cooled godward llp william s freeman richard d...

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2 8COOLEY GODWARD LLP

ATTORNEYS AT LAW

PALO ALTO

COOLED GODWARD LLPWILLIAM S . FREEMAN (82002)RICHARD D . NORTH (225617)Five Palo Alto S quare3000 El Camino RealPalo Alto , CA 94306-2155Telephone: (650) 843-5089Facsimile: (650) 849-7400Email : wfreemanC&cooley.c in

rnorth(2i coo elm

Attorneys for Defendants Vans, Inc . ,Andrew J . Greenebaum and Gary H . Schoenfeld

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

WESTERN DIVISION

In Re VANS, INC . SECURITIESLITIGATION .

This Document Relates to :

ALL ACTIONS

Master File No. CV04-0431 AHM (CTx)

CLASS ACTION

REPLY MEMORANDUM IN SUPPORT OFDEFENDANTS' MOTION TO DISMISS THESECOND AMENDED CONSOLIDATEDCOMPLAINT

Date : May 9, 2005Time: 10:00 a.m.Judge : Hon. A. Howard MatzCourtroom: 1 4

521949 v2; HN

REPLY ISO DEFENDANTS' MTN . TO DISMISS

THE SECOND AMENDED CONSOLIDATE D

COMPLAINT CV04- 0431 AI-IM (CTx)

TABLE OF CONTENT S

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PAGE

1 . INTRODUCTORY STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

A. Plaintiff's Claims Based on Allegations Occurring Befor eJuly 30, 1999 Are Time Barred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

B. The SAC Does Not Comply with the Federal Rules of Civi lProcedure or the PSLRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

C. Plaintiff Cannot Justify Using Confidential Witnesses to Cloakthe Entire Complaint in Anonymity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

D. Plaintiff' s Theory of Damages and Supporting Allegations ar eLegally Insufficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

E. Plaintiff Fails to State a Claim for Violation of Section 10(b) . . . . . . . . . . . . .8

1 . Plaintiff Fails to Plead Falsity with Particularity . . . . . . . . . . . . . . . . . . . . . . . .8

a. Plaintiff Relies on the Incorrect Standard fo rPleading Falsity in the Ninth Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

b. Plaintiff' s Allegations Regarding the Company'sPremature Shi pment of Wholesale Merchandise areInsufficient to-Establish Falsity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

c. Plaintiff' s Allegations Regarding the Company'sSlow-Moving and Obsolete Inventory ar eInsufficient to Establish Falsity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

d. Plaintiff' s Allegations Regarding Demand for theCompany ' s Products are Insufficient to EstablishFalsity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

e. Plaintiff Fails to Establish Falsity Regarding theCompany ' s Skatepark Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3

2. Plaintiff' s Allegations Regarding the Secondary OfferingAre Insufficient to Establish Falsity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

F. Plaintiff Fails to Plead Scienter with Pa rticularity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1 . Plaintiff' s Allegations of Motive and Opportunity Fail t oCreate a Strong Inference of Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

a. Plaintiff' s Secondary Offering Allegations . . . . . . . . . . . . . . . . . . . 15

b. Plaintiff' s Corporate Acquisition Allegations . . . . . . . . . . . . . . . 1 5

c. Incentive -based Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2. Plaintiff's Allegations of GAAP Violations do no tSupport a Strong Inference of Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

3 . Plaintiff's Allegations Regarding One Defendant's StockTrades do not Support a Strong Inference of Scienter . . . . . . . . . . . . . 1 7

REPLY ISO DEFENDANTS' MTN. TO DISMISS THE

SECOND AMENDED CONSOL ID ATED COMPLAINT

-i- CV04-0431 AHM (CTx)

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TABLE OF CONTENTS

(CONTINUED)

PAGEG. Plaintiff Fails to State a Claim for Violation for Section 20(a) . . . . . . . . . 19

H. The SAC Should Be Dismissed with Prejudice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9

III . CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

REPLY ISO DEFENDANTS' MTN . TO DISMISS THE

SECOND AMENDED CONSOLIDATED COMPLAIN T

-ii- CV04-0431 AIHM (CTx)

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TABLE OF AUTHORITIES

PAGE

CASESAlbrecht v. Lund,

845 F.2d 193 (9th Cir. 1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9Dura Pharm., Inc. v. Broudo,

2005 WL 885109 (U .S . Apr. 19, 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,6, 7

No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am . W. Holding

p320 F.3d 920 (9th Cir . 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6

Fla. State B. of Admin v. Green Tree Fin . Corp. ,270 F .3d 645 (8th Cir . 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6

Foss v. Bear, Stearns & Co ., Inc . ,394 F .3d 540 (7th Cir . 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . : . . . . .2

Gompper v. VISX, Inc.298 F .3d 893 (9th C~ir . 2002 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Hollinger v. Titan Capital Corp .914 F .2d 1564 (9th Cir. 19905 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9

Howard v. Everex Sys . I Inc.228 F .3d 1057 (9th Cir . L000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5

In re Boeing Sec. Litig . ,40 F . Supp . 2d 1160 (W.D. Wash. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5

In re Cabletron Systems, Inc. ,311 F.3d 11 (Ist Cir . 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 9

In re Cal pine Corp. Sec. Litig. ,288 F. Supp . Zd 1054 (N.D . Cal. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5

In re Daou Systems, Inc. Sec. Litig. ,397 F.3d 704 (9th Cir . 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 4

In re Enterprise Mortgage Acceptance Co ., LLC, Sec . Litig. ,391 F.3d 401 (2d Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

In re GlenFed, Inc. Sec. Litig.42 F 3d 1541 h Ci 1 949 8( r. ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. t 9 . . . . . . . . . . . . . . . . . . . . . .

In re ICNPharm., Inc. Sec. Liti .,0422 2d l 2C 10 1 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 F. Supp. 1055 (C.D . a . 0 . . . . . . . . . . . . . ,

In re McKesson HBOC, Inc . Sec. Liti~g.,1 0126 F. Supp. 2d 1248 (N.D. Cal . 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

In re Silicon Graphics, Inc. Sec. Litig. ,183 F.3d 970 (9th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 9, 13, 16, 1 7

In re Splash Tech. Holdin s, Inc . Sec. Litig. ,160 F . Supp. 2d 1059 D. Cal . 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

In re Teravon Communications Sys ., Inc. Sec. Litig. ,2002 WL 989480 (N.D. Cal . 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5

REPLY ISO DEFENDANTS' MTN. TO DISMISS

111 . THE SECOND AMENDED CONSOL IDATE D

COMPLAINT CV04-0431 AHM (CTx)

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TABLE OF AUTHORITIES(CONTINUED)

PAGEIn re Twinlab Corp . Sec. Liti . ,

103 F. Supp. 2d 193 (E.DTN.Y . 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5In re Vantive Corp._ Sec. Litig. ,

283 F.3d 1079 (9th Cir . 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,1 7In re Worlds of Wonder Sec. Litig. ,

35 F.3d 1407 (9th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8Landgra v. USI Film Prods . ,

511 U.S . 244 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Lipton284 F.3d 1027n9th Cir . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 1 5

Novak v. Kasaks ,216 F.3d 300 (2d Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Ronconi v. Larkin,253 F.3d 423 (9th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4

Wenger v. Lumisys, Inc. ,2 F. Supp. 2d 1231 (N.D. Cal. 1998 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Wool v. Tandem Computers, Inc. ,818 F .2d 1433 (9th Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9

STATUTES15 U.S .C . § 78u-4(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .215 U .S .C . § 78u-4(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . .9Fed. R. Civ. P . 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2


1V. THE SECOND AMENDED CONSOLIDATE D


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1 . INTRODUCTORY STATEMENT. '

Plaintiff would have this Court view the "twists and turns" of this case a s

inconsequential issues that have no bearing on the viability of its Complaint . This

f view could not be further from the truth . Defendants respectfully submit that th e

Complaint remains fatally defective and should be dismissed with prejudice .

First, Plaintiff cannot hide from the fact that its exclusive reliance on

unnamed sources has been exposed as inherently untrustworthy by the indictment

and conviction of its leading source, Scott Brabson, on multiple charges stemming

from his admitted fraud against Vans . Under existing precedent, the Court can and

should disregard the allegations based on confidential witnesses (hereafter "CWs")

because there is no corroborating evidence to suggest their reliability and because

plaintiff has offered no allegations supporting its "belief' that the names of the

sources must remain secret.

Second, the Complaint must be dismissed because Plaintiff's damage s

allegations are identical to those that the Supreme Court has just determined to be

defective in Dura Pharm ., Inc. v. Broudo, No. 03-932, 2005 WL 885109 (U.S . Apr.

19, 2005). There, as here, the complaint alleged only that "[i]n reliance on the

integrity of the market," the plaintiffs "paid artificially inflated prices" for the

defendant company's securities . (Compare Dura, 2005 WL 885109, at *2 with

SAC ¶ 199.) The Court's holding that Section 10(b) of the 1934 Act requires

pleading and proof of loss causation compels dismissal here .

Finally, the remainder of the arguments raised by Plaintiff in the Oppositio n

differ little from the arguments advanced in opposition to Defendants' previou s

motion to dismiss, and are readily refuted .

1 All defined terms are as stated in Defendants' opening memorandum in support ofthis motion. Plaintiffs opposition memorandum will be referred to as the"Opposition" or "Opp."

REPLY ISO DEFENDANTS ' MTN . TO DISMISS521949 v2/HN 1 . THE SECOND AMENDED CONSOLIDATED


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II. ARGUMENT.

A. Plaintiff's Claims Based on Allegations Occurring Before July 30,1999 Are Time Barred .

Section 804 of the Sarbanes-Oxley Act of 2002 ("SOX") does not apply

"retroactively to revive plaintiffs ' previously expired securities fraud claims ." In re

Enterprise Mortgage Acceptance Co., LLC, Sec. Litig., 391 F.3d 401, 406 (2d Cir .

2004); accord Foss v. Bear, Stearns & Co ., Inc., 394 F .3d 540, 542 (7th Cir . 2005) .

In Enterprise Mortgage, the Second Circuit recognized the "longstanding

presumption against retroactive application" and noted that "[e]xtending the statute

of limitations retroactively `increase [s] [a defendant 's] liability for past conduct."'

391 F.3d at 406 , 410 (quoting Landgraf v. USI Film Prods ., 511 U.S. 244, 280

(1994) ; 128 L. Ed. 2d 229 ; 114 Sup . Ct . 1483, 1505 ). The unrelated EEOC case

law cited by Plaintiff, (Opp. at 23 :6-16), does nothing to controvert these

established p rinciples . Further, the isolated district court cases cited by Plaintiff in

arguing that the SOX statute of limitations extension is retroactive regardless of

when the underlying conduct occurred are unpersuasive , as no appellate court has

adopted such reasoning. (Opp . at 24:6-15 .)

B. The SAC Does Not Comply with the Federal Rules of CivilProcedure or the PSLRA.

Plaintiff fails to rebut Defendants' argument that the SAC should b e

dismissed because "puzzle style" pleading fails to comport with the requirements of

Fed. R. Civ. P. 8 and the PSLRA. Wenger v. Lumisys, Inc ., 2 F . Supp. 2d 1231,

1244 (N.D. Cal. 1998) (citing cases) . In Wenger, the court dismissed the complaint

because plaintiff failed to "set forth a `short and plain statement' of his claims in

violation of Rule 8(a)," failed to "make each allegation `simple, concise and direct'

in violation of Rule 8(e)," and failed to plead why each alleged statement was false

and misleading in violation of the PSLRA, 15 U .S .C . § 78u-4(b)(1) . 2 F. Supp. 2d

at 1243-44. The SAC suffers from these same deficiencies . Plaintiff errs byREPLY ISO DEFENDANTS ' MTN. TO DISMISS

521949 v2/HN 2. THE SECOND AMENDED CONSOLIDATEDCOMPLAINT CV04- 0431 AHM (CTx)

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asserting that having a summary and overview allows the rest of the SAC to violate

both Rule 8 and the PSLRA or that the use of intermittent bold text solves the

"puzzle-style" pleading problem. (Opp. at 5 :1-5 .) Plaintiff's allegations are

repetitive and overwrought, requiring that the "defendants and the court to try to

figure out exactly what the misleading statements are, and to match the statements

up with the reasons they are false ." In re Splash Tech. Holdings, Inc . Sec. Litig.,

160 F. Supp. 2d 1059, 1074 (N .D. Cal. 2001) .

C. Plaintiff Cannot Justify Using Confidential Witnesses to Cloak theEntire Complaint in Anonymity .

Defendants agree with Plaintiff that the governing standard in the Ninth

Circuit for a complaint's reliance on "confidential witnesses" is the recent decision

in In re Daou Systems, Inc . Sec. Litig., 397 F.3d 704 (9th Cir. 2005). Contrary to

Plaintiff's contention, however, Daou does not save the Complaint from its

deficiencies . Here, unlike Daou, the Complaint is based entirely on the allegations

of concealed persons, and Plaintiff does not even attempt to explain its professed

"information and belief ' that concealing the identity of every one of these persons

is somehow essential .

In Daou, the court observed that "where plaintiffs rely on both confidential

witnesses and on otherfacts, `they need not name their sources as long as the latter

facts provide an adequate basis for believing that the defendants ' statements were

false."' 397 F .3d at 711 (citing Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir . 2000)

(emphasis added). As the italicized portions of this passage make clear, the

viability of confidential witness allegations depends on their relationship to other

facts pleaded in the complaint . As the court elsewhere stated, this "involves an

evaluation , inter alia, of the level of detail provided by the con fidential sources, the

corroborative nature of the other facts alleged (including from other sources, the

coherence and plausibility of the allegations , the number of sources , the reliability

of the sources, and similar indicia . "

521949 v2/HN

Id. (citing In re Cabletron Systems, Inc., 31 1REPLY ISO DEFENDANTS' MTN . TO DISMISS

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F.3 d 11, 29-30 (1st Cir . 2002) .

Under Daou, this Court should only accept confidential witness allegation s

where those allegations form part of an overall picture and are supported b y

independent allegations that suggest the confidential witness allegations are

reliable. Under this standard, the "CW" allegations of this complaint are woefully

11 insufficient .

First, as we previously stated (Opening Memo. at 8 :26-9:6) and as Plaintiff

has not attempted to refute, there are no allegations of falsity or scienter that are no t

attributed to CWs. Thus the complaint is lacking the "other facts" that, unde r

Daou, are essential to permit the Court to determine the reliability of the C W

allegations .

Second, the Scott Brabson debacle casts a long shadow over the rest of th e

CW allegations . Plaintiff cannot simply pretend that this deplorable and

unprecedented episode never occurred ; under Daou, the "corroborative nature of

the other facts alleged," including the "reliability of the sources," is critical to the

analysis of whether the remaining CW allegations are entitled to any weight . 397

F .3d at 711 . The fact that Plaintiff placed its highest reliance on a felonious source

and the source's blatantly fabricated documents casts sufficient doubt on Plaintiff' s

fact-checking standards and procedures to the extent that, quite frankly, none of the

other CW allegations are entitled to any presumption of legitimacy .

Third, Plaintiff has simply ignored Defendants' citation to the statutor y

language of the PSLRA, which states that "information and belief' allegation s

must be supported by "all facts" supporting the information or belief (Openin g

Memo. at 9 :7-9) . Plaintiff has set forth no facts supporting its bald contention that

any of the 16 concealed persons, let alone all of them, could be harmed by public

identification . 2 In light of Plaintiff's rejection of the PSLRA's requirements,

2 Plaintiff's "information and belief ' as to this point is further cast in doubt byreason of the fact that the Complaint does not even identify who has this

REPLY ISO DEFENDANTS ' NITN . TO DISMISS521949 v2/HN 4 . THE SECOND AMENDED CONSOLIDATED

COMPLAINT CV04 -0431 ARM (CTx)

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Plaintiff must inform the Court what facts support this "information and belief ."

After all, these same witnesses would be required to give testimony if the case were

to proceed to discovery. In the absence of these basic facts, Defendants can only

conclude that Plaintiff is refusing to state these facts because if the CWs were

identified at this time, it would soon become apparent that they either would not or

could not substantiate the facts attributed to them, just as Scott Brabson was unable

to support the "facts" attributed to CW 18 .

Indeed, the evil stemming from cloaking the entire complaint in anonymity i s

perfectly revealed by the "CW 18" fiasco . Had it not been for the extraordinary

efforts of Defendants and the United States Attorney, the allegations now known to

be attributed to Scott Brabson would still be contained in the Complaint ; Plaintiff

would continue to dismiss Defendants' arguments against them as acts of

desperation; and the Court might well be misled into believing that the Complaint

was sufficient to survive a motion to dismiss . Defendants and the Court have every

right to be suspicious of Plaintiff's CW-based allegations in light of the history of

this case to date, and the PSLRA does not permit CW's to be employed for the

cynical purpose of advancing dubious claims beyond a motion to dismiss so that a

plaintiff can obtain discovery that would otherwise be unavailable .

We know of no case that permits a plaintiff to conceal all of the facts

supporting his claims behind unnamed sources , as Plaintiff has attempted to do

here . While some witnesses may remain confidential under some circumstances so

long as independent corroborating facts are alleged , there is no justification for

permitting this complaint to continue to be supported exclusively by CW 's, and for

"information and belief " Plaintiff alleges that "Lead Plaintiff is informed andbelieves" that disclosing witnesses' identities will lead to harm (SAC'S 45) ; but the"Lead Plaintiff' appears to be a pension fund entity (SAC ¶ 18) . The Complaintdoes not identify who, if anyone, within that entity has this "information andbelief," let alone what facts it might be based on . This is further evidence ofPlaintiff's attempt to play "hide the ball" with the requirements of the PSLRA .

REPLY ISO DEFENDANTS' MTN . TO DISMISS521949 v2/HN 5. THE SECOND AMENDED CONSOLIDATED

COMPLAINT CV04-0431 AIIM (CTx)

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that reason alone it should be dismissed.

D. Plaintiff's Theory of Damages and Supporting Allegations areLegally Insufficient.

The Complaint must also be dismissed in light of the April 19, 2005 decisio n

of the U.S. Supreme Court in Dura Pharm., Inc. v. Broudo, No. 03-932, 2005 WL

885109 (U.S . Apr. 19, 2005). In that case, the Court unanimously held that where

the plaintiff in a Section 10(b) case failed to allege that his losses were caused by

the alleged misrepresentations, the complaint must be dismissed . 3 Dura, 2005 WL

885109, at *7 .

Plaintiffs' theory of damages, and the allegations it advances in support of

that theory, are precisely the same as those found to be legally insufficient in Dura .

There, plaintiffs bought stock that was alleged to be inflated at the time of purchase

by a misrepresentation about future FDA approval of a medical device . Id. at *2.

(There were other alleged misrepresentations, but by the time the case reached the

Supreme Court, the allegations as to those representations had been dismissed.)

The stock price later declined, but no price drop could be specifically attributed to

the alleged false statement about approval of the device . Id. at *2, *7. When the

company revealed, some months later, that the FDA would not approve the device,

the stock price did not lose value . 4 Id. at *2. Because the plaintiffs could not

allege that a decline in value of their shares was directly attributable to the fals e

statement about device approval, they alleged only that they purchased shares a t

inflated values . Id. The plaintiffs claimed that, "'in reliance on the integrity of th e

3 Defendants did not previously raise this issue because until April 19, 2005, thelaw governing the Complaint was that of the Ninth Circuit's opinion in Dura, underwhich the damages allegations of the Complaint were legally sufficient . 339 F.3d933 (9th Cir. 2003). On April 21, 2005, counsel for Defendants notified counsel forPlaintiff that Defendants intended to raise this issue in the Reply . Defendants donot oppose the filing by Plaintiff of a brief sur-reply limited to this issue .4 The share price "temporarily fell but almost fully recovered within one week ."Dura, 2005 WL 885109, at *2 .

REPLY ISO DEFENDANTS' MTN . TO DISMISS521949 v2/HN 6. THE SECOND AMENDED CONSOLIDATE D


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market, [the plaintiffs] . . . paid artificially inflated prices for Dura securities' and

the plaintiffs suffered `damages' thereby. " Id. (emphasis in o ri ginal) .

Here , as in Dura, while Vans ' share price may have declined over time ,

Plaintiff does not link any price drop to an alleged false statement :

• Allegations of improper revenue recognition by shipping product t o

third-party distributors cannot be linked to a price drop because the Company neve r

restated its financials or announced that its accounting had been in error .

• Allegations concerning excess and "slow-moving inventory," failure t o

reveal "poor sales and demand," and "underperforming skateparks" are only

minimally tied to a corporate announcement on Mary 23, 2002 that certain

writedowns would be taken, (SAC ¶ 16), but this announcement is not alleged to

have resulted in any price drop . Rather, Plaintiff alleges that following this news

Vans' stock price "continued its sharp descent to below $10 per share, (id.), without

stating what dollar drop, if any, was attributable to the announcement .

Moreover, Plaintiffs damages allegations here are strikingly similar to thos e

in Duna. Plaintiff alleges that class members "have suffered damages in that, in

reliance on the integrity of the market, they paid artificially inflated prices for Vans

common stock ." (SAC ¶ 199; see also SAC ¶ 193 .) No attempt whatsoever is

made to link any misrepresentation to any specific damages .

In Dura, the Court could not have made it clearer that both the theory and th e

allegations employed by Plaintiff here are insufficient as a matter of law .

Reversing the Ninth Circuit, the Court flatly declared that a section 10(b) claim is

not stated by merely alleging that stock was purchased at an "inflated" price; a

plaintiff must plead and prove "that the defendant's misrepresentation (or other

fraudulent conduct) proximately caused the plaintiffs economic loss ." Dura, 2005

WL 885109, at *6 . Accordingly, the allegation that a plaintiff paid "artificiall y

inflated prices" and suffered "damages" is not enough because it does not articulate

a "relevant economic loss ." Id. at *7 . In other words, because stock prices can goREPLY ISO DEFENDANTS' MTN . TO DISMISS

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down for any number of reasons, it is essential to plead and prove a relationship

between falsity and stock price loss, or else Section 10(b) would be improperl y

converted into "a partial downside insurance policy ." Id . at *7.

Because the Complaint articulates precisely the same damages theory and

employs precisely the same pleading artifices that were ruled insufficient in Dura, it

should be dismissed .

E. Plaintiff Fails to State a Claim for Violation of Section 10(b) .

Dismissal of the SAC is further appropriate because the allegations

themselves lack the particularity necessary to comply with the strict pleadin g

requirements of the PSLRA .

1 . Plaintiff Fails to Plead Falsity with Particularity .

a. Plaintiff Relies on the Incorrect Standard for PleadingFalsity in the Ninth Circuit .

Plaintiff ignores Silicon Graphics, which held that to plead with particularit y

"a plaintiff must provide a list of all relevant circumstances in great detail ." 183

F .3d 970, 984 (9th Cir . 1999) (emphasis added). In the Ninth Circuit, "only

complaints with particularized facts giving rise to a strong inference of wrongdoin g

survive a motion to dismiss ." Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir .

2002) . While plaintiffs are entitled to have their allegations considered in a

favorable light, under Gompper, the Court also "must consider all reasonable

inferences to be drawn from the allegations, including inferences unfavorable to the

plaintiffs ." Id. (emphasis in original) . Plaintiff instead cites In re GlenFed, Inc .

Sec. Litig., as the applicable pleading standard . (Opp. at 5 :14-6 : 1 (citing 42 F .3d

1541, 1549 (9th Cir . 1994)).) But GlenFed predates the sweeping reforms of the

PSLRA and the Ninth Circuit's interpretation of the same as articulated in Silicon

Graphics. 5

5 Importantly, Plaintiffs do not take issue with the fact that they are required t omake particularized showings with respect to each Defendant in order satisfy th e

REPLY ISO DEFENDANTS ' MTN. TO DISMISS

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b. Plaintiff's Allegations Regarding the Company'sPremature Shipment of Wholesale Merchandise areInsufficient to Establish Falsity.

Plaintiffs inaccurate contention that multiple confidential witnesses with

corroborating stories are sufficient to satisfy the particularity requirement is

founded on inapplicable First Circuit authority. (Opp . at 12:10-12 (citing In re

Cabletron Sys ., Inc., 311 F.3d 11 (1st Cir . 2002).) The Cabletron court specifically

stated that it was applying a standard inconsistent with Ninth Circuit authority . 311

F .3d at 29 .

Furthermore, the confidential witnesses in Cabletron provided highly

detailed facts in support of plaintiffs claims, such as an alleged "tenfold jump in

return rates" and the return of "pallets full of as many as forty pieces of expensiv e

equipment." Id . at 31 . In comparison, Plaintiff alleges merely that distributors

were "used to `park' Vans inventory which was booked as sold by then CFO at the

direction of Gary Schoenfeld." 6 (Opp. at 11 :9-14 .) This oversimplified

characterization neglects to articulate how the alleged shipments to distributors

amounted to accounting fraud because Plaintiffs do not address exactly how

revenue was improperly recognized, when the merchandise was ultimately sold or

returned and what the impact of such sales or returns was on the revenue numbers .

PSLRA . See 15 U.S.C. §78u-4(b)(2) ; Silicon Graphics, 183 F.3d at 983 .

6 This statement regarding Defendant Schoenfeld's involvement is not supported bythe allegations . Plaintiff alleges only that Defendant Schoenfeld "was a regularattendee at weekly shipping meetings" where early shipments "were discussed ."(SAC ¶' 49(g), 55(g), 60(g), 66(g), 72(d), 78(d), 84(d), 89(d), 96(d), 104(d), and110(d).) No detail as to specific meeting dates or who said what to whom isprovided. To nevertheless assert that the alleged "parking" was performed "at thedirection of Gary Schoenfeld" is a rhetorical stretch, at best .7 The allegation that "individual merchandise shipments to U-Nique/Pronto [were]valued at $450,000 to over $1 million" is insufficient to show impact on revenuenumbers with particularity. (Opp. at 11 :14-16 .) Plaintiff applies the sameallegation word-for-word to four separate quarters - the last two quarters of fiscalyear 1999 and the first two quarters of fiscal year 2000 - thereby highlighting th e

REPLY ISO DEFENDANTS' MTN . TO DISMISS521949 v2/HN 9. THE SECOND AMENDED CONSOLIDATED


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See In re ICN Pharm ., Inc. Sec. Litig., 229 F. Supp. 2d 1055, 1062, 1066 (C .D. Cal .

2004) . In effect, Plaintiff makes it impossible to determine whether an accounting

violation occurred, or if one did, whether it was merely "technical in nature" or

"constituted widespread and significant inflation of revenue ." 8 In re McKesson

HBOC, Inc. Sec. Litig., 126 F . Supp. 2d 1248, 1273 (N .D. Cal. 2000) ; see also ICN,

299 F. Supp. 2d at 1062-63.

c. Plaintiff's Allegations Regarding the Company'sSlow-Moving and Obsolete Inventory areInsufficient to Establish Falsity.

Plaintiff responds to Defendants' arguments by merely regurgitating

allegations about the Company's slow-moving and obsolete inventory from the

SAC, (Opp . at 15 :7-27), without satisfactorily addressing Defendants' arguments

that these allegations lack the particularity required by the PSLRA . (Opening

Memo . at 15 :3-17:7 .) In addition to the reconstituted allegations from the SAC,

Plaintiff relies on an alleged internal report that is not attached to the SAC and

cannot be verified, as well as two exhibits that, when excised from Plaintiff's

rhetoric, offer nothing to support Plaintiff's allegations . Plaintiff's failure to

address Defendants' arguments are highlighted as follows :

First, Plaintiff fails to address Defendants' point that the SAC lacks any

particular facts that support the assertion, attributed to CW7, that certain

"merchandise was so old and outdated that in some cases it had next to no value a t

all or could not be sold ." (SAC ¶ 149 ; Opening Memo. at 15 :11-18 .) One would

assume that CW7, a "former director" at Vans with "responsibilities for monito ring

and tracking Company inventory ," (SAC 'S 45(g)), could provide the necessary facts

to support this falsity allegation .

utter absence of particularity . (SAC ¶' 48(a), 54(a), 59(a), and 65(a) . )8 For example, despite asserting that Vans recognized revenue on shippedmerchandise without having a paying customer, Plaintiff acknowledges in the samefootnote that the merchandise was "scheduled to be delivered to wholesalecustomers, such as J .C . Penny and Mervyn's ." (Opp . at l I :n. 11 . )

REPLY ISO DEFENDANTS' MTN. TO DISMISS521949 v2/14N 10. THE SECOND AMENDED CONSOLIDATED


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Second, Plaintiff fails to address Defendants' argument that the SA C

contains no particular facts to support the allegation that shipping products to

"Latin America " or company-owned "retail outlets" took the product off the

Company's books . (Opening Memo . at 15 :28- 16:10.) Plaintiff attempts to answer

this question by noting that the entire reason the inventory was shipped to these

destinations was so it would not have to be written off. (Opp. at 16 :13-19.)

Plaintiff does not allege that this merchandise was never sold at this alte rnative

venue (therefore making a w rite -off unnecessary), but instead relies on insinuation

in alleging only that the merchandise was sent to retail outlets and Latin Ame rica

joint ventures "for storage." (See, e.g., SAC ¶ 71(e) .)

Third , Plaintiff fails to respond to the complete absence of authentication for

SAC Exhibits B and C, purported to be Vans, Inc . internal reports. 9 (Opening

Memo. at 16 :18-17 :1 .) Exhibit B is alleged to be a Vans distribution center mem o

reporting that the warehouse contained more inventory than it could comfortably

handle. This document is inconclusive on its face, 10 and Plaintiff's negative spin i s

mere conjecture given the equally valid interpretation that strong sales require high

levels of inventory. (See, e.g., (SAC ¶ 89(j) .) Plaintiff has alleged nothing to

indicate that the capacity of this particular warehouse at this particular time was

somehow indicative of falsity on the part of Defendants . Exhibit C is a nearly

unintelligible document alleged to show increasing growth in inventory value .

(SAC ¶ 96(k) .) Even with that interpretation, Plaintiff makes no effort to explain

why increasing inventory value is indicative of falsity, I 1 given that an increase i n

9 Plaintiff also relies on a purported "Excess Inventory Recap for Footwear Report,"(Opp. at 15 :19-22; SAC ¶ 150), which is not attached to the SAC and cannot beverified.10 Exhibit B appears to be nothing more than a routine administrative reportaddressing typical storage problems and solutions for handling them . See SACExhibit B ("in order to maximize the use of space, the DC is : - creating locationson the floor - prioritizing the `off-load' of containers," etc .11 Plaintiff only states that "inventory should have been shrinking," a conclusio n


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inventory would have been necessary to meet a 21 % increase in sales over

comparable prior year sales . (SAC'S 92.) That Plaintiffs allegations with regard to

these documents are "corroborated" by Plaintiffs unreliable and unsubstantiated

confidential witnesses lends little or nothing to the documents' probative value .

(Opp. at 16 :n. 16.)

d. Plaintiff's Allegations Regarding Demand for theCompany's Products are Insufficient to EstablishFalsity.

Plaintiff quotes paragraph 89(g) of the SAC in its entirety as if no othe r

information is necessary for the Court to allow Plaintiffs claim to advance . (Opp.

at 13 :17-14:7.) In fact, paragraph 89(g) only highlights the Complaint's lack of

particularity . Plaintiff ominously refers to "notable [sales] decline[s]" and how

Vans was "not in touch" with demands and trends, but fails to provide the

substance necessary to determine how "notable" these matters really were . (Id.)

For example, Plaintiff does not identify what period of time a decline in sales of

men's goods occurred, offers no documents in corroborative support, and provides

no context with regard to prior or subsequent periods . (Opp. at 13 :22-25 .) Neither

does Plaintiff substantiate the meaning of "not in touch ." (Opp. at 13 :25-27 .)

Without specifics, these allegations in no way support a strong inference of

falsity. 1 2

that is both analytically unsupported and inherently inconsistent with amanufacturer's need to increase inventory in order to meet the greater demandcaused by increasing sales . (SAC'S 96(k) .)12 Plaintiff points to "corroborating details" contained in a "Major CancellationsReport" attached to the SAC as Exhibit A . (Opp. 14 :n . 15 .) Even if accepted atface value, Exhibit A is inconsequential given that the cancelled orders described inthe document (approximately $1 million) would have amounted to less that 0 .4% ofsales for the three quarters detailed therein (approximately $256 million) . (SAC89(h), 106-107.)


521949 v2/HN 12 . THE SECOND AMENDED CONSOLIDATED

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e. Plaintiff Fails to Establish Falsity Regarding theCompany's Skatepark Losses.

Plaintiff expects the Court to accept its skatepark-related allegations based

upon an unverifiable "Retail Historical Information Report" and an unreliabl e

confidential witness . (Opp. 17:9-18:15 .) The alleged report is not attached to the

SAC and cannot be verified as to reliability or content . 13 And Plaintiff fails to

rebut Defendant's argument that CW14 is insufficiently identified "to support a

reasonable conviction" in his or her basis of knowledge about the skateparks .

Simply stating that CW14 was "personally involved" with senior executives at

Vans does not provide enough detail to determine CW14's basis of knowledge .

(Opp . at 18 :8-15.) Plaintiff fails to provide any details from the supposed

discussions, when the discussions occurred, or who else might have been involved

in the discussions . (See id.)

2 . Plaintiff's Allegations Regarding the Secondary OfferingAre Insufficient to Establish Falsity.

Plaintiff argues that Vans's secondary offering establishes falsity due to

certain information allegedly available to the Defendants at the time the prospectu s

and registration statement for the offering were filed. (Opp . at 18 :17-19:2 ; SAC 'S

101, 102 .) However, Plaintiff draws absolutely no connection between the alleged

information and any statements contained in the filings . (See id.) Plaintiff' s

preference for intimation over substantiation reflects an effort to obscure the

absence of the necessary particularity : (1) Plaintiff does not describe how the

alleged prematurely booked revenue rendered any of the statements contained in the

secondary offering filings false ; (2) Plaintiff offers no context with regard t o

13 The unreliability of the alleged report is emphasized by the fact that Plaintiff iswilling to refer to specific content but not to provide the report for review . SeeSilicon Graphics, 183 F .3d at 985 (complaint cannot rely on an internal reportwhere there are no "facts as may indicate [the report's] reliability") .


521944 v2/HN 13. THE SECOND AMENDED CONSOLIDATEDCOMPLAINT CV04 -0431 AHM (CTx)

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alleged sales declines in men and women's shoes, including their impact on revenue

or connection to statements contained in the filings ; and (3) the alleged statements

by unidentified "Latin American partners" on May 24, 2001 occurred after the

secondary offering documents were filed on May 23, 2001 . (Id.)

F. Plaintiff Fails to Plead Scienter with Particularity .

The Court is entitled to consider whether individual allegations are

I sufficiently pleaded. See Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001 )

(complaint is properly dismissed where "pleadings are not sufficiently

particularized") . The Court may also consider "whether the total of plaintiffs'

allegations, even though individually lacking, are sufficient to create a strong

inference [of scienter] ." Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1038 (9th

Cir. 2002) (emphasis added). Accordingly, Plaintiff now argues that "the total" of

its allegations along with certain motive and opportunity evidence, alleged GAAP

violations and insider trading are sufficient to support a strong inference of scienter .

(Opp. at 19 :5-13 .) This position is problematic for two reasons : (1) Plaintiff makes

only an ambiguous reference to the total of allegations by stating, "as discussed

above," (Opp . at 19:7-10), in effect leaving it to the Court to guess which specific

factual allegations are relevant to the scienter argument; and (2) the "additional []

evidence" referred to in the Opposition, (Opp . at 19:10-13), has numerous

shortcomings .

1. Plaintiff's Allegations of Motive and Opportunity Fail toCreate a Strong Inference of Scienter .

Plaintiff fails to address Defendant's argument, (Opp . at 19:14-20:11 ; 22 :4-

12), that allegations that the Defendants artificially inflated the Vans, Inc. stock

price in order to boost the proceeds of a secondary stock offering, make corporate

acquisitions and increase performance-based compensation are classic "motive and

opportunity" allegations that have been rejected in the Ninth Circuit . Lipton, 284

521949 v2/HN


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F .3d at 1038 . 14

a. Plaintiff's Secondary Offering Allegations .

Plaintiff erroneously relies on Howard v. Everex Sys., Inc., 228 F.3d 105 7

(9th Cir. 2000), to support the argument that the Court should consider motive

allegations relating to Vans's secondary offering for purposes of pleading scienter .

(Opp. at 19:24-27 .) Howard was a summary judgment matter, not a motion to

dismiss, and the Howard court explicitly noted that it was not applying th e

PSLRA's more stringent pleading standard . See Howard, 228 F .3d at 1064 ; accord

In re Vantive Corp . Sec. Litig., 283 F.3d 1079, 1097 (9th Cir. 2002) . 1 5

b. Plaintiff's Corporate Acquisition Allegations .

Plaintiff's argument that corporate acquisitions support a strong inference o f

scienter flies in the face of clear Ninth Circuit precedent to the contrary .

Allegations of motive "to secure credit or to engage in similar business activities

are insufficient to establish a strong inference of scienter ." In re Calpine Corp. Sec.

Litig., 288 F. Supp. 2d 1054, 1087 (N .D . Cal. 2003) .

Plaintiffs argument relies on two cases where the court accepted allegation s

of corporate acquisitions as supportive for an inference of scienter only because

plaintiff alleged in detail that the pricing of certain acquisitions predated the class

period and was a key impetus for the defendants to prop up stock prices during the

class period . (See Opp. at 20 :4-11 (citing In re Terayon Communications Sys ., Inc .

Sec. Litig ., 2002 WL 989480, at * 11 (N .D. Cal. 2002) and In re Boeing Sec . Litig.,

40 F. Supp. 2d 1160, 1175 (W.D. Wash. 1998)) .) In the instant case, Plaintiff

14 Plaintiff fails to address Lipton or any other clear Ninth Circuit authoritypresented in the Defendants ' opening memorandum. (Opp. at 19 :3-22:12.)

15 Plaintiff also relies on a case from the Eastern Dist rict of New York, In reTwinlab Corp . Sec. Litig., 103 F. Supp. 2d 193, 206 (E .D .N.Y. 2000), which isunpersuasive in the face of controlling Ninth Circuit authority . (See Opp . at 19:27-20:2 ; Opening Memo . at 20:27-21 :17 .)

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merely tacks onto the SAC a list of corporate acquisitions negotiated by Vans

during the class period without any attempt to plead why the acquisitions are

relevant to scienter. (SAC ¶ 41 .) Plaintiff essentially pleads that the acquisitions

are prima facie evidence of scienter - exactly the type of motive pleading that has

been expressly rejected in the Ninth Circuit . See Silicon Graphics, 183 F.3d at 984-

85 ("allegations of a motive to present better financial statements to secure credit or

engage in similar business activities are insufficient to establish a strong inference

of scienter") .

c. Incentive-based Compensation.

Plaintiff relies on No. 84 Employer-Teamster Joint Council Pension Trus t

Fund v. Am. W. Holding Corp., 320 F.3d 920, 944 (9th Cir . 2003 ), to argue that

allegations of incentive-based compensation support a finding of scienter . 16 (Opp .

at 22:4-12 .) However, the holding in America West was narrowly tailored to the

specific facts in that case . The plaintiff in America West was able to provide

"specific particularized allegations" that clearly demonstrated why the defendants'

incentive-based compensation gave rise to a strong inference of scienter .

Specifically, plaintiff was able to show that the defendants first received options

awards the year the false statements were allegedly made, that the defendants chose

members of the company's compensation committee and that a named defendant

was one member of the compensation committee . 320 F.3d at 944.

In the instant case, Plaintiff's pleadings are insufficient to show wh y

16 Plaintiffs also cite Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d645, 665 (8th Cir . 2001), as support . (Opp. at 22 :7-8.) However, the Eighth Circuitimposes a far less stringent standard than that required by the Ninth . Compare

Green Tree, 270 F .3d at 665 (holding that allegations may be used to "paint arational and plausible picture of why the executives would have gone along withthe alleged fraud") (emphasis added) with Silicon Graphics, 183 F .3d at 988("general allegations . . . do not give rise to a strong inference of deliberaterecklessness") (emphasis added) .


521949 v2/HN 16. THE SECOND AMENDED CONSOLIDATEDCOMPLAINT CV04 -0431 ARM (CTx)

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Defendants' compensation is relevant to scienter . Plaintiff merely recites the

compensation of the individual defendants, derived from Vans's public filings, as

though the mere fact of six-figure annual compensation was prima facie evidence

of scienter . (SAC ¶j 36-40.) Ninth Circuit courts have repeatedly rejected such

generalized allegations . See, e.g., Calpine, 288 F. Supp. 2d at 1087 .

2. Plaintiffs Allegations of GAAP Violations do not Support aStrong Inference of Scienter .

Plaintiff has not provided many of the "basic detail[s]" needed for an

accounting to rise to the level of fraud, including the amount by which revenues

have been overstated . See Vantive, 283 F .3d at 1091 ; see also In re ICN Pharm.,

Inc. Sec. Litig., 299 F. Supp. 2d 1055, 1062, 1066 (C .D. Cal. 2004) (allegation

insufficient for failure to identify specific transactions, shipment dates and the

amounts by which revenues were overstated) .

3 . Plaintiff's Allegations Regarding One Defendant's StockTrades do not Support a Strong Inference of Scienter .

Plaintiff mischaracterizes the correct standard for pleading insider trading i n

support of scienter . Plaintiff must demonstrate much more than an "indication" of

improper trades . (Opp. at 21 :3-5 .) Rather, it is required to show that the trading

was "unusual" or "suspicious" based on a defendant's history of trading . Silicon

Graphics, 183 F.3d at 986. Moreover, the inquiry is not a question of whether a

Defendant "took advantage of the alleged market manipulation ." (Opp. at 21 :3-5 .)

The key issue is whether the pertinent allegations provide circumstantial evidence

that tends to support or is inconsistent with a strong inference of scienter . Silicon

Graphics, 183 F .3d at 974.

Plaintiff's response to Defendants' arguments in this regard is deficient .

First, Plaintiff fails in its attempt to connect Defendant Schoenfeld's trades wit h

allegedly false statements made on December 18, 2000 and affirmed on January 9 ,

2001 . (Opp . at 21 :19-21 .) The allegedly false statements encompass nearly thre eREPLY ISO DEFENDANTS' MTN . TO DISMISS

521949 v2/HN 17. THE SECOND AMENDED CONSOL ID ATEDCOMPLAINT CV04 -0431 AHM (CTx)

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pages of the SAC and nearly half of the material is in boldface print . 17 (SAC ¶ 86-

87 .) Again emphasizing volume over substance and clarity, Plaintiff essentially

forces the Court to guess which of many highlighted statements may or may not be

false and why. Further, Plaintiff does not address the fact that Mr. Schoenfeld's

stock sales, at a value 29% lower than the peak price, were not timed "to maximize

the personal benefit from undisclosed inside information ." (Opening Memo. at

23 :4-15, quoting Ronconi, 253 F .3d at 435 . )

Finally, Plaintiff engages in fuzzy math to obscure the fact tha t

Mr. Schoenfeld sold only a small percentage of his total holdings and retained the

large majority of his holdings while the stock declined, thus incurring the same

losses as other shareholders . (Opening Memo. at 22 :10-23 :3.) Apparently

oblivious to the contradiction, Plaintiff argues on one hand that Mr . Schoenfeld's

trades support scienter because he "sold 55% of his Vans holdings in January

2001, but also concedes that Mr. Schoenfeld was acquiring additional stock after

the sales and before the alleged "bad news" became public . (SAC ¶ 35 ; Opp. at

12:n. 20 .) The fact is that Mr. Schoenfeld had at least 412,666 shares available for

sale during the class period, sold only 84,486 of those shares (approximately

20.5%), and steadily acquired additional saleable shares throughout the class

period. 18 (Opening Memo. at 22:10-17.) These facts tend to negate the inference

17 Plaintiff has not shown why many of these statements are false . For example,Plaintiff has not alleged contemporaneous "true" facts that contradict Defendants'statements that new skateparks were being built, that there had been a "positiveresponse" to new product lines, and that Vans had received an industry award .

(SAC ¶ 86 . )

18 Plaintiff's tunnel vision is not limited to characterizing Mr . Schoenfeld's stocksales within a one-month period as opposed to the class period as a whole . Plaintiffalso quotes In re Worlds of Wonder Sec . Litig., (Opp . at 21 :n. 21), withoutbothering to include the more pertinent sentences immediately prior and subsequentto the quoted portion, which contain the court's actual disposition of the issue :

But in this case, when one considers the amounts traded, Plaintiffs' claimsappear fantastic . These Defendants sold only a portion of their holdings in


521949 v2/HN 18. THE SECOND AMENDED CONSOLIDATED


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of scienter .

G. Plaintiff Fails to State a Claim for Violation for Section 20(a) .

Plaintiff has ignored Defendants' argument that the SAC does not plea d

specific facts showing each Defendant's ability to exercise control over the specific

activity on which the primary violation is premised . See, e.g., Wool v. Tandem

Computers, Inc., 818 F.2d 1433, 1440 (9th Cir . 1987) ; overruled on other grounds

in part by Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569-70 (9th Cir .

1990). Instead, Plaintiff simply refers back to the SAC's vague and overbroad

allegations. (Opp. at 24 :23-24 . )

H. The SAC Should Be Dismissed with Prejudice.

This case should be dismissed with prejudice now . Plaintiff has had more

than one year since the filing of the initial complaint in January 2004 to craft a

colorable claim . The SAC represents Plaintiff's fourth attempt to do so . Plaintiff

should not be given a fifth opportunity because there are no facts to support its

claim that the Defendants violated the PSLRA . The Courts may deny a plaintiff

leave to amend if amendment of the complaint would be futile . See Albrecht v .

Lund, 845 F.2d 193, 195 (9th Cir . 1988) .

WOW. Of course, an insider may not always trade all his shares in thecompany for which he possesses the inside information ; the trader may holdon to a portion of his shares to hedge against the unforeseen or to obscurethe insider trading from the SEC. Here, however, Plaintiffs' allegation isessentially that these defendants possessed inside information on WOW'simminent collapse, so one would expect that they would have sold a goodproportion of their holdings . On the contrary, most of these Defendants soldonly a minuscule fraction of their holdings in WOW, and ended up reapingthe same large losses as did Plaintiffs when WOW collapsed .

35 F.3d 1407, 1427 (9th Cir. 1994).COOLEY GODWARD LLP 11 REPLY ISO DEFENDANTS' MTN. TO DISMISS

ATTORNEYS AT LAW 521949 v2/HN 19. THE SECOND AMENDED CONSOLIDATEDPALO ALTO COMPLAINT CV04-0431 AHIYI (CTx)

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III. CONCLUSION.

This case has now been pending for fifteen months, and Plaintiff has

amended its original complaint three separate times . That it is legally insufficient is

beyond dispute . That its defects are incurable is demonstrated by the fact that,

despite repeated challenges from the Defendants pointing out those defects and

repeated opportunities to correct them, Plaintiff has failed to do so . Defendants

respectfully submit that the Complaint should be dismissed with prejudice .

Dated: April 26, 2005

521949 v2/HN

COOLEY GODWARD LLP

William S . Freeman

Attorneys for Defendants Vans, Inc .,Gary H. Schoenfeld and Andrew J .Greenebaum


20. THE SECOND AMENDED CONSOLIDATED


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28COOLEY GODk ARD LLP

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COOLEY GODWARD LLPWILLIAM S . FREEMAN (82002)RICHARD D . NORTH (225617)Five Palo Alto S quare3000 El Camino Rea lPalo Alto, CA 94306-2155Telephone: (650) 843-5089Facsimile: (650) 849-7400Email: wfreeman r@ ,cooley com

rnorth@coole-

Attorneys for Defendants Vans, Inc . ,Andrew J . Greenebaum and Gary H . Schoenfeld



WESTERN DIVISION

In Re VANS, INC. SECURITIESLITIGATION.


ALL ACTIONS


CLASS ACTION

REPLY MEMORANDUM IN SUPPORT OFDEFENDANTS' REQUEST FOR JUDICIALNOTICE IN SUPPORT OF DEFENDANTS'MOTION TO DISMISS THE SECONDAMENDED CONSOLIDATED COMPLAINT

Date : May 9, 2005Time : 10:00 a.m.Judge : Hon. A. Howard Mat zCourtroom: 1 4

522637 v1/HNREPLY ISO DEFENDANTS' REQ. FOR JUDICIAL

NOTICE ISO MTD THE SA CCV04-0431 AHM (CTx)

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1 . INTRODUCTORY STATEMENT.

It is well established in the Ninth Circuit that judicial notice of documents

filed with the Securities and Exchange Commission ("SEC") and expressl y

referenced in the complaint is appropriate on a motion to dismiss . Plaintiff' s

contrary arguments, based on inapposite legal authority, provide no ground for

altering or undermining this principle. Furthermore, Defendants seek judicial

notice of Vans, Inc's ("Vans" or "the Company") SEC filing not to assert the truth

of the content contained therein, but to alert the Court to a reasonable inference that

can be drawn from the allegations as an alternative to Plaintiff's theory of the case .

II. ARGUMENT.

As attached to Defendants' Request for Judicial Notice of Documents File d

in Support of Defendants' Motion to Dismiss Second Amended Complaint a s

Exhibit A, Vans's 10-K for the fiscal year ended May 31, 2001 and filed with th e

SEC on August 29, 2001 ("Form 10-K") is appropriate for judicial notice .

Plaintiff's contrary argument raised in the Opposition to Defendant's Request fo r

Judicial Notice ("RJN Opp .") attempts to circumvent clear authority on the issue by

relying on inapplicable case law . (RJN Opp. at 1 :16-3 :14.)

Generally, judicial notice is appropriate for documents "whose contents are

alleged in a complaint and whose authenticity no party questions, but which are no t

physically attached to the [plaintiff ' s] pleading ." Parrino v. FHP, Inc., 146 F.3d

699, 705-06 (9th Cir . 1998). In particular , it is undisputed in the Ninth Circuit tha t

"the Court may properly take judicial notice of SEC filings and documents

expressly referenced in the [complaint] without converting the motions to dismiss

into motions for summary judgment ." In re Calpine Corp . Sec. Litig., 288 F. Sup .

2d 1054, 1076 (N.D . Cal. 2003). Plaintiff expressly references Vans's Form 10-K

in the Second Amended Complaint ("SAC"), (SAC ¶ 150), and judicial notice is

appropriate for this reason alone .

COOLEYGODWARDLLr 11 REPLY ISO DEFENDANTS' REQ. FOR JUDICIAL

ATTO NFys AT LAw 11 522637 vl/HN 1 . NOTICE ISO MTD THE SACPALO ALTOCV04-0431 AHM (CTx)

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In addition, judicial notice of SEC filings is appropriate for several other

reasons that are unique to such documents : (1) they "are required by law to be filed

with the SEC, and no serious question as to their authenticity can exist ;" (2) they

"are relevant . . . to determine what the [SEC filings] stated ;" (3) "a plaintiff whose

complaint alleges that such documents are legally deficient can hardly show

prejudice resulting from a court's studying of the documents ;" and (4) "[w]ere

courts to refrain from considering such documents, complaints that quoted only

selected and misleading portions of such documents could not be dismissed under

Rule 12(b)(6) even though they would be doomed to failure ." Kramer v. Time

Warner Inc ., 937 F.2d 767, 774 (2d Cir. 1991). Thus, as Plaintiff recognizes,

judicial notice of an SEC filing is appropriate for the fact that the document exists

"or that [it] contain[s] certain assertions ." (RJN Opp. at 2 :2-5.)

The case law relied upon by Plaintiff in arguing that judicial notice of the

Form 10-K is inappropriate is entirely inapposite . Plaintiff cites In re Network

Equip. Techs., Inc. Litig. for the proposition that the Court should not take judicial

notice of the portion of the Form 10-K dealing with seasonality because doing so

would constitute judicial notice of "the truth of the matter asserted [therein] ." I

(RJN Opp . at 1 :21-2 :2 (citing 762 F. Supp . 1359, 1363 (N.D. Cal . 1991)).)

However, the defendants in Network sought judicial notice of specific facts entirely

separate and apart from the contents of any particular SEC filing . 2 762 F. Supp. at

1363 . Plaintiff also quotes Kramer and Lee v. City of Los Los Angeles to the effect that

the Court may not judicially notice "the truth of the matters asserted" or "dispute d

' The first case cited by Plaintiff on this point, Fecht v. Price Co., does not supportPlaintiff's argument given that the Ninth Circuit approved the district court'sreview of "various public statements," including SEC filings, Shareholder Reportsand newspaper interviews, that were attached to the defendants' motion to dismiss .(RJN Opp. at 1 :21-2:1 (citing 70 F.3d 1078, 1080 (9th Cir. 1995)) . )2 E.g., the fact that "outside accounts [sic] audited and approved NET'S financialrecords ." Network, 762 F. Supp. at 1363 .

REPLY ISO DEFENDANTS' REQ . FOR JUDICIAL

522637 vI/HN 2. NOTICE ISO MTD THE SAC

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facts stated in public records ." (RJN Opp . at 2 :2-5, 15-21 .) However, the language

in these cases narrowly pertains to the propriety of judicially noticing "documents

filed in other courts" or the contents of "another court's opinion" - not SEC filings,

the uniqueness of which has been specifically addressed by Ninth Circuit courts as

discussed above . Kramer, 937 F.2d at 774; Lee v. City of Los Angeles, 250 F.3d

668, 690 (9th Cir . 2001) .

Moreover, the purpose of judicial notice in this case is not to persuade the

Court that Vans ' s business was in fact seasonal , but to alert the Court to an

alternative explanation of the "sales decline" that Plaintiff describes as though it

were a horrible secret tightly held within the Company . The Form 10 -K is invoked

at footnote 18 of Defendants ' Motion to Dismiss Second Amended Consolidated

Complaint , ("Opening Memo ."), in response to Plaintiff's allegations , (e.g., SAC ¶

88(e)), that employees knew of such a decline in the fall of 2000 . Under Gompper

v. VISX, Inc., which Defendants cited in the Opening Memo . but which Plaintiff

failed even to acknowledge , the Court must consider all inferences, including

inferences unfavorable to the plaintiff, when deciding whether a complaint creates a

strong inference of scienter . 298 F . 3d 893 , 897 (9th Cir. 2002). The Form 10-K

constitutes a public disclosure that powerfully suggests an alternative inference to

the dark conspiracy painted by Plaintiff: in short, sales declined in the fall of 2000

simply because they always declined after the back-to-school season.

Plaintiff's opposition to judicial notice is designed solely to prevent the Court

from considering a perfectly reasonable inference that does not fit Plaintiff's theor y

of the case . Under Gompper, the Court can and should consider such inference s

and judicial notice of the Form 10-K is therefore appropriate .

COOLEY GODWARD LLP 11 REPLY ISO DEFENDA N TS' REQ. FOR JUDICIALATT RNEYs AT LAW 522637 v1/HN 3

. NOTICE ISO MTD THE SACPALO ALTO 11 CV04-0431 AIIM (CTx)

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III. CONCLUSION.

For the reasons stated above, the Court is entitled to take judicial notice of

the Form 10-K as attached to Defendants' Request for Judicial Notice of

Documents Filed in Support of Defendants' Motion to Dismiss Second Amended

Complaint as Exhibit A.

Dated : April 26, 2005

522637 v l/HN

COOLEY GODWARD LLP

William S. Freeman

Attorneys for Defendants Vans, Inc .,Gary H. Schoenfeld and Andrew J .Greenebaum

REPLY ISO DEFENDANTS' REQ . FOR JUDICIAL4. NOTICE ISO MTD THE SAC

CV04-0431 ARM (CTx)

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COOLEY GODWARD LLPWILLIAM S . FREEMAN (82002)RICHARD D. NORTH (225617)Five Palo Alto S quare3000 El Camino RealPalo Alto, CA 94306-2155Telephone: (650) 843-5089Facsimile: (650) 849-7400Email: wfreeman@cooley .com

rnorth cc,cooley.com.

Attorneys for Defendants Vans, Inc . ,Gary H. Schoenfeld , Andrew J . Greenebaum,and Arthur I . Carver



WESTERN DIVISION

In Re VANS, INC . SECURITIESLITIGATION .


PROOF OF SERVICE

CLASS ACTION


ALL ACTION S

685013 v1/PA

# k501l .DOC1 .

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ATTOKNFvs AT LAw

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PROOF OF SERVICE(FRCP 5)

I am a citizen of the United States and a resident of the State of California .

I am employed in Santa Clara County, State of California, in the office of a

member of the bar of this Court, at whose direction the service was made . I am

over the age of eighteen years, and not a party to the within action . My business

address is Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real,

Palo Alto, California 94306-2155 . On the date set forth below I served the

documents described below in the manner described below :

1. REPLY MEMORANDUM IN SUPPORT OF DEFENDANTS' MOTION TO DISMISS THESECOND AMENDED CONSOLIDATED COMPLAIN T

2. REPLY MEMORANDUM IN SUPPORT OF DEFENDANTS' REQUEST FOR JUDICIAL NOTICEIN SUPPORT OF DEFENDANTS' MOTION TO DISMISS THE SECOND AMENDEDCONSOLIDATED COMPLAIN T

O (BY FACSIMILE) I am personally and readily familiar with thebusiness practice of Cooley Godward LLP for collection andprocessing of document(s) to be transmitted by facsimile and I causedsuch document(s) on this date to be transmitted by facsimile to theoffices of addressee(s) at the numbers listed below .

1 (BY OVERNIGHT MAIL) I am personally and readily familiar withthe business practice of Cooley Godward LLP for collection andprocessing of correspondence for overnight delivery, and I causedsuch document(s) described herein to be deposited for delivery to afacility regularly maintained by Federal Express for overnightdelivery .

685013 vI/PA

# k501!.DOC2 .

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COOLEY GoDW ARD LLP

ATTORNEYS AT LAW

PALO ALTO

Jonathan E. Behar, Esq .Jason R. Llorens, Esq.Lerach Coughlin Stoia GellerRudman & Robbins LL P355 South Grand Avenue , Suite 4170Los Angeles , CA 9007 1

William S Lerach, Esq .Darren J. Robbins, Esq .Lerach Coughlin Stoia GellerRudman & Robbins LLP401 B Street, Suite 1700San Diego, CA 92101

Richard A. Maniskas, Esq .Schiffrin & Barroway, LLPThree Bala Plaza East, Suite 400Bala Cynwyd, PA 19004

(BY ELECTRONIC MAIL) I am personally and readily familiar withthe business practice of Cooley Godward L LP for the preparation andprocessing of documents in portable document format (PDF) for e-mailing, and I caused said documents to be prepared in PDF and thenserved by electronic mail to the undersigned .

Securities Class Action ClearinghouseStanford University School of LawCrown Quadrangl eStanford, CA 94305-8612Email: [email protected]

on the following part(ies) in this action :

Executed on April 26, 2005, at Palo Alto, California .

685013 v1/PA# k5011 .DOC

Brandie Giovannoni

3 .