1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

DAVID M. FURBUSH (SBN 83447; dfurbush@omm.com) DHAIVAT H. SHAH (SBN 196382; dshah@omm.com) OMELVENY & MYERS LLP 2765 Sand Hill Road Menlo Park, California 94025 Telephone: (650) 473-2600 Facsimile: (650) 473-2601 Attorneys for Defendants Ellen M. Hancock, R. Marshall Case, Dick Stoltz, Herbert A. Dollahite, Adam W. Wegner, Beverly Brown, Sam S. Mohamad, William Yeack

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

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

Master File No. C-01-2661-MMC DEFENDANT ELLEN HANCOCKS NOTICE OF MOTION AND MOTION FOR: 1) LEAVE TO FILE A MOTION FOR RECONSIDERATION; 2) CERTIFICATION PURSUANT TO 28 U.S.C. 1292(b); AND 3) A STAY OF DISCOVERY PENDING APPEAL; AND MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF Hon. Maxine M. Chesney Hearing Date: Not Set

16 ALL ACTIONS. 17 18 19 20 21 22 23 24 25 26 27 28

DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3
I.

TABLE OF CONTENTS Page INTRODUCTION ...............................................................................................................1 ARGUMENT.......................................................................................................................3 A. The Courts Order Warrants Reconsideration Because It Is Contrary To Settled Ninth Circuit Authority................................................................................3 If Reconsideration Is Not Granted, This Issue Warrants Certification For Interlocutory Appeal ................................................................................................5 1. The Pleading Standard For Plaintiffs 11 Claim Against Hancock Is A Controlling Issue Of Law In This Litigation, The Resolution Of Which Will Materially Advance The Ultimate Termination Of This Litigation. .............................................................................................5 There Is A Substantial Ground For Difference Of Opinion As To The Standard By Which A District Court Determines Whether A 11 Claim Sounds In Fraud.....................................................................7

4
II.

5 6 7 8 9 10 11 12 13 14
IV. CONCLUSION....................................................................................................................8 III. 2. B.

THE COURT SHOULD STAY FURTHER PROCEEDINGS UNTIL THE COURT OF APPEALS RESOLVES THIS ISSUE. ...........................................................8

15 16 17 18 19 20 21 22 23 24 25 26 27 28
- iDEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 OTHER AUTHORITIES CASES

TABLE OF AUTHORITIES Page(s)

A.P.C.C. Servs., Inc. v. Sprint Commcns Co., L.P., 297 F. Supp. 2d 90 (D.D.C. 2003) .............................................................................................8 In re Cement Antitrust Litig., 673 F.2d 1020 (9th Cir. 1982) ...............................................................................................5, 6 In re Daou Sys., Inc. Sec. Litig., 411 F.3d 1006 (9th Cir. 2005) ...............................................................................................3, 4 In re Portal Software, Inc. Securities Litigation, No. C-03-5138 VRW, 2005 WL 1910923 (N.D. Cal. Aug. 10, 2005) ..................................5, 8 In re Stac Electronics Sec. Litig., 89 F.3d 1399 (9th Cir. 1996) .................................................................................................3, 4 Medhekar v. U.S. Dist. Ct. for N.D. Cal., 99 F.3d 325 (9th Cir. 1996) .......................................................................................................7 Ovando v. City of L.A., 92 F. Supp. 2d 1011, 1025 (C.D. Cal. 2000) .............................................................................6 S.G. Cowen Sec. Corp. v. U.S. Dist. Ct. for N.D. Cal., 189 F.3d 909 (9th Cir. 1999) .....................................................................................................7 U.S. ex rel Huangyan Imp. & Exp. Corp. v. Natures Farm Prods., Inc., 370 F. Supp. 2d 993 (N.D. Cal. 2005) .......................................................................................5 Williams v. Cruise Ships Catering & Serv. Intl, N.V., 20 F. Supp. 2d 1347 (S.D. Fla. 2004) ........................................................................................6

STATUTES
15 U.S.C. 77k(a) ...........................................................................................................................4 15 U.S.C. 78u-4(b)(3)(B) ..............................................................................................................7 28 U.S.C. 1292(b) .............................................................................................................1, 5, 6, 9 Securities Act of 1933 10..............................................................................................................3 Securities Act of 1933 10(b) .........................................................................................................4 Securities Act of 1933 11.....................................................................................................passim Securities Act of 1933 15.....................................................................................................passim

141 Cong. Rec. H13691, H13700 ....................................................................................................7

- ii DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

NOTICE OF MOTION AND MOTION TO PLAINTIFFS AND THEIR ATTORNEYS OF RECORD: PLEASE TAKE NOTICE THAT Defendant Ellen M. Hancock (Hancock) will and hereby does move the Court 1) for leave to file a motion for reconsideration of the Courts September 12, 2005 Order granting plaintiffs motion for reconsideration of dismissal of plaintiffs claims against Hancock brought under 11 and 15 of the Securities Act of 1933 in plaintiffs Corrected Third Amended Consolidated Class Action Complaint (CTAC); 2) in the event that reconsideration is not granted, to issue an order certifying for interlocutory appeal pursuant to 28 U.S.C. 1292(b) the Courts September 12, 2005 Order; 3) to stay further proceedings pending appeal. Hancock seeks leave to file a motion for reconsideration pursuant to Local Civil Rule 7-9 on the grounds that the Courts September 12 Order is contrary to controlling Ninth Circuit authority. Hancock brings her motion for certification for interlocutory appeal pursuant to 28 U.S.C. 1292(b) on the grounds that the pleading standard applied by the Court to plaintiffs 11 and 15 claims against Hancock is a controlling issue of law, about which there is substantial ground for difference of opinion, the immediate resolution of which by the Ninth Circuit will materially advance the ultimate termination of this litigation. The motion is based on this notice of motion and motion, the memorandum of points and authorities, the Request For Judicial Notice, and the Courts September 12, 2005 Order, as well as the records contained in the Courts file in this matter, and such further evidence, whether documentary or oral, as may be presented at the time of any hearing on this matter. MEMORANDUM OF POINTS AND AUTHORITIES

23 24 25 26 27 28 I. INTRODUCTION Individual Defendant Ellen Hancock (Hancock) does not lightly ask this Court to reconsider an order that was itself issued upon reconsideration of another order. Hancock recognizes the importance of finality to orders of this Court. However, for the reasons set forth / / /
DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

below, Hancock respectfully suggests that this is one of the rare circumstances where such a request is appropriate. The Courts September 12, 2005 Order granting plaintiffs motion for reconsideration of dismissal of plaintiffs claims under 11 and 15 of the Securities Act of 1933 (Reconsideration Order) left undisturbed its finding that: Hancock was alleged to have participated in a broad scheme to defraud investors by, among other things, falsifying Exoduss financial results . . . . Reconsideration Order at 1. The Court found, however, that several paragraphs in the TAC stated a non-fraudulent basis for liability. The Court ruled that three factors were dispositive: 1) that plaintiffs alleged that Hancock signed the Registration Statement and was a director of Exodus; 2) that plaintiffs did not incorporate by reference their fraud allegations into their 11 claim; and 3) that plaintiffs alleged that Exodus was an issuer. Reconsideration is warranted because this Courts ruling on whether Rule 9(b) applies to plaintiffs 11 and 15 claims is contrary to the grounded in fraud doctrine in the Ninth Circuit. The Ninth Circuit has ruled that there are a category of 11 claims that are grounded in fraud and that these claims are subject to the pleading standards of Rule 9(b). The Reconsideration Order is inconsistent with this doctrine because it finds that status allegations that are required in every 11 claim, i.e., that defendants are within group of persons that may be liable under 11, are sufficient to bring these claims outside of the scope of the grounded in fraud doctrine. Because such status allegations are found in every 11 claim, the Reconsideration Order eviscerates the grounded in fraud doctrine. The Ninth Circuit has also rejected nominal efforts to avoid the grounded in fraud doctrine through artful pleading, such as plaintiffs election not to incorporate their fraud allegations into their 11 claim. Indeed, the Ninth Circuit, as well as district courts within the Circuit, have applied the grounded in fraud doctrine to complaints identical in all relevant respects to the TAC. If the Court determines not to reconsider the Reconsideration Order, Hancock respectfully requests that the Court certify the order for appeal. The immediate guidance of the Ninth Circuit on this controlling issue of law may prevent years of protracted litigation. Likewise, the Court should stay further proceedings pending appeal because failure to grant a stay may moot the relief -2DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

from discovery to which Hancock would be otherwise be entitled upon reversal by the Ninth Circuit. II. ARGUMENT A. The Courts Order Warrants Reconsideration Because It Is Contrary To Settled Ninth Circuit Authority

Under the controlling Ninth Circuit standard, 11 claims in a complaint where plaintiffs allege a unified course of fraudulent conduct are grounded in fraud and must satisfy the pleading requirements of Rule 9(b). In re Daou Sys., Inc. Sec. Litig., 411 F.3d 1006, 1027 (9th Cir. 2005); In re Stac Electronics Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir. 1996). The Ninth Circuit has held that where a 11 claim is grounded in fraud, Rule 9(b) should serve an important screening function to prohibit plaintiffs from unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis. Stac, 89 F.3d at 1405 (quotations and internal bracketing omitted). This Court correctly found, originally, that the claims against Hancock were grounded in fraud because Hancock was alleged to have participated in a broad scheme to defraud investors by, among other things, falsifying Exoduss financial results . . . . Reconsideration Order at 1. Even though the Court left its finding that Hancock was alleged to have participated in a fraudulent scheme undisturbed, upon reconsideration the Court revived plaintiffs dismissed 11 on two grounds: 1) that plaintiffs had alleged a non-fraudulent basis for the 11 claim because they alleged that Hancock signed the registration statement and was an officer and director of Exodus; and 2) that plaintiffs complaint did not incorporate by reference the 10 allegations within the 11 claim. Likewise, the Court revived plaintiffs 15 claim on the ground that plaintiffs alleged that Exodus was the issuer of the registration statement, and that this was sufficient to plead a non-fraudulent primary violation as the basis for 15 control person liability. The allegations upon which the Court reversed its prior holding are status allegations. Every 11 claim requires the allegation that the defendants fall within the category of persons that may be liable, i.e., the registrant, a person that signed the registration statement, a director of the registrant, an underwriter, or an expert certifying a portion of the registration statement. 15 -3DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

U.S.C. 77k(a). By finding that ubiquitous status allegations in a complaint are of themselves sufficient to bring a 11 claim outside the requirement for Rule 9(b) pleading, even where a unified course of fraudulent conduct has been alleged, the Courts ruling eviscerates the grounded in fraud doctrine. In both Stac and Daou, plaintiffs alleged that defendants signed the registration statement, and that they were directors of the issuer. Request For Judicial Notice (RJN), Ex. A (hereinafter Stac Compl.) at 23, 76; RJN, Ex. B (hereinafter Daou Compl.) at 16, 107. Under this Courts rationale, these allegations would state a non- fraud basis for [a defendants] liability and would bring the section 11 claim outside of the grounded in fraud doctrine. Order at 2. Yet in both instances, the Ninth Circuit applied a Rule 9(b) pleading standard. The Courts Order also attaches significance to plaintiffs failure to incorporate the 10(b) allegations by reference into the 11 claim. Yet the section 11 claim in Stac contained no incorporation by reference of the 10(b) allegations. 1 Stac Compl. 76. Rule 9(b) would serve no screening function if plaintiffs could circumvent it simply by foregoing an incorporation paragraph. See Stac, 89 F.3d at 1405 & n.2 (discussing policy concerns behind application of Rule 9(b) to Section 11 claims, and rejecting nominal efforts to circumvent this standard). The reliance on status allegations is repeated in the Courts revival of plaintiffs failed 15 claim. The Court notes that plaintiffs have alleged that Exodus was the issuer of the Registration Statement, and that this allegation of Exoduss status was sufficient to comprise a non- fraudulent primary violation of 11 upon which a 15 could be premised. But in every 15 claim against directors or signers of a registration statement that allegedly controlled a company, plaintiffs must allege that the company issued the registration statement. The complaints in both Stac and Daou contained allegations that the company was an issuer, yet the Ninth Circuit applied the Rule 9(b) pleading standard to the primary 11 claim in both instances. See Stac Compl. at 77; Daou Compl. at 106. / / /
1

28

The Court is correct that the Daou complaint does incorporate the Section 10 claims. See Daou, 411 F.3d at 1027-28. -4DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

In In re Portal Software, Inc. Securities Litigation, No. C-03-5138 VRW, 2005 WL 1910923 (N.D. Cal. Aug. 10, 2005), Judge Walker was recently asked to consider a complaint identical in all relevant respects to the TAC. The Portal complaint 1) contained an allegation that defendants were directors and signed the registration statement; 2) did not incorporate by reference the Section 10 claims; and 3) alleged that the company was an issuer. See RJN, Ex. C (hereinafter Portal Compl.) at 21-23, 144, 147. Judge Walker found that because the complaint alleged a unified course of fraudulent conduct, the Section 11 claim was grounded in fraud and dismissed the Section 11 and 15 claims for failure to satisfy the pleading standards of Rule 9(b). 2005 WL 1910923, at *16. In short, this Courts decision to revive plaintiffs failed 11 and 15 claims based on ubiquitous status allegations is contrary to settled Ninth Circuit authority as well as reasoned opinions of other jurists in this district. B. If Reconsideration Is Not Granted, This Issue Warrants Certification For Interlocutory Appeal

If the Court does not reconsider its order, Hancock respectfully requests that the Court certify its order for immediate appeal. In order to merit certification pursuant to 28 U.S.C. 1292(b), three factors must be present: (1) that there be a controlling question of law, (2) that there be substantial grounds for difference of opinion, and (3) that an immediate appeal may materially advance the ultimate termination of the litigation. In re Cement Antitrust Litig., 673 F.2d 1020, 1026 (9th Cir. 1982); see also U.S. ex rel Huangyan Imp. & Exp. Corp. v. Natures Farm Prods., Inc., 370 F. Supp. 2d 993, 1005 (N.D. Cal. 2005). All three factors are present here.

/ / / / / / / / / / / / / / / / / /
-5DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
2

1.

The Pleading Standard For Plaintiffs 11 Claim Against Hancock Is A Controlling Issue Of Law In This Litigation, The Resolution Of Which Will Materially Advance The Ultimate Termination Of This Litigation.

Hancock undeniably satisfies the first and third requirements. 2 Whether plaintiffs need to satisfy Rule 9(b) pleading standards for their 11 claim against Hancock is a controlling issue of law in this case. In the initial order, plaintiffs claims died. Upon reconsideration, they survived. There is no doubt that a question is controlling if its incorrect disposition would require reversal of a final judgment, either for further proceedings or for a dismissal that might have been ordered without the ensuing district court proceedings. 16 Wright & Miller, Fed. Prac. & Proc., 3930 (West 1996) (emphasis added); see also Ovando v. City of L.A., 92 F. Supp. 2d 1011, 1025 (C.D. Cal. 2000) (An issue is controlling if resolution of the issue on appeal could materially affect the outcome of litigation in the district court.) (quoting In re Cement, 673 F.2d at 1026). Appellate reversal of the Courts ruling on the pleading standard for plaintiffs 11 claim would result in dismissal of plaintiffs 11 and 15 claims against Hancock. This is, therefore, a clear circumstance where interlocutory appeal may materially advance the ultimate termination of the litigation. In re Cement, 673 F.2d at 1026. Where a case would otherwise proceed and unnecessarily exhaust the resources of the parties and the Court, certification is appropriate. See, e.g., Williams v. Cruise Ships Catering & Serv. Intl, N.V., 320 F. Supp. 2d 1347, 1362 (S.D. Fla. 2004) (certifying order for review because [p]roceeding with this case will require the use of the parties time and money and considerable judicial resources to examine each of Plaintiffs claims and potentially proceed to trial); Ovando, 92 F. Supp. 2d at 1025 (certifying order denying motion to dismiss will, inter alia, effectuate judicial economy); Wright & Miller, 3930 (a primary purpose of 28 U.S.C. 1292(b) is minimizing the total burdens of litigation on the parties and the judicial system by accelerating or at least simplifying trial court

27 28

The requirement that an appeal may materially advance the ultimate termination of the litigation is closely tied to the requirement that the order involve a controlling question of law. 16 Wright & Miller, Fed. Prac. & Proc., 3930 (West 1996). For this reason, Hancock presents these two issues together in this subsection. -6DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

proceedings). Interlocutory review is particularly significant in a securities case, such as this one, because surviving Hancocks motion to dismiss was a threshold that plaintiffs were required to cross before any discovery was permitted in the action. See 15 U.S.C. 78u-4(b)(3)(B). One of the purposes of the discovery stay in the Private Securities Litigation Reform Act (PSLRA) was to prevent baseless or premature lawsuits from being filed in the hopes that discovery would provide grounds for the claims asserted. 141 Cong. Rec. H13691, H13700; see also Medhekar v. U.S. Dist. Ct. for N.D. Cal., 99 F.3d 325, 328 (9th Cir. 1996) (Congress clearly intended that complaints in these securities actions should stand or fall based on the actual knowledge of the plaintiffs rather than information produced by the defendants after the action has been filed.). Another equally important concern is that defendants should be not be exposed to the cost and burden of discovery until plaintiffs have established that they have a viable claim. See S.G. Cowen Sec. Corp. v. U.S. Dist. Ct. for N.D. Cal., 189 F.3d 909, 911 (9th Cir. 1999) (citation omitted) (noting Congress worry when enacting the PSLRA that [t]he cost of discovery often forces innocent parties to settle frivolous securities class actions). The effect of the Courts Order denying Hancocks motion to dismiss is that she will soon be required to make initial disclosures under Rule 26(a), and that she will subsequently be exposed to full-blown discovery. Not only will Hancock be exposed to the cost and burden of these discovery obligations but plaintiffs may use the information learned from the discovery process to attempt to ameliorate the manifest deficiencies in their original pleadings. These concerns have led the Ninth Circuit to award extraordinary writ relief in securities cases where an erroneous ruling at the threshold would unnecessarily expose defendants to initial disclosures and discovery. See Medhekar, 99 F.3d at 326-27 (granting writ relief because the harm sought to be avoided, the burden and cost of providing the initial disclosures, cannot be corrected in a subsequent appeal from a final judgment and [i]t is the precise harm intended to be avoided by the stay provision of the [PSLRA]); see also S.G. Cowen, 189 F.3d at 911 (granting writ relief to enforce stay of discovery).

/ / /
-7DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 III. 16 17 18 19 20 21 22 23 24 25 26 27 28

2.

There Is A Substantial Ground For Difference Of Opinion As To The Standard By Which A District Court Determines Whether A 11 Claim Sounds In Fraud.

A substantial ground for dispute [] exists where a courts challenged decision conflicts with decisions of several other courts. A.P.C.C. Servs., Inc. v. Sprint Commcns Co., L.P., 297 F. Supp. 2d 90, 97-8 (D.D.C. 2003). This Courts Order is contrary to the grounded in fraud doctrine in the Ninth Circuit, that instructs that there is a category of 11 and 15 claims that are grounded in fraud and must be subject to the pleading standards of Rule 9(b). This Courts order eviscerates the doctrine because it holds that status allegations that are necessary to every 11 or 15 claim state a non- fraudulent basis for liability automatically bring the claim outside of the grounded in fraud doctrine. The Courts Reconsideration Order also clashes with the only other opinion post-Daou interpreting when a 11 claim is grounded in fraud. See Portal, 2005 WL 1910923 at *16. Judge Walker found that a complaint that contained identical status allegations and that did not incorporate fraud allegations into the 11 claim did sound in fraud. THE COURT SHOULD STAY FURTHER PROCEEDINGS UNTIL THE COURT OF APPEALS RESOLVES THIS ISSUE. Given that reversal by the Ninth Circuit would terminate this matter completely, Hancock requests that the Court impose a stay of further proceedings as to her, pending appeal. In the event that the Court determines not to certify this matter for interlocutory appeal, Hancock respectfully requests that this proceeding by stayed as to her, so that they she may seek a writ of mandamus from the Ninth Circuit. IV. CONCLUSION For the foregoing reasons, Hancock respectfully requests that the Court grant leave to file a motion for reconsideration. In the event that the Court determines not to reconsider the order, Hancock respectfully requests that the Court should grant Hancocks motion for an order

/ / / / / / / / /
-8DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

certifying for interlocutory appeal pursuant to 28 U.S.C. 1292(b) the Reconsideration Order, and further grant Hancocks request for a stay pending appeal. DAVID M. FURBUSH DHAIVAT H. SHAH OMELVENY & MYERS LLP Dated: October 12, 2005 By: _________ /s/ David M. Furbush___________ David M. Furbush Attorneys for Individual Defendants Ellen M. Hancock, R. Marshall Case, Dick Stoltz, Herbert A. Dollahite, Adam W. Wegner, Beverly Brown, Sam S. Mohamad, and William Yeack
MP1:968393.4

-9DEFENDANT HANCOCKS MOTION FOR RECONSIDERATION Master File No. C-01-2661 MMC