Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_06-cv-04592/USCOURTS-cand-5_06-cv-04592-9/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 15:77 Securities Fraud

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 This disposition is not designated for publication and may not be cited. 1

Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

**E-Filed 7/16/2007**

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

IN RE ATMEL CORPORATION DERIVATIVE

LITIGATION

Case Number C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH 1

LEAVE TO AMEND MOTIONS TO

DISMISS FOR FAILURE TO STATE

A CLAIM; (2) DEFERRING MOTION

TO DISMISS FOR FAILURE TO

MAKE DEMAND

[re: docket nos. 52, 53, 54, 58]

I. BACKGROUND

1. Procedural Background

On July 27, 2006, Plaintiff James Juengling filed a shareholder derivative complaint

against a number of the directors and officers of nominal defendant Atmel Corporation (“Atmel”

or “the Company”), which designs, develops, manufactures and sells a wide variety of integrated

circuit products, including microcontrollers, advanced logic, mixed-signal, non-volatile memory,

and radio frequency components. The complaint alleged improper backdating of stock options

Case 5:06-cv-04592-JF Document 83 Filed 07/16/07 Page 1 of 21
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 The plaintiff in Noble v. Perlegos, et al., Case No. C 06-4973 JF brought claims for: (1) 2

violation of Section 14(a) of the Exchange Act; (2) breach of fiduciary duty; (3) gross

mismanagement; (4) waste of corporate assets; and (5) unjust enrichment and breach of the duty

of loyalty.

The plaintiff in Kelley v. Perlegos, et al., Case No. C 06-4680 JF brought claims for: (1)

breach of fiduciary duty; (2) violation of Section 10(b) of the Securities Exchange Act and Rule

10b-5 promulgated thereunder; and (3) restitution/unjust enrichment.

 Those claims without notation as to specific defendants are asserted against all the 3

Individual Defendants.

2

Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

and asserted three claims: (1) breach of fiduciary duty; (2) violation of Section 10(b) of the

Securities Exchange Act and Rule 10b-5 promulgated thereunder; and (3) restitution/unjust

enrichment. On October 4, 2006, the Court consolidated the Juengling action with two other

derivative actions and appointed a leadership structure for the consolidated action (“the 2

Consolidated Plaintiffs”). 

On November 3, 2006, the instant consolidated complaint (“the Complaint”) was filed.

The Complaint names eighteen individual defendants (“the Individual Defendants”) who served

as officers or directors of Atmel. The Complaint separates those eighteen defendants into two

categories: the “Option Recipient Defendants” (Gust Perlegos, Tsung-Ching Wu (“Wu”), Kris

Chellam (“Chellam”), Jack Peckham (“Peckham”), Donald Colvin (“Colvin”), Mike Sisois

(“Sisois”), B. Jeffrey Katz (“Katz”), Francis Barton (“Barton”), Graham Turner (“Turner”),

Bernard Pruniaux (“Pruniaux”), and Steven Schumann (“Schumann”)) and the “Director

Defendants” (George Perlegos, T. Peter Thomas (“Thomas”), Chaiho Kim (“Kim”), Pierre

Fougere (“Fougere”), Norman Hall (“Hall”), David Sugishita (“Sugishita”), and Steven Laub

(“Laub”)). It asserts eleven claims: (1) violation of §10(b) and Rule 10b-5 of the Securities

Exchange Act; (2) violation of §14(a) of the Securities Exchange Act; (3) violation of §20(a) of 3

the Securities Exchange Act (against Chellam, Barton, Wu and the Director Defendants); (4)

accounting; (5) breach of fiduciary duty and/or aiding and abetting; (6) unjust enrichment

(against the Option Recipient Defendants); (7) rescission (against the Option Recipient

Defendants); (8) constructive fraud; (9) corporate waste; (10) breach of contract (against the

Case 5:06-cv-04592-JF Document 83 Filed 07/16/07 Page 2 of 21
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 CEO refers to Chief Executive Officer, VP refers to Vice President, and GM refers to 4

General Manager.

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

Option Recipient Defendants); and (11) violation of California Corporation Code § 25402

(against the Individual Defendants, with the exception of Barton, Fougere, Kim, Laub and

Sugishita). No demand has been made upon Atmel’s Board of Directors (“the Board”). The

Consolidated Plaintiffs allege that such demand would be a futile and useless act because the

Board is incapable of making an independent and disinterested decision to institute and

vigorously prosecute this action. Complaint ¶ 153. 

On January 29, 2007, three motions to dismiss were filed. Fifteen of the Individual

Defendants moved to dismiss for failure to state a claim upon which relief may be granted (“the

Barton Motion”). Defendants Gust Perlegos and George Perlegos also moved to dismiss, joining

the Barton Motion with limited exceptions. Atmel moved to dismiss for failure to make demand. 

On January 30, 2007, defendant Sisois moved to dismiss, joining the Barton Motion with limited

exceptions. The Consolidated Plaintiffs have filed an omnibus opposition to the four motions to

dismiss. The Court heard oral argument on April 27, 2007. 

2. Factual Allegations

The Complaint alleges that the Individual Defendants had the following relationships

with Atmel:

Defendant Role with Atmel

George

Perlegos

President, CEO, & director from Atmel’s inception in 1984 to August 2006. 4

Gust Perlegos Executive VP Office of the President, 2001 to August 2006.

Director, January 1985 to August 2006.

Executive VP & GM, January 1996 to 2001.

VP, GM, January 1985 to January 1996.

Wu Executive VP, Office of the President since 2001.

Director since 1985.

Executive VP & GM, January 1996 to 2001.

VP, Technology, January 1986 to January 1996.

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

Thomas Director since December 1987.

Member of the Compensation Committee & the Audit Committee since at

least 1996.

Hall Director from August 1992 until in or about 2005. Member of the

Compensation Committee from 1997 to 2004, & member of the Audit

Committee from 1997 to 2003.

Fougere Director, member of the Audit Committee, & member of the Compensation

Committee since February 2001.

Kim Director & member of the Audit Committee since September 2002. Member

of the Compensation Committee from September 2002 through 2003.

Sugishita Director, Chairman of Audit Committee, & Chairman of Corporate

Governance & Nominating Committee, February 2004 to present.

Laub Director since February 10, 2006. 

Appointed President & CEO in August 2006.

Chellam Chief Financial Officer & VP, Finance & Administration, September 1991

to July 1998.

Peckham GM, ASIC Operations, January 1992 to 1998.

VP, Sales, January 1986 to January 1992.

Director of Sales, June 1985 to January 1986.

Colvin Chief Financial Officer, & VP, Finance, March 1998 to January 2003. Chief

Financial Officer, Atmel Rousset S.A. 1995 to 1998.

Sisois VP, Planning & Information Systems, 1986 to August 2006. Director of

Information Systems, February 1985 to 1986.

Katz VP, Marketing, November 1998 to about 2005.

Barton Executive VP & Chief Financial Officer, May 2003 to July 2005.

Turner VP and GM, Microcontroller Segment since October 2001. Joined the

Company in 1989.

Pruniaux VP and GM, ASIC Segment since November 2001.

CEO of Atmel Rousset S.A., May 1995 to November 2001.

Schumann VP and GM, Non-Volatile Memory Segment since January 2002.

Joined the Company in 1985.

Complaint ¶¶ 22-76.

As summarized below, the Complaint alleges that the Option Recipient Defendants

received twenty-one backdated option grants on eleven dates.

//

Case 5:06-cv-04592-JF Document 83 Filed 07/16/07 Page 4 of 21
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 An asterisk indicates that the option grant was “At least” the number stated here. 5

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

Recipient Purported Grant Date Shares Share Price

Turner February 4, 1994 160,000* $2.29 5

Schumann February 22, 1994 192,000* $3.8516

Gust Perlegos April 11, 1997 40,000 $6.0938

Wu April 11, 1997 40,000 $6.0938

Chellam April 11, 1997 40,000 $6.0938

Peckham April 11, 1997 40,000 $6.0938

Turner October 9, 1998 100,000* $1.9844

Pruniaux October 9, 1998 200,000* $1.9844

Schumann October 9, 1998 192,000* $1.9844

Colvin February 12, 1999 20,000 $3.6719

Sisois June 11, 1999 40,000 $5.9063

Colvin July 16, 1999 40,000 $7.8281

Katz July 16, 1999 10,000 $7.8281

Turner July 16, 1999 40,000* $7.8281

Colvin November 17, 2000 40,000 $12.125

Colvin September 17, 2001 100,000 $7.12

Gust Perlegos November 14, 2002 50,000 $2.11

Wu November 14, 2002 100,000 $2.11

Colvin November 14, 2002 50,000 $2.11

Sisois November 14, 2002 40,000 $2.11

Barton April 30, 2003 500,000 $1.81

Complaint ¶¶ 24-62, 103. 

The Complaint alleges the following: The Company’s stock option plans require that the

exercise price of an option be no less than the fair market value on the date of the grant. 

Complaint ¶ 91. However, in “a striking pattern that could not have been the result of chance,”

all the grants listed above purportedly were granted at some of the lowest prices of the year in

which they fell. Complaint ¶ 109. The purported grant dates were not the actual grant dates. 

Case 5:06-cv-04592-JF Document 83 Filed 07/16/07 Page 5 of 21
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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

Complaint ¶ 110. “Rather, at the behest of the Option Recipient Defendants, the Director

Defendants improperly backdated the stock option grants to make it appear as though the grants

were made on dates when the market price of Atmel stock was lower than the market price on the

actual grant dates.” Id. “From 1994 to 2003, the Compensation Committee granted . . .

backdated Atmel stock options to the Option Recipient Defendants . . . .” Complaint ¶ 103. 

After the Sarabanes-Oxley Act became effective, the Compensation Committee granted

backdated options to Gust Perlegos, Wu, Colvin, Sisois, and Barton. Complaint ¶¶ 114-15. 

“From 1998 to 2003, the Company, with the knowledge, approval and participation of each of

the Individual Defendants, for the purpose and with the effect of concealing the improper option

backdating, disseminated to shareholders and filed with the SEC annual proxy statements that

falsely reported the dates of stock option grants to the Option Recipient Defendants . . . .” 

Complaint ¶ 126. 

The Complaint alleges the following with respect to Atmel’s announced discovery of

backdating: On July 25, 2006, Atmel issued a press release announcing that the Audit

Committee was reviewing the Company’s practices relating to its stock options grants with the

assistance of independent legal counsel and independent accountants. Complaint ¶ 96. The

Company failed to file a timely Form 10-Q for the quarter ending June 30, 2006. Complaint ¶

97. On August 15, 2006, the Company announced that it had received a request for information

from the SEC relating to its past stock option grants. Id. On August 17, 2006, Atmel issued a

press release announcing that its investigation was ongoing and that it was still unable to provide

financial information for the quarter ending June 30, 2006. Complaint ¶ 98. On October 30,

2006, the Company issued a press release reporting the Audit Committee’s preliminary

conclusion that “the actual measurement dates for certain stock options differed from the

recorded measurement dates for such stock options.” Complaint ¶ 99. The release stated that the

Company’s prior financial statements could not be relied upon. Id. As of the filing of the

Complaint, the Company had yet to issue its Form 10-Q for the quarter ending June 30, 2006,

and faced possible delisting by NASDAQ. Complaint ¶ 101. 

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

The Complaint also alleges the following: On August 6, 2006, Laub, Fougere, Thomas,

Kim, and Sugishita elected Sugishita as Chairman and canceled the stockholders’ meeting

George Perlegos had called for the day before, which had sought their removal. Complaint ¶ 92. 

The Board then fired George and Gust Perlegos, as well as two other executives, citing misuse of

corporate travel funds. Id. On August 25, 2006, George Perlegos submitted a letter of

resignation to the Board. Complaint ¶ 95. On August 28, 2006, the Company announced that it

had received a notice from NASDAQ that it was not in compliance with the director

independence listing requirement, but that it had come back into compliance with the

requirement after the resignation of George Perlegos. Id. 

II. LEGAL STANDARD

1. Motion to Dismiss

For purposes of a motion to dismiss, the plaintiff’s allegations are taken as true, and the

Court must construe the complaint in the light most favorable to the plaintiff. Jenkins v.

McKeithen, 395 U.S. 411, 421 (1969). Leave to amend must be granted unless it is clear that the

complaint’s deficiencies cannot be cured by amendment. Lucas v. Department of Corrections,

66 F.3d 245, 248 (9th Cir. 1995). When amendment would be futile, however, dismissal may be

ordered with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996). On a motion to

dismiss, the Court’s review is limited to the face of the complaint and matters judicially

noticeable. North Star International v. Arizona Corporation Commission, 720 F.2d 578, 581

(9th Cir. 1983); MGIC Indemnity Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986); Beliveau

v. Caras, 873 F.Supp. 1393, 1395 (C.D. Cal. 1995). However, under the “incorporation by

reference” doctrine, the Court also may consider documents that are referenced extensively in the

complaint and are accepted by all parties as authentic, even though the documents are not

physically attached to the complaint. In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d

970 (9th Cir. 1999).

2. Demand Requirement

A derivative complaint must “allege with particularity the efforts, if any, made by the

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 The parties agree that Delaware law applies to the instant action because Ditech is 6

incorporated in Delaware.

8

Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and,

if necessary, from the shareholders or members, and the reasons for the plaintiff's failure to

obtain the action or for not making the effort.” Fed. R. Civ. P. 23.1. The existence and

satisfaction of a demand requirement is a substantive issue governed by state law. See Kamen v.

Kemper Financial Services, Inc., 500 U.S. 90, 96-97 (1991). When the challenged decision is 6

that of the board in place at the time of the filing of the complaint, failure to make demand may

be excused if a plaintiff can raise a reason to doubt that a majority of the board is disinterested or

independent or that the challenged acts were the product of the board’s valid exercise of business

judgment. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984); see also Ryan v. Gifford, 918 A.2d

341, 352 (Del. Ch. 2007) (discussing Aronson). However, “[w]here there is no conscious

decision by the corporate board of directors to act or refrain from acting, the business judgment

rule has no application.” Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993); see also Ryan, 918

A.2d at 352 (discussing Rales). In such a situation, demand may be excused only if a plaintiff

“can create a reasonable doubt that, as of the time the complaint is filed, the board of directors

could have properly exercised its independent and disinterested business judgment in responding

to a demand.” Id. at 353 (citing Rales, 634 A.3d 933-34). 

III. DISCUSSION

1. The Barton Motion to Dismiss for Failure to State a Claim

a. Claim One: Violation of Section 10(b) and Rule 10b-5

i. Sufficiency of the Allegations

The Consolidated Plaintiffs allege securities fraud in violation of Section 10(b) of the

Securities Exchange Act and Rule 10b-5 promulgated thereunder. Section 10(b) makes it

unlawful 

[t]o use or employ, in connection with the purchase or sale of any security

registered on a national securities exchange or any security not so registered . . . 

any manipulative or deceptive device or contrivance in contravention of such rules

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

and regulations as the Commission may prescribe as necessary or appropriate in

the public interest or for the protection of investors.

15 U.S.C. § 78j(b). Rule 10b-5 makes it unlawful for any person to use interstate commerce 

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material

fact necessary in order to make the statements made, in the light of the

circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would

operate as a fraud or deceit upon any person, in connection with the purchase or

sale of any security.

17 C.F.R. § 240.10b-5. In cases involving publicly-traded securities and purchases or sales in

public securities markets, the elements of an action under Section 10(b) and Rule 10b-5 are: (1)

a material misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale

of a security, (4) reliance, (5) economic loss, and (6) loss causation. Dura Pharmaceuticals, Inc.

v. Broudo, 544 U.S. 336, 341-42 (2005).

The Consolidated Plaintiffs must meet two heightened pleading standards. Fed. R. Civ.

P. 9(b) requires that “the circumstances constituting fraud . . . be stated with particularity.” The

Ninth Circuit has explained that a “plaintiff must include statements regarding the time, place,

and nature of the alleged fraudulent activities, and that mere conclusory allegations of fraud are

insufficient.” In re GlenFed, Inc. Securities Litigation, 42 F.3d 1541, 1548 (9th Cir. 1994). A

plaintiff asserting fraud “must set forth an explanation as to why the statement or omission

complained of was false or misleading.” Id. (internal quotation marks omitted); see also Yourish

v. California Amplifier, 191 F.3d 983, 992-93 (9th Cir. 1999). The Private Securities Litigation

Reform Act (“PSLRA”) raises the pleading standard further:

(1) Misleading statements and omissions

In any private action arising under this chapter in which the plaintiff alleges that

the defendant– 

(A) made an untrue statement of a material fact; or

(B) omitted to state a material fact necessary in order to make the statements

made, in the light of the circumstances in which they were made, not misleading;

the complaint shall specify each statement alleged to have been misleading, the

reason or reasons why the statement is misleading, and, if an allegation regarding

the statement or omission is made on information and belief, the complaint shall

state with particularity all facts on which that belief is formed.

(2) Required state of mind

In any private action arising under this chapter in which the plaintiff may recover

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

money damages only on proof that the defendant acted with a particular state of

mind, the complaint shall, with respect to each act or omission alleged to violate

this chapter, 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-4b(1)-(2).

The Consolidated Plaintiffs allege the following with respect to the Section 10(B) claim:

159. Throughout the relevant period, the Individual Defendants individually and

in concert, directly and indirectly, by the use and means of instrumentalities of

interstate commerce and/or of the mails, intentionally or recklessly employed

devices, schemes and artifices to defraud and engaged in acts, practices and a

course of business which operated as a fraud and deceit upon the Company.

160. The Individual Defendants, as top executive officers and/or directors of the

Company, are liable as direct participants in the wrongs complained of herein. 

Through their positions of control and authority as officers and/or directors in the

Company, each of the Individual Defendants was able to and did control the

conduct complained of herein.

161. The Individual Defendants acted with scienter in that they either had actual

knowledge of the fraud set forth herein, or acted with reckless disregard for the

truth in that they failed to ascertain and to disclose the true facts, even though

such facts were available to them. The Individual Defendants were among the

senior management and/or directors of the Company and were therefore directly

responsible for the fraud alleged herein.

162. The Company relied upon the Individual Defendants’ fraud in granting the

Option Recipient Defendants options to purchase shares of the Company’s

common stock, as alleged herein.

163. As a direct and proximate result of the Individual Defendants’ fraud, the

Company has sustained millions of dollars in damages, including, but not limited

to, the additional compensation expenses and tax liabilities the Company will be

required to incur, the costs associated with the Company’s internal investigation,

the loss of funds paid to the Company upon the exercise of stock options, costs

and expenses incurred in connection with the Company’s restatement of historical

financial results, and costs and expenses incurred in connection with the SEC

investigation of the Company.

Complaint ¶¶ 159-163. 

These allegations do not satisfy the specificity requirement of Rule 9(b) or of the PSLRA. 

They neither identify what roles each defendant played in the alleged back-dating scheme nor

allege facts giving rise to a strong inference of scienter on the part of each defendant. In light of

the public statement by Atmel, it appears almost certain that some of the options at issue here

were backdated. However, that apparent fact does not permit the Consolidated Plaintiffs to name

any number of individual defendants without providing adequate detail regarding their role and

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 Nor are the Consolidated Plaintiffs relieved of the requirement that they allege facts 7

raising an inference that a particular option grant was backdated. While the Court need not

decide the sufficiency of such allegations in the instant complaint, it notes that other courts

within this district have considered the presence or absence of a pattern of backdating, primarily

in the context of the demand futility requirement. See e.g. In re Zoran Corp. Deriv. Litig., 2007

WL 1650948 (N.D.Cal. June 5, 2007); In re Openwave Systems Inc. Deriv. Litig., 2007 WL

1456039 (N.D.Cal., May 17, 2007); In re CNET Networks, Inc. Deriv. Litig., 483 F.Supp.2d 947

(N.D.Cal. 2007); In re Linear Tech. Corp. Deriv. Litig., 2006 WL 3533024 (N.D.Cal. Dec. 7,

2006). This Court also has provided a non-exclusive list of facts that, if alleged, would

strengthen allegations that a grant was backdated. See Order Re Motions to Dismiss 11-12, In re

Ditech Derivative Litigation, Case No. C 06-5157 JF (listing the following factors: “the degree to

which the options were granted at the discretion of the compensation committee or the board,

versus at fixed, preestablished times; the actual grant dates of the options and the appropriate

price of the options; the date that the options were exercised; whether required performance goals

were met before the options were granted; the presence or absence of other major corporate

events, such as an acquisition, at the time of the grants; and the results of any requests by

Plaintiff for information.”).

 “A statute of repose is a fixed, statutory cutoff date, usually independent of any 8

variable, such as claimant’s awareness of a violation.” Munoz v. Ashcroft, 339 F.3d 950, 957

11

Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

knowledge of the alleged backdating. This is not a case in which requiring further detailed 7

allegations of the roles played by individual defendants would lead to an unreasonably

cumbersome complaint. See In re Washington Public Power Supply System Securities

Litigation, 623 F.Supp. 1466, 1472 (W.D.Wash. 1985). Accordingly, this claim will be

dismissed with leave to amend to the extent that it is not time-barred. 

ii. Statute of Limitations

[A] private right of action that involves a claim of fraud, deceit, manipulation, or

contrivance in contravention of a regulatory requirement concerning the securities

laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15

U.S.C. § 78c(a)(47)), may be brought not later than the earlier of – 

(1) 2 years after the discovery of the facts constituting the

violation; or

(2) 5 years after such violation.

28 U.S.C. § 1658(b); see e.g. In re Heritage Bond Litig., 289 F.Supp.2d 1132, 1147-48 (C.D.Cal.

2003). This statute of limitations is not subject to equitable tolling. Durning v. Citibank, Int’l,

990 F.2d 1133, 1136-37 (9th Cir. 1993). 

The parties agree that the five-year period of repose applies to the first claim for 8

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(9th Cir. 2003) (citing Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350,

363 (1991)). 

 The Court is skeptical of a continuing wrong theory that would create liability under 9

Section 10(b) upon the issuance of a financial statement that merely fails to correct a prior false

statement. Such a theory appears to approximate the effects of the fraudulent concealment

doctrine in relation to equitable tolling, a doctrine that does not apply in the Section 10(b)

context. 

12

Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

violations of Section 10(b) and Rule 10b-5 of the Securities and Exchange Act. The

Consolidated Plaintiffs argue that their claims fall within the five-year period of repose. While

only a limited number of the alleged stock grant dates fall within this period, the Consolidated

Plaintiffs do allege a series of false financial statements within the five-year period and argue that

the period of repose begins no earlier than the latest such financial statement, which was filed on

March 15, 2003. This argument raises the question as to whether such subsequent false financial

statements preserve claims for options manipulation that occurred outside the five-year period of

repose. The Court concludes that in light of the statute’s focus on the “violation,” the Court must

consider the statute of limitations in terms of the specific violations alleged. To the extent that

the claim is based upon the backdating itself, the period of repose starts on the date that the

option grant was made. See Durning, 990 F.2d at 1136 (noting that the federal rule is that a

cause of action accrues at the completion of the sale of the instrument); Falkowski v. Imation

Corp., 309 F.3d 1123, 1130 (9th Cir. 2002) (describing the grant of an option as “a purchase or

sale” under the Securities Litigation Uniform Standards Act). The Consolidated Plaintiffs may

be able to state a claim under Section 10(b) and Rule 10(b)(5) for dissemination of fraudulent

financial statements, but such statements must fall within the five-year period of repose. The 9

Consolidated Plaintiffs may not avoid the effect of the statute of limitations by combining

allegations of recent financial statements and time-barred option back-dating. Because the first

claim, as currently pled, depends upon such a combination, it will be dismissed. The Court will

grant leave to amend so that the Consolidated Plaintiffs may allege independent wrongful acts

that occurred on or after July 27, 2001. 

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

b. Claim Two: Violation of Section 14(a)

Rule 14a-9 provides:

No solicitation subject to this regulation shall be made by means of any proxy

statement, form of proxy, notice of meeting or other communication, written or

oral, containing any statement which, at the time and in the light of the

circumstances under which it is made, is false or misleading with respect to any

material fact, or which omits to state any material fact necessary in order to make

the statements therein not false or misleading or necessary to correct any

statement in any earlier communication with respect to the solicitation of a proxy

for the same meeting or subject matter which has become false or misleading.

17 C.F.R. § 240.14a-9(a). To state a claim under Rule 14a-9 and Section 14(a), a plaintiff must

allege a false or misleading statement or omission of material fact; that the misstatement or

omission was made with the requisite level of culpability; and that it was an essential link in the

accomplishment of the transaction. Desaigoudar v. Meyercord, 223 F.3d 1020, 1022 (9th Cir.

2000). 

The Individual Defendants argue that the Section 14(a) claim is time-barred because it

must be filed within one year after discovery of the facts constituting the violation, and in no

event more than three years following publication of the proxy statement. Barton Motion 23. 

The Consolidated Plaintiffs argue that Section 14(a) claims fall within the two-year/five-year

scheme that applies to a Section 10(b) claim. See Opposition 18. The Court concludes that the

one-year/three-year scheme applies to the Section 14(a) claim because such a claim does not

sound in fraud. See In re Exxon Mobil Corp. Sec. Litig., 387 F.Supp.2d 407, 424 (D.N.J. 2005);

In re Global Crossing, Ltd. Sec. Litig., 313 F.Supp.2d 189, 196-97 (S.D.N.Y. 2003); In re Zoran

Corp. Derivative Litig., 2007 WL 1650948 * 24. As currently pled, the Section 14(a) claim

alleges false statements made more than three years prior to the filing of this action. 

Accordingly, the claim will be dismissed with leave to amend. Any amended claim must allege

wrongful acts that occurred on or after July 27, 2003 and not later than one year after discovery

of the violation.

In light of the foregoing discussion, the Court need not reach the challenges to the

sufficiency of the allegations. However, assuming without deciding that the PSLRA also applies

to Section 14(a) claims, see e.g. In re Textainer Partnership Securities Litig., 2005 WL 3801596

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 This Court has held in another action that the PSLRA has foreclosed the application of 10

the “group published pleading” doctrine, which provides that when false or misleading

information is conveyed in group published statements, it is reasonable to presume that the

statements are the result of the collective actions of the company’s officers. In re Nextcard, Inc.

Sec. Litig., 2006 WL 708663 *2-3 (N.D.Cal. March 20, 2006). This holding likely will be

relevant to the sufficiency of an amended claim under Section 14(a).

 The parties agree that the statute of limitations analysis for claim three is the same as

11

for claim one. See also In re Heritage Bond Litigation, 289 F.Supp.2d at 1148. Accordingly,

amendment of claim three should comply with the limitations articulated in the Court’s analysis

of claim one.

14

Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

(N.D.Cal. March 8, 2005), In re McKesson HBOC, Inc. Sec. Litig., 126 F.Supp.2d 1248, 1267

(N.D.Cal. 2000)., greater specificity likely would strengthen this claim considerably. 

10

c. Claim Three: Violation of Section 20(a)

Section 20(a) provides:

Every person who, directly or indirectly, controls any person liable under any

provision of this chapter or of any rule or regulation thereunder shall also be liable

jointly and severally with and to the same extent as such controlled person to any

person to whom such controlled person is liable, unless the controlling person

acted in good faith and did not directly or indirectly induce the act or acts

constituting the violation or cause of action.

15 U.S.C. § 78t(a). “To establish ‘controlling person’ liability, the plaintiff must show that a

primary violation was committed and that the defendant ‘directly or indirectly’ controlled the

violator.” Paracor Finance, Inc. v. General Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir.

1996). As discussed above, the Consolidated Plaintiffs have failed to state a claim for a primary

violation of the securities laws. However, it is possible that they may be able to do so in an

amended pleading. Accordingly, the Section 20(A) claim will be dismissed with leave to

amend.11

d. Claims Four to Eleven: The State Law Claims

i. Claims Under Delaware Law (Claims Four to Eleven)

(1) Statute of Limitations

The parties agree that a three-year statute of limitations applies to each claim under

Delaware law. See 10 Del. C. § 8106 (2006). The Consolidated Plaintiffs contend that the

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

statute was tolled in the instant case “based upon the doctrines of inherently unknowable injuries

and fraudulent concealment.” Opposition 20. “Fraudulent concealment requires an affirmative

act of concealment by a defendant-an actual artifice that prevents a plaintiff from gaining

knowledge of the facts or some misrepresentation that is intended to put a plaintiff off the trail of

inquiry.” Ryan, 2007 WL 1018208 *13 (quotation marks omitted). “Inaccurate public

representations as to whether directors are in compliance with shareholder-approved stock option

plans constitute fraudulent concealment of wrongdoing sufficient to toll the statute of

limitations.” Id. Because the Consolidated Plaintiffs allege such inaccurate public

representations, see Complaint ¶ 126, the three-year statute of limitations is tolled as to the

Delaware state law claims. 

(2) Claim Five: Breach of Fiduciary Duty

The Consolidated Plaintiffs allege the following:

179. As alleged in detail herein, each of the Individual Defendants had a fiduciary

duty to, among other things, refrain from unduly benefiting themselves and other

Company insiders at the expense of the Company.

180. As alleged in detail herein, the Individual Defendants breached their

fiduciary duties by, among other things, engaging in a scheme to grant backdated

stock options to themselves and/or certain other officers and directors of the

Company and cover up their misconduct.

181. In breach of their fiduciary duties of loyalty and good faith, the Individual

Defendants agreed to and did participate with and/or aided and abetted one

another in a deliberate course of action designed to divert corporate assets to

themselves and/or other Company insiders.

182. The Individual Defendants’ foregoing misconduct was not, and could not

have been, an exercise of good faith business judgment. Rather, it was intended

to and did, unduly benefit the Option Recipient Defendants at the expense of the

Company.

Complaint ¶¶179-82. 

The Individual Defendants argue that their actions are protected by the business judgment

rule. However, where a defendant acts in bad faith and commits a breach of loyalty, the business

judgment rule does not apply. See Ryan, 2007 WL 1018208 *11. The Individual Defendants

also argue that the fiduciary duty claim is not stated with sufficient particularity. This argument

is well taken, as the Complaint does not put the Individual Defendants, and particularly the nonofficer defendants, on notice as to how they are alleged to have violated their fiduciary duties. 

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

See York Linings v. Roach, 1999 WL 608850 *2 (Del. Ch. July 28, 1999) (unpublished). The

Consolidated Plaintiffs refer to detailed allegations elsewhere in the Complaint, but, as discussed

above, necessary detail is largely absent. Accordingly, this claim will be dismissed with leave to

amend.

(3) Claim Six: Unjust Enrichment

The Individual Defendants move to dismiss the unjust enrichment claim on a number of

bases. The Consolidated Plaintiffs respond by citing to Ryan, 2007 WL 1018208 *14, in which

the Delaware Chancery indicated that an unjust enrichment claim may be viable in the context of

options backdating. The Court need not resolve the legal challenges to this claim, as amendment

of the complaint is required on other bases. The Court notes that more detailed allegations of

options backdating will strengthen any claim that the recipients of such options were unjustly

enriched.

(4) Claims Four and Seven: Remedies Pled as Claims

The Individual Defendants move to dismiss the claims for accounting and rescission on

the basis that accounting and rescission are remedies, not separate claims for relief. The

Consolidated Plaintiffs effectively concede as much, but argue that it is inconsequential whether

accounting and rescission are pled as remedies or claims for relief. Opposition 48. The Court

concludes that the Consolidated Plaintiffs should include accounting and rescission as remedies

sought in any amended complaint. 

(5) Claims Eight and Nine: Constructive Fraud and Corporate Waste

The Individual Defendants argue that constructive fraud and corporate waste are merely

types of breaches of fiduciary duty, not separate torts. Barton Motion 17 n.10. The Consolidated

Plaintiffs do not respond to this specific argument, which is well taken as to the constructive

fraud claim. The Court will dismiss that claim, which should be restated in any amended

complaint as a “straightforward fiduciary duty claim[].” See Parfi Holding AB v. Mirror Image

Internet, Inc., 794 A.2d 1211, 1236 (Del. Ch. 2001) (“[Plaintiff] should amend the complaint to

transform its derivative constructive fraud counts into straightforward breach of fiduciary duty

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

counts.”). 

The corporate waste claim also will be dismissed. “To support a claim [for corporate

waste], a shareholder must demonstrate that the transaction in question either served no purpose

or was so completely bereft of consideration that the transfer is in effect a gift.” Lewis v.

Vogelstein, Del. Ch., 699 A.2d 327, 336 (1997). A plaintiff must allege facts that, if true,

establish that the defendant directors “authorize[d] an exchange that is so one sided that no

business person of ordinary, sound judgment could conclude that the corporation has received

adequate consideration.” Glazer v. Zapata Corp., Del. Ch., 658 A.2d 176, 183 (1993). The

Consolidated Plaintiffs have not alleged such facts here; instead, they have alleged a grant of

equity-compensation. As the Individual Defendants assert, these grants may well have been in

consideration for the recipients remaining in Atmel’s employ. Accordingly, the claim will be

dismissed with leave to amend.

(6) Claim Ten: Breach of Contract

The Individual Defendants move to dismiss the breach of contract claim on the grounds

that it is not pled with sufficient particularity, that no employment agreements existed between

Atmel and the “option recipient defendants,” that the Consolidated Plaintiffs have not alleged

any act of breach, and that the directors ratified any breach. The Consolidated Plaintiffs respond

briefly that “[t]he terms of the Atmel stock option plans were blatantly violated when the

Director Defendants approved backdated stock option grants.” Opposition 47. However, the

Consolidated Plaintiffs have not alleged which, if any, of the defendants entered into a binding

contract that incorporates the terms of an option plan. Accordingly, this claim will be dismissed

with leave to amend. 

ii. Claim Eleven: Insider Trading Under California Law

(1) Statute of Limitations

A Section 25402 claim must be brought “before the expiration of five years after the act

or transaction constituting the violation or the expiration of two years after the discovery by the

plaintiff of the facts constituting the violation, whichever shall first expire.” Cal. Corp. Code §

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

25506(b). While the Consolidated Plaintiffs argue that this period should be equitably tolled, the

Court concludes that the five-year period since the violation is a strict limit that may not be

tolled. See SEC v. Seaboard Corp., 677 F.2d 1301, 1308 (9th Cir. 1982) (concluding that the

four-year bar under an earlier version of the statute was a strict limit). The insider trading

allegations refer to sales as early as 1997. Accordingly, portions of the claim are barred as

currently pled. Any amended claim should allege violations that occurred on or after July 27,

2001 and discovery of which occurred on or after July 27, 2004.

(2) Sufficiency of the Allegations

Cal. Corp. Code § 25402 provides that

[i]t is unlawful for an issuer or any person who is an officer, director or

controlling person of an issuer or any other person whose relationship to the issuer

gives him access, directly or indirectly, to material information about the issuer

not generally available to the public, to purchase or sell any security of the issuer

in this state at a time when he knows material information about the issuer gained

from such relationship which would significantly affect the market price of that

security and which is not generally available to the public, and which he knows is

not intended to be so available, unless he has reason to believe that the person

selling to or buying from him is also in possession of the information.

A claim under Section 25402 must be pled with particularity under Rule 9(b). In re RasterOps

Corp. Sec. Litig., 1993 WL 476651 *5 (N.D.Cal. Sep. 10, 1993). 

The Consolidated Plaintiffs allege the following:

202. At the time that the Insider Selling Defendants sold their Atmel common

stock as set forth herein at ¶¶ 135-49, by reason of their high executive and/or

directorial positions with Atmel, the Insider Selling Defendants had access to

highly material information regarding the Company, including the information set

forth herein regarding the true adverse facts of Atmel’s option backdating,

improper accounting, and false financial statements.

203. At the time of such sales, that information was not generally available to the

public of the securities markets. Had such information been generally available, it

would have significantly reduced the market price of Atmel shares at the time.

204. The Insider Selling Defendants had actual knowledge of material, adverse

non-public information and thus sold their Atmel common stock in California in

violation of California Corporations Code §25402.

Complaint ¶¶ 202-04. The Court concludes that like the other claims, the insider trading claim

is not pled with sufficient particularity and should be dismissed with leave to amend. An

amended claim should allege facts specific to each of the Individual Defendants.

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 The parties agree that Delaware law governs the instant dispute. Because California 12

courts follow Delaware law in demand futility cases, this is true even if California law applies

due to Atmel’s asserted prior incorporation in California. See Oakland Raiders v. National

Football League, 93 Cal.App.4th 572, 586 n.5 (2001) (“The parties agree that we may properly

rely on corporate law developed in the State of Delaware given that it is identical to California

corporate law for all practical purposes.”).

19

Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

e. Motions to Dismiss Joining in the Barton Motion

The Court has reviewed the two additional motions to dismiss that join in the Barton

Motion. The Court concludes that the dismissal of the claims on the basis of the arguments made

in the Barton Motion renders it unnecessary to address the separate arguments asserted in the

Sisois and Perlegos motions. 

2. The Atmel Motion to Dismiss for Failure to Make Demand

The Delaware Court of Chancery recently explained: 12

 

[I]n an effort to balance the interest of preventing strike suits motivated by the

hope of creating settlement leverage through the prospect of expensive and

time-consuming litigation discovery [with the interest of encouraging] suits

reflecting a reasonable apprehension of actionable director malfeasance that the

sitting board cannot be expected to objectively pursue on the corporation’s behalf,

Delaware law recognizes two instances where a plaintiff is excused from making

demand. Failure to make demand may be excused if a plaintiff can raise a reason

to doubt that: (1) a majority of the board is disinterested or independent or (2) the

challenged acts were the product of the board’s valid exercise of business

judgment.

The analysis differs, however, where the challenged decision is not a decision of

the board in place at the time the complaint is filed. In Rales v. Blasband[, 634

A.2d 927 (Del. 1993)], the Supreme Court of Delaware held that [w]here there is

no conscious decision by the corporate board of directors to act or refrain from

acting, the business judgment rule has no application. Stated differently, the

absence of board action . . . makes it impossible to perform the essential inquiry

contemplated by Aronson [v. Lewis, 473 A.2d 805, 812 (Del. 1984)]. 

Accordingly, where the challenged transaction was not a decision of the board

upon which plaintiff must seek demand, plaintiff must create a reasonable doubt

that, as of the time the complaint is filed, the board of directors could have

properly exercised its independent and disinterested business judgment in

responding to a demand.

. . . .

Where at least one half or more of the board in place at the time the complaint

was filed approved the underlying challenged transactions, which approval may be

imputed to the entire board for purposes of proving demand futility, the Aronson

test applies.

Ryan v. Gifford, 918 A.2d 341, 352-53(Del. Ch. 2007) (citations and quotation marks omitted). 

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 George & Gust Perlegos, Wu, Fougere, Thomas, Kim, Laub, and Sugishita. 13

 The original eight-person Board, less George and Gust Perlegos.

14

20

Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

The parties dispute whether the Court should consider the eight-member Board that was

in place at the time that the initial complaint was filed or the six-member Board that was in 13

place at the time that the Complaint was filed. 

14

[W]hen an amended derivative complaint is filed, the existence of a new

independent board of directors is relevant to a Rule 23.1 demand inquiry only as

to derivative claims in the amended complaint that are not already validly in

litigation. Three circumstances must exist to excuse a plaintiff from making

demand under Rule 23.1 when a complaint is amended after a new board of

directors is in place: first, the original complaint was well pleaded as a derivative

action; second, the original complaint satisfied the legal test for demand excusal;

and third, the act or transaction complained of in the amendment is essentially the

same as the act or transaction challenged in the original complaint. 

Braddock v. Zimmerman, 906 A.2d 776, 786 (Del. 2006); see also Harris v. Carter, 582 A.2d

222, 228 (Del. Ch. 1990) (“Demand futility is assessed as of the time that the original complaint

was filed, not as of the filing of an amended complaint containing further factual allegations in

support of the same claims.”). However, Delaware courts have not explained whether the three

circumstances for excuse of a new demand requirement apply to a consolidated complaint. 

In light of the dismissal for failure to state a claim, the Court concludes that it is

premature to resolve this question, or the subsequent questions as to whether Aronson or Rales

applies, and what result the appropriate test dictates. Accordingly, the motion to dismiss for

failure to make demand will be deferred.

 IV. ORDER

Good cause therefor appearing, IT IS HEREBY ORDERED that the motions to dismiss

for failure to state a claim are GRANTED with leave to amend and that the motion to dismiss for

failure to make demand is DEFERRED.

DATED: July 16, 2007.

 

JEREMY FOGEL

United States District Judge

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Case No. C 06-4592 JF (HRL)

ORDER (1) GRANTING WITH LEAVE TO AMEND MOTIONS TO DISMISS FOR FAILURE TO STATE A

CLAIM; (2) DEFERRING MOTION TO DISMISS FOR FAILURE TO MAKE DEMAND

(JFLC1)

This Order has been served upon the following persons:

Todd L. Burlingame burlingame@mofo.com, rsexton@mofo.com 

John L. Cooper jcooper@fbm.com, brestivo@fbm.com; calendar@fbm.com 

Lawrence Timothy Fisher ltfisher@bramsonplutzik.com, moldenberg@bramsonplutzik.com 

Tara Puhua Kao tkao@sbtklaw.com, der_filings@sbtklaw.com 

Brian Lawrence Levine BLevine@mofo.com, sdevol@mofo.com 

Marisa C. Livesay livesay@whafh.com 

Betsy C. Manifold manifold@whafh.com 

Jessica Koren Nall jnall@fbm.com, bheuss@fbm.com; calendar@fbm.com 

James Lawrence Pagano paganolaw@aol.com 

Alan R Plutzik aplutzik@bramsonplutzik.com 

Darryl P. Rains drains@mofo.com, dgillis@mofo.com 

Rachele R. Rickert rickert@whafh.com 

Kathryn A. Schofield kschofield@bramsonplutzik.com,

moldenberg@bramsonplutzik.com 

Emanuel Shachmurove mshachmurove@sbtklaw.com 

Eric L. Zagar ezagar@sbclasslaw.com, rwinchester@sbtklaw.com;

der_filings@sbtklaw.com; kpopovich@sbtklaw.com 

Case 5:06-cv-04592-JF Document 83 Filed 07/16/07 Page 21 of 21