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IN RE EXODUS COMMUNICATIONS

August 5, 2005.

In re EXODUS COMMUNICATIONS, INC. SECURITIES LITIGATION. This Document Relates To: ALL ACTIONS.


The opinion of the court was delivered by: MAXINE CHESNEY, District Judge

ORDER GRANTING IN PART AND DENYING IN PART UNDERWRITER DEFENDANTS' MOTION TO DISMISS; GRANTING INDIVIDUAL DEFENDANTS' MOTION TO DISMISS
Before the Court are the two separate motions to dismiss filed by (1) defendants Goldman, Sachs & Co. ("Goldman Sachs"), Merrill Lynch & Co. ("Merrill Lynch"), Morgan Stanley Dean Witter ("Morgan Stanley"), and J.P. Morgan (collectively, "Underwriter Defendants"); and (2) defendants Ellen M. Hancock ("Hancock"), R. Marshall Case ("Case"), Sam S. Mohamad ("Mohamad"), Dick Stoltz ("Stoltz"), Herbert A. Dollahite ("Dollahite"), Adam W. Wegner ("Wegner"), Beverly Brown ("Brown"), and William Yeack ("Yeack") (collectively, "Individual Defendants"), each of whom is a former officer of Exodus Communications, Inc.*fn1 Each motion seeks dismissal of plaintiffs' Third Amended Consolidated Class Action Complaint, pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA") and Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. On April 29, 2005, plaintiffs filed a Corrected Third Amended Consolidated Class Action Complaint ("Third Amended Complaint" or "TAC"). The Court granted the parties leave to file supplemental memoranda addressing the impact of the amendments on the pending motions to dismiss and, after such supplemental memoranda were filed, took the motions under submission as of May 13, 2005. For the reasons set forth below, the Court GRANTS in part and DENIES in part the Underwriter Defendants' motion, and GRANTS the Individual Defendants' motion.

BACKGROUND

  The above-titled action is a purported class action brought on behalf of those individuals and entities who purchased securities issued by Exodus Communications, Inc. ("Exodus") between April 20, 2000 and September 25, 2001, inclusive (the "class period"). (See TAC ¶ 1.)*fn2

  Exodus "operated Internet Data Centers (`IDCs') that leased space to Exodus's customers to place (`co-locate') the computer servers that ran the customers' Internet operations." (See TAC ¶ 2.) Exodus also "provided broadband access and other design and management services to support commercial Internet operations." (See id.)

  On June 20, 2001, Exodus announced that its results for the second quarter of 2001 and for the fiscal year 2001*fn3 would be below prior expectations, whereupon the price of Exodus's stock fell almost 50%. (See TAC ¶¶ 93-94.) On July 12, 2001, the first of many complaints against Exodus was filed in this district.

  On September 25, 2001, the last day of the class period, the Wall Street Journal published an article stating that Exodus's bankruptcy was forthcoming, whereupon Exodus's stock, which had traded as high as $179 per share during the class period, fell to $0.17 per share. (See TAC ¶ 18.) The following day, September 26, 2001, Exodus filed for bankruptcy. (See id.)

  On December 13, 2001, plaintiffs filed a Consolidated Class Action Complaint, alleging claims against Hancock, Case, Stoltz, Dollahite, and Wegner, for violation of §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934 ("Exchange Act"). A Corrected Consolidated Class Action Complaint ("Consolidated Complaint" or "CAC") was filed April 17, 2002. By order filed May 28, 2002, the Court granted the defendants' motion to dismiss the Consolidated Complaint, finding plaintiffs had failed to adequately plead that any of the alleged statements were false or misleading at the time they were made, and that plaintiffs had failed to plead facts sufficient to raise an inference that defendants had made the alleged false or misleading statements with the requisite state of mind. Plaintiffs were afforded leave to amend.

  On July 11, 2002, plaintiffs filed their First Amended Consolidated Class Action Complaint ("First Amended Complaint" or "FAC"), which significantly expanded the scope of the litigation. The First Amended Complaint increased the class period from 11 weeks (March 30, 2001 to June 20, 2001) to 73 weeks (April 20, 2000 to September 25, 2001). (Compare CAC ¶ 1 with FAC ¶ 1.) In addition, the First Amended Complaint added two new plaintiffs, Thomas Welch and Martin Fox, and seven new defendants, three of whom are former officers of Exodus, specifically, Mohamad, Brown and Yeack, and four of whom are the Underwriter Defendants, who were underwriters of Exodus's February 6, 2001 secondary stock and note offerings ("February Offerings"). The First Amended Complaint included a new claim under §§ 11 and 15 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77k, 77o, against former Exodus CEO Hancock, as well as new claims against the Underwriter Defendants, for violation of § 10(b) of the Exchange Act and § 11 of the Securities Act. The new claims against Hancock and the Underwriter Defendants were based on allegedly false statements made in the registration statements and prospectuses issued in connection with the February Offerings. On August 19, 2003, the Court granted the motions filed by the Underwriter Defendants and the Individual Defendants to dismiss the First Amended Complaint, and afforded plaintiffs leave to amend. The Court dismissed all claims against the Underwriter Defendants because plaintiffs failed to allege facts sufficient to demonstrate conformity with the statute of limitations. The Court also held that the § 10(b) claims against the Underwriter Defendants were subject to dismissal because plaintiffs failed to adequately allege scienter or that the statements in the Registration Statements were false when made. The Court dismissed the § 11 claims against the Underwriter Defendants, with leave to amend, because plaintiffs failed to adequately allege falsity with the particularity required by Rule 9(b). The Court dismissed plaintiffs' § 10(b) claims against the Individual Defendants because plaintiffs failed to adequately allege scienter and that the allegedly false and misleading statements were false when made. As an additional basis for dismissal, the Court held that plaintiffs had failed to allege sufficient facts to demonstrate that the following claims were timely: (1) the § 10(b) claims against the Individual Defendants as alleged by class members who purchased securities between April 20, 2000 and March 31, 2001; and (2) the new § 10(b) claims asserted against Mohamad, Yeack, and Brown that were based on statements made between March 31, 2001 and June 20, 2001. The Court dismissed the § 11 claim against Hancock because plaintiffs failed to plead sufficient facts to show the claim was timely and failed to adequately allege falsity. Finally, the Court dismissed plaintiffs' claims for violation of § 20(a) of the Exchange Act and § 15 of the Securities Act because such claims were dependent on a violation of § 10(b) or § 11, and plaintiffs had not adequately alleged a violation of either statute.

  On October 20, 2003, plaintiffs filed a Second Amended Consolidated Class Action Complaint ("Second Amended Complaint"). On November 25, 2003, before defendants responded to the Second Amended Complaint, plaintiffs filed a motion for leave to file a Third Amended Complaint. The Court granted the motion on January 12, 2004, and plaintiffs filed their Third Amended Consolidated Class Action Complaint on January 15, 2004. Defendants thereafter filed the instant motions to dismiss. On March 8, 2005, while the motions to dismiss were under submission, plaintiffs filed a motion for leave to amend their Third Amended Consolidated Class Action Complaint to add one line of text and one exhibit. On April 18, 2005, the Court granted the motion and afforded the parties leave to file supplemental memoranda addressing the impact of the amendments on the pending motions to dismiss. Plaintiffs' Corrected Third Amended Consolidated Class Action Complaint was filed April 29, 2005. The motions to dismiss were taken under submission as of May 13, 2005, once the supplemental memoranda were filed.

  LEGAL STANDARDS

  A. Rule 12(b)(6)

  A motion to dismiss under Rule 12(b)(6) cannot be granted unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." See Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. See Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1990).

  Generally, a district court, in ruling on a Rule 12(b)(6) motion, may not consider any material beyond the pleadings. See Hal Roach Studios, Inc. v. Richard Feiner And Co., Inc., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1990). Material that is properly submitted as part of the complaint, however, may be considered. See id. Documents whose contents are alleged in the complaint, and whose authenticity no party questions, but which are not physically attached to the pleading, also may be considered. See Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994). In addition, the Court may consider any document "the authenticity of which is not contested, and upon which the plaintiff's complaint necessarily relies," regardless of whether the document is referred to in the complaint. See Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998). Finally, the Court may consider matters that are subject to judicial notice. See Mack v. South Bay Beer Distributors, Inc., 798 F.2d 1279, 1282 (9th Cir. 1986). In analyzing a motion to dismiss, the Court must accept as true all material allegations in the complaint, and construe them in the light most favorable to the nonmoving party. See NL Industries, Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). In analyzing a motion to dismiss, the Court may disregard factual allegations if such allegations are contradicted by the facts established by reference to exhibits attached to the complaint. See Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987). Conclusory allegations, unsupported by the facts alleged, need not be accepted as true. See Holden v. Hagopian, 978 F.2d 1115, 1121 (9th Cir. 1992).

  B. Section 10(b) and the PSLRA

  Section 10(b) of the Exchange Act provides that "[i]t shall be unlawful for any person . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe[.]" See 15 U.S.C. § 78j(b). Rule 10b-5 provides:
It shall be unlawful for any person . . .
(a) To employ any device, scheme, or artifice to defraud,
(b) 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 light of the circumstances under which they were made, not misleading, or
(c) 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. The elements of a § 10(b)/Rule 10b-5 claim are (1) "a material misrepresentation (or omission)"; (2) "scienter, i.e., a wrongful state of mind"; (3) "a connection with the purchase or sale of a security"; (4) "reliance"; (5) "economic loss"; and (6) "`loss causation,' i.e., a causal connection between the material misrepresentation and the loss." See Dura Pharmaceuticals, Inc. v. Broudo, 125 S.Ct. 1627, 1631 (2005). False statements in a registration statement are actionable under § 10(b) as well as under § 11. See Herman & Maclean v. Huddleston, 459 U.S. 375, 387 (1983) ("We hold that the availability of an express remedy under Section 11 of the 1933 Act does not preclude defrauded purchasers of registered securities from maintaining an action under Section 10(b) of the 1934 Act.")

  Any class action complaint alleging securities fraud in violation of the Exchange Act is subject to the heightened pleading standards set forth in the Private Securities Litigation Reform Act of 1995 ("PSLRA"). See In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 973-74 (9th Cir. 1999). Under the PSLRA, for all claims based on misrepresentations or omissions, plaintiffs 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 that belief is formed." See 15 U.S.C. § 78u-4(b)(1). Plaintiffs "must provide all the facts forming the basis for [their] belief in great detail." See Silicon Graphics, 183 F.3d at 983.*fn4 The PSLRA also requires that "the complaint shall, with respect to each such act or omission alleged to violate [the Exchange Act], state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." See 15 U.S.C. § 78u-4(b)(2). The required state of mind is "deliberate recklessness, at a minimum." See Silicon Graphics, 183 F.3d at 974. Plaintiffs "must plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct." See id. They "must state specific facts indicating no less than a degree of recklessness that strongly suggests actual intent." See id. at 979. If the challenged statement in question is forward-looking, however, the requisite state of mind is "actual knowledge." See No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920, 931 (9th Cir. 2003) (quoting 15 U.S.C. § 78u-5(c)(1)).

  In determining whether scienter has been adequately alleged, the Court must examine the totality of plaintiffs' allegations. See America West, 320 F.3d at 938. The Court must consider "`all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs.'" See id. (quoting Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002)). "District courts should consider all the allegations in their entirety, together with any reasonable inferences that can be drawn therefrom, in concluding whether, on balance, the plaintiffs' complaint gives rise to the requisite inference of scienter." Gompper v. VISX, Inc., 298 F.3d at 897. To establish a strong inference of scienter, the allegations must show that an inference of fraud is "`the most plausible of competing inferences.'" See id. (quoting Helwig v. Vencor, Inc., 251 F.3d 540, 553 (6th Cir. 2001) (en banc)).

  Because "falsity and scienter in private securities fraud cases are generally strongly inferred from the same set of facts," the Ninth Circuit has incorporated the falsity and scienter requirements "into a single inquiry." See Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001); see also America West, 320 F.3d at 932 (noting the court "generally examines the falsity and scienter requirements at the same time.") In conducting this inquiry, a court is to 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." See Ronconi v. Larkin, 253 F.3d at 429. "The most direct way to show both that a statement was false when made and that the party making the statement knew that it was false is via contemporaneous reports or data, available to the party, which contradict the statement." See Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1230 (9th Cir 2004).

  C. Section 11 of the Securities Act

  Section 11 "creates a private remedy for any purchaser of a security if `any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein not misleading.'" See In re Daou Systems, Inc. Sec. Litig., 411 F.3d 1006, 1027 (9th Cir. 2005) (quoting 15 U.S.C. § 77k(a)). "Under § 11 of the Securities Act of 1933 . . . any signer of [a] registration statement, any partner or director of the issuer, any professional involved in preparing or certifying the statement, and any underwriter of a registration statement may be liable[.]" Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir. 1994). "The plaintiff in a § 11 claim must demonstrate (1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment." See Daou, 411 F.3d at 1027 (citation omitted); see also Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983) ("If a plaintiff purchased a security issued pursuant to a registration statement, he need only show a material misstatement or omission to establish his prima facie case.")

  Significantly, scienter is not a requirement for liability under § 11, and "defendants will be liable for innocent or negligent material misstatements or omissions." See Daou, 411 F.3d at 1027 (citation omitted).

  Defendants to a § 11 claim, other than the issuer, can establish a "due diligence" defense if they show that after reasonable investigation they had reasonable grounds to believe, and did believe, that, at the time the registration statement became effective, the statements were true and there was no material omission. See Kaplan v. Rose, 49 F.3d at 1371 (citing 15 U.S.C. § 77k(b)(3)(A)).

  DISCUSSION: UNDERWRITERS' MOTION TO DISMISS

  As noted, the Third Amended Complaint alleges causes of action against the Underwriter Defendants for violation of § 10(b) of the Exchange Act and Rule 10(b)(5), and violation of § 11 of the Securities Act. Plaintiffs allege that the Underwriter Defendants are liable under both § 10(b) and § 11 because the registration statements and prospectuses issued in connection with the February Offerings (collectively "Registration Statements")*fn5 contained the following false and misleading statements: (1) "We believe that the acquisition [of GlobalCenter] enhances our global Internet Data Center infrastructure, strengthens our network, our customer support, sales and professional services organizations, and expands our customer base";*fn6 (2) Exodus achieved revenues of $280.4 million for the quarter ended December 31, 2000, and $818.4 million for fiscal year 2000; (3) "[Exodus has] established a diverse base of customers and continues to focus on supporting the strong demand from the enterprise market"; and (4) Exodus had 4500 customers under contract. (See TAC ¶¶ 72-73, 345-346 (alterations in original).)*fn7

  In their Motion to Dismiss, the Underwriter Defendants raise three principal arguments: (1) both of the causes of action are barred by the applicable one-year statute of limitations; (2) plaintiffs have failed to adequately allege a § 11 claim because plaintiffs have failed to allege falsity with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure; and (3) plaintiffs have not adequately alleged a § 10(b) claim because plaintiffs have failed to adequately allege falsity and scienter under the requirements of the PSLRA.

  A. Statute of Limitations: Section 10(b) and Section 11 Claims

  The Court previously has held that the instant claims under § 10(b) and § 11 are timely if they were brought "within one year of either actual discovery or inquiry notice" of the facts constituting the alleged violations. (See Dismissal Order at 8.) As to inquiry notice, the Court, relying on the Ninth Circuit's discussion in Berry v. Valence, 175 F.3d 699, 703-04 (9th Cir. 1999), held that it would apply "the Tenth Circuit's formulation," as set forth in Sterlin v. Biomune Systems, 154 F.3d 1191, 1201 (10th Cir. 1998). (See Dismissal Order at 8.) Under that standard, "`inquiry notice . . . triggers an investor's duty to exercise reasonable diligence and . . . the one-year statute of limitations begins to run once the investor, in the exercise of reasonable diligence, should have discovered the facts underlying the alleged fraud.'" See Valence, 175 F.3d at 704 (quoting Sterlin, 154 F.3d at 1201) (ellipses in original). Thus, a court must ask (1) whether an event/publication "raise[d] sufficient suspicion of fraud to cause a reasonable investor to investigate the matter further," and (2) when "a reasonably diligent inventor [should] have discovered the facts underlying the alleged fraudulent activity." See Valence, 175 F.3d at 704. "If the answer to the first question is yes, the answer to the second question would determine when the statute of limitations began to run." Id.

  For purposes of the statute of limitations, the question of when a reasonably diligent investor did discover or should have discovered the alleged wrongdoing is a question of fact, rarely to be decided as a matter of law. See Mosesian v. Peat Marwick, 727 F.2d 873, 877 (9th Cir. 1984) ("The question of when [alleged wrongdoing] was or should have been discovered is a question of fact. It may be decided as a matter of law only when uncontroverted evidence irrefutably demonstrates plaintiff discovered or should have discovered the fraudulent conduct.") (internal citations and quotations omitted). Nevertheless, "a plaintiff must affirmatively plead sufficient facts in his complaint to demonstrate conformity with the statute of limitations." See Toombs v. Leone, 777 F.2d 465, 468 (9th Cir. 1985).

  As noted, plaintiffs' claims against the Underwriter Defendants are based on alleged misstatements in the Registration Statements for the February Offerings. Because plaintiffs first asserted claims against the Underwriter Defendants in the First Amended Complaint, which was filed on July 11, 2002, plaintiffs' claims against the Underwriter Defendants are timely if plaintiffs should have discovered the facts underlying those claims no earlier than July 11, 2001. See Valence, 175 F.3d at 704.

  The Court previously dismissed the § 10(b) and § 11 claims against the Underwriter Defendants because plaintiffs failed to allege any facts from which one could determine "at what point a reasonably diligent investor should have discovered the relevant facts underlying plaintiffs' claims against the Underwriter Defendants," and failed to set forth the nature and scope of their investigation of the facts underlying their claims against the Underwriter Defendants. (See Dismissal Order at 12.) Plaintiffs now allege, in the Third Amended Complaint, that they did not discover, until December 2001, "the possibility that the Underwriter Defendants may have underwritten Exodus's offerings pursuant to a false and misleading Registration Statement and Prospectus." (See TAC ¶ 319.) According to the complaint, plaintiffs Martin Fox and Thomas Welch, the only named plaintiffs who claim to have purchased stock or notes in, or traceable to, the February Offerings, (see TAC ¶ 25), first contacted plaintiffs' counsel on July 18, 2001 and August 23, 2001, respectively. (See TAC ¶ 317.) Thereafter, plaintiffs allege, they "diligently attempted to locate individuals with knowledge of Exodus's business practices." (See id.) According to plaintiffs, it was not until their investigator's interview with CW6, on December 4, 2001, at which CW6 stated that Exodus was not bringing in any new customers at the end of 2000, that plaintiffs first suspected that fraudulent conduct might have begun prior to the second quarter of 2001. (See id.) On December 10, 2001, plaintiffs allege, they spoke with CW9, Vice President of Facilities in Exodus's Santa Clara office, who informed plaintiffs that, in plaintiffs' words, "Exodus's management dismissed his capital report and continued to build additional IDCs when they knew that Exodus did not have the capital to cover the expenses of these expansions." (See id. ¶ 320.) Plaintiffs contend this statement led them "to believe that there was a possibility that statements contained in the registration statements issued in connection with Exodus's February 2001 secondary stock and note offerings were false and misleading." (See id.) In addition, according to plaintiffs, unspecified "defendants fraudulently concealed their activities." (See id. ¶ 316.) If a reasonably diligent investor would not have discovered the facts underlying plaintiffs' claims against the Underwriter Defendants until at least July 11, 2001, one year before the first complaint containing claims against the Underwriter Defendants was filed, plaintiffs' claims against the Underwriter Defendants are timely. See Valence, 175 F.3d at 704.

  The Underwriter Defendants move to dismiss plaintiffs claims on the ground that plaintiffs still fail to adequately allege that their claims are timely. To the extent defendants contend the complaint must be dismissed unless plaintiffs have alleged facts sufficient to determine at what point a reasonably diligent investor should have discovered the relevant facts underlying plaintiffs' claims against the Underwriter Defendants, recent Ninth Circuit authority holds to the contrary. In Livid Holdings Ltd. v. Salomon Smith Barney, 403 F.3d 1050 (9th Cir. 2005), the Ninth Circuit addressed the statute of limitations argument raised by the defendants therein, even though it had not been addressed by the district court, as a possible alternative ground for affirming the district court's dismissal of the complaint. See id. at 1058-60. The Ninth Circuit found it was "not evident, based on the allegations in the complaint," that "Livid should have been aware of the fraud one year before it filed its complaint." See id. at 1059-60. There, the plaintiff, Livid, had alleged it first learned, approximately fourteen months before the complaint was filed, of a bankruptcy proceeding that triggered its first suspicion of fraud and an investigation. See id. at 1060. Livid also alleged that it did not have actual notice of the alleged fraud until approximately ten months before the complaint was filed, when it received a report from the independent auditor for the bankruptcy proceeding. See id. at 1059. The Ninth Circuit noted that "financial problems alone are generally insufficient to suggest fraud" and that "the filing of the bankruptcy petition alone seems unlikely to satisfy the inquiry-plus-due diligence standard, especially since . . . [the] question of what a reasonably prudent investor should have known is particularly suited to a jury determination." See id. at 1060. Rather than finding the complaint subject to dismissal because Livid had failed to allege facts sufficient to determine when a reasonable investor would likely have learned of the alleged fraud, the Ninth Circuit held that it could not decide as a matter of law "whether Livid should have been on notice of the alleged fraud one year before the complaint was filed." See id. The Ninth Circuit concluded that "[b]ecause the record does not establish that the statute of limitations for the federal securities claim has run, we refuse to affirm the district court on this alternative ground." See id. at 1058.

  The Underwriter Defendants further argue that allegations contained in plaintiffs' earlier-filed complaints contradict their allegation that they learned only in December 2001 that the allegedly fraudulent conduct might have begun prior to the second quarter of 2001. The Court, however, previously has rejected the Underwriter Defendants' arguments that such prior allegations demonstrate plaintiffs were aware of their potential claims against the Underwriter Defendants prior to July 12, 2001. (See Dismissal Order at 11-12.)

  The Underwriter Defendants also contend that plaintiffs were on inquiry notice of their claims against the Underwriter Defendants as early as June 20, 2001, when Exodus announced its "disastrous" second quarter of 2001 results. (See TAC ¶ 93.) Poor financial results for one quarter do not necessarily suggest that earlier statements were fraudulent, however. See Livid, 403 F.3d at 1060 (noting that "financial problems alone are generally insufficient to suggest fraud"); see also Gray v. First Winthrop Corp., 82 F.3d 877, 881 (9th Cir. 1996) (noting "poor financial performance, standing alone, does not necessarily suggest securities fraud" and may be explained "by poor management, general market conditions, or other events unrelated to fraud, creating a jury question on inquiry notice").

  Moreover, even assuming that Exodus's June 20, 2001 announcement was sufficient to trigger inquiry notice of the possibility of fraud in earlier financial statements, such as those contained in the Registration Statements for the February Offerings, the statute of limitations would not begin running on that date, but would only trigger a duty to begin an investigation. See Valence, 175 F.3d at 704. The statute of limitations would not begin to run until the date when "a reasonably diligent inventor [should] have discovered the facts underlying the alleged fraudulent activity." See id. Plaintiffs allege that their counsel began investigating after plaintiffs contacted them, but that the investigation did not lead plaintiffs to suspect wrongdoing by the Underwriter Defendants until December 2001. (See TAC ¶ 319.) The Underwriter Defendants do not suggest, let alone specify, what plaintiffs should or could have done that would have alerted them to the facts underlying their causes of action against the Underwriter Defendants before the expiration of the relevant three-week period between the date of Exodus's June 20, 2001 announcement and July 11, 2001, one year prior to the filing of the first complaint that contained claims against the Underwriter Defendants. The issue of when a reasonably diligent investor should have discovered the facts underlying plaintiffs' claims against the Underwriter Defendants may be decided on a motion to dismiss only where "the facts needed for determination of when a reasonable investor of ordinary intelligence would have been aware of the existence of fraud can be gleaned from the complaint and papers . . . integral to the complaint." See LC Capital Partners, LP v. Frontier Insurance Group, Inc., 318 F.3d 148, 157 (2nd Cir. 2003) (ellipsis in original). This is not such a case. The Court cannot conclude, as a matter of law, that a reasonably diligent investor should have discovered wrongdoing in connection with the February Offerings within three weeks of Exodus's June 20, 2001 announcement of its second quarter of 2001 financial results. See, e.g., Livid, 403 F.3d at 1060 (noting the "question of what a reasonably prudent investor should have known is particularly suited to a jury determination").

  Accordingly, the Underwriter Defendants' motion to dismiss the § 10(b) and § 11 claims asserted against it, on the ground they are time-barred, will be DENIED.

  B. Section 11 Claim: Sufficiency of Pleading

  The parties dispute whether the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure*fn8 apply to plaintiffs' § 11 claim against the Underwriter Defendants. The Court previously has held that plaintiffs' § 11 claim, as alleged in the First Amended Complaint, was subject to the pleading requirements of Rule 9(b) because the § 11 claim sounded in fraud. (See Dismissal Order at 28-29.) Plaintiffs now argue that they have amended their § 11 claim to make clear that their allegations of fraud relate only to their § 10(b) claim.

  Although a plaintiff alleging a claim under § 11 need not, as noted above, allege scienter or fraudulent conduct, the Ninth Circuit has held that "the particularity requirements of Rule 9(b) apply to claims brought under Section 11 when . . . they are grounded in fraud." See In re Stac Electronics, 89 F.3d 1399, 1404-05 (9th Cir. 1996). The Ninth Circuit further has clarified that where "fraud is not an essential element of the claim, and where allegations of both fraudulent and non-fraudulent conduct are made in the complaint," only "allegations (`averments') of fraudulent conduct" must satisfy the heightened pleading requirements of Rule 9(b), while "allegations of non-fraudulent conduct need satisfy only the ordinary notice pleading standards of Rule 8(a)." See Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 2003). As further stated in Vess: "`Where averments of fraud are made in a claim in which fraud is not an element, an inadequate averment of fraud does not mean that no claim has been stated. The proper route is to disregard averments of fraud not meeting Rule 9(b)'s standard and then ask whether a claim has been stated.'" See id. (internal quotation and citation omitted) (emphasis in original). Nevertheless, the Ninth Circuit made clear that where a plaintiff "allege[s] a unified course of fraudulent conduct and rel[ies] entirely on that course of conduct as the basis of a claim . . . the claim is said to be `grounded in fraud' or to `sound in fraud,' and the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b)." See id. at 1103-04 (citing Stac, 89 F.3d at 1404-05).

  In the instant case, the Court found that the First Amended Complaint made "no effort to distinguish between the Underwriter Defendants and the Individual Defendants, but rather allege[d] a unified course of fraudulent conduct as to all `defendants,' averring consistently and repeatedly that the defendants knew the statements in question were false and misleading when made." (See Dismissal Order at 29.) The Court noted that plaintiffs had pointed to "no allegations in the FAC to the effect that the false and misleading statements in the Registration Statements were either negligent or innocent misrepresentations, because no such allegations exist." See id. at 30. Finally, relying on Stac, the Court rejected plaintiffs' contention that by pleading their § 10(b) and § 11 claims in separate counts, they adequately alleged a factual basis for their § 11 claim that was not based on fraud. See id.; see also Stac, 89 F.3d at 1405 n. 2 (holding that although plaintiff had "specifically disclaimed any allegations of fraud with respect to its Section 11 claims," such "[n]ominal efforts are unconvincing when the gravamen of the complaint is plainly fraud and no effort is made to show any other basis for the claims levied at the Prospectus.")

  Since the Court's dismissal of the First Amended Complaint, the Ninth Circuit has issued its opinion in Daou, in which the Ninth Circuit discussed Vess and Stac in the context of determining whether the pleading standards of Rule 9(b) applied to the § 11 claim at issue in Daou. See Daou, 411 F.3d at 1027-28. The Ninth Circuit noted that "Rule 9(b) may prove fatal to 1933 Securities Act claims `grounded in fraud' when the complaint makes a `wholesale adoption' of the securities fraud allegations for purposes of the Securities Act claims." See id. at 1028. The Ninth Circuit found such "wholesale adoption" present in Daou because the complaint alleged a fraudulent scheme by all defendants, and incorporated all allegations previously averred in the complaint for purposes of all of the claims. See id. at 1028. Moreover, the plaintiffs in Daou "never rel[ied] on such conduct as negligence or mistake in stating their claims." See id.

  By contrast, in the instant case, the Third Amended Complaint contains significant new amendments to the § 11 claims that distinguish those claims from the § 11 claims alleged in the First Amended Complaint, and from those at issue in Daou and Stac. While the First Amended Complaint had alleged, for example, that all "defendants . . . participated in an egregious accounting fraud . . . including . . . falsifying Exodus's financial results" (see, e.g., FAC ¶ 1), the Third Amended Complaint largely eliminates such all-inclusive references to "defendants" and replaces them with references to "Individual Defendants." (See, e.g., TAC ¶ 44 ("Individual Defendants embarked on a scheme to defraud by, among other things, . . . falsifying Exodus's financial results").) As a result, plaintiffs no longer allege that the Underwriter Defendants participated in all of the fraudulent conduct allegedly engaged in by the Individual Defendants. Further, plaintiffs now expressly allege that the Underwriter Defendants acted negligently by failing to conduct due diligence as to the veracity of the statements contained in the Registration Statements and only allege in the alternative that the Underwriter Defendants acted with knowledge or deliberate recklessness because they were aware that Exodus's financial results and forecasts were false due to improper revenue recognition practices and Exodus's failure to conform with GAAP. (See TAC ¶¶ 305-306.) Finally, plaintiffs now expressly disclaim any allegations of fraud in their cause of action for violation of § 11 (see TAC ¶ 343), set forth in that count all the specific conduct alleged to violate § 11, and do not incorporate in that count any of the other factual allegations set forth in the complaint, (see TAC ¶¶ 343-355.) After itemizing the allegedly false and misleading statements and omissions contained in the Registration Statements for the February Offerings, plaintiffs allege that the Underwriter Defendants "owed to the purchasers of Exodus securities the duty to make a reasonable and diligent investigation of the statements contained in the [Registration Statements] at the time [they] became effective, to assure that those statements were true and that there was no omission to state material facts required to be stated in order to make the statements contained therein not misleading." (See TAC ¶ 354.) Unlike the plaintiffs in Daou, plaintiffs here expressly allege that the Underwriter Defendants were negligent by failing to conduct a reasonable investigation into the statements contained in the Registration Statements and do not incorporate their allegations of fraud into their claim for violation of § 11. Unlike the plaintiffs in Stac, plaintiffs here make more than a "nominal effort" at disclaiming fraud as a basis for the § 11 claims, and expressly allege a separate basis for their § 11 claims and their § 10(b) claims.

  As a result of the amendments to the complaint, plaintiffs have made sufficiently clear their intent to assert two alternative theories of liability against the Underwriter Defendants based on misstatements in the Registration Statements: (1) a § 11 claim based on negligent or innocent misrepresentations or omissions, (see TAC ¶¶ 306, 343-355), and (2) a § 10(b) claim based on fraud, (see TAC ¶¶ 305, 356-362). Rule 8(e)(2) of the Federal Rules of Civil Procedure expressly permits plaintiffs to state claims in the alternative. See Fed.R.Civ.P. 8(e)(2) ("A party may set forth two or more statements of a claim or defense alternately or hypothetically, either in one count or defense or in separate counts or defenses.") There is no requirement that the claims be consistent. See Fed.R.Civ.P. 8(e)(2) ("A party may also state as many separate claims or defenses as the party has regardless of consistency.") Thus, plaintiffs' assertion of separate claims against the Underwriter Defendants for violation of § 10(b) and § 11, based on the same conduct, but alleging differing states of mind, is expressly permitted by Rule 8.

  Moreover, the Supreme Court has recognized that "some conduct actionable under Section 11 may also be actionable under Section 10(b)." See Herman & MacLean v. Huddleston, 459 U.S. at 383. "[T]he availability of an express remedy under Section 11 of the 1933 Act does not preclude defrauded purchasers of registered securities from maintaining an action under Section 10(b)." See id. at 387 (emphasis added). In short, nothing in the statutory scheme precludes plaintiffs from proceeding against the Underwriter Defendants under both § 10(b) and § 11.

  The Ninth Circuit has held, where plaintiffs choose not to allege "a unified course of fraudulent conduct," but rather to allege "some fraudulent and some non-fraudulent conduct," that "only the allegations of fraud are subject to Rule 9(b)'s heightened pleading requirements." See Vess, 317 F.3d at 1104. "To require that non-fraud allegations be stated with particularity merely because they appear in a complaint alongside fraud averments . . . would impose a burden on plaintiffs not contemplated by the notice pleading requirements of Rule 8(a)." See id. at 1104. "Allegations of non-fraudulent conduct need satisfy only the ordinary notice pleading standards of Rule 8(a)." See id.

  In the instant case, as noted, plaintiffs base their § 11 claims entirely on negligent or innocent misrepresentations, and base their § 10(b) claims against the Underwriter Defendants on fraudulent misrepresentations. In Vess, the Ninth Circuit held that the district court erred in dismissing the plaintiffs' entire complaint for failure to comply with Rule 9(b) because the state law claims at issue therein were based on both fraudulent and non-fraudulent conduct and, thus, the allegations did "not rely entirely on a unified fraudulent course of conduct." See id. at 1105-06. The Ninth Circuit, in Stac, held that Rule 9(b) applies to § 11 claims only where such claims sound in fraud, citing approvingly a Fifth Circuit case in which that court held that Rule 9(b) applies to § 11 claims that are based on fraud rather than negligence. See Stac, 89 F.3d at 1405 (citing Melder v. Morris, 27 F.3d 1097, 1100 n. 6 (5th Cir. 1994)). Here, because plaintiffs' § 11 claims are based on negligent and innocent misrepresentations, not fraud, and the complaint specifically alleges that plaintiffs "expressly disclaim any allegations of fraud" in connection with the § 11 claim, the Court finds Rule 9(b) does not apply. See Lone Star Ladies Investment Club v. Schlotzsky's, Inc., 238 F.3d 363, 369 (5th Cir. 2001) (finding Rule 9(b) inapplicable to § 11 claim where complaint alleged plaintiffs did "not assert that defendants [were] liable for fraudulent or intentional conduct and disavow[ed] any allegation of fraud"); see also Holmes v. Baker, 166 F. Supp. 2d 1362, 1371-74 (S.D. Fla. 2001) (holding Rule 9(b) not applicable to § 11 claims based on erroneous financial statements in Prospectus because no allegation of scienter; applying Rule 9(b) to § 10(b) claim based on fraudulent financial statements); see also In re JDS Uniphase Corp. Securities Litigation, 2005 WL 43463 at *9 (N.D Cal. Jan. 6, 2005) (holding Rule 9(b) inapplicable to § 11 claim even though "many of the allegations in the [complaint] sound in fraud" because § 11 claim was based on failure to conduct reasonable investigation and plaintiffs expressly disclaimed "any allegations based on fraud or deliberate recklessness"); In re Turnstone Systems Inc. Securities Litigation, No. C-01-1256 SBA, slip op. at 23-37 (N.D. Cal. Feb. 4, 2003) (surveying case law at length and declining to apply Rule 9(b) to § 11 claim based on allegations of negligence where the "gravamen of the [complaint] is fraud but the allegations underlying the Securities Act claims have been segregated out from those underlying the Exchange Act claims and do not aver fraud").*fn9

  As noted, a plaintiff states a § 11 claim by alleging "(1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment." See Daou, 411 F.3d at 1027 (citation omitted). "Allegations of non-fraudulent conduct need satisfy only the ordinary notice pleading standards of Rule 8(a)." See Vess, 317 F.3d at 1104. Plaintiffs adequately allege specific misrepresentations and omissions contained in the Registration Statements, and further allege how those misrepresentations and omissions were misleading. (See, e.g., TAC ¶¶ 306, 343-355). Nothing more is required.

  Accordingly, the Underwriter Defendants' motion to dismiss the § 11 claim asserted against them will be DENIED.

  C. Section 10(b) Claim: Sufficiency of Pleading

  The Underwriter Defendants contend that plaintiffs have not adequately pleaded a § 10(b) claim as to any of the allegedly false statements made in the Registration Statements because plaintiffs have failed to establish falsity and scienter with the particularity required by the PSLRA.

  As noted, plaintiffs allege that four statements in the Registration Statements were false or misleading when made: (1) "We believe that the acquisition [of GlobalCenter] enhances our global Internet Data Center infrastructure, strengthens our network, our customer support, sales and professional services organizations, and expands our customer base"; (2) Exodus achieved revenues of $280.4 million for the quarter ended December 31, 2000, and $818.4 million for fiscal year 2000; (3) "[Exodus has] established a diverse base of customers and continues to focus on supporting the strong demand from the enterprise market"; and (4) Exodus had 4500 customers under contract. (See TAC ¶¶ 72-73 (alterations in original).)

  1. Statement Regarding Exodus's January 2001 Acquisition of GlobalCenter

  Plaintiffs allege that the following statement in the Registration Statements was false and misleading when made: "We believe that the acquisition [of GlobalCenter] enhances our global Internet Data Center infrastructure, strengthens our network, our customer support, sales and professional services organizations, and expands our customer base." (See TAC ¶ 72.) The Court previously held that plaintiffs failed to adequately allege that the above-referenced statement was false because plaintiffs did not allege any facts that suggested that management's statements of belief therein were untrue or misleading. (See Dismissal Order at 15.)

  In the First Amended Complaint, plaintiffs had alleged the statement was false and misleading because (1) Exodus's internal due diligence team had strongly recommended against the acquisition of GlobalCenter; (2) Exodus's Board of Directors was against the acquisition; (3) GlobalCenter's data centers in Tokyo, Sydney and London, and pending openings in Paris and Munich, all experienced substantial shortage in demand; and (4) the acquisition was nevertheless pushed through by Hancock because she wanted GlobalCenter for its two IDCs in Manhattan. (See FAC ¶ 146.) Plaintiffs allege no new facts about the GlobalCenter transaction in the Third Amended Complaint. Indeed, in their opposition, plaintiffs state: "While plaintiffs still believe that defendants' statements concerning the GlobalCenter acquisition were false and misleading, for the purpose of this opposition, plaintiffs will focus on the remaining three statements." (See Opp. at 11 n. 5.)

  As plaintiffs thus effectively concede that they cannot state more facts about the GlobalCenter transaction to demonstrate the falsity of the statement about that transaction in the Registration Statements, the Court finds plaintiffs again have failed to allege with the particularity required by Rule 9(b) that such statement was false or misleading when made.

  2. Statements Regarding Revenue

  Plaintiffs allege that the statements that Exodus had revenues of $280.4 million for the fourth quarter of 2000 and $818.4 million for fiscal year 2000 were false because Exodus had engaged in four types of accounting improprieties: (1) recording revenue prior to rendering services; (2) recording revenue on cancelled or non-renewed contracts; (3) recording revenue from transactions in which collectability was not probable; and (4) recording revenue and assets in conjunction with "bogus" barter transactions and failing to disclose such transactions. (See TAC ¶ 264.)

  In dismissing the First Amended Complaint, the Court found plaintiffs had not adequately alleged that the statements in the Registration Statements as to Exodus's revenue in the fourth quarter of 2000 and fiscal year 2000 were false and misleading when made, because plaintiffs failed to allege the amounts by which the revenues reported in the Registration Statements were misstated and failed to make "specific factual allegations regarding material accounting improprieties that affected the revenue statements contained in the Registration Statements." (See Dismissal Order at 17-18 (citing In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1091 (9th Cir. 1999).)

  Plaintiffs now allege that the Registration Statements overstated Exodus's fourth quarter of 2000 revenues by $25 million and its fiscal year 2000 revenues by $70 million. (See TAC ¶ 128.) The Underwriter Defendants argue, however, that plaintiffs still have not alleged "any particular amount associated with any particular accounting theory at any particular point in time," (see Motion at 24), and, thus, have not adequately alleged that the revenue statements in the Registration Statements were false or misleading when made.

  Under GAAP, "revenue must be earned before it can be recognized."*fn10 See Daou, 411 F.3d at 1016 (emphasis omitted). "When pleading irregularities in revenue recognition, plaintiffs should allege (1) such basic details as the approximate amount by which revenues and earnings were overstated; (2) the products involved in the contingent transaction; (3) the dates of any of the transactions; or (4) the identities of any of the customers or [company] employees involved in the transactions." See id. (internal quotations omitted, brackets in original). "Plaintiffs need not allege each of those particular details," however, but "must allege enough information so that a court can discern whether the alleged GAAP violations were minor or technical in nature, or whether they constituted widespread and significant inflation of revenue." See id. at 1017 (internal quotation and citation omitted). "`[A] general allegation that the practice? at issue resulted in a false report of company earnings is not a sufficiently particular claim of misrepresentation.'" See id. at 1016. Rather, "although overstatement of revenues in violation of GAAP may support a plaintiff's claim of fraud, the plaintiff must show with particularity how the adjustments affected the company's financial statements and whether they were material in light of the company's overall financial position." See id. at 1018.

  As the challenged statements in the Registration Statements address Exodus's revenues in fiscal year 2000, the Court examines the Third Amended Complaint for specific factual allegations of improprieties in revenue recognition in 2000.

  a. Recording revenue prior to rendering services

  Plaintiffs allege that Exodus had a practice, in fiscal year 2000, of generating "installation reports, which triggered the onset of monthly invoicing and revenue recognition" before installation had begun. (See TAC ¶¶ 153, 154(b).)

  Plaintiffs allege that CW10, a credit and collections analyst for Exodus from July 1998 through June 2001, (see id. ¶ 126(j)), states that all customers were subjected to false installation reports and this practice "enabled Exodus to begin invoicing and recognizing revenue right after new sales were entered into, rather than to delay the process until installation was actually completed." (See id. ¶ 154(c).) Further, according to plaintiffs, CW12, a senior collections specialist at Exodus from late 1999 through September 2001, (see id. ¶ 126(l)), states that "customers that ordered new installations in IDCs were consistently invoiced prior to installations having been completed, and many times prior to even beginning." (See id. ¶ 155(a).) As an example, plaintiffs allege that a document titled "Cu. Open Orders by Customer — by Customer; Period: 02-00 as of 03/07/00," pertaining to a customer identified as "Customer Nbr. 000661," states that several items were installed on "1/1/1900," which, plaintiffs allege, was a "place holder" indicating that the installation had not yet occurred. (See id. ¶ 155(b).)*fn11 In addition, plaintiffs allege that, according to CW11, an Exodus credit and collections analyst from August 1999 through June 2001, (see id. ¶ 126(k)), Exodus had a "practice of inputting false installation dates in order to begin billing customers." (See id. ¶ 156.) Plaintiffs, however, do not, in any fashion, identify a single customer that was billed during fiscal year 2000 prior to installation, nor do plaintiffs attempt to quantify the amount by which this alleged practice overstated revenues in fiscal year 2000 or the fourth quarter of 2000. As noted, a "general allegation" that a particular practice "resulted in a false report of company earnings is not a sufficiently particular claim of misrepresentation"; rather, "the plaintiff must show with particularity how the adjustments affected the company's financial statements and whether they were material in light of the company's overall financial position." See Daou, 411 F.3d at 1016, 1018.

  Accordingly, the Court finds plaintiffs have not alleged with the particularity required by Rule 9(b) that the statements of revenues for fiscal year 2000 and the fourth quarter of 2000 contained in the Registration Statements were false and misleading when made as a result of Exodus's alleged practice of billing customers prior to installation.

  b. Recording revenue on cancelled or non-renewed contracts

  Plaintiffs allege that Exodus's billing system would invoice customers "in perpetuity" unless someone specifically input a change to a particular customer's billing, and that Exodus had a practice of not contacting customers to verify cancellations for purposes of changing the order system and discontinuing invoicing. (See TAC ¶ 146.) According to plaintiffs, "[w]hen customers were finally contacted by Exodus for payment, their response to Exodus, if any, would simply be that they were not going to pay the bill and were told they did not have to." (See id. ¶ 146(b).) Plaintiffs allege that, according to CW10, "invoicing would continue even though the customer's equipment had been pulled out and Exodus was no longer performing services." (See id. ¶ 147(b).) Plaintiffs allege that CW10 "believes that approximately 80% of the revenue reported by Exodus" from fiscal year 2000 through the end of the Class Period was largely fraudulent. (See id. ¶ 147(d).) Plaintiffs allege that CW11 "recalled that it was a common, daily occurrence for collectors to contact customers about old [accounts receivable], and be told that the customer had cancelled months earlier." (See id. ¶ 148(a).) CW11 estimated that as much as 40% of the revenue recognized from late 2000 through Exodus's bankruptcy in September 2001 was uncollectable, "[b]ased on the number of accounts in the Solomon system during the Class Period, and the fact that about half of those invoiced had actually cancelled."*fn12 (See id. ¶ 148(c).) Plaintiffs allege no estimate obtained from either CW10 or CW11 of the revenue improperly recognized in fiscal year 2000 or the fourth quarter of 2000 on previously-cancelled contracts, nor do they allege that CW10 or CW11 identified any particular customer who cancelled during that time period yet continued to receive invoices from Exodus that were recorded as revenue.

  According to plaintiffs, CW21, who held various management positions for Exodus from 1999 through 2003, (see TAC ¶ 126(u)), experienced difficulties in obtaining approval from Exodus's management to stop invoicing for cancelled contracts in 2001. (See TAC ¶ 149(a).) Such allegations do not support plaintiffs' allegation that revenues were overstated in 2000 due to Exodus's failure to stop invoicing on cancelled contracts.

  According to plaintiffs, CW22 performed data entry and processed orders provided by Exodus's sales organization from 1999 to April 2001, and thereafter was one of two Exodus employees responsible for processing cancellations. (See TAC ¶ 126(v).) Plaintiffs allege that CW22 first became aware of a significant number of cancellations in November and December of 2000 and personally experienced a large number of cancellations "ordered by customers months earlier," but which had not been processed through the Siebel system.*fn13 (See id. ¶ 151(a).) In addition, plaintiffs allege that, according to CW22, "in the first part of the 1Q01, many of the customers booked at the end of the 4Q00 were cancelling — claiming that they had never ordered the services, or that they were not aware of how high the charges were, and could not afford the monthly program." (See id. ¶ 151(i).) Plaintiffs further allege that CW22 told them that, prior to April 2001, "the vast majority of customer cancellations were routinely delayed for months, until the credit and collections department discovered through communications with the customers that the customers had pulled out months earlier and had notified salespersons," and that "credits owed to these customers were routinely not processed for posting against these overcharges." (See id. ¶ 151(c).) Plaintiffs allege that when CW22, in April 2001, became one of two persons responsible for processing cancellations, there were "stacks and stacks and piles on the floor" of outstanding cancellation request forms prepared by the credit and collections department that had not yet been processed, some of which were more than a year old and the majority of which had been prepared "months earlier." (See id. ¶ 151(e)-(f).) Plaintiffs, however, set forth no estimate obtained from CW22 of the revenue improperly recognized in fiscal year 2000 or the fourth quarter of 2000 on previously-cancelled contracts, nor do they allege that CW22 identified any particular customer who cancelled during that time period yet continued to receive invoices from Exodus that were recorded as revenue.

  Plaintiffs allege that CW25, an Exodus customer support representative responsible for resolving disputes with "high profile and strategic account customers," (see TAC ¶ 126(y)), told them that in late 2000, it routinely took six months to process a cancellation and that the cancelling customer would continue to be billed during that period. (See TAC ¶ 152(a).) Again, however, plaintiffs set forth no estimate obtained from CW25 of the revenue improperly recognized in fiscal year 2000 or the fourth quarter of 2000 on previously-cancelled contracts, nor do they allege that CW25 identified any particular customer who cancelled during that time period yet continued to receive invoices from Exodus that were recorded as revenue.

  CW23, an Exodus finance analyst from August 2000 to May 2001 who was responsible for performing collections, (see TAC ¶ 126(w)), allegedly became aware between August and December 2000, that Exodus had a "huge issue" with continuing to bill customers who had cancelled services either completely or in part. (See TAC ¶ 178(a).) CW23 estimated that from the fall of 2000 through the end of the class period, approximately 75% of customer accounts receivable were not legitimately owed by Exodus customers. (See id. ¶ 178(b).) Plaintiffs, however, allege no estimate obtained from CW23 of the revenue improperly recognized in fiscal year 2000 or the fourth quarter of 2000 on previously-cancelled contracts, nor do they allege that CW23 identified any particular customer who cancelled during that time period yet continued to receive invoices from Exodus that were recorded as revenue.

  In sum, although plaintiffs have alleged a general practice by Exodus of failing to promptly process cancellations during fiscal year 2000 and thereafter, they have not attempted to identify the amount of revenue improperly recognized in 2000 as a result of that practice. Moreover, although plaintiffs have alleged a general practice by Exodus of billing customers after cancellation, they have not identified any customers who were improperly billed in 2000 after cancellation, nor have they alleged that Exodus recorded the amount of any such bills as revenue.

  Accordingly, the Court finds plaintiffs have not alleged with the particularity required by Rule 9(b) that the statements of revenues for fiscal year 2000 and the fourth quarter of 2000 contained in the Registration Statements were false and misleading when made as a result of Exodus's alleged ...


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