy in Redback’s 1111 products in 2001. He also caused Redback to ship non-operational SMS™10000 units to Qwest 1212 as part of a quid pro quo deal for Redback to purchase ASP services from Qwest, and 1313 contemporaneously he caused Redback to issue materially false and misleading press releases 1414 regarding purported agreements with Qwest that were in reality illusory and were induced by 1515 Kruep, Khosla, Ragavan, Barsema, Garg and others through millions of dollars in stock kickback 1616 payments and quid pro quo purchases of unneeded and unwanted products and services from 1717 Qwest. 1818 405. 399. Kruep knew that the quid pro quo arrangements with Qwest caused Redback 1919 to overstate its revenues, assets and earnings, and with knowledge and deliberate or extreme 2020 recklessness, provided materially false and misleading information regarding Redback’s 2121 purported sales and agreements to Larry Blair and others and designed and certified materially 2222 false and misleading information regarding sales and revenues that he knew was going to be 2323 published in Redback’s press releases, financial statements and SEC filings. The materially false 2424 and misleading statements contained in Redback’s press releases, financial statements and SEC 2525 filings flowed as a natural consequence of Kruep’s deceptive actions and conduct. 2626 406. 400. Kruep was one of Redback’s four highest paid executives. As stated in the 2727 2001 Proxy Statement, a large part of Kruep’s compensation was contingent on his meeting sales 2828 revenue targets and upon the price of Redback’s common stock, which he knowingly or with

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11 extreme and deliberate recklessness caused to be artificially inflated during the Class Period. 22 Redback’s 2001 Proxy Statement stated that in 1999, Kruep received $125,000 in salary and 33 $295,000 in bonus and sales commission. In 2000, he received $125,000 in salary, $344,219 in 44 bonus and sales commission and 290,000 options to buy Redback stock in addition to the 55 300,000 options he was granted in 1998. Thus, the bulk of Kruep’s compensation was 66 contingent on reported sales and revenues. In addition, the options did not vest for one year 77 from the date of the grant and had an exercise price between $53 and $163.62 per share. 88 Therefore, they were “out of the money” when Kruep left the company in February 2001. 99 407. 401. In March, August, September and October of 2000, Kruep sold a total of 1010 114,000 shares of Redback stock (reaping over $25 million), which was 16 percent of his 1111 holdings at the time. Kruep also reaped $23.5 million from his stock sales in 1999 by selling 1212 189,450 shares of his stock at artificially-inflated prices while in possession of material, non- 1313 public adverse information regarding illicit agreements with Qwest and others and the fact that 1414 Qwest had not deployed Redback’s products as reported to the public. Kruep timed these sales 1515 to take advantage of material non-public adverse information regarding: Redback’s non- 1616 operational SMS™ equipment sales; the known delay in bringing the new SmartEdge™ 1717 equipment (and attendant revenues) to the market; Redback’s inability to meet its revenue 1818 forecasts in its business plan for 2001; the upcoming fulfillment and expiration of Qwest’s 1919 obligations under the Siara Warrant Agreement; the quid pro quo nature of the ASP Services 2020 transaction; Qwest’s demands that Redback purchase sales and products from Qwest that 2121 Redback did not really want or need; undisclosed stock kickback agreements and the overall 2222 chimerical nature of Redback’s business practices, revenues, earnings. 2323 408. 402. Immediately prior to and continuing after Redback’s IPO, Kruep knowingly 2424 engaged in a scheme and course of business that operated as a fraud on Plaintiffs. 2525 409. 403. Kruep was not content with the amount of his trading and complained in an 2626 August 12, 2002 Wall Street Journal article “Dialing for Dollars: Before Telecom Industry 2727 Sank, Insiders sold Billions in Stock” that he would have sold much more if he could: 2828

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1 1 [I] “would have gotten out faster if I could have,” and now wishes 2 he could have sold double the $100 million [sic – it was $50 2 million] he sold in share transactions during 1999 and 2000. Tight 3 trading “windows,” which limited when insiders can sell their 3 shares, prevented Mr. Kruep from doing additional selling, he says. 44 But for the trading restrictions in Redback stock, Kruep and the other Individual Defendants 55 would have engaged in more extensive unlawful insider trading based on material non-public 66 information. Kruep’s admission that tight trading windows restricted his selling is further 77 evidence of his scienter because Kruep sold a large percentage of his holdings that were 88 available to sell during the Class Period. 99 Dennis P. Wolf 1010 410. 404. Redback’s 2003 Proxy Statement stated that in 2001, Defendant Wolf 1111 received $360,833 in salary and bonus and options for 1,810,683 shares of Redback common 1212 stock. In 2002, he received $285,000 in salary and 250,000 Redback options. In August 2001, 1313 Wolf traded in over 700,000 options for re-priced options with an exercise price between $1.75 1414 and $4.17 per share, and the new options did not vest for one year from the date of the grant. By 1515 August 2002, all of Wolf’s options were again “out of the money” as Redback’s stock price had 1616 fallen below $1.00 per share. Thus, Wolf was not able to trade on the material non-public 1717 information that he possessed. 1818 411. 405. As alleged herein, Wolf participated in Redback’s fraudulent acts, practices, 1919 scheme and course of business. Therefore, he knew or deliberately and recklessly disregarded 2020 that the Company’s financial statements did not comply with GAAP and that Redback was

2121 overstating its revenues in material amounts. Wolf understood the extortionistic tactics used by 2222 Qwest to generate revenues, and Wolf approved Redback’s improper recognition of revenue 2323 from quid pro quo sales to Qwest (that he had authorized) and signed SEC filings that he knew 2424 omitted material information regarding Redback’s sales, revenues and earnings. 2525 412. 406. Wolf personally signed SEC filings that he knew or deliberately and 2626 recklessly disregarded were false and misleading statements and omitted material information 2727 that was necessary under the circumstances to avoid making statements that were misleading. In 2828 May 2001, Wolf knowingly or recklessly denied that customers were returning equipment to

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11 Redback. Wolf had had a duty to speak truthfully on the call and correct any false or misleading 22 information provided to analysts, investors and the public. 33 Thomas L. Cronan, III 44 413. 407. As Redback’s General Counsel and CFO, Cronan was in a unique position to 55 know the true nature of Redback’s undisclosed quid pro quo contracts with Qwest and other 66 telecommunications companies. He also had the power to but failed to have Redback disclose 77 that it had transferred securities to Qwest executives and purchased Qwest’s products or services 88 solely to obtain Qwest’s business. Redback’s 2004 Proxy Statement stated that in 2001, 99 Defendant Cronan received $168,750 in salary and bonus; in 2002, he received $192,500 in 1010 salary, and in 2003 he received $271, 875. He also received 644,659 options in 2003. 1111 414. 408. The motive of the Individual Defendants to commit fraud included their 1212 ability to profit from sales of the Company stock at artificially inflated prices. The Individual 1313 Defendants engaged in extensive insider trading during the Class Period, taking advantage of 1414 Redback’s stock, which was artificially inflated by the defendants’ fraud. The Individual 1515 Defendants sold in the open market almost $178 million of their personal holdings of Redback 1616 stock, the majority of the sales taking place at prices many times the market price of Redback 1717 shares at the end of the Class Period. All of these sales took place prior to the revelations of the 1818 fraud. 1919 415. 409. In addition to the distributions that the Redback directors distributed to their 2020 venture capital firms, during 1999 through October 2003, Redback insiders dumped over $3.1 2121 billion of the Company’s stock at artificially-inflated prices. During the Class Period and while 2222 in possession of non-public material adverse information, Redback insiders dumped over $467.8 2323 million of the Company’s stock as follows: 2424 25 REDBACK INSIDER STOCK 25 SALES∗ DURING THE CLASS PERIOD 2626 NAME2727 DATE PRICE SHARES PROCEEDS 2828 T ransactionsTransactions in bold are gifts or distributions that have been valued based on closing prices. FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 150 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 152 of 198

1 NAME1 DATE PRICE SHARES PROCEEDS BARSEMAP 12/9/1999 $150.02 40,000 $6,000,800.00 22 resident, CEO 3/1-3/3/2000 $302.67-311.06 75,000 $22,944,937.00 and3 Director (November3 3/9/2000 $359.91 1,000 $359,910.00 8/2-8/4/2000 $113.53-130.73 150,000 $18,147,873.28 19974 to May 2001)4 8/30/2000 $137.01 8,000 $1,096,080.00 55 8/31/2000 $149.39 200,000 $29,878,000.00 8/31-9/1/2000 $148.65-149.00 75,000 $11,157,500.00 66 9/5-9/6/00 $148.83-150.51 47,500 $7,119,775.75 11/2-11/3/2000 $115.45-119.31 39,000 $4,517,862.40 77 BARSEMA 11/6/2000 $110.50 5,000 $552,500.00 cont.88 11/17/2000 $80.46 20,000 $1,609,260.00 11/21- $74.50-76.09 50,000 $3,750,874.00 99 11/24/2000 10 11/27- $76.83-82.25 45,000 $3,559,887.50 10 11/28/2000 1111 11/29/2000 $69.63 20,000 $1,392,600.00 11/29- $70.00-74.00 41,000 $2,972,500.00 1212 11/30/2000 12/5-12/7/2000 $77.16-82.00 110,000 $8,536,300.00 13 13 12/8/2000 $93.76 20,000 $1,875,200.00 1414 12/8/2000 $89.50 20,000 $1,790,000.00 1515 TOTAL: 966,500 $127,261,859.93

RAGAVAN1616 C 2/13/2001 $31.00 30,000 $930,000.00 EO & 3/1/2001 $30.25 5,000 $151,250.00 17 Director17 3/6/2001 $27.31 5,000 $136,562.50 (March 2000 July1818 2000) 4/18/2001 $20.16 10,000 $201,565.00 4/19/2001 $21.00 10,000 $210,000.00 1919 4/20/2001 $22.00 10,000 $220,000.00 2020 4/30/2001 $19.00 10,000 $190,000.00 5/1/2001 $19.42 1,188,835 $23,087,175.70 2121 5/2/2001 $20.01 20,000 $400,200.00 5/21/2001 $19.00 624,820 $11,871,580.00 2222 2323 TOTAL: 1,913,655 $37,398,333.20 2424 GARG 10/19/2000 $126.00 20,000 $2,520,000.00 Founder2525 & Director (May26 262001 to May 2001) 2727 2828 10/23/2000 $139.00 3,500 $486,500.00

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1 NAME1 DATE PRICE SHARES PROCEEDS 10/24/2000 $139.00 16,500 $2,293,500.00 22 10/27/2000 $117.25 5,000 $586,250.00 33 10/31/2000 $103.00-113.88 12,500 $1,357,187.50 11/1-11/3/2000 $111.00-119.00 12,500 $1,443,750.00 4 4 11/6-11/8/00 $95.50-110.65 36,000 $3,833,947.60 55 11/22/2000 $74.66 10,000 $746,563.00 11/24/2000 $76.65 14,000 $1,073,125.20 66 11/27-11/30/2000 $71.97-82.61 50,000 $3,871,252.00 12/1/2000 $76.69 10,000 $766,875.00 77 12/4-12/8/2000 $75.06-89.98 90,000 $7,598,873.00 88 1/22-1/23/2001 $40.05-41.36 20,000 $814,038.00 2/13-2/17/2001 $32.16-36.91 73,500 $2,457,556.95 9 9 2/21-02/23/2001 $29.50-31.37 77,500 $2,342,331.75 1010 3/1/2001 $29.15-30.29 105,000 $3,140,700.50 GARG 3/5-3/8/2001 $23.18-28.02 64,000 $1,722,099.65 cont.1111 4/19/2001 $21.00 50,000 $1,050,075.00 1212 5/1-5/4/2001 $19.19-24.78 175,000 $3,767,550.00 1313 11/26-11/28/2001 $5.02-5.24 90,000 $455,490.00 11/30/2001 $4.12-4.20 52,500 $217,252.00 14 14 8/11/2003 $0.37 1,219,038 $444,948.87 1515 TOTAL: $2,206,538 $42,987,866.02 1616 KRUEP 3/9/2000 $327.00 50,000 $16,350,000.00 VP Worldwide1717 Sales (1999 to February1818 2001) 8/10/2000 $153.33 30,000 $4,599,900.00 19 19 9/6/2000 $150.13 20,000 $3,002,500.00 2020 10/24/2000 $140.06 14,600 $2,044,817.60

2121 TOTAL: 114,600 $25,997,217.60 2222

KURTZ2323 10/16/2000 $130.64 35,000 $4,572,330.00 Director 2424 TOTAL: 35,000 $4,572,330.00

GENTNER2525 10/16/2000 $130.88 100,000 $13,087,500.00 CFO (19992626 to January 2001) 2727 10/19/2000 $129.38 20,000 $2,587,676.00 TOTAL: 120,000 $15,675,176 2828

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1 NAME1 DATE PRICE SHARES PROCEEDS LAMOND2 8/7/2000 $142.14 1,504,112 $213,794,479.68 CEO2 & Director3 3 TOTAL: 1,504,112 $213,794,479.68 44 DENUCCIO 8/18/2003 $0.30 500,000 $150,000.00 President,55 CEO and Director (August66 2001 - present) 77 TOTAL: 500,000 $150,000.00 88 GRAND 7,360,405 $467,837,262.43 TOTAL: 99 Contemporaneous Trading 1010 416. 410. Lead Plaintiff and other members of the Class and Plaintiffs who have filed 1111 actions that are consolidated herein purchased Redback stock contemporaneously with 1212 defendants’ illegal insider sales of Redback stock. The chart attached as Exhibit “AB” hereto 1313 compares Plaintiffs’ purchases with defendants’ contemporaneous sales during the Class Period. 1414 1515 Suspicious Timing of Sales 417. 411. The overwhelming bulk of the Individual Defendants’ sales of Redback stock 1616 was suspiciously timed and calculated to maximize personal benefit from undisclosed inside 1717 information during the six-month period between June and December 2000. This period is when 1818 Qwest was actively purchasing Redback’s products in undisclosed quid pro quo agreements and 1919 immediately follows Redback’s May 30, 2000 press release touting its new SmartEdge™ 800 2020 product during the period of the greatest sustained inflated share prices of Redback’s common 2121 stock. As demonstrated by the chart below showing, Redback’s stock price (adjusted for 2-for-1 2222 splits on August 20, 1999 and April 4, 2000), from June 4, 1999 (before the Class Period) to 2323 December 31, 2003, the Company’s stock price rose dramatically from the beginning of the 2424 Class Period and remained at Class Period highs throughout the period of the greatest insider 2525 $200selling: 2626 2727 $150 $200 2828

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11 22 33 44 55 66 77 88 99 (The stock prices shown are adjusted for 2:1 stock splits in August 1999 and April 2000). 1010 PwC’s Scienter And False And Misleading Audit Reports 1111 418. 412. PwC is the largest firm of certified public accountants in the world and a 1212 member of the AICPA. As the long-time auditor of Redback, PwC was intimately familiar with 1313 Redback’s financial condition. PwC had continual access to and knowledge of Redback’s 1414 confidential corporate financial and business information, including agreements with Qwest and 1515 internal monthly financial statements. Accordingly, PwC was privy to, knew of, or disregarded 1616 with deliberate or extreme recklessness the accounting improprieties and violations of GAAP set 1717 forth above. PwC allowed Redback to utilize the improper revenue recognition techniques 1818 described herein and other improper accounting practices relating to the illicit quid pro quo and 1919 undisclosed sales inducements with Qwest, which PwC knew were improper and violated 2020 GAAP. 2121 419. 413. Defendant PwC audited the financial statements of Redback beginning in 2222 1996 and for each year thereafter including fiscal years 2000, 2001 and 2002 during the Class 2323 Period. PwC also reviewed the Company’s quarterly financial results in fiscal years 2000, 2001 2424 and 2002 through third quarter 2003, before they were publicly reported. At the conclusion of 2525 each audit, PwC issued an unqualified opinion, stating that it had conducted its audits in 2626 accordance with GAAS and that the financial statements fairly presented Redback’s financial 2727 position in accordance with GAAP. PwC knew and expected that its audit opinions would be 2828

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11 disseminated to Redback’s stockholders and other potential investors in the Company, who 22 would rely upon those opinions when making investment decisions. 33 420. 414. In addition to its audit work, PwC provided significant consulting, tax, 44 restructuring, securities filings, and acquisition-related services to the Company from 1996 55 through 2003 and received large fees for those services. 6 6 415. The Audit Committee’s Report in Redback’s 2001 Proxy Statement, stated: 7 7 Audit Fees. Fees for the fiscal year 2000 audit and the reviews of the Forms 10-Q are $235,000. 88 … 99 10 All Other Fees. Aggregate fees billed for all other services 10 rendered by PricewaterhouseCoopers LLP for the fiscal year ended 11 December 31, 2000 are $1,266,000, which principally related to 11 acquisitions. 12 12 416. The Audit Committee’s Report in Redback’s 2002 Proxy Statement, stated: 13 13 Audit Fees. Fees for the fiscal year 2001 audit and the reviews of the Forms 10-Q were $320,000. 1414 … 1515 16 All Other Fees. Aggregate fees billed for all other services 16 rendered by PricewaterhouseCoopers LLP for the fiscal year ended 17 December 29, 2001 were $809,509, which principally related to 17 acquisitions, securities filings, restructuring and tax related services. 1818 417. The Audit Committee’s Report in Redback’s 2003 Proxy Statement, stated: 1919 20 Audit Fees. Audit fees billed by PricewaterhouseCoopers LLP for 20 the audit of our annual financial statements for the fiscal year 21 ended December 31, 2002, and the review of our financial 21 statements included in our quarterly reports on the Form 10-Q 22 during the fiscal year ended December 31, 2002, totaled 22 approximately $425,000. 2323 … 24 24 All Other Fees. Aggregate fees billed for all other services 25 rendered by PricewaterhouseCoopers LLP for the fiscal year ended 25 December 31, 2002 were approximately $530,000, which 26 principally related to tax related services. The audit committee has 26 determined that the provision of such non-audit services is 27 compatible with the independent accountants maintaining their 27 independence. 28 28 418. The Audit Committee’s Report in Redback’s 2004 Proxy Statement, stated:

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1 1 Audit Fees. For the years ended December 31, 2003 and 2002, 2 PricewaterhouseCoopers billed Redback $936,000 and $425,000, 2 respectively, for professional services rendered for the audits of the 3 consolidated financial statements of Redback, the review of 3 Redback’s financial statements included in quarterly reports and 4 assistance with and review of the registration statements and other 4 regulatory filings. 5 5 Audit Related Fees. For the years ended December 31, 2003 and 6 2002, PricewaterhouseCoopers billed Redback $59,000 and 6 $54,000, respectively, for assurance and related services related to 7 consultations concerning financial accounting and reporting 7 standards and Sarbanes-Oxley Section 404 advisory work. 8 8 Tax Fees. For the years ended December 31, 2003 and 2002, 9 PricewaterhouseCoopers billed Redback $398,000 and $476,000, 9 respectively, for services related to federal, state, and international tax compliance, tax advice and tax planning. 1010 11 All Other Fees. PricewaterhouseCoopers billed Redback $2,000 in 11 each of the years ended December 31, 2003 and 2002 for services 12 rendered for the license of an accounting and reporting research 12 tool. 1313 421. 419. Thus, in total, PwC received fees of approximately $1.5 million, $1.1 1414 million, $955,000, and $1.4 million respectively, in 2000, 2001, 2002 and 2003 for audit and 1515 other services performed for Redback. PwC also used its audit practice at Redback to cross-sell 1616 consulting services to other technology companies that were formed by KPCB and other 1717 powerful Silicon Valley venture capital firms and created a lucrative information technology and 1818 systems risk management consulting service and practice that brought millions of dollars to PwC 1919 and its partners. 2020 422. 420. PwC held itself out globally as a “recognized leader in information security

2121 consulting” and formed many strategic alliances with companies funded and owned by KPCB 2222 and other companies affiliated with Defendant Khosla such as Sun Microsystems, which held 2323 itself out as “the world’s top supplier of open network computing solutions.” Sun Microsystems 2424 was founded by Defendant Khosla. The powerful Silicon Valley venture capital firms, like 2525 KPCB, Norwest and Sequoia controlled access to many lucrative business opportunities and 2626 provided access to those opportunities to PwC, which allowed PwC to earn millions of dollars in 2727 revenues. As early as 1997, PwC announced an alliance with Internet Security Systems (“ISS”), 2828 which was a supplier of security management systems for network protection and also was

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11 funded and privately held by KPCB. PwC’s alliance with ISS continued during the Class Period 22 as did another alliance between PwC’s Management Consulting Services (“PwC MCS”) and Sun 33 Microsystems. 44 423. 421. PwC MCS is a member of PwC’s worldwide network of firms. In 1995, 55 PwC and Sun Microsystems announced that they were expanding their existing relationship to 66 provide support for systems information, software, integration, installation and service to 77 simplify and speed for customers implementing “data warehousing projects.” In June 1998, 88 PwC and Sun Microsystems announced another alliance to bring a new service called “Compas” 99 to communications businesses and operators “around the globe.” Compas provided customers 1010 with a “fully integrated suite of applications such as customer care, billing, data warehousing, 1111 financial procurement and human resource management.” The press release announcing the 1212 Compas alliance between PwC and Sun Microsystems stated that Sun Microsystems had more 1313 than $9 billion in annual revenues with business in more than 150 countries. Also, on May 15, 1414 1998, Sun Microsystems and PwC announced that they had signed a “memorandum of 1515 understanding” to set up an “authorized Java centre” at PwC’s technology center in Salt Lake, 1616 Calcutta. According to the press release, the center was designed to provide consultancy and 1717 customized solutions to manufacturing customers in India. Similarly, in April 2000, PwC 1818 announced that it had launched a company known as Determinet, a European Internet and 1919 intranet strategic planning service company created by Sun Microsystems and PwC MCS. These 2020 alliances represent only a few of PwC’s lucrative ventures with affiliates of KPCB and Khosla. 2121 424. 422. Sun Microsystems’ formed a second Java center in India in May 1999, and 2222 the related press release stated: 2323 24 According to Forrester Research, the computing appliances market will grow 300 24 percent to $16.6 billion by the year 2002 as companies adopt appliances more 25 rapidly than PCs, thanks to their simplicity, reliability and lower total cost of 25 ownership. And IDC estimates that by the year 2002, the number of handheld, 26 non-PC devices will soar to 55 million in the USA rivaling the installed base of 26 home personal computers. 2727 425. 423. PwC’s worldwide information systems consulting practice reaped millions 2828 from its alliances with Khosla-affiliated companies and business ventures. With Khosla, KPCB

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11 and Sun Microsystems firmly rooted in the rapidly-developing computing and information 22 technology global sectors, PwC stood to profit handsomely from rubber-stamping Redback’s 33 improper accounting and standing idly by while Redback and Qwest boosted each other’s 44 revenues and stock price through reported revenues from improperly-induced and quid pro quo 55 sales of services and products that were not functional and, as in the case of the economically 66 worthless IRU, had no relation whatsoever to Redback’s business. PwC’s Annual Review for 77 fiscal year 2003 states that PwC’s revenues exceeded $14.3 billion in 2003. The InfoComm and 88 Technology segments of PwC’s practice constituted approximately 13% of PwC’s revenues, and 99 in 2001 and 2002, PwC reported that it earned $5.6 billion and $5.0 billion, respectively. Thus, 1010 PwC had multi-billion dollar incentives to turn a blind eye to Redback’s fraudulent scheme and 1111 deceitful course of business during the Class Period. 1212 426. 424. Additionally, PwC was required to review the information in Redback’s 1313 public filings that was outside the financial statements. AU § 550, Other Information in 1414 Documents Containing Audited Financial Information, states that the auditor “should read the 1515 other [non-financial] information and consider whether such information, or the manner of its 1616 presentation, is materially inconsistent with information, or the manner of its presentation, in the 1717 financial statements.” If the auditor determines that such other information is either inconsistent 1818 with the information contained in the financial statements or is aware of a material misstatement 1919 of fact contained in the other information, then the auditor should withhold the use of the audit 2020 report from the document containing the inconsistency or misstatement. AU § 550 at ¶¶ 04-06. 2121 Thus, PwC was required to review the non-financial disclosures in Redback’s public filings to 2222 determine whether there was any inconsistency with the financial information presented in those 2323 filings and, if so, PwC was required to withhold its certification of the financials. 2424 427. 425. Because PwC did not conduct its audits in accordance with GAAS, and 2525 because it acted with extreme and deliberate recklessness and consciously disregarded numerous 2626 warning signs that the Company’s financial statements and other public statements were 2727 materially false and misleading, PwC did not discover, or recklessly disregarded, the fraudulent 2828 acts, practices and course of business being perpetrated by the defendants; the fact that the

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11 Company’s revenues were overstated; and that Redback’s financial statements were not prepared 22 in accordance with GAAP. 33 428. 426. PwC failed to report or disclose the facts regarding the defendants’ 44 fraudulent scheme and deceitful course of business to the public because, by remaining silent 55 and issuing false and misleading audit opinions, PwC could and did continue to receive millions 66 of dollars in auditing and consulting work from Redback (and Redback’s affiliated companies) 77 and the Individual Defendants. Additionally, by participating in the fraud or with deliberate 88 recklessness allowing it to occur, PwC could continue its campaign to increase its market share 99 for auditing, accounting and consulting services to be performed for Internet and 1010 telecommunications companies in general. 1111 1212 1313 1414 1515 1616 1717 1818 1919 2020

2121 2222 2323 2424 2525 2626 2727 2828

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11 PwC’s Audits Of Redback Failed To Comply With GAAS 22 429. 427. In certifying Redback’s financial statements for 2000, 2001 and 2002, PwC 33 falsely represented that it had conducted its audits in accordance with GAAS, and that Redback’s 44 financial statements were prepared in conformity with GAAP. GAAS are those standards 55 recognized by the accounting profession as the professional standards issued by the Auditing 66 Standards Board of the AICPA, which are to be followed by auditors in conducting an audit to 77 determine if financial statements are presented in accordance with GAAP. 88 430. 428. During the Class Period, a series of unusual transactions, accounting 99 practices and other facts put PwC on notice that enhanced audit procedures were necessary. The 1010 rapid growth of Redback, especially in the face of a declining telecommunications sector, should 1111 have caused PwC to scrutinize Redback’s accounting and its relationship with Qwest. 1212 Additionally, the unusual and late-in-the-quarter transactions with Qwest, the unusual (for 1313 Redback) IRU purchase from Qwest, and Redback’s purchase of redundant and unneeded IT 1414 services from QCS, a Qwest affiliate, constituted additional “red flags” to PwC as it planned for 1515 and conducted its audit. 1616 431. 429. Rather than closely scrutinize Redback’s financial statements and accounting 1717 as required by GAAS, PwC deliberately or with deliberate recklessness chose to overlook 1818 irregularities in Redback’s sales to Qwest and improper revenue recognition from the sales. 1919 PwC knew that Redback announced several multi-million, multi-year agreements including an 2020 agreement with Qwest in June 1999, but subsequently the Company failed to ship any equipment 2121 to Qwest or book any revenues for the announced sales for over one year, until the third quarter 2222 of 2000. In addition, PwC knew that Qwest was Redback’s single largest customer and that 2323 Redback recorded revenues from large sales to Qwest at the end of each quarter, which not 2424 coincidentally generated the amount of revenue required for Redback to meet its financial targets 2525 and Wall Street’s expectations. PwC knew that Redback booked $80.6 million in revenue 2626 (approximately 20% of the Company’s total revenue) from its sales to Qwest in quid pro quo 2727 deals, including the $7 million economically worthless IRU purchase that had no business 2828

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11 purpose whatsoever to Redback, but PwC simply ignored the obviously improper nature of the 22 revenue booked in these exchange transactions. 33 432. 430. PwC also knew, from its audit, consulting and other non-audit services 44 provided to Redback, that Redback managed its own IT systems internally. Thus, PwC knew 55 that Redback had no need for the ASP services that Redback purchased from QCS, a Qwest 66 affiliate, as QCS would, under that contract, manage various IT applications that Redback was 77 already managing in-house. PwC also was well aware of the market cost of IT services, and 88 knew that Redback was paying QCS for such services, and thus knew that such amount was 99 astronomical given Redback’s size and needs. 1010 433. 431. According to the VP NA Sales, PwC also was aware that Redback had 1111 between $35-40 million in outstanding receivables for several months from sales of equipment to 1212 Qwest and that Redback also refused to pay for non-performing ASP services that it had 1313 purchased from Qwest. PwC also knew that Redback had agreed to purchase the $18 million of 1414 unneeded ASP services from an entity – Qwest (or Qwest’s affiliate) – that was also agreeing to 1515 purchase $20 million of Redback’s SMS™ 10000 equipment. 1616 434. 432. Year after year, Redback announced multi-million, multi-year agreements 1717 with Qwest and other customers, and these purported agreements (which clearly reflected the 1818 “friends and family” shares and Siara warrants provide to customers) were available to and were 1919 or should have been reviewed by PwC because the revenue generated by sales to large 2020 customers, and especially Qwest, was highly material to Redback’s reported revenues. PwC 2121 knowingly or with deliberate recklessness ignored the obvious material misstatements in 2222 Redback’s financial statements, particularly with regard to revenues, and the true nature of 2323 Redback’s fraudulent course of business with Qwest and other customers. 2424 435. 433. PwC was aware of other facts regarding the fraud. PwC knew, from its 2525 attendance at Redback Board meetings, that Redback was not by August 2000 able to 2626 successfully develop the SmartEdge™ product and so could not ship in 2001 as planned. Thus, 2727 PwC knew that Redback could not meet its projected revenue targets, established guidance or 2828 Wall Street’s expectations in 2001, but the Board refused to revise the Company’s revenue

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11 targets or business plan for 2001. Thus, PwC knew that the Company was already lying to 22 investors, as its projected revenue and guidance, based on the SmartEdge™ sales that would not 33 occur, were false. 44 436. 434. Under GAAS, particularly AU § 316, Consideration of Fraud in a Financial 55 Statement Audit, and AU § 110.01A, auditors have a defined responsibility to detect material 66 misstatements in financial statements due to fraud. AU § 316 specifically identifies risk factors 77 relating to misstatements arising from fraudulent financial reporting, including the lack of 88 internal controls, declining industry conditions, management incentive compensation plans, and 99 other factors showing a declining business operation. The SEC has long taken the position that 1010 auditors are expected to detect certain kinds of fraud. See Accounting Series Releases Nos. 19 1111 and 292 (“Since routine audit procedures cannot always be relied upon to detect management 1212 fraud, the auditor must always be alert to unusual discrepancies and inconsistencies – such as . . . 1313 illogical management explanations and major confirmation exceptions – and take appropriate 1414 steps to investigate them.”). 1515 437. 435. PwC violated AU § 316, which provides that an auditor must have 1616 considered the following factors in assessing audit risk: (a) whether management compensation 1717 creates a motivation to engage in fraudulent financial reporting, (b) domination of management 1818 by a small group; (c) one’s actions which are not supported by proper documentation or are not 1919 appropriately authorized; (d) reporting records or files that should be, but are not, readily 2020 available and are not promptly produced when requested; and (e) lack of timely or appropriate 2121 documentation for transactions. PwC violated AU § 316 and the SEC rules governing its 2222 conduct by failing to properly consider these risk factors and by failing to perform properly the 2323 audit procedures required in connection with the audits of Redback's 2000, 2001 and 2002 year- 2424 end financial statements. 2525 438. 436. PwC ignored risk factors that pointed to fraudulent financial reporting as 2626 outlined in AU Section 316, Consideration of Fraud in a Financial Statement Audit. Among the 2727 many “red flags” putting PwC on notice that the accounting at Redback was improper, or at least 2828 demanded more scrutiny, are the following:

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1 1 a. Redback’s executives had employment contracts that motivated them to engage in 2 fraudulent financial reporting because their bonuses, stock options and other 2 incentives were linked to the Company’s operating results and financial position; 3 3 b. Redback’s management was dominated by a small group with very significant 4 stock holdings and options, and the Company lacked compensating controls such 4 as effective oversight by an independent board of directors and audit committee; 5 5 c. Redback insiders sold $150 million of their Company stock and distributed $1.7 6 billion of their Redback holdings and the Company contracted to purchase 6 millions of dollars of products and services from Qwest, all while Redback incurred overall operating losses; 77 8 d. Redback was actively engaging in mergers and acquisitions and relying on an 8 artificially-inflated stock price to fund the acquisitions; 9 9 e. Redback’s executives were employing aggressive purchase accounting in connection with the Company’s acquisitions; 1010 11 f. The telecommunications sector was volatile in 2000 and 2001, and Redback’s 11 reported double-digit revenue growth ran counter to the struggling telecommunications industry; 1212 13 g. Redback was dependent on a select few customers, including Qwest, for its 13 revenues; 14 14 h. Redback reported two separate multi-year, multi-million dollar contracts with 15 Qwest, but the Company’s sales to Qwest immediately ceased in 2002 after the 15 SEC began investigating suspicious revenue-recognition practices at Qwest; 16 16 i. Redback entered into numerous material sales transactions with Qwest close to the end of reporting periods; 1717 18 j. Qwest was purchasing millions of dollars of products (including the non- 18 operational SMS™10000) from Redback that had not been tested by Qwest, as 19 was customary and required under Qwest’s business procedures, and the 19 purchases were made at the end of reporting periods in amounts that permitted Redback to meet its target revenues; 2020 21 k. Redback purchased an economically worthless IRU from Qwest for $7 million in 21 2001 that had absolutely no business purpose or function at the Company, and 22 PwC was aware that in March 2002, the SEC began a public investigation of 22 Qwest’s improper revenue recognition practices in 2000 and 2001, including improper reciprocal IRU sales; 2323 24 l. Redback was not able to resell the $7 million IRU that it had purchased from 24 Qwest at the end of the first quarter 2001; 25 25 m. Redback failed to timely pay Qwest for the ASP services purchase, and Qwest failed to timely pay Redback for its $35-40 million purchase in 2000-2001; 2626 27 n. At the direction of defendant DeNuccio, Redback hired Arnold for a key 27 executive position immediately prior to public disclosure of an SEC investigation 28 of Arnold’s participation in fraudulent revenue recognition practices at Qwest, 28 although Arnold had no experience in Redback’s business; and

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1 1 o. In February 2003, the SEC named Joel Arnold as a defendant in a civil action 2 relating to his participation in a scheme to artificially inflate revenues while he 2 was a sales executive at Qwest in 2000 and 2001, which was when Qwest and Redback engaged in a series of material reciprocal transactions. 33 439. 437. PwC further violated AU § 316, by failing to properly evaluate risks of 44 material misstatements in Redback’s financial records by (i) failing to exhibit the requisite 55 professional skepticism with regard to Redback’s financial statements, (ii) failing to assign 66 technically proficient personnel to conduct the audits, (iii) failing to recognize that Redback’s 77 accounting policies were unusually aggressive, and (iv) failing to ensure that Redback 88 maintained sufficient internal controls to prevent financial and accounting misstatements. 99 440. 438. PwC also violated GAAS because its audits improperly departed from GAAS 1010 in the following ways: 1111 12 a. PwC violated GAAS general standards that auditors should maintain 12 independence in mental attitude for all matters relating to an engagement and that due professional care must be exercised in performance of the audit. 1313 14 b. PwC violated GAAS field work standards that require audits to be adequately 14 planned and supervised and require the auditor to obtain a sufficient 15 understanding of internal controls and sufficient, competent evidential matter to 15 afford a reasonable basis to support an opinion on the financial statements under audit. 1616 17 c. PwC violated GAAS standards of reporting that require the audit report to state 17 whether financial statements are prepared in accordance with GAAP, to identify 18 circumstances that consistently fail to follow GAAP, to identify informative 18 disclosures that are not reasonably adequate and to contain an expression of opinion or reasons why an opinion cannot be provided. 1919 2020 441. 439. GAAS required PwC to consider whether the disclosures in Redback’s 2121 financial statements were adequate. SEC rules and regulations and GAAS require adequate 2222 disclosure of all material matters. GAAS requires the disclosure of matters related to the “form, 2323 arrangement and content of financial statements. . . . An independent auditor considers whether 2424 a particular matter should be disclosed in light of the circumstances and facts of which he is 2525 aware at the time.” AU § 431.02-.03, Adequacy of Disclosure in Financial Statements. PwC 2626 knew that Qwest was Redback’s largest customer and knew or with deliberate recklessness 2727 disregarded that Redback failed to adequately disclose material matters relating to its 2828 transactions with Qwest.

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11 442. 440. PwC needed corroborating documents to support the assertions made by 22 Redback in the financial statements, as mandated by AU § 316, Evidential Matter. Without such 33 evidence to support questionable transactions such as Qwest’s purported multi-year, multi- 44 million dollar agreements with Redback, PwC did not have a reasonable basis for its audit 55 opinion. PwC deliberately ignored or with deliberate recklessness failed to follow the auditing 66 guidance in assessing Redback’s inadequate disclosures regarding the Company’s quid pro quo 77 deals with Qwest, and PwC should have closely evaluated the fair value of all transactions 88 between Redback and Qwest, including Redback’s suspicious IRU purchase in 2001. 99 443. 441. PwC disregarded with deliberate or extreme recklessness Redback’s obvious 1010 failure to report the nature of material transactions with Qwest that were essential to Redback’s 1111 reported financial results. Contrary to GAAS, PwC failed to require revisions to Redback’s 1212 disclosures and failed to issue qualified opinions on Redback’s financial statements. If Qwest 1313 had properly audited Redback in accordance with GAAS, it would have verified that equipment 1414 that Redback shipped was operational (but it was not), made sure that the product actually 1515 shipped (and was not subsequently returned)(but it was returned), and sent confirmations to 1616 customers to verify purchases and agreements (but PwC did not do so). PwC also should have 1717 requested to review all agreements that Redback announced publicly as being multi-million, 1818 multi-year agreements and then should have required Redback to report undisclosed sales 1919 incentives and recorded the sales incentives in accordance with GAAP. 2020 444. 442. Throughout 2000 to October 2003, in connection with its audits of Redback’s 2121 financial statements, PwC violated numerous professional standards, including the following: 2222 23 23 a. PwC violated GAAS General Standard No. 1, which provides that “the audit is to 24 be performed by a person or persons having adequate technical training and 24 proficiency as an auditor.” Given the complex nature of Redback’s and Qwest’s 25 products and sales transactions and the determination of acquisition-related 25 charges for In-Process Research and Development projects, it was incumbent 26 upon PwC to ensure the individuals who performed the audit had the requisite 26 technical proficiency in those areas. PwC failed to do so. 27 27 b. PwC violated GAAS General Standard No. 2, which requires that an 28 independence in mental attitude be maintained by the auditor in all matters related 28 to the assignment. Given PwC’s substantial non-audit fees paid by Redback,

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1 1 PwC lacked the requisite independence when it audited the Company’s financial statements. 22 3 c. PwC violated GAAS General Standard No. 3, and AU Section 230, Due 3 Professional Care in the Performance of Work, paragraph .01 which require that 4 due professional care be exercised by the auditor in the performance of the audit 4 and the preparation of the report, as opposed to the deliberate reckless disregard 5 described herein. Due professional care concerns what the independent auditor 5 does and how well he or she does it. It also requires that the auditor exercise 6 professional skepticism. PwC violated this standard by not recognizing the 6 questionable nature and accounting for Redback’s quid pro quo sales to Qwest 7 and its numerous acquisitions. Given the pervasiveness of the accounting 7 violations discussed herein, PwC failed to exhibit the requisite professional care in performing its audits. 88 9 d. PwC violated GAAS Standard of Field Work No. 2, which requires the auditor to 9 make a proper study of existing internal controls, including accounting, financial 10 and managerial controls, to determine whether reliance thereon was justified, and 10 if such controls are not reliable, to expand the nature and scope of the auditing 11 procedures to be applied. The standard provides that a sufficient understanding of 11 an entity’s internal control structure be obtained to adequately plan the audit and 12 to determine the nature, timing and extent of tests to be performed. AU § 150.02. 12 In all audits, the auditor should perform procedures to obtain a sufficient 13 understanding of three elements of an entity’s internal control structure: the 13 control environment, the accounting system, and control procedures. AU § 14 319.02, Consideration of Internal Control in a Financial Statement Audit. The 14 control environment, which includes management’s integrity and ethical values, 15 is the foundation of internal control and provides discipline, structure and sets the 15 tone of an organization. After obtaining an understanding of an entity’s internal 16 control structure, the auditor assesses the entity’s control risk. AU § 319.02. 16 Control risk is the risk that a material misstatement in an assertion by 17 management contained in a company’s financial statements will not be prevented 17 or detected on a timely basis by an entity’s internal control structure policies or 18 procedures. AU § 319.29. The ultimate purpose of assessing control risk is to aid 18 the auditor in evaluating the risk that material misstatements exist in the financial statements. AU § 1919 20 319.61. The unrelenting downturn in the telecommunications industry was a 20 significant factor that negatively affected the control environment at Redback and 21 should have been a “red flag” to PwC as it planned for and conducted its audit. In 21 the course of auditing the financial statements of Redback, PwC either knew or 22 with deliberate recklessness disregarded facts that evidenced that Redback’s 22 management was establishing unrealistic financial and sales expectations and 23 entering into reciprocal transactions with Qwest with no real business purpose or 23 need. PwC disregarded weaknesses and deficiencies in Redback’s internal 24 control structures and failed to adequately plan the audit or expand the auditing 24 procedures to include actual review of all agreements with Qwest and substantive tests of account balances as required by GAAS. 2525 26 e. PwC violated GAAS Standard of Reporting No. 1, which requires the auditor to 26 attest to whether the financial statements are presented in accordance with GAAP. 27 PwC’s opinion falsely represented that Redback’s financial statements were 27 presented in conformity with GAAP when they were not for the reasons alleged herein. Redback’s improper accounting practices discussed above rendered the 2828

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1 1 Company’s financial statements materially false and PwC should have detected, corrected and disclosed the misstatements. 22 3 f. PwC violated GAAS Standard of Reporting No. 3, which provides that 3 “informative disclosures in the financial statements are to be regarded as 4 reasonably adequate unless otherwise stated in the report.” The financial 4 statement disclosures failed to adequately disclose the quid pro quo nature of the 5 transactions entered into by and between Redback. Furthermore, because of the 5 magnitude and scope of the transactions with Qwest — which accounted for 6 almost 20% of Redback’s revenues in 2000 and 2001 — PwC should have 6 insisted on, and in fact had a professional responsibility in demanding, full and 7 complete disclosure of Redback’s dealings with Qwest, including the resulting 7 accounting irregularities prior to the public release of Redback’s financial statements. 88 9 g. PwC violated GAAS Standard of Reporting No. 4, which requires that when an 9 opinion on the financial statements as a whole cannot be expressed, the reasons 10 therefore must be stated. PwC should have stated that no opinion could be issued 10 by it on Redback’s fiscal 2000, 2001 and 2002 financial statements or issued an 11 adverse opinion stating that those financial statements were not fairly presented. 11 PwC knowingly or with deliberate recklessness allowed Redback to make 12 material misrepresentations regarding the Company to its shareholders and to the 12 investing public during the relevant time period. 13 13 h. PwC violated SAS No. 54 and AU § 316 by failing to perform the audit 14 procedures required in response to known or possible improper acts by Redback. 14 GAAS required PwC to develop a plan that accounted for risks that Redback’s 15 financial statements included material misstatements arising from fraudulent 15 financial reporting. AU § 316. Specifically, to comply with GAAS, PwC should 16 have considered, but did not, the risk factors identified above that were present at 16 Redback in designing the audit procedures to be performed. However, PwC 17 ignored the risk factors and permitted Redback to overstate its revenue to meet 17 unrealistic financial targets. Thus, PwC failed to properly audit Redback’s 18 financial statements in accordance with GAAS and violated the trust placed in 18 PwC by Redback’s shareholders and investors. 19 19 i. PwC violated GAAS and the standards set forth in AU §§ 311 and 316 (Planning 20 and Supervision) at a minimum by, among other things, failing adequately to plan 20 its audit and properly supervise the work of assistants and to establish and carry 21 out procedures reasonably designed to search for and detect the existence of 21 errors and irregularities which would have a material effect upon the financial statements. 2222 23 j. PwC violated GAAS, particularly AU Section 333, Management Representations, 23 which requires the auditor to obtain written representations from management and 24 to investigate circumstances and evaluate the reliability of those representations 24 when they are contradicted by other evidential matter obtained in the audit. PwC 25 improperly relied on Redback management’s representations as a substitute for 25 the application of thorough auditing procedures as a basis for PwC’s unqualified 26 opinions on Redback’s financial statements. PwC was aware that any 26 representations made by management were suspect because management was 27 establishing unrealistic financial targets and entering into undisclosed sales pacts 27 with Qwest executives to meet its targets. Redback’s executives also had enormous personal financial incentives to prop up the Company’s sales and 2828

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1 1 revenues. PwC therefore should have considered the reliability of all Redback management representations prior to accepting them. 22 3 k. PwC violated AU Section 341, The Auditor’s Consideration of an Entity’s Ability 3 to Continue As A Going Concern, which requires the auditor to evaluate, based on 4 relevant conditions and events that exist at or have occurred prior to the 4 completion of field work, whether there is a substantial doubt about the entity’s 5 ability to continue as a going concern and, if so, to include an explanatory 5 paragraph in the auditor’s opinion to reflect that conclusion. As PwC knew that 6 Redback’s financial condition was built upon sales to Qwest, Redback’s largest 6 customer, and knew or with deliberate recklessness disregarded that Redback was 7 purchasing Qwest’s business in the quid pro quo deals, PwC knew, or deliberately 7 or with deliberate recklessness ignored the fact that Redback’s ability to continue 8 as a going concern was in jeopardy, and so PwC should have provided that 8 conclusion in its audit opinions. 9 9 l. PwC violated GAAS by failing to obtain sufficient “competent evidential matter” 10 to afford a reasonable basis for an opinion regarding Redback’s financial 10 statements, as required by AU §326. PwC issued “clean” unqualified opinions on 11 Redback’s financial statements throughout the relevant periods, when the 11 Company’s financial statements were not prepared in conformity with GAAP, a 12 clear violation of this auditing standard. In addition, PwC consistently failed to 12 exercise the required professional skepticism for blatantly suspicious undisclosed 13 related-party transactions with Qwest such as the IRU transaction in 2001. AU§ 13 230. 14 14 m. PwC violated GAAS in that it was required to identify all significant estimates for 15 In Process Research and Development (“IPRD”) and audit the amounts in relation 15 to historical patterns, review subsequent transactions and develop its own 16 expectation of the estimate in order to verify the amounts recorded in Redback’s 16 financial statements. AU§ 342. In particular, as part of performing its audits, 17 PwC was required by AU Section 342, Auditing Accounting Estimates, paragraph 17 .01 to obtain and evaluate sufficient evidential matter to support significant 18 accounting estimates. Companies routinely take write-offs in connection with 18 business combinations or acquisitions in a given period that are subject to some 19 uncertainty at the time of the transaction. If the charge taken is a fair estimate of 19 the assets acquired and the liabilities undertaken, the charge is proper and 20 appropriate. The SEC has specifically denied excessive write-offs by companies 20 such as WorldCom for IPRD for acquisitions of Internet or telecommunications 21 companies. By failing to obtain sufficient evidence to confirm the size of the 21 various research projects at companies Redback acquired during the Class Period, 22 or by simply disregarding the overstatement of Redback’s charges for IPRD in 22 connection with various acquisitions, PwC violated AU Section 342. 23 23 n. PwC violated GAAS in that it was required to issue a qualified opinion or 24 disclaim an opinion altogether as a result of Redback’s ongoing fraudulent 24 scheme with Qwest. AU § 508, Reports on Audited Financial Statements. AU § 25 410, Adherence to Generally Accepted Accounting Principles, paragraph .01 25 requires that the audit report state whether the financial statements are presented 26 in accordance with GAAP. Because a number of Redback’s accounting practices 26 violated GAAP, PwC should have issued adverse or negative audit reports. To the 27 contrary, PwC issued “clean” unqualified opinions on Redback’s financial 27 statements throughout the Class Period, suggesting that the Company’s financial 28 statements were prepared in conformity with GAAP, when in fact they were not, a 28 clear violation of this auditing standard.

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1 1 o. PwC was required to qualify its opinion if there was any doubt about the 2 Company’s ability to proceed as a going concern. PwC knew that Qwest was 2 Redback’s largest customer and that sales to Qwest comprised a material (in some 3 cases up to 27%) of Redback’s total sales in a quarter. PwC also knew or with 3 deliberate recklessness disregarded that Redback’s quid pro quo sales to Qwest 4 were improper and that, as a result, Redback’s ability to continue as a going 4 concern was in jeopardy. PwC ignored other factors that pointed to Redback’s 5 demise, such as the suspicious purchase of an IRU from Qwest that was unneeded 5 and unwanted by any other company; excessive write-offs in acquisitions; 6 reliance on Qwest and a few other customers in the declining telecommunications 6 sector for all of Redback’s revenues; and material sales to Qwest at the end of 7 reporting periods that enabled Redback to meet unrealistic financial projections. 7 These facts required PwC to amend its audit report to bring Redback’s precarious 8 financial condition to the attention of shareholders as specified in AU Section 8 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern. 99 10 p. PwC failed to obtain sufficient, competent evidential matter as to the fair 10 presentation, in all material respects, of Redback’s financial position, results of 11 operations, and its cash flows in conformity with generally accepted accounting 11 principles. AU §§ 110, 150. AU Section 411, The Meaning of Present Fairly in 12 Conformity with GAAP, recognizes the importance of reporting transactions in 12 accordance with their substance. PwC failed to request and obtain competent 13 evidential matter regarding Redback’s sales to Qwest — its largest customer — 13 that would have enabled PwC to determine whether those transactions had a 14 business purpose or were properly accounted for in accordance with GAAP, or 14 whether the substance of these transactions differed from their form, in which 15 case PwC was required to insist that Redback comply with GAAP and fully 15 disclose its relationship with and the nature of its dealings with Qwest. PwC 16 failed to raise questions regarding Redback’s suspicious purchases, obtuse 16 financial disclosures and excessive write-offs in acquisitions. Had PwC taken 17 those steps, it would have uncovered the fraudulent nature of Redback’s 17 accounting practices, but PwC’s failure to do so, despite its responsibilities under 18 GAAS, and the presence of the many red flags, constitutes either knowledge of 18 the fraud or deliberate reckless disregard of it. 19 19 q. PwC violated GAAS in failing during its performance of interim reviews of 20 quarterly financial statements to have a sufficient knowledge of internal controls, 20 identify areas of potential misstatement and the likelihood of occurrence, or 21 compare the amounts and ratios in the financial statements with expectations 21 developed by PwC. Had PwC conducted an adequate quarterly review, PwC 22 would have uncovered significant matters in the quarterly financial statements 22 that were not in compliance with GAAP. Transactions such as recording 23 revenues for transactions in which Redback was forced to buy valueless products 23 and services from Qwest before Qwest would honor its obligations to Redback 24 should have been adjusted and brought to the attention of the Audit Committee by 24 PwC as required by AU Section 722, Interim Financial Information. PwC 25 deliberately or with deliberate recklessness ignored Redback’s routine practice of 25 booking millions of dollars from sales to Qwest immediately prior to the end of a 26 quarter reporting period and simultaneously purchasing unwanted and unneeded 26 products from Qwest. 27 27 r. PwC violated GAAS by failing to obtain evidence directly from third parties as a 28 means of testing Redback’s balance sheet amounts, as required by AU § 329. 28 Had PwC performed any testing through confirmations with Qwest, it would have obtained evidence that Qwest was not testing Redback’s products in its labs (as FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 169 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 171 of 198

1 1 Qwest routinely did before products were incorporated into its network), and PwC 2 would also have learned that Qwest stored products it purchased from Redback in 2 warehouses because Qwest had no real business need for those products. AU § 330. 33 4 d. AU Section 431, Adequacy of Disclosure in Financial Statements, paragraph .01 4 provides that informative disclosures in the financial statements are to be regarded 5 as reasonably adequate unless otherwise stated in the report. The financial 5 statement disclosures failed to adequately disclose the terms or the motives 6 behind the numerous transactions between Qwest and Redback, a clear violation 6 of this standard. PwC should have required, and in fact had a professional 7 responsibility to demand, full and complete disclosure of important facts 7 regarding Redback’s dealings with Qwest prior to the public release of the Company’s financial statements. 88 99 445. 443. Because Redback’s financial statements were not in conformity with GAAP, 1010 PwC should have required Redback to make the appropriate adjustments to bring them in 1111 conformity with GAAP, or should have issued a qualified audit report or an adverse audit 1212 opinion stating that the financial statements did not present fairly the results of operations and 1313 financial position of Redback in conformity with GAAP as required by AU Section 508, Reports 1414 of Financial Statements. 1515 VII. LOSS CAUSATION 1616 446. 444. From prior to the Class Period and through the end of the period, Redback’s 1717 stock price was massively inflated as the result of a long-standing and comprehensive scheme to 1818 inflate its current and anticipated future revenues. Redback sought to convince the market of its 1919 future cash flows by demonstrating its current revenues and by projecting its future results. 2020 Redback’s public statements, designed to convince the market of its future cash flows, were

2121 knowingly and materially false because much of its reported revenue was the result of illicit quid 2222 pro quo agreements with its customers such as Qwest and UUNET, and its statements regarding 2323 projected results were knowingly false when made because of known technical problems with its 2424 products. 2525 447. Redback’s revenue and ability to obtain contracts with large telecommunications 2626 businesses was material information to Plaintiffs. Had Plaintiffs known the truth – that the 2727 Company’s contracts were nothing more than revenue purchasing and that the products Redback 2828 was trying to sell were inoperable – Plaintiffs either would not have purchased Redback stock at

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11 all, or would have done so only at substantially lower prices than the artificially inflated prices 22 which they actually paid. 33 448. The Defendants’ fraudulent scheme was gradually revealed to the market through 44 announcements blaming the stock’s decline on the economy, the telecommunications market 55 slowdown, announcements concerning investigations into its customers, earnings releases, SEC 66 filings and other public statements. As alleged herein, the receipt of this information caused 77 progressive declines in the price of Redback’s stock, causing Plaintiffs to suffer significant 88 losses. 99 449. 445. Beginning in Spring and Summer of 2001, Redback’s ability to engage in 1010 illicit agreements to promote sales of its equipment was greatly reduced because its customers 1111 (Qwest, UUNET, etc.) were themselves under enormous pressure from declining sales and could 1212 no longer hide the fact that Redback’s products were not desirable to the market and had 1313 substantial technical difficulties. Moreover, SEC and market scrutiny of Qwest effectively 1414 ended Redback’s ability to engineer fraudulent sales agreements with Qwest. Thus, Redback 1515 began to announce delays in the readiness for market of certain new products, lower than 1616 expected sales and declining expectations for the future. As a result, Redback’s stock price 1717 declined substantially, from a high of above $150 per share in late 2000 to less than $1.50 per 1818 share by the end of September 2001. Information contradicting Redback’s earlier statements 1919 continued to dribble out through 2020 450. Redback began its effort to condition the market to the decline in and ultimate end 2121 of the bribe-induced revenues from Qwest, UUNET and others in April 2001. On April 2, 2001, 2222 Redback foreshadowed lower than expected first quarter revenues. Instead of blaming it on 2323 declining fraudulent deals with Qwest, undisclosed delays in the SmartEdge product, and 2424 inoperable excess SMS equipment, they blamed it on a weakened global telecommunications 2525 market. Redback’s stock price fell from a close of $13.08 on March 30, 2001, to $9.77 on April 2626 3, 2001, a decline of 25 percent. 2727 451. More negative news trickled out in May. A May 23, 2001 analyst report from 2828 Dain Rauscher Wessels, reported that Qwest started to order less product from Redback than

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11 expected. While the analyst, accepting Redback’s cover story, blamed this on inventory Qwest 22 already had on hand, the real reasons for Qwest’s lower orders were that: a) Qwest did not need 33 the equipment it had purchased; b) the SMS equipment it had ordered was inoperable; and c) all 44 of Qwest’s obligations under the secret stock-induced agreements had been fulfilled. In reaction 55 to this news, the Company’s stock dropped from a close of $17.31 per share on May 22, 2001 to 66 a close of $16.05 the next day. By the end of the week it had declined to $15.71, a decline of 77 9.24 percent. 88 452. Beginning in late June 2001, and continuing through the end of September 2001, 99 Redback made a series of announcements that provided to the market information demonstrating 1010 that, without the bribe-induced orders from Qwest and others, Redback had minimal sales and its 1111 stock price was enormously overvalued. On June 27, 2001, Redback’s stock price was $11.31. 1212 By September 28, 2001, its stock price had declined to only $1.45, a loss of 87 percent of 1313 Redback’s market capitalization. The summer 2001 announcements by Redback demonstrated 1414 (although couched by Redback merely as reports regarding its financial preformance) that 1515 Redback’s ability to bribe its way to higher revenues was at an end because Qwest and other 1616 consumers simply could not purchase from Redback products that did not work and which these 1717 telecom providers did not need: 1818 19 a. On June 27, 2001, Redback announced lower expected revenues in the second 19 quarter 2001 of approximately $55 to $60 million and additional write-offs for 20 excess and obsolete inventory. The write-off and disastrous revenue decline was 20 due to the fact that neither Qwest nor Williams were ordering any equipment from 21 Redback in second quarter 2001 because Redback’s fraudulent scheme with 21 Qwest had come to an end as Qwest had fulfilled its obligations to Redback under 22 secret stock-induced agreements and further because Williams was on the brink of 22 bankruptcy and would not be ordering any equipment from Redback. Although 23 Redback tried to attribute the bad news to “an unprecedented downturn in the 23 telecommunications marketplace,” the truth started to become known regarding 24 Redback’s stagnant sales, lack of hard sales to back up previously-announced 24 multi-million dollar agreements with Qwest and Williams, excess equipment and 25 declining revenues. From its June 27th close of $11.31, Redback’s stock declined 25 to $7.02 by July 10th. 26 26 b. On July 11, 2001, Redback announced its second quarter 2001 financials, largely 27 mirroring its June pre-announcement. The release of 2nd quarter data by Redback 27 precipitated a July 12, 2001 analyst report. The analyst report indicated that 28 delays from Williams and other telecommunications companies compounded 28 Redback’s financial problems, but discussed the fact that there were trials ongoing with five customers for some of Redback’s new equipment. The bad FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 172 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 174 of 198

1 1 news overshadowed any positive data and the Company’s stock price dropped to 2 $6.66 by the close on July 12 and it continued its decline into August. As 2 outlined above, the telecommunications downturn was only one piece of the 3 downturn. Qwest and Williams were not ordering any equipment from Redback 3 in the second quarter 2001 because Qwest had fulfilled all its obligations under 4 the secret agreements and Williams was on the brink of bankruptcy; additionally, 4 the reported trials of the SmartEdge equipment were non-existent. 5 5 c. On August 14, 2001, the Company filed with the SEC the “August 2001 10-Q”, 6 which reiterated the financial results previously announced on July 11, 2001 and, 6 as in prior filings, noted the importance of Redback’s sales to key customers. The 7 filing stated that Qwest accounted for 27% of the Company’s total revenue for the 7 first six months of 2001 and 15% of Redback’s revenue for all of 2000. 8 Redback’s stock, which had closed on July 11, 2001 to $6.53, closed on August 8 14, 2001 at $6.05, a 7.3% drop. 9 9 d. After the release of the August 2001 10-Q, Redback’s stock continued its slide 10 through the end of September, finally closing at $1.45 on September 28, 2001. 10 Redback’s stock had begun dropping in June and continued dropping through the 11 end of September 2001 because of the series of revelations that the Company’s 11 revenues were declining as a result of Redback’s failure to obtain any business 12 from Qwest. The real cause of this inevitable result, once the bribes had stopped 12 being paid, was hidden from investors. 1313 453. After rebounding during the 3rd quarter of 2001 and the 1st quarter of 2002 on the 1414 basis of false reassurances about the target launch of new SmartEdge™ router equipment (which 1515 Redback knew was moribund in production) and related revenues (from sales the company knew 1616 would not occur) (see supra paras. 243-51), beginning in March 2002, a series of announcements 1717 demonstrated to investors that Redback would not be able to use sales to Qwest to bolster its 1818 revenues. What the market did not know was that Redback never had made any legitimates sales 1919 to Qwest and the Company’s stock price had been enormously and improperly inflated for years. 2020 Thus, between March 11, 2002 and October 10, 2002, Redback’s stock price declined from

2121 $4.30 to $0.27 per share, a decline of 94 percent. This decline came in spurts as Redback began 2222 its selective partial disclosure. 2323 454. On March 11, 2002, Qwest issued a press release acknowledging that the SEC 2424 was investigating its revenue recognition practices, including its sales of IRUs and the sale of 2525 equipment by Qwest to customers from which Qwest bought services or to which it contributed 2626 equity financing. Because Qwest was Redback’s largest customer, the market reacted negatively 2727 to this announcement and by March 26th, Redback price had declined to $3.50 per share (a 19 2828 percent decline from March 11th).

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11 455. On March 27, 2002, Redback filed its 10-K for 2001, reporting lower revenues 22 than expected for 2001, attributing the drop to “lower than anticipated deployments of our 33 products by our customers, as the networking business specifically, and the economy generally, 44 slowed down in 2001.” Redback’s stock dropped further, from an open of $3.52 on March 27 to 55 a close of $2.85 per share by April 9. As outlined above, Redback’s revenues declined because 66 it could no longer engage in stock kickbacks and revenue or press release purchasing. 77 456. On April 10, 2002, Redback announced its first quarter 2002 financial results. 88 Redback’s press release indicated that without the benefit of sales to Qwest, Redback’s revenues 99 had fallen by more than 50% from the first quarter 2001. Redback’s stock dropped from an open 1010 of $2.88 on April 10, 2002 to a close of $2.35 on April 11, 2002. On April 22, 2002, Redback 1111 issued its 10-Q for the 2nd quarter, confirming its earlier horrendous results, and Redback’s slide 1212 continued, with its share price declining to $1.85 per share by July 9, 2002. 1313 457. On July 10, 2002, the market received a double dose of negative news about 1414 Redback in which the market learned of the serious problems faced by its business partner Qwest 1515 and Redback’s enormous decline in revenue, a large part of which was due to the fact that it was 1616 no longer obtaining substantial sales from Qwest. First, Qwest announced that the SEC had 1717 begun a criminal probe of Qwest. Second, Redback issued a press release announcing its 1818 financial results for its second quarter of 2002. The press release and subsequent Form 8-K 1919 reported that net revenue for the second quarter of 2002 was $40.1 million, compared to $40.6 2020 million in the prior fiscal quarter and $59.4 million for the same quarter in the prior year, or a 2121 decline of nearly one-third. Redback’s market slide continued, with its stock price falling to 2222 $1.20 by August 1, 2002. 2323 458. When Redback filed its second quarter 2002 10-Q on August 14, 2002, the 2424 decline in revenues was attributed to a “current downturn in economic activity continuing into 2525 2002.” The stock price fell from $1.03 at the open of August 13, 2002 to $0.87 by the close of 2626 August 14. The decline in revenue was not because of a decline in the economy; it was due to 2727 the decline in revenue from the loss of its fraudulent business partner, Qwest (which was facing 2828

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11 an SEC criminal probe by this time), and a decline in the Company’s ability to purchase revenue 22 from companies like Broadband Office and Williams. 33 459. On September 26, 2002, knowing its products were worthless and it could no 44 longer purchase any revenues through illicit bribes, Redback foreshadowed lower third quarter 55 2002 financial results. It stock price continued the steep decline begun in March, reaching $0.27 66 per share on October 9. Throughout this period (March-October 2002), Redback’s stock price 77 fell because defendants could no longer hide the fact that an enormous percentage of Redback’s 88 purported revenues had been obtained through improper kickback arrangements that could no 99 longer be maintained. Without these illicitly-obtained revenues, Redback was essentially a 1010 worthless company. 1111 460. On February 25, 2003, the SEC filed civil fraud charges against Arnold and others 1212 for artificially inflating Qwest’s revenues in transactions with the Arizona School Facilities 1313 Board and Genuity Inc. Redback confirmed these charges in its 2002 Form 10-K on March 31, 1414 2003. The Company’s stock dropped from $0.67 on February 25 to $0.58 on the filing of its 1515 2002 Form 10-K. 1616 461. By the end of the Class Period, although until the very end, Redback and the 1717 defendants continued to make false statements in an attempt to support the stock price.the jig 1818 was up. Redback finally had to admit its involvement with Qwest was being investigated by the 1919 SEC since the press was starting to report on the investigation. 2020 462. 446. Even though Redback did not specifically admit that its statements 2121 regarding its revenues and future prospects were fraudulent, which became publicly known in 2222 late 2003 and thereafter, the enormous decline in Redback’s stock price was the result of the 2323 piecemeal disclosure of information related toabout the fraud and thus is sufficient to establish 2424 that Plaintiffs’ losses were caused by the Defendants’ fraud. This trickle of corrective 2525 disclosures failed to alert Plaintiffs to the true fraud and yet managed to cause a gradual 2626 correction of Redback’s stock price, which dropped from $13.08 at the beginning of April 2001 2727 to $0.55 on October 10, 2003 when the true extent of the fraud was revealed at the end of the 2828 Class Period.

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11 VIII. INAPPLICABILITY OF STATUTORY SAFE HARBOR 22 463. 447. As alleged herein, the defendants acted with scienter in that the defendants 33 knew at the time they issued them that the public documents and statements issued or 44 disseminated in the name of the Company were materially false and misleading or omitted 55 material facts; knew that such statements or documents would be issued or disseminated to the 66 investing public; knew that persons were likely to reasonably rely on those misrepresentations 77 and omissions; and knowingly and substantially participated or were involved in the issuance or 88 dissemination of such statements or documents as primary violations of the federal securities 99 law. As set forth elsewhere herein in detail, the defendants, by virtue of their receipt of 1010 information reflecting the true facts regarding Redback, their control over, and/or receipt of 1111 Redback’s allegedly materially misleading misstatements and/or their association with the 1212 Company which made them privy to confidential proprietary information concerning Redback 1313 which were used to inflate financial results and which defendants caused or were informed of, 1414 participated in and knew of the fraudulent scheme alleged herein. With respect to non-forward- 1515 looking statements and/or omissions, defendants knew and/or with deliberate recklessness 1616 disregarded the falsity and misleading nature of the information, which they caused to be 1717 disseminated to the investing public. 1818 464. 448. Defendants’ false and misleading statements and omissions do not constitute 1919 forward-looking statements protected by any statutory safe harbor. The statements alleged to be 2020 false and misleading herein all relate to facts and conditions existing at the time the statements 2121 were made. No statutory safe harbor applies to any of Redback’s material false or misleading 2222 statements. 2323 465. 449. Alternatively, to the extent that any statutory safe harbor is intended to apply 2424 to any forward-looking statement pled herein, the defendants are liable for the false forward- 2525 looking statement pled herein because, at the time each forward-looking statement was made, the 2626 speaker knew or had actual knowledge that the forward-looking statement was materially false 2727 or misleading, and the forward-looking statement was authorized and/or approved by a director 2828 and/or executive officer of Redback who knew that the forward-looking statement was false or

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11 misleading. None of the historic or present tense statements made by defendants was an 22 assumption underlying or relating to any plan, projection or statement of future economic 33 performance, as they were not stated to be such an assumption underlying or relating to any 44 projection or statement of future economic performance when made nor were any of the 55 projections or forecasts made by the defendants expressly related to or stated to be dependent on 66 those historic or present tense statements when made. 77 8 IX. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE- 8 MARKET DOCTRINE 99 466. 450. At all relevant times, theThe market for Redback’s stock was an open, well- 1010 developed and efficient market at all relevant times for the following reasons, among others: 1111 a. Redback common stock met the requirements for listing, and was listed and 1212 actively traded on the NASDAQ, a highly efficient and automated market; 1313 b. As a regulated issuer, Redback was required to file and did file periodic reports 1414 with the SEC; 1515 c. Redback regularly communicated with public investors via established market 1616 communication mechanisms, including through regular disseminations of press 1717 releases on the national and international circuits of major newswire services and 1818 through other wide-ranging public disclosures, such as communications with the 1919 financial press and other similar reporting services; 2020 d. Redback was followed by several securities analysts employed by major 2121 brokerage firms who wrote reports which were distributed to the sales force and 2222 certain customers of their respective brokerage firms, which reports were each 2323 publicly available and entered the public marketplace; and 2424 e. The trading volume of Redback stock was substantial during the Class Period. 2525 467. 451. As a result, the market for Redback common stock promptly digested current 2626 information regarding Redback from all publicly available sources and reflected such 2727 information in Redback’s stock price. Under these circumstances, all persons in the Class who 2828 purchased Redback common stock during the Class Period based on Defendants’ false and

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11 misleading statements suffered similar injury through their purchase of shares of such stock at 22 artificially inflated prices and a presumption of reliance applies. 33 X. CLASS ACTION ALLEGATIONS 44 468. 452. Connecticut Retirement Plans brings this action as a class action pursuant to 55 Rule 23 of the Federal Rule of Civil Procedure on behalf of itself and all persons who purchased 66 or acquired common stock in Redback (the “Class”) between November 27, 1999 and October 77 10, 2003, and who were damaged thereby. 88 469. 453. Excluded from the Class are defendants and all persons ever named in this 99 action as defendants, their subsidiaries, affiliates and any insurance carriers who provide any 1010 insurance coverage to them, and the officers and directors of Redback, members of their 1111 immediate families and their legal representations, heirs, successors or assigns or any entity in 1212 which any of the foregoing has a controlling interest. 1313 470. 454. The Class is so numerous that joinder of all members is impractical. 1414 Throughout the Class Period, Redback common shares were actively traded on the NASDAQ. 1515 As of October 10, 2003, Redback had outstanding over 183 million shares of its common stock. 1616 While the exact number of Class members is unknown to Plaintiff at this time and can only be 1717 ascertained through discovery, Plaintiff believes that there are thousands of members of the 1818 proposed class, including individuals and entities too numerous to bring separate actions. It is 1919 reasonable to assume that holders of Redback common stock are geographically dispersed 2020 throughout the United States of America. 2121 471. 455. Record owners and other members of the Class may be identified from 2222 records maintained by Redback or its transfer agent and may be notified of the pendency of this 2323 action by mail, using the form of notice similar to that customarily used in securities class 2424 actions. 2525 472. 456. There are questions of law and fact that are common to the Class which 2626 predominate over any questions affecting only individual Class members. The common 2727 questions include: 2828

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11 a. Whether the defendants publicly disseminated or caused the Company to publicly 22 disseminate press releases, earnings pronouncements, regulatory filings and other 33 public statements during the Class Period which contained material 44 misrepresentations or omitted to state material facts necessary to make such 55 statements not misleading in violation of the federal securities laws as alleged 66 herein; 77 b. Whether the defendants participated in a fraudulent scheme to artificially inflate 88 and misrepresent the proceeds from Redback’s sales to Qwest and thereby 99 artificially inflate Redback’s stock price; 1010 c. Whether the defendants acted intentionally with direct knowledge of the falsity of 1111 such statements, or at least with deliberate recklessness, in making such 1212 statements; 1313 d. Whether the defendants are “controlling persons” as that term is defined in 1414 Section 20(a) of the Exchange Act; 1515 e. Whether the market prices of Redback’s common stock during the Class Period 1616 were artificially inflated due to material misstatements and omissions complained 1717 of herein; 1818 f. Whether the defendants concealed their breaches of fiduciary duties in causing, 1919 directing and/or approving, or allowing or permitting, material misrepresentations 2020 and omissions in the Company’s public statements and filings relating to certain 2121 transactions with Qwest and the Company’s financial condition; 2222 g. Whether the individual Class members were improperly induced to purchase their 2323 Redback shares; and 2424 h. Whether the members of the Class have sustained damages and, if so, what the 2525 appropriate measure of damages should be. 2626 473. 457. Lead Plaintiff is committed to prosecuting the Class claims and has retained 2727 competent counsel experienced in litigating claims of this nature. Lead Plaintiff’s claims are 2828

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11 typical of the claims of other members of the Class. Accordingly, Lead Plaintiff is an adequate 22 representative of the Class and will fairly and adequately protect the interests of the Class. 33 474. 458. Defendants have acted on grounds generally applicable to the Class with 44 respect to the matters complained of herein, thereby making appropriate the relief sought herein 55 with respect to the Class as a whole. 66 475. 459. The prosecution of separate actions would create the risk of: 77 a. Inconsistent or varying adjudications which would establish incompatible 88 standards for conduct for the defendants; and/or 99 b. Adjudications, which would as a practical matter be dispositive of the interests of 1010 other members of the Class. 1111 476. 460. Accordingly, a class action is superior to other available methods for the fair 1212 and efficient adjudication of this controversy. Additionally, because the damages suffered by 1313 individual members of the Class may in some circumstances be relatively small, the expense and 1414 burden of individual litigation make it impossible for such class members individually redress 1515 the wrongs done to them. 1616 FIRST CAUSE OF ACTION 1717 18 Violation Of Section 10(b) of The Exchange Act 18 And Rule 10b-5(b) Promulgated There under (Against All Defendants) 1919 477. 461. Plaintiffs repeat and reallege each and every allegation contained above as if 2020 fully set forth herein. 2121 478. 462. This Cause of Action is asserted by Lead Plaintiff on behalf of itself and the 2222 Class against all of the defendants and is based upon Section 10(b) of the Exchange Act, 15 2323 U.S.C. 78j(b), and Rule 10b-5(b), 17 C.F.R. 240.10b-5, promulgated there under. 2424 479. 463. During the Class Period, the defendants, singularly and in concert, directly 2525 carried out a common plan, scheme and unlawful course of conduct, pursuant to which they 2626 intended to and, throughout the Class Period, did: (a) deceive the investing public, including 2727 Plaintiff and other Class members, as alleged herein; (b) artificially inflate and maintain the 2828 market price of Redback=s stock; and (c) cause Plaintiff and other members of the Class to

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11 purchase or otherwise acquire Redback=s stock at artificially-inflated prices. In furtherance of 22 this unlawful scheme, plan and course of conduct, the defendants, collectively and each of them, 33 took the actions set forth herein. 44 480. 464. The defendants knowingly or with deliberate recklessness made untrue 55 statements of material fact and/or omitted to state material facts necessary to make the 66 statements not misleading by use of means or instrumentalities of interstate commerce, which 77 operated as a fraud and deceit upon the purchasers and acquirers of the Company=s stock in an 88 effort to maintain artificially high market prices for Redback=s stock in violation of Section 99 10(b) of the Exchange Act and Rule 10b-5(b). 1010 481. 465. The defendants engaged in the fraudulent activity described above 1111 knowingly and intentionally or with such extreme or deliberate recklessness as to constitute 1212 willful deceit and fraud upon Plaintiff and the Class. The defendants knowingly or with extreme 1313 or deliberate recklessness caused their reports and statements to contain misstatements and 1414 omissions of material fact as alleged herein, which caused Redback’s stock price to be inflated at 1515 the time of Plaintiffs’ purchases. 1616 482. 466. As a result of the defendants= fraudulent activity, the market price of 1717 Redback’s stock was artificially inflated during the Class Period, and remained inflated until the 1818 market began to no longer believe the defendants’ fraudulent statements. Defendants’ 1919 misrepresentations induced a disparity between the transaction price and the true investment 2020 quality and value of Redback’s stock at the time Plaintiffs purchased or acquired the stock. 2121 483. 467. The market price of Redback’s stock declined materially when the 2222 defendants could not prop up Redback’s stock price any more through their fraud. 2323 484. 468. In ignorance of the true financial condition of Redback, Plaintiff and other 2424 members of the Class, relying to their detriment on the integrity of the market and/or on the 2525 statements and reports of Redback containing the misleading information, purchased or 2626 otherwise acquired Redback stock at artificially inflated prices during the Class Period. 2727 2828

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11 485. 469. Had Plaintiff and the other members of the Class known the truth, they 22 would not have purchased Redback’s stock or would not have purchased the stock at the inflated 33 prices that were paid. 44 486. 470. Plaintiffs’ losses were proximately caused by defendants’ material 55 misrepresentations and omissions regarding reported revenue, assets and cash flow; market 66 demand for Company products; material contracts; sales to Qwest and other customers; quid pro 77 quo transactions for product and services; stock payment kick backs; sales inducements; product 88 development; and cash flow. 99 487. 471. Plaintiff and the other Class members purchased Redback’s stock in reliance 1010 on the integrity of the market price of the stock and/or defendants’ fraudulent and misleading 1111 statements and regulatory filings, and defendants manipulated the price of Redback’s stock 1212 through their misconduct as described above. 1313 488. 472. Further, defendants’ misconduct proximately caused the losses of Plaintiff 1414 and other Class members. Plaintiffs’ losses were a direct and foreseeable consequence of 1515 defendants’ failure to disclose and concealment of, inter alia, the true nature of the Company’s 1616 contracts with Qwest including Redback’s quid pro quo stock grants to U.S. Telesource and 1717 Qwest insiders; Redback’s purchase of services and products from Qwest (and Qwest affiliates) 1818 solely to obtain Qwest’s business; and the true nature of Redback’s revenue, assets and cash 1919 position. As a direct and proximate cause of the defendants= wrongful conduct, Plaintiff and 2020 other members of the Class suffered substantial damages in connection with their respective 2121 purchases and sales of Redback’s stock during the Class Period. 2222 SECOND CAUSE OF ACTION 2323 24 Violation Of Section 10(b) of The Exchange Act 24 And Rule 10b-5(a) and (c) Promulgated There under (Against All Defendants) 2525 489. 473. Plaintiffs repeat and reallege each and every allegation contained above as if 2626 fully set forth herein. 2727 2828

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11 490. 474. This Cause of Action is asserted by Lead Plaintiff on behalf of itself and the 22 Class against all of the defendants and is based upon Section 10(b) of the Exchange Act, 15 33 U.S.C. 78j(b), and Rule 10b-5(a) and (c), 17 C.F.R. 240.10b-5, promulgated there under. 44 491. 475. During the Class Period, the defendants, singularly and in concert, directly 55 carried out a common plan, scheme and unlawful course of conduct, pursuant to which they 66 intended to and, throughout the Class Period, did: (a) deceive the investing public, including 77 Plaintiff and other Class members, as alleged herein; (b) artificially inflate and maintain the 88 market price of Redback=s stock; and (c) cause Plaintiff and other members of the Class to 99 purchase or otherwise acquire Redback=s stock at artificially-inflated prices. In furtherance of 1010 this unlawful scheme, plan and course of conduct, the Defendants, collectively and each of them, 1111 took the actions set forth herein. 1212 492. 476. The defendants intentionally or with deliberate recklessness employed 1313 devices, schemes, and artifices to defraud; and engaged in acts, practices, and a course of 1414 business, which operated as a fraud and deceit upon the purchasers and acquirers of the 1515 Company=s stock in an effort to maintain artificially high market prices for Redback=s stock in 1616 violation of Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c). 1717 493. 477. The defendants engaged in the fraudulent activity described above 1818 knowingly and intentionally or with such extreme or deliberate recklessness as to constitute 1919 willful deceit and fraud upon Plaintiff and the Class. The defendants knowingly or with extreme 2020 or deliberate recklessness employed a fraudulent scheme and deceitful course of business as 2121 alleged herein, which caused Redback’s stock price to be inflated at the time of Plaintiffs’ 2222 purchases. 2323 494. 478. As a result of the defendants= fraudulent activity, the market price of 2424 Redback’s stock was artificially inflated during the Class Period, and remained inflated until the 2525 market began to no longer believe in the value of Redback’s stock. Defendants’ acts, practices, 2626 scheme, and course of business induced a disparity between the transaction price and the true 2727 investment quality and value of Redback’s stock at the time Plaintiffs purchased or acquired the 2828 stock.

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11 495. 479. The market price of Redback’s stock declined materially when the 22 defendants could not prop up Redback’s stock price any more through their fraud. 33 496. 480. In ignorance of the true financial condition of Redback, Plaintiff and other 44 members of the Class, relying to their detriment on the integrity of the market and/or on the 55 statements and reports of Redback containing the misleading information, purchased or 66 otherwise acquired Redback stock at artificially inflated prices during the Class Period. 77 497. 481. Had Plaintiff and the other members of the Class known the truth, they 88 would not have purchased Redback’s stock or would not have purchased the stock at the inflated 99 prices that were paid. 1010 498. 482. Plaintiffs’ losses were proximately caused by defendants’ active and primary 1111 participation in Redback’s scheme to defraud the investing public by artificially inflating 1212 Redback’s revenues, assets and cash flows; improperly accounting for reported revenue; 1313 employing aggressive purchase accounting to overstate earnings; intentionally misrepresenting 1414 market demand for Company products; shipping products that were not operational to falsely 1515 generate revenues; inducing material contracts through stock payment kickbacks to Qwest and 1616 other material customers and their insiders; providing undisclosed stock kick back payments to 1717 customers in exchange for the right to issue false and misleading press releases regarding their 1818 purported deployment of Redback’s products; engaging in quid pro quo transactions that had no 1919 real business purpose and caused Redback to pay millions of dollars for products and services 2020 that the Company did not want or need; propping up Redback’s revenues to meet established 2121 guidance and targets that were unrealistic and unobtainable absent fraudulent acts and practices. 2222 499. 483. Plaintiff and the other Class members purchased Redback’s stock in reliance 2323 on the integrity of the market price of the stock and/or defendants’ fraudulent scheme and 2424 deceitful course of business, and defendants manipulated the price of Redback’s stock through 2525 their misconduct as described above. 2626 500. 484. Further, defendants’ misconduct proximately caused the losses of Plaintiff 2727 and other Class members. Plaintiffs’ losses were a direct and foreseeable consequence of 2828 defendants’ fraudulent devices, schemes, acts, practices and course of business, including, inter

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11 alia, the undisclosed stock payment kickbacks and sales incentives provided to Qwest and other 22 material customers and their insiders, and Redback’s quid pro quo purchases and transactions 33 with Qwest (and Qwest affiliates) solely to obtain Qwest’s business, and the true nature of 44 Redback’s revenue, earnings and cash position. As a direct and proximate cause of the 55 defendants= wrongful conduct, Plaintiff and other members of the Class suffered substantial 66 damages in connection with their respective purchases and sales of Redback’s stock during the 77 Class Period. 88 99 1010 1111 1212 1313 1414 1515 1616 1717 1818 1919 2020

2121 2222 2323 2424 2525 2626 2727 2828

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1 1 THIRD CAUSE OF ACTION 2 2 Violation of Section 10(b) Of The Exchange Act And 3 Rule 10b-5 Promulgated Thereunder 3 (Against The “Insider-Selling Defendants,” 4 Barsema, Garg, Gentner, Kruep, Kurtz, 4 Lamond Ragavan and DeNuccio) 55 501. 485. Plaintiffs repeat and reallege each and every allegation contained above as if 66 fully set forth herein. 77 502. 486. This cause of action is asserted by Lead Plaintiff on behalf of itself and the 88 Class against the Insider-Selling Defendants, and is based upon Section 10(b) of the Exchange 99 Act, 15 U.S.C. 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b–5, promulgated thereunder, in 1010 connection with their insider trading in Redback stock. 1111 503. 487. During the Class Period, the Insider-Selling Defendants were at various 1212 times high-ranking officers and/or directors at Redback, by virtue of which they had access to 1313 material, non-public information about Redback’s business, operations, operational trends, sales, 1414 finances, revenue recognition, markets, and present and future business prospects. At all 1515 relevant times, the Insider-Selling Defendants by virtue of their positions with Redback owed a 1616 duty to the Company and its shareholders to maintain the confidentiality of the Company’s 1717 material, non-public information until that information was properly disclosed to the public. In 1818 addition, pursuant to the Company’s Insider Trading Policy, the Insider-Selling Defendants 1919 owed the Company and its shareholders a duty not to trade, or direct others to trade, in Redback 2020 stock on the basis of their possession of material, non-public adverse information.

2121 504. 488. As outlined in the Section IV above, during the Class Period, the Insider 2222 Selling Defendants sold over $178 million of their Redback stock in open market trades. 2323 505. 489. At the time that Insider-Selling Defendants sold their Redback common 2424 stock as set forth herein, by reason of their high-level executive and/or director positions with 2525 Redback, the Insider Defendants had access to highly-material information regarding the 2626 company, including the information set forth herein regarding the true facts of Redback’s 2727 undisclosed sales incentives, inoperable products, improper accounting and false and misleading 2828 disclosures regarding Redback’s sales agreements and deployment of its products. At the time of

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11 the Insider-Selling Defendants’ sales, that information was not generally available to the public 22 or the securities markets. Had such information been generally available, it would have 33 significantly reduced the market price of Redback shares at that time. 44 506. 490. The Insider-Selling Defendants, collectively and individually, had actual 55 knowledge of material, adverse non-public information and thus sold their Redback common 66 stock in violation of Section 10(b) and Rule 10b-5. In violation of duties that each of the 77 Insider-Selling Defendants owed to Redback and its shareholders, they knowingly used the 88 material, non-public adverse information they possessed to sell Redback stock at artificially 99 inflated prices as set forth in paragraph Section IV above. 1010 507. 491. As a result of the Insider-Selling Defendants= fraudulent activity, other than 1111 the trading activity set forth herein, the market price of Redback’s stock was artificially inflated 1212 from May 17, 1999 (the date of Redback’s IPO) and continued to be artificially inflated 1313 throughout the Class Period and at the time that each defendant sold Redback stock. 1414 508. 492. Without the benefit and knowledge of the true financial condition of 1515 Redback and its fraudulent business practices, Lead Plaintiff and other members of the Class, 1616 relying to their detriment on the integrity of the market and/or on the statements and reports of 1717 Redback containing false or misleading information, purchased Redback stock at artificially 1818 inflated prices during the Class Period. 1919 509. 493. The Insider-Selling Defendants’ sales of Redback stock based on material 2020 non-public adverse information in violation of their duties to the Company and its shareholders 2121 constituted a manipulative and deceptive device in violation of Section 10(b) of the Exchange 2222 Act and Rule 10b-5 promulgated thereunder. 2323 2424 2525 2626 2727 2828

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11 FOURTH CAUSE OF ACTION 22 3 Violation of Section 20(A) Of The Exchange Act 3 Against, Barsema, Garg, Gentner, Kruep, 4 Kurtz, Lamond, Ragavan and DeNuccio 4 (the “Section 20(A) Defendants”) 55 510. 494. Plaintiffs repeat and reallege each and every allegation contained above as if 66 fully set forth herein. 77 511. 495. This Cause of Action is asserted by Lead Plaintiff on behalf of itself and the 88 Class against the Section 20(A) Defendants, and is based upon Section 20(A) of the Exchange 99 Act, 15 U.S.C. § 78t-1 in connection with their insider trading in Redback stock. 1010 512. 496. The Section 20(A) Defendants collectively sold more than 1,352,500 shares 1111 of Redback stock, reaping total proceeds in excess of $52.3 million. 1212 513. 497. The Section 20(A) Defendants knowingly or with deliberate recklessness 1313 sold their Redback common stock during the Class Period while in possession of material, 1414 adverse, non-public information. As set forth in Exhibit AB, attached hereto, 1515 contemporaneously with sales of Redback stock by these defendants, Plaintiffs purchased 1616 Redback common stock sold by these defendants. 1717 514. 498. By reason of Plaintiffs purchases of Redback stock contemporaneously with 1818 certain of the Defendants’ sales of stock, Plaintiffs suffered recoverable damages. Under Section 1919 20(A) of the Exchange Act, the Section 20(A) Defendants are liable to Plaintiffs for all profits 2020 gained and losses avoided by them as a result of these contemporaneous transactions. 2121 2222 2323 2424 2525 2626 2727 2828

FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 188 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 190 of 198

1 1 FIFTH CAUSE OF ACTION 2 2 Violation of Section 18(a) of the Exchange Act 3 Against DeNuccio, Lamond, Cronan, Kurtz, Khosla, Wolf, 3 Gentner, Ragavan, Barsema, Garg, Haque, and PwC (the “Section 18 Defendants”) 44 55 515. 499. Plaintiffs repeat and reallege each and every allegation contained above as if 66 fully set forth herein. 77 516. 500. This Cause of Action is asserted by Lead Plaintiff on behalf of itself and the 88 Class against the Section 18 Defendants and is based upon Section 18 of the Exchange Act, 15 99 U.S.C. 78r. 1010 517. 501. As set forth above, in reports and documents filed with the SEC filed during 1111 the Class Period, including without limitation Redback’s Forms 2000, 2001 and 2002 10-K and 1212 its Forms 8-K issued during the Class Period, Defendants made or caused to be made statements 1313 which were, at the time and in light of the circumstances under which they were made, false or 1414 misleading with respect to material facts. 1515 518. 502. Each of the above reports was filed with the SEC pursuant to the Securities 1616 and Exchange Act of 1934. 1717 519. 503. Each of the Section 18 Defendants that were officers and directors of the 1818 Company signed certain of Redback’s Forms 10-K and Forms 8-K filed with the SEC during the 1919 Class Period, and PwC certified the financial statements in Redback’s Forms 10-K as set forth 2020 herein.

2121 520. 504. The Section 18 Defendants knew or with extreme or deliberate recklessness 2222 disregarded that such statements were false and misleading because these defendantsDefendants: 2323 (a) knew that Qwest was a material Redback customer; (b) knew the materially adverse non- 2424 public information regarding the true quid pro quo nature of Redback’s contracts with Qwest and 2525 undisclosed stock and other sales incentives provided to Qwest and other material customers and 2626 their insiders; and (c) had an obligation to inform themselves of the publicly-issued statements of 2727 the Company. 2828

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11 521. 505. PwC consented to the use of its unqualified opinions in Redback’s financial 22 statements and reports filed with the SEC. These financial statements were incorporated into 33 and made a part of the Company’s Exchange Act filings with the knowledge and express consent 44 of PwC. PwC knew or with extreme or deliberate recklessness disregarded that its unqualified 55 opinions filed with the SEC were in fact false and misleading. 66 522. 506. The Section 18 Defendants’ conduct resulted in the Company issuing false 77 and misleading statements with respect to its revenues, income, earning per share and market 88 demand for its products. The Section 18 Defendants’ conduct also resulted in the Company 99 misrepresenting that its financial statements filed during the Class Period were presented in 1010 conformity with GAAP or principles of fair reporting. 1111 523. 507. In connection with the purchase of Redback’s stock, Plaintiff and other Class 1212 Members read and reasonably relied upon the statements contained in the reports and documents 1313 set forth above not knowing that such statements were false and misleading. 1414 524. 508. As a direct result of the false and misleading statements in the Forms 10-K 1515 and Forms 8-K described herein, Plaintiff and other Class Members purchased Redback stock 1616 and an artificially-high price, and they were significantly damaged thereby. 1717 525. 509. As a result of the Section 18 Defendants’ fraudulent activity, the market 1818 price of Redback’s stock was artificially inflated during the Class Period, and remained inflated 1919 until the market began to no longer believe the defendants’ fraudulent statements. Defendants’ 2020 misrepresentations induced a disparity between the transaction price and the true, investment 2121 quality and value of Redback’s stock at the time Plaintiffs purchased or acquired the stock. 2222 526. 510. The market price of Redback’s stock declined materially when the 2323 defendantsDefendants could not prop up Redback’s stock price any more through their fraud. 2424 527. 511. By virtue of the foregoing, defendantsDefendants have violated Section 18 of 2525 the Exchange Act. 2626 2727 2828

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11 528. 512. As a direct and proximate result of defendants’ wrongful conduct, Plaintiff 22 and other Class members suffered damages in connection their purchases of Redback common 33 stock during the relevant period. 44 SIXTH CAUSE OF ACTION 55 6 Violation of Section 20(a) of the Exchange Act 6 Against The Individual Defendants 77 529. 513. Plaintiffs repeat and reallege each and every allegation contained above as if 88 fully set forth herein. 99 530. 514. This Cause of Action is asserted by Lead Plaintiff on behalf of itself and the 1010 Class against the Individual Defendants and is based upon Section 20(a) of the Exchange Act, 15 1111 U.S.C. 78t(a). 1212 531. 515. The Individual Defendants acted as controlling persons of Redback within 1313 the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their executive 1414 positions, Board membership and/or stock ownership, as alleged above, the Individual 1515 Defendants had the power to influence and control and did influence and control, directly or 1616 indirectly, the decision-making of the Company, including the content and dissemination of the 1717 various materially false and misleading statements, and artificially creating revenue and false 1818 product demand by entering into quid pro quo transactions with Qwest in which both companies 1919 sold products and services to each other that neither company needed or wanted to prop up each 2020 of Redback’s and Qwest’s revenues and stock price, and providing undisclosed stock payment 2121 kickbacks and other sales incentives to Qwest and other material customers and their insiders to 2222 secure large contracts, or the right to publish materially false and misleading press releases 2323 reporting that certain material customers were purportedly deploying Redback’s equipment in 2424 their networks. The Individual Defendants each had material contributions to the preparation 2525 and dissemination of Redback’s press releases and SEC filings, or signed the SEC filings, and 2626 each and all of the Individual Defendants were provided with or had unlimited access to copies 2727 of the Company=s internal reports, press releases, public filings and other statements that they 2828 knew or with extreme or deliberate recklessness disregarded were materially false and

FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 191 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 193 of 198

11 misleading prior to and/or shortly after these statements were issued and had the ability to 22 prevent the issuance of the statements or cause the statements to be corrected. 33 532. 516. In particular, the Individual Defendants had direct involvement in the day-to- 44 day operations of the Company and contracts with Qwest and other material customers, or 55 oversight responsibilities thereof, and therefore, are presumed to have had the power to control 66 or influence the particular transactions giving rise to the securities violations as alleged herein, 77 and exercised the same. 88 533. 517. As set forth above, Redback committed a primary violation of Section 10(b) 99 and Rule 10b-5 and Section 18 of the Exchange Act by the acts and omissions alleged in this 1010 Complaint. By virtue of their positions as controlling persons of Redback, all of the Individual 1111 Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate 1212 result of the Individual Defendants= wrongful conduct, Plaintiff and the other members of the 1313 Class suffered damages in connection with their purchase or acquisition of Redback’s stock. 1414 PRAYER FOR RELIEF 1515 WHEREFORE, Plaintiffs pray for relief and judgment, as follows: 1616 (a) Determining that this action is a proper class action under Rule 23 of the Federal 1717 Rules of Civil Procedure; 1818 (b) Awarding compensatory damages in favor of Lead Plaintiff and all other Class 1919 members against all defendants, jointly and severally, for all damages sustained as a result of 2020 defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon; 2121 (c) Compelling the Individual Defendants to disgorge the proceeds from their unlawful 2222 insider trading; 2323 (d) Awarding Lead Plaintiff and all Class members their costs and disbursements of 2424 this suit, including reasonable attorneys’ fees, accountants’ fees and experts’ fees; and 2525 (e) Awarding such other and further relief as may be just and proper. 2626 2727 2828

FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 192 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 194 of 198

1 1 JURY TRIAL DEMANDED 22 Plaintiffs hereby demand a trial by jury on all claims so triable. 33 Dated this 2719th day of May 20052006. 44 Of Counsel: /s/ Stuart M. Grant 55 Stuart M. Grant (pro hac vice) John C. Kairis (pro hac vice) 66 Catherine E. LaMarr Lauren E. Wagner (pro hac vice) Kimberly L. Wierzel (pro hac vice) 77 General Counsel Office of the Grant & Eisenhofer P.A. Chase Manhattan Centre 88 Treasurer State of 1201 N. Market Street Wilmington, DE 19801 99 Connecticut 55 Elm Street Tel: 302.622.7000 Fax: 302.622.7100 1010 Hartford, Connecticut 06106 Lead Counsel for Lead Plaintiff The 1111 Connecticut Retirement Plans and Trust Funds 1212 Richard Blumenthal Merrill Glen Emerick (State Bar No. 117248) Anderlini, Finkelstein, Emerick & Smoot 1313 Attorney General of Connecticut 400 S. El Camino Real, Suite 700 San Mateo, CA 94402 1414 Joseph Rubin Associate Tel: 650.348.0102 Fax: 650.348.0962 1515 Attorney General of Connecticut Local Counsel for Lead Plaintiff The 1616 55 Elm Street Hartford, Connecticut Retirement Plans and Trust Funds 1717 Connecticut 06106 1818 1919 2020

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FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 193 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 195 of 198

1 1 CERTIFICATE OF SERVICE 2 2 I hereby certify that the foregoing was served by the method noted upon the following 33 counsel of record by electronic case filing on May 27, 200519, 2006: 44

55 Via U.S. Mail Via U.S. Mail Robert A. Jigarjian, Esquire Rowan D. Wilson , Esquire 66 Robert S. Green, Esquire Thomas G. Rafferty, Esquire GREEN & JIGARJIAN LLP LaShann M. DeArcy, Esquire 77 235 Pine Street, 15th Floor CRAVATH, SWAINE & MOORE LLP San Francisco, CA 94104 Worldwide Plaza 88 Counsel for Plaintiffs Robert W. Baker, Jr. 825 Eighth Avenue and Richard Wimble New York, NY 10019 99 Counsel for Defendant Pricewaterhousecoopers LLP 1010 Via U.S. Mail Via CM/ECF 1111 Luke O. Brooks, Esquire Frederick Sexton Fields, Esquire LERACH, COUGHLIN, STOIA, COBLENTZ PATCH DUFFY & BASS, LLP 1212 GELLER, RUDMAN & ROBBINS, One Ferry Building, Suite 200 LLP San Francisco, CA 94111-4213 1313 100 Pine Street, Suite 2600 [email protected] San Francisco, CA 94111 Counsel for Defendant Pricewaterhousecoopers 1414 [email protected] LLP Counsel for Plaintiffs Robert W. Baker, Jr. 1515 and Central States, Southeast and Southwest Areas Pension Fund 1616 Via U.S. Mail Via CM/ECF 1717 Mark C. Gardy, Esquire Terry T. Johnson, Esquire Charles H. Dufresne, Esquire John P. Stigi III, Esquire 1818 ABBEY GARDY, LLP Laura R. Smith, Esquire 212 East 39th Street Cameron P. Hoffman, Esquire 1919 New York, NY 10016 Kristin Anne Dillehay, Esquire Counsel for Plaintiff Robert W. Baker, Jr. WILSON SONSINI GOODRICH & ROSATI 2020 650 Page Mill Road Palo Alto, CA 94304-1050 2121 [email protected] Counsel for Defendants Thomas L. Cronan III, 2222 Kevin A. Denuccio, Pierre R. Lamond, Vinod Khosla, Vivek Ragavan, Dennis P. Wolf, Dennis 2323 Barsema, Guarav Garg, Craig Genter, Promod Haque, William Kurtz 2424 2525 2626 2727 2828

FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 194 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 196 of 198

11 2 Via CM/ECF Via CM/ECF 2 Darren J. Robbins, Esquire Francis M. Gregorek, Esquire 3 LERACH, COUGHLIN, STOIA, Betsy C. Manifold, Esquire 3 GELLER, RUDMAN & ROBBINS LLP Rachele R. Rickert, Esquire 4 401 B Street, Suite 1700 WOLF, HALDENSTEIN, ADLER, 4 San Diego, CA 92101 FREEMAN & HERZ LLP 5 [email protected] Symphony Tower – Suite 2770 5 Counsel for Plaintiff Central States, 750 B Street 6 Southeast and Southwest Areas Pension San Diego, CA 92101 6 Fund [email protected] [email protected] 77 Counsel for Plaintiff Bartnik Group 88 99 I further declare, pursuant to Civil L.R. 23-3, that on the date hereof I served the 1010 1111 foregoing on the Securities Class Action Clearinghouse by electronic mail through the following

1212 electronic mail address provided by the Securities Class Action Clearinghouse at: 1313 Securities Class Action Clearinghouse 1414 Attention: Juan-Carlos Sanchez or Cara Mia Perlas 1515 Stanford University School of Law Crown Quadrangle 1616 Stanford, CA 94305-8612 Email: [email protected] 1717 1818

1919 Robert S. Green Terry T. Johnson Robert A. Jigarjian John P. Stigi III 2020 Green & Jigarjian LLP Laura R. Smith 235 Pine Street, 15th Floor Cameron P. Hoffman 2121 San Francisco, CA 94104 Wilson, Sonsini, Goodrich & Rosati Professional Corporation 2222 Patrick J. Coughlin 650 Page Mill Road Luke O. Brooks Palo Alto, CA 94304 2323 Lerach Coughlin Stoia Geller Rudman & Robbins LLP Darren J. Robbins 2424 100 Pine Street, Suite 2600 Lerach Coughlin Stoia Geller Rudman San Francisco, CA 94111 & Robbins LLP 2525 401 B Street, Suite 1700 Thomas G. Rafferty San Diego, CA 92101 2626 Rowan D. Wilson LaShann M. DeArcy Francis M. Gregorek 2727 Cravath Swaine & Moore LLP Betsy C. Manifold Worldwide Plaza, 825 Eighth Avenue Rachele R. Rickert 2828 New York, NY 10019 Wolf Haldenstein Adler Freeman & Herz LLP FOURTH AMENDED CONSOLIDATED COMPLAINT FOR VIOLATION 195 OF THE FEDERAL SECURITIES LAWS Case Number C 03-05642 JF Case 5:03-cv-05642-JF Document 243 Filed 08/04/2006 Page 197 of 198

1 1 Marc L. Godino Symphony Towers 2 Braun Law Group, P.C. 750 B Street, Suite 2770 2 12400 Bilwshire Blvd., Suite 920 San Diego, CA 92101 3 Los Angeles, CA 90025 3 Frederick S. Fields, Esquire 4 Susan K. Jamison, Esquire 4 Coblentz, Patch, Duffy & Bass, LLP 5 One Ferry Building 5 Suite 200 San Francisco, CA 94111-4213 66 7 7 /s/ Lauren E. Wagner 88 99 10 10 Lauren E. Wagner 1111 1212 1313

1414 1515 1616 1717 1818 1919 2020

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IN THE UNITED STATES DISTRICT COURT r FOR THE NORTHERN DISTRICT OF ALAtAMAQ Phi 4' ~5 SOUTHERN DIVISION ro"R T

STATE OF W-ISCONSIN INVESTMENT BOARD, KENNETH D. BUSH, EDWARD E. EUBANK, and JOHN MICHAEL, suing on behalf of themselves and all others similarly situated, CIVIL ACTION NOS. Plaintiffs, CV-99-BU-3097-S end vs. CV-99-BU-3129-S HAROLD RUTTENBERG , et al., ENTERED Defendants. Jul 0 3 M b

MEMORANDUM OF OPINION

This cause comes to be heard on a motion for class certification filed by the Lead Plaintiff Committee ("Committee") on February 1, 2001 .

This Committee, consisting of the State of Wisconsin Investment Board,

Kenneth D . Bush, Edward E. Eubank, Jr., and John Michael, contends that class treatment under Federal Rule of Civil Procedure 23(b)(3) Is appropriate for the putative class members ' claims for various violations

Page t of 20 5 Case 5:03-cv-05642-,1P Document 148 Filed 12/1312004 Page 45 of 86

of securities laws by Harold Ruttenberg , Eric L_ Tyra, Peter Berman,

Cooper Evans, Patrick Lloyd, Don-Alien Ruttenberg, Michael P . Lazarus,

Helen Rockey, Scott C. Wynne, Randall Haines, and Adam Gilburne, as

high-level officers and insiders of Just for Feet, inc. ("Feet Defendants');

and by Deloitte & Touche LLP, Steven H. Barry, and Karen Baker, as

independent auditors and audit managers ("audit Defendants") . Only one

argument against certification of the class as a whole has been presente d

to the Court by any of the Defendants . This argument is that internal

conflicts among the claims of the putative class members make a clas s

action an inadequate means of resolving the claims of the putative class

members. The Defendants concentrate instead on issues of class

definition, disputing which claims would come within the compass of th e

class action; what the appropriate class period is; and whether a single

class or multiple subclasses should be certified against the Defendants ,

Class certification is appropriate if and only If all of the requirements

of Federal Rule of Civil Procedure 23(a) are satisfied and "at least one of

the alternative requirements of Rule 23(b) are satisfied . . . ," so long as

that alternative requirement is appropriate to the relief sought in th e

action. Turner v. Beneficial Corp,, 242 F.3d 1023, 1025 (11 `h Cir. 2001). Page 2 of 20 Case 5:03-cv-05642-JF Document 148 Filed 12113/2004 Page 46 of 8 6

To begin with, plaintiffs desiring class certification "must satisfy the prerequisites of numerosity, commonality, typicality, and adequacy of representation specified in Rule 23(a)," Murray v. Auslander, 244 F.3d

807, 810 (11th Cir. 2001). The class must be so numerous 'that any attempt to bring such claims of its members in a single action pursuant to standard Joinder rules would be impracticable . See Kllgo v. Bowman

Transport, Inc., 789 F.2d 859, 878 (14"" Cir. 1986); Pederson v. Louisiana

State University, 213 F.3d 858, 868 (51h Cir. 2000); and Andrews v.

Bechtel Power Corp., 780 F.2d 124, 132 (15t Cir. 1985). Next, issues of law or fact common to all members of the putative class must exist . This requirement is a minimal one, requiring a mere identity of some factual or legal matter among members of the putative class . See Hudson v. Delta

Air Lines, Inc., 90 F.3d 451, 456 (19'h Or . 1998); James v. City of Dallas,

Texas, - F.3d -, 2001 WL 682089 at *12 (51' Cir. June 18, 2001);

Hanlon v. Chrysler Corp., 1 50 F.3d 1011, 1019-20 (91' Cir. 1998) ; and

Baby Meal for and by Kanter v. Casey, 43 F.3d 48, 66 (3d Cir. 1994).

Third, the claims and defenses of the class representatives must be typical of those of the class members . This requ rement tends to merge with those of commonality and adequacy: both representative plaintiffs Page 3 of 20 Case 5:03-cv-05642-JF Document 148 Filed 12)13/2004 Page 47 of 86

and putative class members must be able to bring their claims to court on board the same truck . See Hudson, 90 F.3d at 4 6; In re Milk Products

Antitrust Litigation, 195 F.3d 430, 436-37 (Btul Cir. 1999); Marlsol A. v.

Giuliani, 126 F.3d 372, 376 (20 Or. 1997) ("Typicality Search Term End . .

. requires that the claims of the class representatives be typical of those of the class, and 'is satisfied when each class member's claim arises fro m the same course of events, and each class member makes similar legal arguments to prove the defendant's liability.'"); ar i Georgine v. Amchem

Products, inc., 83 F.3d 610, 631 (3" Cir. 1996) ("The typicality requirement is intended to preclude certification of those cases where the legal theories of the named plaintiffs potentially Inflict with those of the absentees,").

Fourth, it must be the case that the class representatives will fairl y and adequately protect the interests of the class . "Resolution of two questions determines legal adequacy: (1) do the named plaintiffs an d their counsel have any conflicts of interest with other class members an d

(2) will the named plaintiffs and their course` prosecute the actio n vigorously on behalf of the class?" Hanlon v. Chr€vsler Corp., 150 F.3d at

1020. See also Baffa v. Donaldson, Lufkin & Jenrette Securities Corp., Page 4 of 20 Case 5:03-cv-05042-JF Document 1 48 Filed 1203/2004 Page 48 of 86

222 F .3d 52, 60 (2d Cir. 2000). First, there can east no conflicts between the class representatives and the putative clad members that would impair those representatives ' ability to eflectly ly litigate their class claims. See Andrews v. American Telephone andl Telegraph Co., 95 F.3d

1014, 1022-23 (111h Cir, 1996); and Georglne v. 14mchem Products, Inc.,

83 F.3d at 630-31 . Second, representative piaihtiffs and their counse l must be of sufficient quality, determination, and demeanor that they ca n celerously and skillfully litigate all relevant mat-ters. See Local Joint

Executive Board of Culinary/Bartender Trust Fund v. Las Vegas Sands,

Inc., 244 F.3d 1152, 1162 (91h Cir. 2001); Rand w Monsanto Corp ., 926

F.2d 598, 599 (7th Cir. 1991) ("Rule 23 contemplat4s, and the district court should Insist on, a conscientious representative] plaintiff . . . ," as "[a)il class suits create some conflict between the repre~entative and the class ; the representative and counsel may be tempted to sell out the class for benefits to themselves."); and Dujanovic v. Mor t jageArrerica, Inc., 185

F.R.D. 660, 867-68 (N.D. Ala. 1999).1

' At points In this 1111gatton, this Court has been given reason to do t that lead counsel for the Committee has the appropriate demeanor with which to litigate this ctlon on behalf of the class as opposed to themselves or their principal clients . Those cone-am need not preven t cerlircettr n, however, as this Court her, authority under the Private 4ecurities Litigation Reform Act to remedy the inadequacies of counsel by substitution of lead c nse! that the Court deems to be adequate for the remainder of the prosecution of this case. Page 5 of 20 Case 5:03-cv-O5642-JF Document 148 Pied 1241312004 Page 49 of 8 6

Beyond showing that all requisites of Rolle 23(a) are satisfied , representative plaintiffs must show that an appropl fate requisite condition of Rule 23(b) is met . In the instant action, the Committee, seeking damages relief on their putative class wide securities claims, contends that the putative class satisfies not only the requirements of Rule 23(a), but those of Rule 23(b)(3), which requires that f dividuai issues or the claims of the individual class members not predominate over those of the class as a whole. See Culpepper v. Irwin Mortgage Corp., - F.3d -,

2001 WL 672825 at * 3 (1 jth Or, June 15, 2001) . Rule 23(b)(3) requires

"a functional similarity amongst the class members, that is, while each individual class member may have some differentiparticulars to his or her claim, for purposes of resolving the core matter of the suit, any class member [is) functionally as good as another." Culpepper v. Inland

Mortgage Co., 189 F.R,D. 668, 672 n.1 (N.D. Ala. 1999), afl'd sub. nom.,

Culpepper v. Irwin Mortgage Corp., -- F.3d --, 2001 WL 672825 at * 3

(0 It' Cir. June 15, 2001). As this Court stated in Culpepper v. Inland

Mortgage Co.,

"[tihe Rule 23(b)(3) predominance inquE tests whether proposed classes are sufficiently coh ive to warrant adjudication by representation ." Amchem IProducts, Inc. v. Page 6 of 20 Case 5:03-cv-05642-JF Document 148 Filed 12/13/2004 Page 50 of 8 6

Windsor, 521 U.S. at 594, 117 S.Ct. at 22Q. Therefore, the examination of predominance "focuses on tie legal or factual questions that qualify each class member's ease as a genuine controversy,' and, Is 'far more demanding' than Rule 23(a)'s commonality requirement ." Jackson v. Motet 6 Multipurpose, !no., 130 F.3d 999 (11th Cir.1997) (citing Atnchem Products, Inc. v. Windsor, 521 U .S. at 594, 117 S.Ct. at 2249-50). The locus of the predominance inquiry is whethlr those common issues of law and fact presented by the case are overwhelmed by the particular factual and Legal inquires that the case might present . See Andrews v. Arnerfcan Telephone & Telegraph Company, 95 F .3d 1014 (f 1th Cir.1996) . If resolution of the central inquiry of the class claim "breaks down into an unmanageable variety of individual legal and factual issues," class certification is Inappropriate . Id.

Id. at 673 n,3. "The matters pertinent to the findings include: (A) the interest of members of the class in individually cobtrolling the prosecutio n or defense of separate actions; (B) the extent ano nature of any litigation concerning the controversy already commenced oy or against members of the class; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum ; (ID) the difficulties likely to be encountered in the management of a class action." Fed. R. Civ. Pro.

23 (b)(3).

Page 7 of 20 Case 5:03-cv-05642-JF Document 148 Filed 12113/2004 Page 51 of 8 6

BACKGROUND

Many of the facts related to this motion ape stated in this Courts opinion of April 7, 2000 . Burke v. Rutfenberg, 4 02 F. Supp. 2d 1280,

1286-89 (N.© . Ala. 2000). The Court only states the most pe rtinent facts here, The claims of the putative class members in this case stem from alleged attempts by the various Feet Defendants,to manipulate the price of Just for Feet common stock for personal or corborate gain .2 In May of

1997, at the opening of the proposed class Period, Feet ran thirty company owned and forty-eight franchised specialty stores in eighteen states and Puerto Rico. These stores, in contr*st to. others owned by different companies in the market, had been unaffected by recent flagging sales of athletic footwear, and had, in fact, shhwn growth during the period of lackluster sales, at least on paper. Thlsistellar performance, as reported by Feet, allegedly persuaded numerous individuals and entities, including the members of the Committee and putihtive class members, to invest in Feet common stock . However, the 0ommittee alleges, the

2 Throughout the alleged class period, Just for Feet, although inoo orated In Delaware, wa s prinoipeity an Alabama corporation, headquartered In Pelham, Alab ma, and running its operations from there. Until trading was hatted an November 2,199 , shares of Feet common stock were publicly traded on the NASDAQ National Market system,,. Page 8 of 20

I Case 5:03-cv-05642-JF Document 148 Filed 12113/2004 Page 52 of 8 6

stellar performance of Feet was an illusion, maintained through the deliberate efforts of the company's officers and directors . This Illusion was first maintained by inadvisable efforts to expbnd Feet's share of the

athletic shoe market at a period when sales were low. These expansion

efforts tended to require the masking of losses through the alleged use of

fraudulent accounting practices, in order that etpansion occur with a

minimum of dissent from shareholders .

Also, the Feet Defendants, the CommitteC alleges, attempted to

directly mislead investors In the market by filing fraudulent documents

with the Securities and Exchange Commission dupported by less-than-

austere accounting methods. Averedly, in each Form 10-0 or 10-K fled

with the SEC and in each public release touting Feet's performance

contemporaneously issued, the Defendants made or participated in the

making of several fraudulent misrepresentations by overstating the total

sales of Feet, its gross and net Income, and int ome per share . This

continued without abatement from May of 1997, until January 21, 1999,

when Feet slowly began to disseminate statementt indicating the financial

weakness of the company and presaging later, stronger disclosures o f

Page9of 20 Case 5:03-cv-05642-JF Document 148 Filed 12/1312004 Page 53 of 86

financial instability in September, October, and November of 1999.3

According to the complaints, to keep up the illuWon of profitability and

continued cash flow into and through 1999, the directors and officers of

Feet engaged In a number of improper accounting tpractlces .

Feet's third alleged fraudulent act was an tittempt to maintain th e

appearance that the company would remain intact even after buffeted by

harsh financial winds in 1 999 and even though up to six weeks prior to

the announcement by Just for Feet that it wbuid file a petition of

bankruptcy under Chapter 1 1, the officers and dijectors of Feet knew of

such an intention . According to the Committee, Feet did not disclose this

intention to the public, for the purpose of arrang?g a secret repayment

plan with certain of Feet's creditors that would be unfavorable to its

shareholders. The Committee attributes this w1ongdoing to a host o f

officers and directors of Just for Feet, averting that each either

participated in the wrongdoing or permitted it to happen, with his or her

knowledge and blessing, despite the presence of fluty to intervene in and

correct the wrongdoing.

With regard to Deloitte & Touche ("Deloitte''), the Committee avers

According to the Committee, time later disclosures were not entirety fomcoming, either. Page 10 of 20 Case 5:03-cv-05642-JF Document 148 Filed 12113/2004 Page 54 of 8 6

that it was derelict in its duty to expose the improper accounting practices of Just for Feet, In particular, it asserts that Deiditte, while issuing audit reports on the company's financial statements €t4 the fiscal year ending

January 1998 through the end of the class period failed to insure that the underlying audit tests conformed to generally accepted auditing standards

("GAAS"). Among other things, the complaint aileJes that Deloitte violated

GRAS in that its senior personnel did not adeduately supervise junior personnel; that it did not develop an audit plarl that would screen for management irregularities ; that Deloitte's auditors had an inadequate understanding of Feet's operations ; that the, auditors Insufficiently examined collected evidence to make informed opinions about the financial statements audited by it ; and that it failed to report problems to the audit committee of Feet's board of directors, Claims based on th e same facts are also aimed against Steven H . Barry (C'Barry„}, who was, during the class period, the Birmingham officio managing partner of

Deloitte and the audit partner on Deloitte's audit of Just for Feet, an d

against Karen Baker ("Baker"), who was, during the class period, the

senior manager in the audit of Just for Feet.

Page 11 of 20 Case 5:08-cv-05642-,1F Document 148 Filed 12/1312004 Page 55 of 86

CONTENTIONS & ANALYSIS

The Committee, in Its motion, seeks to have certified the followin g defined class:

A class of all persons and entities who p based common stock of Just for Feet, inc., between M y 5, 1997, and November 1, 1999, excluding (1) the D Pendants in this action; (2) members of the families of the efendants in this action; (3) the subsidiaries or affiliates of ar jy Defendants; (4) any person or entity who Is a shareholde4, partner, officer, director, employee, or controlling person of 4ny Defendant ; (5) any entity in which any Defendant has a ctntrolling Interest; (6) sitting magistrates, judges, justi es, and their representative spouses and children ; (7) co4inset for Plaintiffs and their respective spouses and children ;land (B) the legal representatives, heirs, successors or assigns of any such excluded person. The Defendants have made only one chalidnge to certification of a class, focusing their efforts on narrowing the class definition. In arguing against class certification, the Defendants claim, that the Committee is unable to satisfy the adequacy requirement of Rule 23(a) because conflicts within the class structure prevent the representative Committee from serving the interests of all class members . The Defendants next assert that if, however, class certification is 'appropriate, the clas s definition should be narrowed by the exclusion of certain claims from it s

Page 12 of 20 Case 5:03-cv-05642-JF Document 148 Filed 12/1312004 Page 56 of 8 6

compass; by the shrinking of the class period ; and by the certification of multiple subclasses against the different Defendarts .

A. ADEQUACY CHALLENGE TO CLASS CERTIFICATION .

Various defendants have presented a, challenge to class certification on the grounds that the class representatives are Incapable of fairly and adequately representing the interests of the class due to intra class conflicts. This conflict, the Defendants aver,, are over the nature of the securities claims between those individuals who purchased Just for

Feet, Inc., securities before any disclosure of alleged misrepresentations

---- principally on May 21 , 1 999 -- and those individuals who purchased those securities after the disclosure. The Defendants spell out the conflict as follows: Individuals who sold after disclosure of alleged misrepresentations will have an incentive to rnlximize the amount to which that disclosure corrected the price of Feet sl3curities from their prior inflated values. This is so because their recoveiy for purchasing at an

inflated price will be offset by the amount in exc4ss of the "true" market

value at which they sold their shares, By contrast4 argue the Defendants,

post-disclosure purchasers will argue that the value of their shares Page 13 of 20 Case 5:03-cv-05642-JF Document 148 Filed 12/13/2004 Page 57 of 8 6

remained inflated even after the disclosure because it was only a partia l confession of Feet's mismanagement. These posit-disclosure purchasers have an interest in arguing such because if the purchase price was not inflated after disclosure, post-disclosure purchasers are entitled to n o remedy.

The Defendants thus portend to raise an ]allocation dilemma, as discussed in Arnchem Products, inc. v. Windsor, 521 U.S . 591 (1997).

Although involving a settlement class, the proposed class in Windsor contained an irreconcilable conflict of interests among its members, wh o were suing asbestos manufacturers for present and future compensation : the interests of one group of claimants for immediate disbursement o f medical benefits would conflict with the interests of another group in th e establishment of a long-term fund for care . Id. a, 625-26. As has been described by the Third Circuit Court of Appeals{ in Hanlon v. Chrysler

Corp., the clashing interests of present and future claimants presente d insurmountable conflicts for class counsel who could not possibly provid e adequate representation to both groups as regtired by Rule 23(a)(4)." Hanlon, 150 F.3d at 1020.

Page 14 of 20 Case 5 :03-cv-05642-JF Document 148 Filed 12/13/2004 Page 56 of 8 6

Here, however, the defendant's allocation dilemma argument fails, for three reasons. First, the argument presented by the Defendants is, in fact, a red herring . No conflict between various pre- and post disclosure purchasers exists, as the pre-disclosure purchasers are economically neutral on whether the disclosure deflated the prike to market levels . As an example, assume that the stock was inflated blj $10 per share prior to disclosure and that disclosure fully deflated the !price to market levels .

The pre-disclosure purchaser would then be entitlbd to the entire amount of the over-valuing: $10 per share . By contrast, assume that the stock price Is inflated $20 per share, but the disclosure is only partial, deflating the stock value $10 per share . The purchaser theln sells . He still has the benefit of $ 1 0 inflation when he sells, and thus, that $10 per share being offset from the inflation value, he is only entitl :d to a $10 per share recovery. Thus, It does not matter how much the deflation of the stock price at the time of sale: the recovery to the post disclosure purchaser will be the some with or without offset.

Second, even were the Defendants correct in their argument, It still would not imply an irreconcilable conflict between pre-disclosure purchasers and post-disclosure purchasers suftiblent to merit denial of Page 15 of 20 Case 5:O3-cv-65642-JF Document 148 Filed 12/13/2004 Page 59 of 8 6

certification. This is so, because the conflicts argued by the Defendants

between groups of pre-disclosure and post discldsure purchasers would

also apply to the common series of pre-disclosut-e purchasers, each of

whom sells his or her stock at a different price after disclosure . Each of

these pre-disclosure purchasers, on the Defendahts` argument will have

an interest in arguing that on the day of his or her sale, the stock price

had declined to market values, precluding any sellers who received a

greater loss after that date from claiming more da rages. This Court has

not found a case in which such a difficulty defeatOd the prospect of class

certification. Finally, the Committee contains merAbers that represent the

whole range of interests capable of maximizing recovery for the class in a

manner not possible were the class divided . The challenge to the

adequacy of representation In the class therefore flails .

B. CHALLENGES TO CLASS DEFINITION.

The remaining challenges of the Defeindants relate to the

appropriate definition of the class. First, the Defendants argue that the

representative Plaintiffs' claims pursuant to section 18 of the Securities

Act should not be made class-wide, as a demonstration of liability on Page 16 of 20 Case 5:03-cv-05642-JF Document 148 Filed 12/1312004 Page 60 of 8 6

those claims would require individualized proof of reliance by each

Plaintiff on the misrepresentations of Feet, This would violate th e

predominance requirement of Rule 23(b)(3), the ; Defendants argue, by

making individual issues of reliance the overwheinting issue of the various

claims. This Court will follow Simpson v. Specially Retail Concepts, 149

F.R.D. 94, 102 (M.D .N.C. 1993) and In re M1PC Holdings Securiffe*

Litigation, 754 P,Supp. 785, 792 (S.D. Cal. 1990). Because the Simpson

courts argument is persuasive, the Court quotes it in full :

in the remaining federal and state law claims, Simpson must prove individual reliance on behalf of himself and the class. DH & S argues that class certifiication'should be denied as to these claims because such proof would be unwieldy and unnecessary. While individualized rellancel will have to be proven, this Court agrees with those courts which have found that the common issues predominate and Oat considerations of judicial efficiency and economy will be furthered by permitting certification of the pendent statd law claims. See e.g. Kirschner, 139 F.R.D. at 83 (and rags cited therein); Keyser v. Commonwealth Net. Fin. Corp., 121 P.R.D. 642 (M,D.Pa. 1988). As noted in Kirschner, urn the event that individual issues of reliance pose difict4ties as to case management at a later stage, there are mechanisms available to effectively litigate the reliance questions, without destroying the efficiency of class proceedings on other issues ." 139 F.R.D. at 83 (citing In re ORFA Sec. Litig., 664 F.Supp. 1449, 1462 (D.N .J. 1987) (citing cases that approve of the use of hearings, questionnaires, or other procedurbs to manage the reliance element)). As a result, the Court finds individual

Page 17 of 20 Case 5:03-cv-05642-JF Document 148 Filed 12/13/2004 Page 61 of 86

questions of reliance do not predominate over issues common to the claims.

Simpson, 149 F.R.D. at 102. This Court, after, the principal common practice issues are resolved, can hold mini-trials on the issue of individual reliance with respect to each shareholder. In re A ADC Holdings Securities

Litigation, 754 F .Supp. at 792. As such, this Court will not cleave this claim from the class definition on grounds that individual Issues wil l therefore preponderate ,

The Defendants next argue for the Court to-shrink the class period for the same reasons it requests the Court to deny class certification.

This Court is of the opinion that the periods for which liability can be ascribed to the various Defendants is one best left to the jury at trial an d not made by the Court on a motion for class certifidation .

Finally, the Defendants argue that multiplb subclasses must be certified to deal with each of the Defendants in this action and the variou s limited periods of their liability . For the most part, this argument lacks merit. The Feet Defendants were allegedly dngaged In a common scheme and it would be redundant to have to ret y much of those issues with regard to separate classes . At the same time, the putative class

Page 18 of 20 Case 5:03-cv-05642-JF document 148 Filed 12/13/2004 Page 62 of 8 6

members' bases for liability against the Feet Defendants and the audit

Defendants are substantially varied . Combining Trials against these two sets of defendants would be potentially confusing or a jury. However, the certification of two subclasses is not likely to rerriedy the issue ; the two subclasses would be identical and could still try the issue in a common

(and still more confusing) proceeding.

The appropriate course, rather, is to sever the action by the clas s against the Feet Defendants from their actibn against the audit

Defendants pursuant to Federal Rule of Civil] Procedure 21 . The severance of issues for subsequent proceedings And trial is committed to the district court's broad discretion . See Brunet v United Gas Pipeline

Co., 15 F.3d 500, 505 (5t' Cir . 1994). Several factors are to be considered in determining the appropriateness of severance : the convenience of the parties, the risk of prejudiod to any party, and the promotion of judicial expedience and economy . -See Rojas v. National

Accident Insurance Urrderwroters, 2001 WL 68 231 (W.D . Tex. 2001), and Old Colony Ventures I v. SMWNPF Holdings; Inc., 91 8 F.Supp. 343,

350 (D.Kan. 1996). All of these factors militate in favor of severing th e

Page 19 of 20 Case 5:03-cv-05642-JF Document 148 Filed 12/1312004 Page 63 of 8 6

action against the Feet Defendants from that against the audit

Defendants.

CONCLUSION

For the foregoing reasons, the motion for class certification will be

GRANTED. Further, the case will heretofore be SEVERED into one

action against Harold Ruttenberg, Eric L. Tyra, Peter Berman, Cooper

Evans, Patrick Lloyd, Don-Allen Ruttenberg, Michael P. Lazarus, Helen

Rockey, Scott C. Wynne, Randall Haines, and 'Adam Gilbume and a

second action against Deloitte & Touche LLP, Steven H . Barry, and Karen

Baker. VA IT IS SO ORDERED this" ' day of July, 2001 .

M. DEAN BU3TRAM,'JR. UNITED STATES DE TRICT JUDGE Page 20 of 20