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May 19, 2000


The opinion of the court was delivered by: Orrick, District Judge.


This, securities fraud class action arises out of three suits originally brought by plaintiffs Ken Webb, Peter Rodes, and Park East, Inc. against The Vantive Corporation ("Vantive") and individual defendants John R. Luongo (former CEO*fn1 of Vantive), John M. Jack (former COO*fn2 of Vantive), Kathleen A. Murphy (former CFO*fn3 of Vantive), Christopher W. Lochhead (former Vice President ("VP") of Vantive), Roger J. Sippl (founder and former chairman of Vantive), David J. Jodoin (former VP of Vantive), and Michael M. Loo (former VP and former interim CEO of Vantive) (collectively "the individual defendants"*fn4). The Court consolidated the actions for all purposes, and appointed the Gilman Group of shareholders as lead plaintiff. Vantive now moves to strike or dismiss plaintiffs' third pleading, the first consolidated amended complaint ("FCAC"). Plaintiffs move to amend their allegations nunc pro tunc and to strike excerpts of conference call transcripts submitted by defendant. For the reasons set forth hereinafter, plaintiffs' motion to amend its allegations nune pro tune is granted, and plaintiffs' motion to strike excerpts of conference call transcripts is denied. Defendants' motion to strike is denied, and defendants' motion to dismiss is granted with prejudice.


The facts are summarized from the FCAC. This action is brought under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) and 78k(a), and Rule 10(b)-5 thereunder. Plaintiffs allege violations of the Exchange Act on behalf of a class of investors who bought Vantive stock between April 23, 1997 and July 6, 1998 (the "class period").

Vantive sells and services customer relationship management software (called "front-office software") that enables field personnel to deliver customer service across many channels, including the Internet, a call center, or in person.

Vantive went public in August 1995 at $6 per share. Enjoying rapid sales and earnings growth, Vantive's stock price increased to more than $35 per share by late 1996. In April 1997 (the beginning of the class period), however, Vantive's stock price dropped to $14 3/4 per share as two competitors announced disappointing results; many believed that this particular software sector had peaked.

Plaintiffs allege that beginning in April 1997, defendants made knowingly false and misleading statements about Vantive's products' competitive prospects and the growth of its sales force, and falsely forecasted increased revenues for 1998 and 1999. Plaintiffs also allege that the individual defendants caused Vantive to manipulate and falsify its publicly reported financial results by prematurely recognizing millions in revenues by recording revenue on software licenses to resellers even though the resellers were not obligated to pay for those licenses unless and until they sublicensed the product to the ultimate end user. Allegedly, as a result of these misrepresentations, Vantive's stock soared to $39. During the class period, Vantive allegedly made two acquisitions by issuing 874,000 shares of its common stock and selling $60 million in debt securities to raise capital, while the individual defendants sold 1.39 million shares of their Vantive stock at as high as $31 per share (for a total of roughly $36 million in insider trading proceeds). After this alleged insider "bailout," Vantive's chairman (Roger Sippl) and its CFO (Kathleen Murphy) resigned.

Finally, on July 6, 1998, Vantive revealed that its results for the 1998 second quarter would be worse than earlier forecast, that Vantive was appointing a new head of North American sales, and that it was going to reduce the size of its direct sales force. Analysts slashed the 1998 revenue and earnings per share ("EPS") forecast for Vantive. Vantive's stock fell to as low as $11, and has performed poorly ever since.

On July 6, 1999, one year after the end of the alleged class period, shareholders filed three virtually identical complaints against Vantive and the individual defendants. Vantive filed a motion to dismiss all three of the complaints. The three original plaintiffs amended their complaints. Vantive filed motions to dismiss the first amended complaints on October 5, 1999, and plaintiffs filed a motion to consolidate the cases and appoint a lead plaintiff. On October 19, 1999, the Court consolidated the three individual cases and appointed the Gilman Group as lead plaintiff in this action. At the hearing on the motions, the Court permitted plaintiffs to file a consolidated complaint, and allowed defendants' already-filed briefing on its motion to dismiss the first amended complaints to stand.

On November 15, 1999, plaintiffs filed their reorganized,*fn5 102-page FCAC, which includes numerous additional pages of allegations.*fn6 The allegations in the FCAC are pled on information and belief Defendants filed a third motion to dismiss the FCAC*fn7 that the Court now grants.*fn8




Plaintiffs' allegations in the FCAC fall into four general categories: (1) Vantive manipulated its financial results, (2) Vantive made false and misleading statements about the expansion of its sales force, (3) Vantive made false and misleading statements concerning its sales force automation product, and (4) Vantive made false and misleading statements about its indirect sales channels.*fn9 All of these statements were allegedly made despite defendants' knowledge that Vantive could not possibly fulfill its rosy financial forecasts. The FCAC also alleges that the individual defendants engaged in suspicious insider trading. These categories are described in more detail below.

The FCAC first alleges that the individual defendants manipulated Vantive's publicly reported financial results for the first quarter 1997 and all of its results during the class period. (FCAC ¶ 9.) During this time, Vantive reported strong revenue growth and strong license revenue; much of the license revenue was attributable to Vantive's recognizing revenue through its resellers. (Id. ¶ 118.) Plaintiffs allege that the financial results were false because Vantive "secretly" changed its revenue recognition policy with respect to software licenses sold to resellers. Thus, when Vantive management told analysts in July 1998 that Vantive had expected more from one of its resellers that did not materialize, they allegedly knew that the contract had already been "bled dry" of revenue from their aggressive revenue recognition practices during the class period. (Id. ¶ 126.)

Second, plaintiffs allege that Vantive made false and misleading statements about the expansion of its sales force. Vantive allegedly represented that, notwithstanding a tight labor market, it was rapidly hiring large numbers of qualified personnel for its direct sales force, and was successfully training them so that they were productive within six months of hiring. (Id. ¶ 4.) Specifically, defendants represented that Vantive's success was due to its growing the field sales force over 30 percent in one quarter, that the turnover in the sales force was about 10 percent, that the force was staffed by more than sixty sales professionals, and that the company had met its goals for revenue and sales force growth. (Id. ¶¶ 37, 39, 49, 56, 79.) These statements were allegedly false when made because Vantive was not able to hire a sufficient number of qualified people (and was therefore hiring unqualified people); allegedly, the sales force turnover rate actually exceeded 25 percent. By mid-1997, Vantive had lost "virtually all" the experienced and productive sales personnel who had been with the company at the time of its 1995 IPO. (Id. ¶¶ 46(a), 60(a).)

Vantive also allegedly misrepresented its success with its sales force automation product. Vantive represented that it had successfully introduced its sales force automation product and was successfully competing in the market because its sales force automation products were superior to competitive products. Plaintiffs allege that the product was actually so unsuccessful that Vantive had quietly "pulled" the product and told sales personnel to use it as a demonstration only in an attempt to persuade customers to await the release of the new version of the product later in 1998. (Id. ¶ 8(c).)

Finally, Vantive allegedly assured analysts and investors that it was successfully expanding its indirect sales channels, including successful new partnerships with HBOC, Learning International, EDS and Lucent.*fn10 For example, defendants represented that a large deal with EDS would generate $19 million in revenue from the second quarter 1997 through the end of 1998 and that Lucent was starting to resell Vantive "Help-Desk" and "Call-Center" products that would likely generate "millions" in revenues in 1998-1999. (Id. ¶ 6.) Plaintiffs allege that Vantive knew the EDS deal was not worth $19 million, and that its Help Desk product manager in charge of working directly with EDS had resigned, which would greatly hinder development efforts and adversely impact the revenue Vantive would recognize under the EDS agreement. (Id. ¶¶ 93(n), (t), 114-128.)


To state a claim under § 10(b) and Rule 10b-5, a plaintiff must allege facts establishing the following elements in connection with the purchase or sale of a security": (1) a false statement or omission of material fact made by the defendant, (2) with scienter, (3) upon which plaintiff justifiably relied, and (4) the reliance proximately caused damage to the plaintiff McCormick v. Fund American Cos., 26 F.3d 869, 875 (9th Cir. 1994).

The scienter pleading requirement imposed by the Private Securities Litigation Reform Act ("PSLRA") is a stringent one. The Ninth Circuit interpreted the scienter pleading standard in In re Silicon Graphics, Inc. Securities Litigation. 183 F.3d 970 (9th Cir. 1999).*fn11 In Silicon Graphics, plaintiffs alleged that the company ("SGI") and six of its officers made a series of misleading statements or withheld information to inflate the value of SGI's stock while they engaged in insider trading, realizing nearly $14 million. Plaintiffs alleged that an internal memorandum showed that the company's product was not shipping in volume, that sales were slow in North America and Europe, and that SGI would not meet its revenue and growth targets. Plaintiffs contended that these reports notified officers that SGI was suffering, but the officers did not disclose the information to the public. Rather, the officers allegedly entered into a "conspiracy of silence" whereby they agreed to downplay the seriousness of SGI's problems while they sold their stock.

The Ninth Circuit concluded that these allegations and those of insider trading during the fifteen-week class period did not suffice to adequately allege scienter. The Ninth Circuit held that "a private securities plaintiff proceeding under the PSLRA must plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct." Id. at 974.

This "deliberate recklessness" standard applies to allegedly misleading statements made by company officials that are not forward looking. The Regulations promulgated under the Reform Act define "forward-looking" statements as those containing financial projections or the management's plans and objectives for future operations. 17 C.F.R. § 240.3b-6. In addition to this "deliberate recklessness" threshold, the PSLRA creates a safe harbor for statements that are forward-looking statements. A defendant is not liable for statements identified as forward looking if they are "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement." 15 U.S.C. § 78u-5(c)(1)(A)(i). Even if no cautionary statements were made, plaintiffs must plead facts showing that when the forward-looking statement was made, defendants had "actual knowledge" it was false. Id. § 78u-5(c)(1)(B). To adequately plead falsity, the complaint must "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading . . . ." Id. § 78(u)-4(b)(1).

When a pleading is based on information and belief, a plaintiff must state with particularity all facts on which his belief is based. Id. § 78(u)-(b)(1)(B). This means alleging the specific content of the documents upon which the plaintiff relied, identifying who prepared and who reviewed them, and setting out "sources of . . . information with respect to the reports." Silicon Graphics, 183 F.3d at 985. To meet these requirements, plaintiffs must couple each separate allegation in the FCAC with details identifying the sources upon which such beliefs are based. Id. This requirement is the PSLRA's single most important weapon against pleading fraud by hindsight because it ...

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