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May 5, 1997

RICHARD ZEID and SIOM MISRAHI, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs,

The opinion of the court was delivered by: WILLIAMS

 Plaintiffs Richard Zeid and Siom Misrahi, on behalf of themselves and others similarly situated, initiated this class action against John A. Kimberley, Frank M. Richardson, Mark A. Rowlinson and Firefox Communications, Inc. alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Securities Act"), 15 U.S.C. § 78j(b) and § 78t(a), and SEC Rule 10(b)(5). Defendants responded by filing a motion to dismiss which this Court granted, with leave to amend, on June 6, 1996.

 Plaintiffs then filed a First Amended Complaint ("FAC"). Now, Defendants move to dismiss the FAC pursuant to section 21D(b)(3)(A) of the Securities Act, 15 U.S.C. § 78u-4(b)(3)(A), and Fed. R. Civ. P. 9(b) and 12(b)(6), asserting that Plaintiffs have failed to plead sufficient facts to support their claims for relief. After careful consideration of the materials submitted and arguments of counsel, the Court GRANTS Defendants' motion to dismiss Plaintiffs' First Amended Complaint without leave to amend.


 Defendant Firefox Communications, Inc. (Firefox), an English Corporation, develops, markets and supports software that allows users of local area networks to communicate with users on other networks, including the Internet. Defendants Kimberley, Richardson, and Rowlinson are officers and directors of Firefox. Plaintiffs Richard Zeid and Siom Misrahi are individual investors who purchased Firefox stock between July 20, 1995 and January 2, 1996.

 In February 1996, Plaintiffs initiated this action pursuant to Fed. R. Civ. P. 23(a) and (b)(3), alleging that during the period of July 20, 1995 to January 2, 1996 (the "Class Period"), Defendants conducted a fraudulent scheme and course of business to inflate the value of Firefox's stock. Specifically, the FAC provides that Defendants, through analysts' reports, press releases and financial statements, misrepresented to the investment community that it was enjoying strong demand for its products and a successful expansion of its sales and marketing program in the U.S. Further, Plaintiffs claim that Defendants prematurely recognized revenue and recorded "phony" sales in order to distort Firefox's profits. According to the FAC, Defendants engaged in this fraudulent activity to avoid a potential lawsuit and to assist in arranging and finalizing the sale of Firefox for over $ 150 million, which would have netted corporate insiders over $ 50 million.


 A. Rule 12(b)(6) Standard

 A complaint should only be dismissed under Rule 12(b)(6) of the Federal Rules of Civil Procedure where it appears beyond doubt that no set of facts could support plaintiff's claim for relief. Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957); Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987), cert. denied, 484 U.S. 944, 108 S. Ct. 330, 98 L. Ed. 2d 358 (1987). A complaint may be dismissed as a matter of law for two reasons: (1) lack of a cognizable legal theory, or (2) insufficient facts under a cognizable theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984). In reviewing a motion under Rule 12(b)(6), all allegations of material fact are taken as true and must be construed in the light most favorable to the non-moving party. Durning, 815 F.2d at 1267. However, "conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim." In re Verifone Sec. Litig., 11 F.3d 865, 868 (9th Cir. 1993).

 B. Section 10(b) Claims

 Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, makes it unlawful to use in connection with "the mails or facilities of interstate commerce" any "manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . . ." Rule 10b-5 promulgated under section 10(b) provides as follows:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
(1) to employ any device, scheme, or artifice to defraud,
(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of circumstances under which they were made, not misleading, or
(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

 17 C.F.R. § 240.10b-5 (1993).

 The elements of a § 10(b) claim are: 1) a false statement or an omission that rendered another statement misleading; 2) materiality; 3) scienter; 4) loss causation; and 5) damages. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989), cert. denied, 496 U.S. 942, 110 S. Ct. 3229, 110 L. Ed. 2d 676 (1990).

 C. Pleading Standards

 Complaints alleging fraud must meet the heightened pleading standards of Fed. R. Civ. P. 9(b), which requires that "in all averments of fraud or mistake the circumstances constituting fraud or mistake shall be stated with particularity." To satisfy this particularity requirement, a complaint must "state precisely the time, place, and the nature of the misleading statements, misrepresentations, and specific acts of fraud." Kaplan v. Rose, 49 F.3d 1363, 1370 (9th Cir. 1994), cert. denied, 516 U.S. 810, 116 S. Ct. 58, 133 L. Ed. 2d 21 (1995).

 Recently, Congress addressed Rule 9(b) and the pleading standards for fraud as applied in the context of securities class action lawsuits. As part of an effort to discourage the filing of abusive lawsuits, Congress established uniform and stringent pleading requirements for private actions filed under the federal securities laws. S. Rep. No. 98, 104th Cong., 1st Sess. 15 (1995); H.R. Conf. Rep. No. 369, 104th Cong., 1st Sess. 41 (1995). The Reform Act requires that plaintiffs asserting claims for securities fraud specify each false or misleading statement and why each statement is false or misleading. 15 U.S.C. § 78u-4(b)(1). If an allegation regarding a statement or omission is made on information and belief, the complaint must state with particularity the facts on which the belief is formed. Id. Additionally, with respect to each act or omission, plaintiffs must set forth in the complaint particular facts that give rise to a strong inference that defendant acted with the required state of mind. 15 U.S.C. § 78u-4(b)(2). A complaint that fails to comply with any of these requirements must be dismissed. 15 U.S.C. § 78u-4(b)(3)(A).


 Defendants contend that the claims asserted in the FAC fail because they consist of mere conclusory allegations which lack the specificity required by the Reform Act. Defendants also argue that Plaintiffs rely heavily on allegations based on information and belief but fail to state with particularity the factual allegations that form the basis for their beliefs.

 In response, Plaintiffs contend that the Reform Act and its pleading requirements do not apply to their claims. They also assert that even if the Reform Act applies, they have sufficiently alleged in the FAC each false or misleading statement, why each statement was false or misleading, and facts giving rise to a strong inference that Defendants acted with the required state of mind.

 A. Preliminary Matters

 Before assessing the sufficiency of the allegations in the FAC, the Court must examine three preliminary matters: (1) whether the Reform Act applies to claims based on pre-act conduct that are filed after the Reform Act's effective date; (2) whether the requirements of the Reform Act for allegations made on information and belief apply to Plaintiffs' claims; and (3) how to interpret the Reform Act's pleading standard for scienter.

 1.) Application of the Reform Act

 Plaintiffs argue that the Reform Act does not apply retroactively to conduct occurring before its effective date, December 22, 1995, and thus, it should not apply to their case since most of the allegedly improper conduct committed by Defendants occurred before December 22, 1995. However, Plaintiffs misinterpret the language of the Reform Act, which provides in pertinent part:

The amendments made by this title shall not affect or apply to actions under title I of the Securities Exchange Act of 1934 or title I of the Securities Act of 1933, commenced before and pending on the date of enactment of this act.

 Reform Act § 108, Pub. L. No. 104-67, 109 Stat. at 758 (1995).

 2.) Allegations Made on Information and Belief

 Defendants assert that the FAC contains numerous allegations that are implicitly based on information and belief because, due to the nature of the allegations, they cannot be based on either Plaintiffs' or their counsels' personal knowledge. Further, Defendants contend that the FAC does not comply with the Reform Act because it fails to state with particularity all the facts on which these "beliefs" are formed.

 Prior to the Reform Act, courts permitted plaintiffs asserting fraud to make allegations based on information and belief as to matters peculiarly within the defendant's knowledge. Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993). Further, since plaintiffs could not be expected to have knowledge of such matters, courts relaxed the pleading requirements of Rule 9(b) when assessing the sufficiency of these allegations. Id. However, to warrant application of a relaxed standard, ...

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