LEO P. CUNNINGHAM, State BORIS FELDMAN, DANIEL …securities.stanford.edu/filings-documents/1029/LF03-01/20061122_r... · LEAPFROG ENTERPRISES, INC., TIMOTHY M . ... Distribution

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LEO P. CUNNINGHAM, State Bar No . 121605BORIS FELDMAN, State Bar No .128838DANIEL W. TURBOW, State Bar No. 175015WILSON SONSINI GOODRICH & ROSATIProfessional Corporatio n650 Page Mill RoadPalo Alto, CA 94304-1050Telephone : (650) 493-9300Facsimile : (650) 565-5100Email : lcunn i ngham @wsgr. com

Attorneys for DefendantsLEAPFROG ENTERPRISES, INC .,TIMOTHY M . BENDER, JAMES P .CURLEY, THOMAS J . KALINSKEand MICHAEL C . WOOD

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNI A

SAN JOSE DIVISION

In re LEAPFROG ENTERPRISES, INC ., ) No. C-03-05421 (RMW )SECURITIES LITIGATION ) And Related Cases

CLASS ACTION

INDIVIDUAL DEFENDANTS 'NOTICE OF MOTION ANDMOTION TO DISMISS SECON D

This Document Relates to : ) AMENDED CONSOLIDATEDCLASS ACTION COMPLAINT AN D

All Actions . ) MEMORANDUM OF POINTS ANDAUTHORITIES IN SUPPORTTHEREOF

DATE : February 9, 2007TIME : 9:00 a.m .JUDGE : Hon. Ronald M. Whyte

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SACNo. C-03-05421 (RMW)

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TABLE OF CONTENTS

Page

NOTICE OF MOTION AND MOTION TO DISMISS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

ISSUES TO BE DECIDED (Civil Local Rule 7-4(a)(3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

MEMORANDUM OF POINTS AND AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

1 . THE COMPLAINT FAILS TO PLEAD SPECIFIC FACTS GIVING RISE TO ASTRONG INFERENCE OF ANY INDIVIDUAL DEFENDANT'S SCIENTER . . . . . . . . . . . . .2

A . There Are No Allegations Creating Any Inference of Scienter Based on thePowerTouch/Competition Allegations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

B. Scienter Cannot Be Inferred from LeapFrog's Delays In Improving ItsDistribution and Supply-Chain Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

1 . Alleged Problems with DSS in 2003 and early 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

2 . Transition to FDC in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

3 . Supply-Chain Software Systems Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

II . THE ALLEGED STOCK SALES DO NOT CREATE ANY INFERENCE O FSCIENTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

III . PLAINTIFFS' INADEQUATE ALLEGATIONS AGAINST ANY INDIVIDUALREQUIRE DISMISSAL OF THE COMPLAINT AGAINST EACH INDIVIDUA LAND THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

A. Plaintiffs Cannot Rely on Group-Published Information or "Collective "Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

B . The Claims Against Mr. Bender Must Be Dismissed Because He Made NoChallenged Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 5

C . The Claims Against Mr . Wood Must Be Dismissed Because He Made VeryFew, and Only True, Statements and Was Gone From Leapfrog For MoreThan Half The Class Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

D . The Claims Against Mr. Curley Must Be Dismissed Because His Fe wStatements Were Not Fraudulent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

E. The Claims Against Mr. Kalinske Must Be Dismissed Because H eAccurately Stated His Beliefs Regarding PowerTouch and the Status of theOngoing Efforts to Improve Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

IV . THE CLAIM FOR CONTROL PERSON LIABILITY SHOULD BE DISMISSED . . . . . . 19

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20


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TABLE OF AUTHORITIES

Page(s )

Business Objects SA Sec. Litig. ,No. C 04-2401 MJJ, 2005 WL 1787860 (N.D . Cal . July 27, 2005 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A . ,511 U. S . 164 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 , 14,15

Gompper v . VISX, Inc., 298 F .3d 893, 897 (9th Cir . 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2, 7, 14

Greebel v. FTP Software, 194 F.3d 185 (1st Cir . 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

In re Apple Computer, Inc. Sec. Litig ., 243 F . Supp. 2d 1012 (N .D. Cal. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . 15

In re Apple Computer Sec . Litig., 86 F .2d 1109 (9th Cir . 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

In re Applied Signal Tech., Inc. Sec. Litig. ,No . C 05-1027 SBA, 2006 WL 1050174 (N.D. Cal . Feb. 8, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 , 7,20

In re Autodesk, Inc . Sec. Litig., 132 F. Supp. 2d 833, 845 (N .D . Cal . 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

In re Canandaigua Sec. Litig., 944 F. Supp. 1202 (S .D.N .Y. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

In re Ditech Communications Corp. Sec. Litig. ,No. C 05-02406 JSW, 2006 WL 2319784 (N .D. Cal . Aug. 10, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

In re ESS Tech., Inc . Sec. Litig. ,No. C-02-04497 RMW, 2004 WL 3030058 (N .D . Cal . Dec . 1, 2004) . . . . . . . . . . . . . . . . . . . . . . . 12 , 12,1 5

In re Gupta Corp. Sec. Litig., 900 F . Supp. 1217 (N.D . Cal . 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

In re Juniper Networks, Inc. Sec. Litig., No. C 02-0749 SI, 2004 WL 540910 (N .D.Cal. March 11, 2004), affd, [2006-2006 Tr. Binder] Fed . Sec. L . Rep .(CCH) ¶ 93,611 (9th Cir . Dec. 16, 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

In re K-Tel Intl, Inc. Sec. Litig. ,107 F. Supp. 2d 994 (D. Minn. 2000), affd, 300 F.3d 881 (8th Cir . 2002) . . . . . . . . . . . . . . . . . . . . . . 13

In re Lexar Media, Inc . Sec. Litig. ,No. C-04-2013 SC, 2005 WL 1566534 (N .D. Cal . July 5, 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

In re McKesson HBOC, Inc . Sec. Litig., 126 F. Supp . 2d 1248 (N.D . Cal . 2000) . . . . . . . . . . . . . . . . . . . . . . . . 1 9

In re Netflix Sec. Litig. ,No. C 04-2978 WHA, 2005 WL 3096209 (N .D. Cal . Nov . 18, 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

In re Netopia, Inc., Sec. Litig. ,No. C-04-03364 RMW, 2005 WL 3445631 (N .D . Cal . Dec . 15, 2005 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

In re Oak Tech . Sec. Litig. ,No . 96 -20552 SW, 1997 WL 448168 (N.D . Cal . Aug. 1, 1997 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 19

In re Read-Rite Corp. Sec . Litig. ,115 F . Supp . 2d 1181 (N.D . Cal. 2000 ), aff d, 335 F.3d 843 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4

INDIVIDUAI . DEFENDANTS' MOTION TO DISMISS SAC No. C-03-05421 (RMW)

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In re Read-Rite Corp. Sec. Litig., 335 F .3d 843 (9th Cir . 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 , 2,3

In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir . 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2, 4, 7, 12

In re Silicon Storage Tech ., Inc . Sec. Litig. ,No. C 05-0295 PJH, 2006 WL 648683 (N.D. Cal . March 10, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

In re Splash Tech. Holdings Sec. Litig., 160 F. Supp. 2d 1059 (N.D. Cal . 2001) . . . . . . . . . . . . . . . . . . . . . . . . . 12

In re Tibco Software, Inc . Sec. Litig. ,No. C 05-2146 SBA, 2006 WL 1469654 (N.D . Cal . May 26, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

In re Trex Co, Inc. Sec. Litig., No . 5 :05 CV 00047, 2006 WL 2868233 (W .D . Va.Oct. 6, 2006 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 11

In re U.S. Aggregates, Inc. Sec. Litig., 235 F. Supp. 2d 1063 (N.D. Cal. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . .11

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

Limantour v. Cray, 432 F. Supp. 2d 1129 (W .D. Wash. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Lipton v. Pathogenesis Corp., 284 F.3d 1027 (9th Cir . 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .passim

Mitzner v. Hastings,No . C-04-3310 FMS, 2005 WL 88966 (N .D. Cal . Jan. 14, 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Paracor Fin ., Inc. v. General Elec. Capital Corp ., 96 F .3d 1151 (9th Cir . 1996) . . . . . . . . . . . . . . . . . . . . . . . .15

Plevy v. Haggerty, 38 F . Supp . 2d 816 (C .D . Cal . 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Ronconi v. Larkin, 253 F .3d 423 (9th Cir . 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6, 9, 12

Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal . 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Wietschner v. Monterey Pasta Co., 294 F . Supp. 2d 1102, 1117 (N .D. Cal . 2003) . . . . . . . . . . . . . . . . . . . . . . 12

Zucco Partners, LLC v . Digimarc Corp., 445 F. Supp. 2d 1201 (D . Or. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . .11

STATUTES

15 U .S.C . § 78u-4(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

15 U .S.C. § 78u-4(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

26 U .S.C. § 83(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 4

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SA CNo . C-03-05421 (RMW)

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NOTICE OF MOTION AND MOTION TO DISMISS

Please take notice that on February 9, 2007, at 9 :00 a .m., or as soon thereafter as the

matter may be heard, in the Courtroom of the Honorable Ronald M . Whyte, United States

District Court, 280 South First Street, San Jose, California, individual defendants Michael C .

Wood, Thomas J. Kalinske, James P . Curley and Timothy M . Bender (collectively, the

"Individual Defendants") will, and hereby do, move to dismiss Plaintiffs' Second Amended

Consolidated Class Action Complaint ("Complaint" or "SAC"), and will and hereby do join in

LeapFrog Enterprises, Inc .'s ("LeapFrog" or the "Company") motion to dismiss (the "LeapFrog

Motion" or "LF Mot .") . LeapFrog likewise will and hereby does join in this motion .

The Individual Defendants' motion is based on the Complaint's failure to comply with

the pleading requirements of the Private Securities Litigation Reform Act ("Reform Act") and

the Court's August 1, 2006 Order . This motion is supported by the accompanying

memorandum of points and authorities, the Declaration of Daniel W . Turbow ("Turbow Decl .")

and attached exhibits filed concurrently herewith ("Ex . "), all pleadings and papers filed

herein, argument of counsel and any other matters properly before the Court.

ISSUES TO BE DECIDED (Civil Local Rule 7-4(a)(3) )

1 . Does the Complaint correct the defects found by the Court in the prio r

Complaint?

2. Does the Complaint allege specific facts giving rise to a strong inference that any

Defendant acted with scienter ?

3 . Do Plaintiffs adequately particularize which defendant (if anyone) is responsible

for each challenged statement'?

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SAC -iv- C :\NrPortbl\PALIBI\FBI\29929155 .DOCNo. C-03-05421 (RMW)

MEMORANDUM OF POINTS AND AUTHORITIE S

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The Individual Defendants respectfully submit this additional memorandum of points

and authorities addressing issues regarding the Individual Defendants individually, and

incorporate by reference the points and authorities accompanying the LeapFrog Motion.

INTRODUCTIO N

This Complaint is as unsuccessful as the last in stating a claim for securities frau d

against LeapFrog or any of its officers . It contains the same flaws that doom any attempt to

plead a l Ob-5 class action when there was no fraud .

• It lacks particularized allegations demonstrating that as of the time anyIndividual Defendant or LeapFrog made a statement, the speaker was aware offacts (as opposed to speculation or opinion) that rendered the statement false ;

• It establishes facts that are inconsistent with any scienter by any defendant,including -

o The acquisition of stock by two defendants at times when, if Plaintiffs'"pump and dump" theory were correct, all defendants would have beenselling ;

o The lack of unusual or suspicious stock sales ; and

o The announcement of information more than once during the class periodthat had the anticipated effect of causing a substantial drop in LeapFrog'sstock price .

• It relies on hindsight - especially testimony from a 2005 patent trial elaboratingon the effects of competition with PowerTouch - and a mistaken notion as towhat a company is obligated to disclose about competition and operationalchallenges .

This Complaint abandons any pretense that there was accounting fraud at LeapFrog and

attempts, instead, to spin a fraud out of LeapFrog's competition with Mattel's PowerTouch and

LeapFrog's efforts to improve its operations and, particularly, its warehousing and its supply-

chain management. Those topics, however, are non-starters as a premise for fraud because

LeapFrog made abundant accurate disclosures in both areas, never understated the challenges in

improving its operations, and never overstated its successes in meeting the competition from

PowerTouch .

For the reasons discussed below and in LeapFrog's Motion, this action should b e

dismissed as against each of the Individual Defendants, and LeapFrog, with prejudice .

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SAC -1-No. C-03-05421 (RMW)

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ARGUMENT

1 . THE COMPLAINT FAILS TO PLEAD SPECIFIC FACTS GIVING RISE TO ASTRONG INFERENCE OF ANY INDIVIDUAL DEFENDANT'S SCIENTE R

The Reform Act requires that plaintiffs "shall, with respect to each act or omission . . . ,

state with particularity facts giving rise to a strong inference that the defendant acted with the

required state of mind ." 15 U .S.C. § 78u-4(b)(2) . The requisite scienter is actual knowledge

for forward-looking statements (and intent that such statements are false or misleading) or

"deliberate recklessness" as to the false or misleading nature of a present tense statement. See

In re Silicon Graphics Inc . Sec. Litig., 183 F.3d 970, 977, 993 (9th Cir . 1999) . To plead a

strong inference of scienter, "the complaint must contain allegations of specific

`contemporaneous statements or conditions' that demonstrate the intentional or the deliberately

reckless false or misleading nature of the statements when made ." In re Read-Rite Corp . Sec.

Litig., 335 F.3d 843, 846 (9th Cir. 2003) (citation omitted). In evaluating the sufficiency of

scienter allegations, "the court must consider all reasonable inferences to be drawn from the

allegations, including inferences unfavorable to the plaintiffs ." Gompper v. VISX, Inc ., 298

F .3d 893, 897 (9th Cir. 2002) (emphasis added) . An inference that is merely "reasonable" but

not "strong" is insufficient . See id.

Here, because Plaintiffs fail to allege any actionable false or misleading statement (see

LF Mot. at 12-25), a fortiori, the allegations cannot give rise to any inference of scienter . See

In re Vantive Corp . Sec. Litig„ 283 F . 3d, 1079 , 1091 (9th Cir. 2002 ) (unitary inquiry for falsity

and scienter ) ; In re Juniper Networks , Inc. Sec . Litig., No . C 02-0749 SI, 2004 WL 540910, at

*2 (N.D. Cal . March 11 , 2004) (same ), aff'd, [2006-2006 Tr . Binder] Fed. Sec . L. Rep. (CCH)

¶ 93,611 (9th Cir . Dec. 16, 2005 ) . This alone is grounds for dismissal . In fact, that LeapFrog

repeatedly made candid disclosures regarding its challenges , including disclosures that

precipitated dramatic stock price declines during the Class Period , and its senior officers

actually acquired shares during the Class Period, undercuts the plausibility of Plaintiffs' claim

that the Defendants schemed for 15 months to art ificially inflate the Company's stock price .

See VISX, 298 F.3d at 897 (court must consider all reasonable inferences , including thos e


favorable to defendants) .

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A. There Are No Allegations Creating Any Inference of Scienter Based on thePowerTouch/Competition Allegations

The Complaint fails to allege any facts creating a strong inference of scienter by an y

individual regarding PowerTouch or the alleged undisclosed competition affecting LeapFrog .

Plaintiffs do not - because they cannot - allege that LeapFrog's 2003 financial guidance was

knowingly false because of the introduction of PowerTouch . See LF. Mot . at 15. Plaintiffs

plead no facts showing that any Individual Defendant or anyone else at LeapFrog knew that any

of the Company's statements, including its 2004 financial guidance, were misleading because

of the impact of PowerTouch.

Plaintiffs again rely almost exclusively on the 2005 patent trial testimony as supposed

evidence of fraud . Based on this testimony, Plaintiffs allege that Defendants "immediately"

knew that LeapPad sales were lost, that "[PowerTouch] definitely took sales from [LeapFrog],"

"[LeapFrog] reduced [its] prices significantly," and the "tie ratio" on the core LeapPad product

(the ratio of software books purchased for each hardware platform) declined later in 2004

compared to prior years . See SAC ¶¶ 19-22, 28, 30, 38-40 . The post-Class Period patent

testimony is not sufficient to demonstrate that any Defendant knew that any challenged

statements were false at the time they were made, and such fraud-by-hindsight pleading is

routinely rejected . Order at 4; Read-Rite, 335 F.3d at 846 ("`It is clearly insufficient for

plaintiffs to say that a later, sobering revelation makes an earlier, cheerier statement a

falsehood."') (citation omitted) . The Complaint still fails to explain how the 2005 trial

testimony quantifying the damages estimated to have been caused by PowerTouch shows that

any challenged statement was incorrect, let alone made with fraudulent intent . Quite to the

contrary, because LeapFrog achieved its forecasted financial results for the 2003 fiscal year,

any of Defendant's statements about the anticipated effects of competition were proven correct

for that year, thereby negating any inference of scienter at least regarding those statements . See

LF Mot. at 15 ; SAC ¶¶ 25, 27, 29, 32, 35, 42 ; Amended Consolidated Complaint ("AC") ¶ 238 .

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SAC -3-NO . C-03-05421 (RMW)

Plaintiffs also repeat their prior allegations that scienter can be inferred becaus e

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Defendants received daily reports and had daily morning telephone conferences regarding sales

figures. SAC ¶¶ 20, 71 . Plaintiffs, however, still fail to describe the contents of any of these

reports (aside from labeling them as "summary spreadsheets"), or to provide dates as to when

Defendants supposedly received them . See Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1036

(9th Cir . 2002) ("[N]egative characterizations of reports relied on by insiders, without specific

reference to the contents of those reports, are insufficient to meet the heightened pleading

requirements of the PSLRA .") ; Vantive, 283 F.3d at 1087-88 (plaintiffs must provide dates and

details of contents for internal reports) . Plaintiffs still cannot allege that these "summary

spreadsheets" showed that sales of LeapPad were declining or that LeapFrog was in danger of

falling short of its financial guidance. SAC ¶ 71 . Nor do Plaintiffs allege any specific facts

showing that PowerTouch caused LeapFrog's market share, demand or sell-through to decline .'

Without such specifics, there is no basis for Plaintiffs to assert that any Defendant had any

knowledge that any of his statements were rendered false or misleading due to PowerTouch

competition . See Silicon Graphics, 183 F.3d at 985 .

Plaintiffs also allege that unnamed LeapFrog "executives" "met frequently" betwee n

July 2003 and January 2004 to discuss reducing prices in response to competition with

PowerTouch. SAC ¶ 22 . Plaintiffs, however, no longer challenge Mr . Wood's statement in

October 2003 that LeapFrog did not expect at that time to reduce hardware prices (compare AC

¶ 226(c) with SAC ¶ 33), so it is unclear how these executive meeting allegations are intended

to render any statement false, let alone show scienter . In any event, Plaintiffs provide no

specifics about the meetings, such as who attended, what conclusions were reached, or, most

importantly, when LeapFrog actually made the decision to lower prices . Indeed, Plaintiffs do

not - because they cannot - allege that LeapFrog actually decided to lower prices before it did

so in January 2004 . Their vague allegation about meetings indicates nothing more than

1 On the contrary, in February 2004 LeapFrog disclosed independent market research(which Plaintiffs have not challenged) showing that LeapFrog had considerable market sharegains in 2003, and particularly in Q4 03 . Ex . 8 at 2 (citing data from The NPD Group, Inc .) .See also infra at 5 .


executives doing their jobs, and shows neither falsity or scienter as to any statement . 2

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None of the other allegations come close to indicating scienter for any challenge d

statement regarding PowerTouch . For example, Plaintiffs challenge statements in the fall of

2003 that management believed PowerTouch may have a positive impact by increasing the

entire market for educational toys . SAC ¶¶ 27, 29 . Plaintiffs offer not a single fact, let alone

particularized contemporaneous facts, reflecting that this belief was actually known to be false

at the time it was stated . Even if LeapFrog were aware of initial lost sales to PowerTouch - as

would have been obvious to anyone who visited a toy department and which the Company

effectively disclosed in its October 2003 lawsuit against Mattel - this did not foreclose the

possibility that Mattel's marketing blitz could, in the longer run, have a positive impact on the

entire educational toy market .

Plaintiffs likewise fail to plead a single fact showing the scienter (or falsity) of Mr .

Wood's February 10, 2004 statement that consumer demand was "more vibrant than ever ."

SAC ¶ 42. In fact, on February 10 and 11, LeapFrog also disclosed independent market

research from The NPD Group, Inc .-the accuracy of which has not been challenged by

Plaintiffs-supporting Mr. Wood's belief that consumer demand was indeed "vibrant" ;

LeapFrog's market share in the preschool category (the category in which PowerTouch

competed) had increased from 18% to 22% in 2003 despite the introduction of the PowerTouch .

Indeed, after PowerTouch was introduced, LeapFrog saw an even stronger gain in market share

in the preschool category, reaching 27 .5% in 4Q03 . Exs. 7 at 1 ; 8 at 2 ; 12 at 11 . Mr. Wood,

therefore, had ample reason to state that consumer demand was "more vibrant than ever," an d

2 Even if Plaintiffs had pleaded facts reflecting that LeapFrog decided to drop its prices wellbefore announcing it, this is not indicative of fraud . Investors know that companies do not, andare not required to, disclose price reductions in advance because this is competitively sensitiveinformation, and Defendants informed the market accordingly . See Ex. 1 at 6 (2Q03 earningscall ; refusing to discuss pricing strategy in analyst call) ; Ex. 8 at 13 (2/11/04 conference call : "Idon't want to talk about pricing on this call because every time we talk about something on thiscall, one of our competitors does exactly what we are doing.") ; In re Canandaigua Sec. Litig .,944 F. Supp. 1202, 1211 (S .D.N.Y. 1996) (granting summary judgment on claim based onfailure to disclose plan to cut prices; "It is inherently absurd to impose on companies in highlycompetitive consumer-based industries an affirmative duty to disclose to competitors sensitivepricing and marketing decisions .") .

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SAC -5-No . C-03-05421 (RMW)

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I Plaintiffs fail to allege a single particularized fact that Mr . Wood's statement was misleading in

I any way, let alone that Mr . Wood acted with any degree of scienter in making this statement (o r

I any other statement) .

B. Scienter Cannot Be Inferred from LeapFrog's Delays In Improving ItsDistribution and Supply-Chain Initiatives

The allegations that LeapFrog suffered from delays and problems with its operational

initiatives also do not create an inference of scienter . Courts routinely dismiss claims based on

such problems - even "severe" problems - when they do not demonstrate knowing or deliberate

wrongdoing (as opposed to mismanagement) . See, e.g., Ronconi v. Larkin, 253 F.3d 423, 434

(9th Cir . 2001) (allegations of "serious operational problems" did not establish that defendants

lied to investors) ; Vantive, 283 F.3d at 1086-87 (allegations that company suffered "serious

problems" with management and other operational issues were insufficient to plead scienter) .

1 . Alleged Problems with DSS in 2003 and early 200 4

Plaintiffs do not plead any facts demonstrating that any Defendant was aware of an y

critical problems at DSS prior to the end of the 3Q03 or when issuing statements an d

projections . Plaintiffs' allegations, without exception, are vague as to dates and inadequate a s

to the personal knowledge of any of the Defendants .

Plaintiffs allege that summary documents were prepared that "tracked order shipments, "

and allege that Defendants knew - at some unspecified time - that product was not being

shipped "within the time-frames which [LeapFrog's] largest customers insisted upon ." SAC

¶¶ 57, 71, 105(b) . As with their allegations of other internal documents, Plaintiffs fail to plead

any particularized facts concerning these reports that would indicate what any Defendant knew,

and when each of the Defendants supposedly became aware of the shipping delays . See supra

at 4 ; Lipton, 284 F.3d at 1036; Vantive, 283 F.3d at 1087-88 . It is not clear whether these

allegations refer to problems or delays with DSS that were rectified in 4Q03, or to problems

with FDC that arose later in the summer of 2004 . This lack of specificity is fatal because the

Complaint does not plead facts showing when any Defendant learned of information contrary to

any challenged representations . For example, when in 2003 or early 2004 did Defendants lear n


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that any shipping problems were so severe that they would jeopardize the Company's financial

targets? Which customers' orders were late in shipping, and when did the Defendants learn of

the delays? Lacking specifics, these allegations do not come close to creating an inference of

scienter . Silicon Graphics, 183 F.3d at 985 .

Plaintiffs now rely heavily on the account of CW4, but CW4, a collections employee, i s

never alleged to have even visited the DSS warehouse . SAC ¶¶ 2, 55-63 . Nor do Plaintiffs

allege that CW4, or any other witness, had any personal interactions with any of the

Defendants . Id. Even if Plaintiffs could make that allegation, scienter cannot be inferred from

any of the allegations purportedly based on CW4's accounts . Assuming arguendo that Mr .

Curley "screamed at DSS" at unspecified times during the Class Period (id. ¶ 58), Plaintiffs do

not explain why that renders any statement false or creates any inference of scienter . Plaintiffs

also allege that Mr . Wood visited DSS "during" 4Q03 (id. ¶ 83), but they provide no details of

this visit from which scienter can be inferred . Plaintiffs do not say when Mr. Wood visited

DSS, with whom he spoke, what he observed, or how that rendered any statement false . Id.

Similarly, the allegations that Mr. Bender attended "frequent" meetings regarding distribution

problems (id. ¶ 71), without any supporting details concerning what was actually discussed in

these meetings and when, is insufficient .

Furthermore, the allegation that LeapFrog was "furious" with DSS (id. ¶ 83) actually

militates against an inference that LeapFrog knew in advance that DSS would botch orders .

Similarly, Plaintiffs' admission that DSS "prematurely" quit on LeapFrog later in 2004 reflects

that LeapFrog was caught by surprise by DSS' abandonment . Id. ¶¶ 112, 123(c) . See VISX,

298 F.3d at 897 ; In re Applied Signal Tech., Inc . Sec. Litig., No. C 05-1027 SBA, 2006 WL

1050174, at * 19 (N .D. Cal. Feb. 8, 2006) (dismissing claims because plaintiffs' allegations

created negative inference of scienter) . 3

3 Plaintiffs make vague allegations about the Genco warehouse, but they do not indicatewhen the problems arose (other than "prior to and throughout the Class Period"), the severity ofthe alleged problems, or how they render any statement false . SAC ¶¶ 64-65. Also, none of theDefendants are alleged to have had any involvement with the facility .


2. Transition to FDC in 2004

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As with the DSS allegations, the Complaint does not allege any particularized facts

reflecting when any Individual Defendant became aware of problems and delays at FDC so as to

create an inference that any of the challenged statements were made with scienter . See SAC

¶¶ 84, 95, 98, 102-03, 107-119. Plaintiffs allege that LeapFrog was late getting started with the

FDC transition, was late in establishing procedures for implementing the HighJump software that

would run the new warehouse, that "senior management" imposed "intense, unrealistic pressure"

to implement WMS before the end of 2Q04, and that one CW and other unspecified employees

told non-defendant managers that the WMS implementation would not be completed by the end

of 2Q04. Id. ¶¶ 95, 102-103 . Plaintiffs also allege that Mr . Kalinske and another senior

LeapFrog officer were late in negotiating and finalizing the contract with a new third party

warehouse provider CLI, that it was "well-known internally" that the delay in transitioning from

DSS to CLI "would cause major problems with the transition," and that DSS prematurely

stopped working for LeapFrog before the transition could be completed . Id. ¶¶ 110, 113, 123(c) .

These allegations , which are largely the purpo rted opinions of CWs,4 do not create an

inference of scienter. Importantly, Plaintiffs do not allege particularized facts that any of the

CWs had communicated their opinions to any of the Individual Defendants . For example,

CW8's allegations that unnamed LeapFrog employees purportedly warned members of "senior

management" at unspecified times of the complexity of installing HighJump and the dangers of a

"delayed" implementation - without identifying what was actually said to whom and when - do

not create a strong inference of scienter . SAC ¶¶ 102-03 . These allegations do not bear on

Defendants' knowledge of the falsity of the challenged statements concerning the rollout of FD C

4 The CWs' accounts are largely their opinions as to what should have happened with thebenefit of hindsight, as opposed to specific accounts of contemporaneous events or meetingsreflecting that any Individual Defendant intentionally defrauded LeapFrog's investors . SeeBusiness Objects SA Sec. Litig., No. C 04-2401 MJJ, 2005 WL 1787860, at *6 (N .D. Cal . July27, 2005) (dismissing CW allegations that were "long on speculation, but short on relevantdetail") (emphasis added) ; In re Trex Co, Inc . Sec. Litig., No . 5 :05 CV 00047, 2006 WL2868233, at *9 (W .D . Va. Oct. 6, 2006) (CW statements based on opinion insufficient under theReform Act) .


in any way, let alone demonstrate that Defendants actually knew that the timetable for the rollout

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was unachievable .

Plaintiffs also allege that the delay in finalizing the contract with CLI until July 200 4

"made it impossible for CLI and LF to get LF's logistics and supply-chain operations running

until after the 2004 peak selling season began," and that it was "well-known internally" that the

delay "would cause major problems with the transition ." SAC ¶ 110 . The Complaint pleads no

contemporaneous, particularized facts from which to infer that Defendants knew of the extent of

the problems that would later arise with CLI and the FDC at the time of the challenged July 21

statements . In fact, in the prior version of the complaint, Plaintiffs only alleged that the delay in

finalizing the contract with CLI prevented LeapFrog from getting FDC up and running

"smoothly ." Compare AC ¶ 144 (emphasis added) with SAC ¶ 110. Plaintiffs cannot salvage

their claims by deliberately omitting the qualifier "smoothly" from their new Complaint,

particularly given that Plaintiffs fail to plead any new facts to support that misleadingly

aggressive recharacterization of the CW accounts . Notably, the allegation that it was "well

known" that the delay would cause "major problems" comes from CWS, a contract employee

who did not even start at LeapFrog until July 2004 - and therefore has no personal knowledge

about what was "known" at LeapFrog (let alone by the Individual Defendants) prior to that time .

SAC ¶¶ 2, 110, 113 . Moreover, the allegations that problems were "major" and "well-known"

are insufficient under the Reform Act . See, e.g., Ronconi, 253 F.3d at 432 (dismissal affirmed

where plaintiffs relied on unspecified allegations of "significant" or "difficult" problems) ;

Vantive, 283 F.3d at 1086 (same) .

Plaintiffs repeat their unsupported allegation that LeapFrog somehow knew ahead of tim e

that its contingency shipping plans would fail . SAC ¶¶ 122, 123(c) . To the contrary, Plaintiffs

concede that DSS "prematurely stopped working for LF" before the transition to the FDC

warehouse could be completed . Id. ¶ 123(c) . There are no allegations indicating that DSS had

already stopped work, or that Mr . Kalinske could have foreseen that DSS would prematurely

quit, when he told investors on July 21, 2004 that LeapFrog planned to "maintain a level of

redundancy" until FDC had been fully tested. Id. ¶ 122 . See also supra at 7 .

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SAC -9-No.-C-03-05421 (RMW)

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Plaintiffs also allege that Mr . Bender and other management went to FDC to resolv e

delivery issues, and allege that these visits sta rted in "7/04 and thereafter ." SAC ¶ 115 .

Plaintiffs claim that Mr. Kalinske visited FDC in 7/04 and personally observed matters . Id. ¶

109. Plaintiffs , however , do not say when in *'7/04" Mr. Kalinske or Mr . Bender visited FDC, 5

or what they observed that would have led them to conclude that they could not move into FDC

and begin shipping from it by the end of that month . Although Plaintiffs imply it, on July 21

LeapFrog did not tell investors that the consolidation of all shipping operations into the FDC

warehouse would be complete by the end of the month . Id. ¶ 122 . Rather, Mr. Kalinske stated

that LeapFrog expected to move into the new warehouse and begin shipping from it at the end of

the month, while still maintaining shipping operations at other warehouses . Id. An allegation

that Mr. Kalinske and others went to the FDC warehouse at some unknown point in July does not

show that this or any other statement was made with scienter.

Finally, despite the Court's Order (see Order at 4 :18-5 :1), Plaintiffs continue to alleg e

that Mr. Kalinske's statements on October 18, 2004 that the distribution and supply-chain

difficulties adversely impacted LeapFrog's results constituted an "admission" of fraud . SAC

¶ 131 . This is classic deficient hindsight pleading, and this Court has already held that this

allegation does not create an inference of scienter. Order at 4 :21-5 :1 .

3 . Supply-Chain Software Systems Implementation

Plaintiffs also fail to plead facts reflecting that any Defendant knowingly o r

intentionally made any false statements concerning delays in implementing supply-chain

software (Manugistics) . CW8 and CW12 allege that, although Mr. Kalinske stated in April

2004 statement that the supply-chain management system (Manugistics) was "up and running,"

it was not . SAC ¶ 102 . Neither CW8 nor CW12 has any basis for personal knowledge of this

fact, however . Neither is alleged to have been involved in the implementation of Manugistics .

CW12 was a Genco employee who left in April 2004 . Id. ¶ 2 . CW8 allegedly worked on

efforts to implement Highjump, the separate WMS software, not Manugistics . Id. CW8's

5 CW4 previously alleged that these visits occurred between August and October 2004 -after the challenged statements of July 21, 2004 . Compare AC ¶ 121 with SAC ¶ 115 .

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SAC _10-No . C-03-05421 (RMW)

allegations about Highjump have nothing to do with Mr . Kalinske's statement abou t

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Manugistics . See id. ¶¶ 98, 102.6 Moreover, no CW ever alleges that anyone ever told Mr .

Kalinske that Manugistics was not "up and running" in April 2004 .

Plaintiffs allege that according to CW5, during meetings "from 7/04 through 10/04, "

other employees informed CW5 that Mr. Kalinske "was well aware of the software problems."

SAC ¶ 120. But the Complaint does not specify the nature of these problems, and it is not even

clear which software CW5 purports to reference . In fact, Plaintiff made nearly identical

allegations in the prior complaint, but there CW5 purportedly claimed that Mr . Kalinske

"knew" of "the software problems" with the WMS software HighJump - not Manugistics .

Compare AC ¶ 146 with SAC ¶ 120.E And CW5 admits that he only learned this information

second-hand, and as late as October 2004 (SAC ¶ 120),8 and CW5 does not allege how Mr .

Kalinske supposedly learned of the problems (with HighJump or otherwise) or that Mr .

Kalinske knew of any material problems with any software before his July 21 statements . Id.

Plaintiffs also allege that CWI 1 had discussions about "supply chain problems" during

his/her hiring interview in February 2003, but the Complaint provides no details as to what

these "problems" were ; whether they were irremediable or whether they rectified ; identify who

interviewed CW 11 ; or explain how any Defendant was aware of the unidentified problems .

SAC ¶ 66 . It is no basis for a strong inference of scienter . Finally, Plaintiffs' allegation that

Mr. Bender attended "frequent" meetings regarding "sales, IT and warehouse problems" is

likewise far too vague to indicate any scienter . Id. ¶ 71 ; see also supra at 4 .

6 CW8's allegations about Highjump are inadequate to give rise to any inference of scienterin any event . See supra at 8 .

7 Plaintiffs also concede that any problems with HighJump were manageable becauseHighJump was operational by August 2004 and was being "fine-tuned" by October . See SAC¶¶ 68, 119 (Highjump not "up and running" in 7/04 but getting fine-tuned in 10/04) ; AC ¶ 164(Highjump was operating in August 2004) .

8 Such allegations do not create an inference of scienter . See In re US. Aggregates, Inc .Sec. Litig., 235 F. Supp. 2d 1063, 1075 (N.D . Cal . 2002) (hearsay allegations insufficient toestablish scienter) ; Trex, 2006 WL 2868233, at *8 (same) ; Zucco Partners, LLC v . DigimarcCorp., 445 F . Supp. 2d 1201, 1205 (D . Or. 2006) (same) .

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SAC -1 1 -No. C-03-05421 (RMW)

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H. THE ALLEGED STOCK SALES DO NOT CREATE ANY INFERENCE OFSCIENTER

Lacking any direct allegations of scienter, Plaintiffs resort to "motive and opportunity"

stock sale allegations . SAC ¶¶ 1, 6-7, 11-13 . These allegations are not enough to give rise to a

strong inference of scienter . Silicon Graphics, 183 F.3d at 974, 979 ; Lipton, 284 F.3d at 1034-

35 . Moreover, because there is nothing inherently suspicious about insiders' sales, Plaintiffs

must plead facts showing that the sales were "unusual" or "suspicious" and "dramatically out of

line with prior trading practices at times calculated to maximize the personal benefit from

undisclosed inside information." Silicon Graphics, 183 F .3d at 986 (citation omitted) ; see also

Ronconi, 253 F.3d at 435 ; Vantive, 283 F .3d at 1093 . Plaintiffs fail to meet that burden here .

Plaintiffs add no new allegations to show that the Individual Defendants' stock sale s

were suspicious or unusual, nor could they .9 Virtually all the Individual Defendants' stock

sales during the Class Period were automatic, non-discretionary trades executed pursuant to

lOb5-1 trading plans, thus negating any inference that the sales were suspicious .10 Exs. 21-24 .

See Limantour v. Cray, 432 F . Supp. 2d 1129, 1150-51 n .9 (W.D . Wash. 2006) (evidence of use

of IOb5-1 plans could raise inference, on motion to dismiss, that sales were not suspicious in

timing) ; In re ESS Tech., Inc. Sec. Litig., No. C-02-04497 RMW, 2004 WL 3030058, at *10

(N.D . Cal . Dec . 1, 2004) (sales made through non-discretionary trading plan not suspicious) ;

Wietschner v. Monterey Pasta Co., 294 F. Supp. 2d 1102, 1117 (N .D . Cal . 2003) (same) ;

Mitzner v . Hastings, No. C-04-3310 FMS, 2005 WL 88966, at *5 (N .D. Cal . Jan . 14, 2005)

(same) .

9 Because Plaintiffs have dropped all claims against Messrs . Marggraff, Rioux, Lally andFlowers, their stock sales (SAC ¶¶ 11-12) are irrelevant . See Plevy v . Haggerty, 38 F . Supp. 2d816, 834 n .12 (C.D. Cal . 1998) (sales of non-defendants held "irrelevant" to scienter of thenamed defendants) ; In re Splash Tech. Holdings Sec. Litig., 160 F. Supp . 2d 1059, 1082 n .22(N.D . Cal . 2001) (same) ; In re Lexar Media, Inc. Sec. Litig., No. C-04-2013 SC, 2005 WL1566534, at *6 n .1 (N.D. Cal . July 5, 2005) (same) .

10 The sole exception is Mr. Kalinske's sale of 20,000 shares on August 1, 2003 (Ex . 23(a)),but the Complaint contains no facts showing that Mr. Kalinske was made aware of anycontrary, undisclosed information at that time, and his first challenged statement was almosttwo months later . SAC ¶ 29 .


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Each individual's trading history further negates any possible inference of scienter fro m

their sales . Mr. Bender and Mr . Curley sold more heavily in the six months preceding the Class

Period than during the Class Period . Exs. 21, 22 . See Vantive, 283 F .3d at 1092 (no inference

of scienter where pre-class sales exceeded class period sales) ; In re Apple Computer Sec. Litig.,

886 F.2d 1109, 1117 (9th Cir . 1989) (same) ; In re Ditech Communications Corp. Sec . Litig.,

No . C 05-02406 JSW, 2006 WL 2319784, at *8 (N .D. Cal . Aug. 10, 2006) (same) . Moreover,

Mr. Curley actually purchased shares on the open market on August 9, 2004 and kept those

shares until after the Class Period - which negates any inference of scienter by at him . Ex .

22(m); In re K-Tel Int'l, Inc. Sec. Litig., 107 F. Supp. 2d 994, 1005 (D . Minn. 2000), of 'd, 300

F .3d 881 (8th Cir . 2002) ; cf. In re Tibco Software, Inc . Sec. Litig., No. C 05-2146 SBA, 2006

WL 1469654, at *21 (N .D. Cal . May 26, 2006) (purchase would make no sense if defendants

believed the stock to be inflated) .

The context of Mr . Wood's sales likewise shows nothing suspicious or unusual . First, it

is hardly suspicious that Mr . Wood sold more during the 15-month Class Period than in the

prior six months (SAC ¶ 6) as he was precluded from selling until late January 2003 due to a

lock-up after LeapFrog's IPO . See Ex . 24 . Second, all of the sales Mr . Wood made while he

acted as LeapFrog's CEO were automatic sales made pursuant to his l Ob5-1 plan established

prior to the Class Period .l I Id. He sold nothing from February 28, 2004 until he departed

LeapFrog in September 2004 . Id. Notably, all of Mr. Wood's challenged statements occurred

on or before February 10, 2004 - and none of his stock sales during that period deviated from

the regular pattern that he established prior to the Class Period : he sold or gifted 117,500 shares

per month . Id .

Importantly, Mr. Wood ceased to have any role in LeapFrog's day-to-day operations or

I public disclosures by February 2004 - a fact Plaintiffs previously alleged but now omit . AC

¶ 237. Plaintiffs nevertheless allege that scienter can be inferred from Mr . Wood's sale of hi s

I remaining Leapfrog shares seven months later in September 2004 . SAC ¶¶ 11-13 . On the

11 Plaintiffs again improperly include the sales of Mr . Wood's wife in their allegations of histrade totals, but all of Mrs . Wood's sales were likewise pre-planned 10b5-1 trades . Ex. 24 .


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contrary , there is nothing suspicious about Mr . Wood disposing of his remaining shares after

leaving LeapFrog in September 2004 . See, e . g., Greebel v. FTP Software, Inc., 194 F . 3d 185,

206 (1st Cir . 1999) (resignation is a plausible and innocent explanation for stock sales) ; In re

Read-Rite Corp . Sec. Litig., 115 F . Supp. 2d 1181, 1184 (N.D . Cal . 2000) ("sale of stock in

conjunction with the departure of a high level executive " insufficient to show scienter ), aff'd,

335 F.3d 843 ; SAC ¶ 13 .12 Given that LeapFrog met its 2003 forecasts, and that Mr . Wood is

alleged to have had no day-to -day involvement with LeapFrog ' s business in 2004 , Plaintiffs'

insistence on retaining Mr. Wood as a defendant can be explained only as an effo rt to increase

the cumulative number of shares sold inasmuch as Mr . Wood ' s sales are 91 .5% of the

Defendants ' total shares sold .

Plaintiffs fare no better with Mr . Kalinske. With only one exception (supra at n. 10), al l

of his Class Period sales were non-discretionary trades under his 10b5-1 plan . Further, Mr .

Kalinske sold nothing after he became CEO in February 2004 and instead acquired more than

twice the number of shares that he had previously sold .13 Ex. 23 . He owned 259,699 more

shares at the end of the Class Period than at the beginning . Id. Mr. Kalinske's large

acquisitions and lack of sales while he was CEO make any inference of his scienter implausible .

See VISX, 298 F .3d at 897 (scienter must be the most plausible of competing inferences) .

III. PLAINTIFFS' INADEQUATE ALLEGATIONS AGAINST ANY INDIVIDUALREQUIRE DISMISSAL OF THE COMPLAINT AGAINST EACH INDIVIDUALAND THE COMPANY .

A. Plaintiffs Cannot Rely on Group-Published Information or "Collective"Scienter

A defendant cannot be liable under Section 10(b) unless the allegations against hi m

meet "all of the requirements for primary liability under Rule I Ob-5 ." Central Bank of Denver,

12 Plaintiffs make the conclusory allegation that Mr . Wood "knew" about distributionproblems at the time of his September 2004 sale (SAC ¶ 13), but fail to allege a single fact tosupport that conclusion .

13 Mr. Kalinske exercised options for 209,246 shares in April and received an additional50,543 shares in August 2004, all of which he retained until after the Class Period . Ex. 23 . Hegave up a substantial number of his own option shares as payment for his option exercise andincurred an immediate tax liability of over $1 million . Id. See also 26 U.S .C . § 83(a) .


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N.A. v. First Interstate Bank of Denver, N.A., 511 U.S . 164, 191 (1994) . Those requirements

include the making of a false or misleading statement . See Paracor Fin., Inc. v. General Elec .

Capital Corp ., 96 F.3d 1151, 1157 (9th Cir . 1996) . Nonetheless, throughout the Complaint,

Plaintiffs purport to rely upon the group-published doctrine to attach liability to all defendants

for all the allegedly false statements . SAC ¶ 5 . This is deficient pleading . The group-

published information doctrine did not survive the passage of the Reform Act . In re Netopia,

Inc., Sec. Litig., No . C-04-03364 RMW, 2005 WL 3445631, at *6 (N.D . Cal . Dec. 15, 2005) ; In

re Silicon Storage Tech ., Inc. Sec. Litig., No. C 05-0295 PJH, 2006 WL 648683, at *22 (N .D .

Cal. March 10, 2006). Rather, plaintiffs must plead specific facts with respect to each

defendant . 15 U.S.C. § 78u-4(b) .

Similarly, Plaintiffs must allege specific facts to show the scienter of each individual

with respect to each challenged statement . Id. at § 78u-4(b)(2) (Plaintiffs must allege scienter

with particularity "with respect to each act or omission alleged to violate this chapter")

(emphasis added) . Vague, collective allegations about a company's employees are likewise

insufficient to show the scienter of a corporate defendant . Rather, "[a] defendant corporation is

deemed to have the requisite scienter for fraud only if the individual corporate officer making

the statement has the requisite level of scienter[ .]" In re Apple Computer, Inc. Sec. Litig., 243

F . Supp. 2d 1012, 1023 (N.D . Cal . 2002) . As explained below, Plaintiffs fail to adequately state

a claim against any Individual Defendant and have likewise failed to state a claim against the

Company .

B. The Claims Against Mr. Bender Must Be Dismissed Because He Made NoChallenged Statements

Plaintiffs do not challenge any statement made by Mr. Bender . Plaintiffs rely entirely

on the boilerplate allegation that all defendants were "provided with copies of LF's reports and

press releases" and "had the ability and opportunity to prevent or correct" them, yet Plaintiffs

plead no facts to support this . SAC ¶ 14. Such allegations would have been insufficient even

under the defunct group pleading doctrine . ESS, 2004 WL 3030058, at * 12 (plaintiffs must

"state, with particularity, facts indicating that the individual defendant was directly involved in


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the preparation of the allegedly misleading statements .") (emphasis added) ; In re Oak Tech.

Sec. Litig., No. 96-20552 SW, 1997 WL 448168, at * 11 (N .D . Cal . Aug. 1, 1997) .

Furthermore, even the defunct group pleading doctrine would not apply to the numerous oral

communications and analysts' reports that are identified in the Complaint . SAC ¶¶ 27, 29, 33,

43, 50, 72, 76, 78, 87-89, 91, 96, 104, 122, 125, 129 ; see, e.g., In re Autodesk, Inc. Sec. Litig.,

132 F. Supp. 2d 833, 845 (N.D. Cal . 2000) . 14 Mr. Bender cannot be liable for statements he did

not make (and therefore cannot be held liable at all), nor can any other Individual Defendant be

held liable for statements he did not make .

C. The Claims Against Mr. Wood Must Be Dismissed Because He Made VeryFew, and Only True, Statements and Was Gone From Leapfrog For MoreThan Half The Class Period

Apart from the 2Q03 and 3Q03 Forms 10-Q (SAC ¶¶ 25, 35, 74, 93), Mr . Wood is only

alleged to have made false statements in earnings calls on July 24, 2003 and October 22, 2003,

and in an earnings release for 2003 on February 10, 2004 .15 SAC ¶¶ 33, 42, 72, 87-88. The

Forms 10-Q cannot form the basis for a claim because the only purportedly false statements are

the risk factors themselves, which are not actionable . Id. ¶¶ 25, 35, 74, 93 ; Order at 2 & n .1 ; LF

Mot. at 7 . Mr. Wood's statements on July 24, 2003 are not actionable because they are mere

puffery and are forward-looking statements protected by the safe harbor (e .g., "We feel very

positive," "no boogie man out there," "we continue to make strong growth in supply-chain,"

"we're going to stick with our guidance.") . SAC ¶ 72; see LF Mot. at 7-8 . Furthermore, all the

challenged statements about 2003 were vindicated by the fact that LeapFrog achieved its FY

2003 forecast . Notably, Plaintiffs have dropped their challenges to LeapFrog's forecasts for any

period in 2003, i.e ., those during Mr. Wood's tenure (compare SAC ¶¶ 34, 73, 90 with ¶¶ 44(a),

97(a)), and the 2003 results were positive by any account despite the alleged impact of

14 More than once, Plaintiffs allege that two Individual Defendants simultaneously made thesame oral statements . SAC ¶¶ 29, 33, 87. Even under the discredited group pleading doctrine,this pleading would have been insufficient .

15 Plaintiffs erroneously allege that Mr . Wood signed the Company's 2003 Form 10-K .SAC ¶ 10; Ex . 11 . Plaintiffs also allege that Mr . Wood "participated" in the February 11, 2004conference call (SAC ¶ 10), but they do not challenge any statement he made in that call .

INDIVIDUAL, DEFENDANTS' MOTION TO DISMISS SAC -16-No. C-03-05421 (RMW)

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operational problems or competition. Ex . 8 at 2 (2003 net income was up 67% over 2002, sale s

were up 28%, and income per share grew 40%) .

Mr. Wood's October 2003 statements led to a dramatic drop in LeapFrog's stock price s o

cannot credibly be alleged to have been part of a scheme to inflate the stock price . See SAC

¶ 139. In any event, all of his (forward-looking) statements about Q4 03 were proven accurate by

the fact that LeapFrog met its higher Q4 03 revenue forecast . See id. ¶¶ 33, 87-88 ; AC ¶ 238

(LeapFrog's "[r]eported 4Q03 sales were in line with Defendants' revised guidance, which

suggested that the Q303 sales shortfall was made up in 4Q03 as Defendants previously assured

investors would occur .") . The only challenged statement ascribed to Mr. Wood in the February

2004 press release (concerning consumer demand being "vibrant") is not only too "soft" to be

actionable (LF Mot . at 7-8), it was also demonstrably supportable (and true) so completely

lacking in scienter. Supra at 5 . Finally, Plaintiffs previously alleged that Mr . Wood had no

operational responsibilities after February 10, 2004 (AC ¶¶ 236-37), some eight months before

the Class Period ended . Consequently, as with Mr . Bender, Mr. Wood's limited role directs that

he be dismissed from the case .

D. The Claims Against Mr. Curley Must Be Dismissed Because His FewStatements Were Not Fraudulen t

Mr. Curley was LeapFrog's CFO throughout the class period, but the accusations

against the accuracy of the Company's financial statements are no longer part of this case .

Plaintiffs nevertheless persist in naming Mr . Curley as a defendant. None of Mr . Curley's

challenged statements, however, supports a claim of fraud . First, Mr. Curley signed LeapFrog' s

SEC filings for which Plaintiffs continue to contend that the Company's risk disclosures were

actionable - but they are not . See LF Mot. at 7. Second, Mr. Curley's forward-looking

statements are shielded by the safe harbor . SAC ¶¶ 29, 78, 43, 96, 50 . In any event, the

accuracy of Mr . Curley's statements about 2003 expected results (id. ¶ 28) was established

when the Company met its projections for 2003 and even its increased projections for 4Q03 . I 6

16 Plaintiffs inaccurately attribute to Mr . Curley one of Mr . Wood's statements from the10/22/03 earnings call . SAC ¶¶ 33, 87 (reasons for Q3 03 miss were primarily timing) . That

(continued . . . )


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See AC ¶ 238 . Aside from the inactionable risk factors, only two of Mr . Curley's purportedly

false statements were in 2004 : Plaintiffs mischaracterize Mr . Curley's statement about gross

margins to try to render it actionable when it is not (SAC ¶ 43, LF Mot . at 17), fail to allege any

facts to support their claim that Mr . Curley's statement about 4Q03 DSOs and receivables was

false (SAC ¶ 96, LF Mot . at 19 n .11); and cannot state a claim based on the FY 2004 forecast, a

quintessential forward-looking statement (SAC ¶ 50) . Nor have Plaintiffs offered any

contemporaneous facts from which any inference can be drawn that Mr . Curley knew at the

time he stated it that this projection could not be met . See id. ; see also LF Mot. at 15 .

Consequently, Mr . Curley should be dismissed from the case .

E. The Claims Against Mr . Kalinske Must Be Dismissed Because HeAccurately Stated His Beliefs Regarding PowerTouch and the Status of theOngoing Efforts to Improve !Operations

Finally, none of the allegedly false statements ascribed to Mr . Kalinske supports a claim

of securities fraud . Mr. Kalinske's only direct statement regarding competition with

PowerTouch was back in September 2003, when he stated that LeapFrog had not lost shelf

space and that Mattel's competition might actually "expand[] the category ." SAC ¶ 29. Both

statements have been vindicated . Vindication came from the fact that LeapFrog achieved its

projected financial results for that year . Further vindication comes from the fact that, after

years of trying, Plaintiffs can still adduce nothing from which it can be inferred that, in

September 2003, Mr . Kalinske did not in fact believe that Mattel's competition could increase

the entire market for educational toys . Nor have Plaintiffs alleged any facts showing that

LeapFrog lost shelf space .

Mr. Kalinske also made a number of statements related to LeapFrog' s ongoing efforts to

make operational improvements . None of those statements, however, overstated the success of

those efforts, and each made clear that the improvements were a work in progress . For

example, in October 2003, Mr. Kalinske made clear that the software improvements were

inchoate, noting that LeapFrog was "making progress" in implementing Manugistics . Id. ¶ 91 .

( . . .continued from previous page )statement does not form the basis of a claim . See LF Mot . at 18-19 .

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SAC -1 No. C-03-05421 (RMW)

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In March 2004, Mr . Kalinske observed not that they had completed, but rather that "[w]e are

also strengthening our operations . . ." He went on to add comments not as to the benefits that

had been obtained but only as to what Leapfrog "expects ." Id. ¶ 99 . He left no doubt in April

2004 that the efforts to improve operations were not completed, for he referred to them as

"initiatives" and gave a status report to the effect that they were "on track" to be operational at a

later date . Id. ¶ 104. Even as late as July 2004, Mr . Kalinske was not describing the efforts as

completed . He referred to "making progress" "improving" and "continuing" various of the

efforts . Id. ¶ 122 . Mr. Kalinske should also be dismissed from the case because nothing he said

has been contradicted notwithstanding the many assertions of Plaintiffs' CWs .

IV. THE CLAIM FOR CONTROL PERSON LIABILITY SHOULD BE DISMISSED

The Complaint also seeks to hold each of the Individual Defendants liable a s

"controlling persons" under Section 20(a) . SAC ¶¶ 146-47 . Because the Complaint does not

adequately allege a primary violation under Section 10(b) for the reasons set forth above and in

the LeapFrog Motion, the claim for control person liability must be dismissed . Lipton, 284

F.3d at 1035 n .15 (to prevail on a § 20(a) claim, Plaintiffs must allege a primary violation o f

§ 10(b)) ; Wenger v . Lumisys, Inc., 2 F. Supp. 2d 1231, 1252 (N .D. Cal . 1998) (same) .

In addition, Plaintiffs fail to plead with particularity any Defendant's control over an y

other. Reliance solely on a defendant's position is not enough . Oak, 1997 WL 448168, at * 15 ;

In re Gupta Corp. Sec. Litig ., 900 F. Supp. 1217, 1243 (N.D. Cal. 1994) ("[s]tatus alone is

ordinarily insufficient to establish control person liability") . Rather, "the circumstances of that

`control relationship' [must] be pled with particularity" in accordance with the "strict pleading

requirements of Rule 9(b) and the Reform Act ." Oak, 1997 WL 448168, at * 14 . Plaintiffs must

"plead and prove[ ]" with particularity that each of these individuals "exercised `a significant

degree of day-to-day operational control, amounting to the power to dictate another party's

conduct or operations ."' In re McKesson HBOC, Inc . Sec. Litig., 126 F. Supp. 2d 1248, 1269,

1277 (N .D. Cal . 2000) (citation omitted) . The Complaint contains no such details .

The control person claim against Mr . Bender is particularly specious because Plaintiffs

1 1 allege nothing about his supposed control of LeapFrog or any other Defendant . Any contro l

INDIVIDUAL DEFENDANTS' MOTION TO DISMISS SAC _19-No . C-03-05421 (RMW)

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person claim against Mr . Wood is also particularly weak, given the (now omitted) allegation

from the prior complaint expressly conceding a lack ofcontrol by Mr . Wood during significant

portions of the Class Period . AC ¶ 236 . Mr. Wood cannot possibly be liable as a control

person for anything after February 10, 2004 . The failure to particularize any control allegations

is, therefore, a further basis for dismissing the Section 20(a) claim against all Defendants .

CONCLUSION

For the foregoing reasons, the Second Amended Complaint should be dismissed .

Despite having multiple opportunities to amend, Plaintiffs remain unable to state a claim . The

Court should therefore dismiss Plaintiffs' complaint with prejudice . Lipton, 284 F.3d at 1038-

39 (once-amended complaint dismissed with prejudice) ; Applied Signal, 2006 WL 1050174, at

*22-23 (same) ; In re Netflix Sec. Litig., No. C 04-2978 WHA, 2005 WL 3096209, at * 1 (N .D .

Cal . Nov. 18, 2005) (same) .

Dated: November 22, 2006


Respectfully submitted ,

WILSON SONSINI GOODRICH & ROSATIProfessional Corporatio n

By: /s/ Leo P . CunninghamLeo P. Cunningham

Counsel for Defendants LeapFrog Enterprises,Inc ., Timothy M . Bender, James P . Curley,Thomas J . Kalinske and Michael C . Wood

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