DOUGLAS J. CLARK, State Bar No. 171499 CAMERON P....

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DOUGLAS J. CLARK, State Bar No. 171499CYNTHIA A. DY, State Bar No . 172761CAMERON P. HOFFMAN, State Bar No . 229316WILSON SONSINI GOODRICH & ROSATIProfessional Corporation650 Page Mill RoadPalo Alto, CA 94304-1050Telephone : (650) 493-9300Facsimile : (650) 565-510 0

JENNY L. DIXON, State Bar No. 192638CLAUDIA N. MAIN, State Bar No . 212200WILSON SONSINI GOODRICH & ROSATIProfessional Corporatio nOne Market Street, Spear Tower, Suite 3300San Francisco, CA 94105Telephone : (415) 947-2000Facsimile : (415) 947-209 9

Attorneys for Defendant sOMNIVISION TECHNOLOGIES, INC .,SHAW HONG, RAYMOND WU ,H. GENE McCOWN and JOHN T . ROSSI

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNI A

In re OMNIVISION TECHNOLOGIES, INC .

This Document Relates To :

04-2297-SC (Vince) ;04-2298-SC (Campagnuola) ;04-2385-SC (Greenfield) ;04-2410-SC (Paul Lee Associates LLC) ;04-2419-SC (McMillan) ;04-2425-SC (Cheung) ;04-2433-SC (Gamero) ;04-2474-SC (Van Waay) ;04-2514-SC (Glantz) ;04-2525-SC (Starr) ;04-2570-SC (Jewell) ; and04-4350-SC (Schroeder) .

MASTER FILE NO . : C-04-2297 SC

DEFENDANTS' REPLYMEMORANDUM IN SUPPORT OFMOTION TO DISMISS THESECOND CONSOLIDATEDAMENDED COMPLAINT

Date: July 8, 2005Time: 10:00 a.m.Place: Courtroom 1, 17th Floor

Before: The Hon. Samuel Cont i

DEFS.' REPLY ISO MTN TO DISMISSCASE No . C-04-2297 SC

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TABLE OF CONTENTS

Page

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

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

I. PLAINTIFFS DO NOT SATISFY THE REFORM ACT'S STRICT PLEADIN GREQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

A. Plaintiffs ' Reliance on OmniVision' s Disclosures and Speculation i sInsufficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

B. Plaintiffs Fail to Plead with Particularity Any False or MisleadingStatements Outside Of OmniVision' s Financial Restatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1 . Financial results for fiscal 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2 . Statements of OmniVision 's revenue recognition policy . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3 . Statements concerning opinions of the CEO and CFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

4. Statements regarding the SEC's informal inquiry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

II. PLAINTIFFS FAIL TO ALLEGE A "STRONG INFERENCE" OF SCIENTER . . . . . . . . . . . . 5

A. Plaintiffs' Theory Of Scienter Is Anchored In Fraud by Hindsight . . . . . . . . . . . . . . . . . . . . . . . . 5

B . Plaintiffs Have Not Sufficiently Alleged Knowledge of Falsity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1 . Internal controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2. OmniVision 's explanation of the restatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3. Management changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1

4. Plaintiffs' remaining theo ries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2

C. The Alleged Stock Sales Undermine an Inference Of Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2

D. The Secondary Offering Does Not Support a Strong Inference of Scienter . . . . . . . . . 1 3

III . DEFENDANTS ARE NOT LIABLE FOR STATEMENTS THEY DID NO TMAKE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4

IV. THE ECONOMIC LOSSES WERE NOT CAUSED BY THE RESTATEMENT . . . . . . . . . . 1 5

CONCLUSION . . . : . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I j


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TABLE OF AUTHORITIES

CASES

Albert Fadem Trust v. American Elec . Power Co., 334 F. Supp. 2d 985(S.D . Ohio 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aldridge v. A . T. Cross Corp ., 284 F.3d 72 (1st Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cats v. Protection One, Inc ., Nos. CV99-3755DT, CV99-3798DT, CV99-4147DT ,CV99-5534DT, 2001 WL 34070630 (C .D. Cal . June 4, 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cats v . Protection One, Inc ., Nos. CV99-3755DT, CV99-3798DT, CV99-4147DT,CV99-5534DT, 2001 WL 34070755 (C .D. Cal . June 4, 2001), rev'd, 49

Pa e s

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Fed. Appx . 169 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

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

DSAM Global Value Fund v. Altris Software, Inc ., 288 F.3d 385 (9th Cir. 2002 ) . . . . . . . . . . . . . . . . . . . . . . . . .6

Dura Pharms ., Inc. v. Broudo, 125 S . Ct . 1627 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 ,7,15

Epstein v. Itron, Inc., 933 F. Supp . 1314 (E.D . Wash. 1998 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Gompper v. VISX, Inc., 298 F.3d 893 (9th Cir . 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 ,5,8

Howard v. Everex Sys ., Inc., 228 F.3d 1057 (9th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

In re Adaptive Broadband Sec . Litig., [2001-2002 Tr . Binder] Fed. Sec. L. Rep .(CCH) ¶ 91,759 (N . D. Cal. Apr . 2, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 ,11,1 2

In re Baan Co . Sec. Litig ., 103 F . Supp . 2d 1 (D .D.C. 2000 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

In re Clarus Corp. Sec. Litig., 201 F. Supp. 2d 1244 (N.D. Ga . 2002 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1

In re Cylink Sec . Litig., 178 F . Supp . 2d 1077 (N.D. Cal . 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,3, 7

In re Daou Sys ., Inc. Sec. Litig., 397 F .3d 704 (9th Cir . 2005 ), amended andsuperseded on denial of reh'g, - F.3d -, 2005 WL 143183 3(9th Cir. June 21, 2005 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 10, 1 1

In re Harmonic Inc . Sec. Litig ., [2002 -2003 Tr. Binder] Fed. Sec . L. Rep .(CCH) ¶ 92 ,246 (N.D . Cal. Nov. 13, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

In re Homestore.com, Inc . Sec. Litig., 252 F . Supp . 2d 1018 (C .D. Cal. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

In re McKesson HBOC, Inc. Sec. Litig., 126 F . Supp . 2d 1248 (N.D. Cal. 2000) . . . . . . . . . . . . . . . . . . . .7 , 7,11

In re PeopleSoft, Inc. Sec . Litig., [2000 Tr. Binder] Fed . Sec. L. Rep .(CCH) 191,035 (N . D . Cal . May 25 , 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

In re Ramp Networks , Inc. Sec. Litig ., 201 F . Supp. 2d 1051 (N .D. Cal . 2002 ) . . . . . . . . . . . . . . . . . . . . . . . . . . .11

In re Raytheon Sec . Litig ., 157 F . Supp. 2d 131 (D. Mass . 2001 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

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In re Read-Rite Corp . Sec. Litig., 335 F . 3d 843 (9th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 ,10,1 1

In re Resource Am. Sec. Litig., [2000 Tr . Binder] Fed . Sec. L. Rep. (CCH) ¶ 91,029(E.D. Pa. July 26, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

In re Scholastic Corp . Sec. Litig., 252 F.3d 63 (2d Cir. 2001 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

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

In re Splash Tech . Holdings, Inc. Sec. Litig., 160 F . Supp . 2d 1059(N.D. Cal . 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

In re Vantive Corp. Sec. Litig., 110 F . Supp. 2d 1209 (N.D . Cal . 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

In re Vantive Corp . Sec. Litig., 283 F . 3d 1079 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 ,2,6

In re Vivendi Universal, S.A. Sec. Litig., [2003-2004 Tr . Binder] Fed. Sec. L. Rep .(CCH) ¶ 92,619 (S .D.N.Y. Nov . 4, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

In re WorldCom , Inc. Sec. Litig., [2003 Tr. Binder] Fed . Sec. L. Rep .(CCH) ¶ 92 ,450 (S . D.N.Y. June 25 , 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Lipton v. Pathogenesis Corp ., 284 F.3d 1027 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

PR Diamonds , Inc. v. Chandler , 364 F .3d 671, 691-92 (6th Cir . 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Nursing Home Pension Fund, Local 144 v . Oracle Corp., 380 F .3d 1226(9th Cir . 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Shuster v. Symmetricom , Inc., [2000-2001 Tr . Binder] Fed. Sec . L. Rep . (CCH)¶ 91,206 (N.D. Cal . Aug. 1, 2000), aff'd, No. 00-16893, 2002 U.S . App .LEXIS 10335 (9th Cir . May 30 , 2002 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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

STATUTES

1 15 U .S .C § 78u-4(b)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2


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Defendants OmniVision Technologies, Inc . ("OmniVision"), Shaw Hong, Raymond Wu ,

H. Gene McCown, and John T . Rossi respectfully submit this reply memorandum in support of

their Motion to Dismiss the Second Consolidated Amended Complaint ("SAC") .

INTRODUCTION

Plaintiffs' entire case is premised on the theory that OmniVision engaged in "cookie jar"

accounting-namely that defendants were "saving" revenue for future quarters to show

continued "exponential sequential growth in future quarters ." Plaintiff's Opposition to

Defendants' Motion to Dismiss Second Consolidated Amended Complaint ("opposition" or

"Opp .") at 1-4 . This theory is implausible on its face and is not supported by the SAC . First,

"cookie jar" accounting exists where a company creates excess reserves that are then released as

"earnings" when there is a shortfall . There are no such allegations here . Second, there are no

allegations showing that defendants knew the Company would experience a revenue or earnings

shortfall, and deferred revenue for that reason, or that the Company deliberately engaged in

certain transactions that had the effect of deferring revenue . Plaintiffs merely point to the fact

that the Company had understated revenues in Q1'04 and Q2'04 . The theory then dissolves,

however, because the Company overstated revenues in Q3'04 .

Plaintiffs cite to no confidential witnesses or contemporaneous documents to suppor t

their cookie jar accounting theory . Instead, this theory is based on their own strained

interpretation of Omni Vision's disclosures concerning the restatement, unsupported inferences,

and the existence of an informal inquiry by the SEC (which the SEC recently terminated without

recommending any enforcement action) . The nature of the restatement, however, contradicts

plaintiffs' conjecture that defendants deliberately intended to understate revenue to show steady

growth. In each of the two quarters where revenue was understated (Q1'04 and Q2'04), it was

booked in the next quarter, which shows a timing issue - not a "plot" to stash revenue for future

periods . Overstating revenue in Q3'04, moreover, would be inconsistent with plaintiffs'

allegation that the defendants were holding back revenue . Finally, the Company's revenues for

the restated period show the same steady growth before and after the restatement, which

contradicts the notion that defendants "pulled back" revenue to manage growth . The reasonabl e

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inference to be drawn from these facts-that the restatement was caused by accounting errors-

contradicts plaintiffs' theory of cookie jar accounting . After several opportunities, plaintiffs still

have not adequately pleaded their claims . Accordingly, the SAC should be dismissed wit h

prejudice .

ARGUMENT

1 . PLAINTIFFS DO NOT SATISFY THE REFORM ACT'S STRICT PLEADINGREQUIREMENTS

A. Plaintiffs' Reliance on OmniVision's Disclosures and Speculation isInsufficient

Defendants showed that because the SAC's allegations were pleaded on "information an d

belief," plaintiffs were required to plead "with part icularity all facts" that form the basis for that

belief. 15 U.S.C § 78u-4 (b)(1)(B). This requirement "forces plaintiffs to reveal whether they

base their allegations on an inference of earlier knowledge drawn from later disclosures or from

contemporaneous documents or other facts ." In re Vantive Corp . Sec. Litig., 110 F . Supp. 2d

1209 , 1216 (N.D . Cal. 2000 ), aff'd, 283 F.3d 1079 (9th Cir . 2002) . In the opposition, plaintiffs

asse rt that they are not required to plead internal reports or confidential witnesses and that they

are somehow excused from the Reform Act's pleading requirements because the "facts" are

within the possession of defendants . Opp. at 8-9 (citing cases from other jurisdictions ) . This is

not the law ; if it were, the Reform Act would have no meaning .

The SAC contains no such allegations and is bereft of contemporaneous documents ,

confidential witness statements or other facts indicating that OmniVision's Class Period

statements were false when made or that the accounting errors were part of a cookie jar scheme

to defer revenue to later periods . OmniVision's disclosures provide the sole basis for plaintiffs'

conclusory allegations . Thus, plaintiffs are left to argue that the mere fact of a restatement is

sufficient to "form the basis for" their belief . Id. at 10 (citing In re Cylink Sec. Litig., 178 F .

Supp. 2d 1077, 1083 (N.D. Cal. 2001) (restatement involving, inter alia, shipments to

warehouses, full rights of returns or cancellation, which resulted in revenue overstatements of

97% and 46% in each of two quarters)) . Plaintiffs' reliance on Cylink to show that a restatement

satisfies the Reform Act's "strong inference" requirement is misplaced . In Cylink, the CFO

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argued that falsity had not been established because "he was no longer employed by Cylink when

its revenues were restated ." 178 F . Supp . 2d at 1083. Rejecting this argument, Judge Walker

found that the restatement itself established that the class pe riod financial statements were false

(id. at 1084), but analyzed separately the sufficiency of the scienter allegations (id. at 1081-82) .

A financial restatement only takes a plaintiff so far toward pleading a securities fraud

claim. It may satisfy the falsity requirement as to the financials at issue, but does not address

"whether there is any basis for alleging that the officers knew that [the] statements were false at

the time they were made ." In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 985 (9th Cir .

1999) . The SAC does not contain particularized factual allegations showing that defendants

knew the prior, restated financials were false when issued .

B. Plaintiffs Fail to Plead with Particularity Any False or MisleadingStatements Outside Of OmniVision's Financial Restatemen t

Plaintiffs contend that other OmniVision statements, aside from those relating to th e

restatement, were false and misleading . The SAC fails to plead with particularity any allegations

from which the Court could reasonably infer that these other statements were materially false or

misleading . See Defendants' Motion to Dismiss Second Consolidated Amended Complaint

("Def. Mem.") at 8-10.

1. Financial results for fiscal 2003

Nothing in the SAC contradicts the fact that "the errors did not have material effects on

quarterly or annual financial statements for fiscal 2003 ." Id. at 8 ; see ¶¶ 60-61 .' Plaintiffs'

claim as to the 2003 financial statements is based solely on CFO Rossi's alleged statement that

the distributor reporting issue began "in the second half of fiscal 2003 ." ¶¶ 60, 70 . This is not

enough to show that the financial results for fiscal 2003 were materially false or misleading .

Def. Mem. at 8 .

In the opposition, plaintiffs speculate that Mr. Rossi's alleged statement shows

1 All "¶ _" references herein are to the Second Consolidated Amended Complaint . All"Ex. _" references herein are to the Declaration of Claudia N. Main in Support of Defendants'Motion to Dismiss Second Consolidated Amended Complaint .


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defendants must have known all along about the accounting errors because it is "unlikely" the

practices went undetected "for so long ." Opp . at 12. Plaintiffs further speculate that defendants

"had incentive to avoid restating" 2003 financial results . Id. at 13 . This conjecture hardly meets

the requisite pleading standard. Indeed, the involvement of outside auditors, who are not alleged

to be part of a fraudulent scheme, belies such speculation. The lack of factual foundation for

plaintiffs' musings is underscored by the fact that the SAC lacks any quantification of unreported

distributor revenue or its impact on the third or fourth quarters of fiscal 2003 . See Def. Mem. at

8-9 (citing cases) . 2

2. Statements of OmniVision's revenue recognition polic y

The SAC appears to allege that OmniVision's recitation of its revenue recognition polic y

was false (e.g., 1137, 41, 43, 49, 53) . Failing to establish falsity, plaintiffs jump to the

conclusion that a purported failure to comply with revenue recognition policy "creates an

inference of scienter ." Opp. at 4-5, 20-21 . None of the cases plaintiffs cite (id. at 20-21),

however, hold that the mere fact of a restatement or non-compliance with GAAP or a revenue

recognition policy dispenses with the Reform Act's "strong inference" of scienter requirement .

See Def. Mem. 7-8 .

3. Statements concerning opinions of the CEO and CFO

Defendants demonstrated that statements by OmniVision's CEO and CFO, as to thei r

opinions concerning the Company's internal controls, based on knowledge at that time, were not

rendered false or misleading by the subsequent restatement or the auditors' subsequent

identification of material weaknesses . See id. at 4, 9-10 . Plaintiffs ignore the qualifying

language set forth in the CEO and CFO certifications, which they plead in the SAC, and continue

to contend such certifications were false . See Opp . at 21-22. The SAC's failure as to the

executive certifications, as with other allegations in the SAC, is that there are no facts pleaded

demonstrating that the CEO or CFO knew at the time the certifications were executed that thei r

2 Plaintiffs ' citation to Aldridge v. A. T. Cross Corp ., 284 F.3d 72 (1st Cir. 2002) ismisleading . While plaintiffs claim that "the fact that the financial statements for the year inquestion were not restated" does not preclude a claim for fraud, they omit the important qualifierthat a complaint must "otherwise [meet] the pleading requirements of the PSLRA." Id. at 83 .

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opinions had no basis, or that they had contrary knowledge concerning the efficacy of the

Company's internal controls. See In re Harmonic Inc. Sec. Litig., [2002-2003 Tr. Binder] Fed.

Sec. L. Rep. (CCH) ¶ 92,246 at 91,488 (N .D . Cal . Nov. 13, 2002) (holding claim based on

opinion, in the absence of particularized facts showing falsity, failed to state a claim) .

4. Statements regarding the SEC's informal inquiry

While plaintiffs concede that OmniVision's disclosure of an informal inquiry by the SE C

did not render any Class Period statements false and misleading (Opp . at 19-20), they argue that

this disclosure shows a "pattern of deception" because defendants "attempted to conceal this

information ." Id. Not true. The Company disclosed this information (see IT 66-68) even though

it had no duty to do so . Plaintiffs' argument is further weakened by the Company's June 23,

2005 announcement that the SEC staff has terminated its inquiry without any recommendation

for an enforcement action to the Commission . Supplemental Declaration of Claudia N . Main in

Support of Defendants' Motion to Dismiss Second Consolidated Amended Complaint, Ex . KK .

II. PLAINTIFFS FAIL TO ALLEGE A "STRONG INFERENCE" OF SCIENTE R

The SAC lacks factual allegations showing that the defendants intentionally delaye d

I revenue recognition because they knew that the Company's future revenue would decline . Def.

Mem. at 11-22 ; see supra at 2-3. None of plaintiffs' theories, including the overarching cooki e

I jar accounting theory, establish that the accounting errors were part of a fraudulent scheme .

A. Plaintiffs' Theory of Scienter Is Anchored In Fraud by Hindsight

Neither the restatement nor the facts underlying OmniVision's restatement give rise to a

strong inference of fraudulent intent . Def. Mem. at 11-12 (citing cases) . As discussed above, the

facts show that in each of the two quarters where revenue was understated, it was booked in the

next quarter. See ¶¶ 60-61 . Overstating revenue in Q3'04, moreover, would be inconsistent with

plaintiffs' allegation that the defendants were holding back revenue . See ¶ 60. Finally, the

Company's revenues for the restated period show the same steady growth before and after the

restatement. Exs . M-P; ¶ 60 . The most reasonable inference to be drawn from these facts-that

the restatement was caused by accounting errors-contradicts plaintiffs' theory of cookie ja r

accounting . See Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002) (holding that court

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must consider all reasonable inferences, whether or not favorable to plaintiffs) . The fact that ,

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after conducting its inquiry, the SEC declined to take enforcement action further indicates tha t

defendants' inference is more reasonable . Supp . Main Decl., Ex. KK.

Plaintiffs must allege specific facts demonstrating that each individual defendant knew ,

or was deliberately reckless in not knowing, that the accounting was incorrect at the time it was

determined . DSAM Global Value Fund v. Altris Software, Inc., 288 F .3d 385, 390-91 (9th Cir.

2002) . To plead scienter adequately, plaintiffs must allege specific facts showing that the most

reasonable inference is that OmniVision's o riginal accounting - in light of the circumstances that

existed at the time - was the product of deliberate recklessness or fraud. Cats v. Protection One,

Inc., Nos . CV99-3755DT, CV99-3798DT, CV99-4147DT, CV99-5534DT, 2001 WL 34070630,

at *14 (C .D. Cal . June 4, 2001) (rejecting allegations where plaintiffs "offer nothing more than

their suspicions that the o riginal accounting for goodwill was the product of fraud").3 Without

such facts , the allegations are no different from the "fraud by hindsight" complaints that the

Reform Act was designed to eliminate . In re Vantive Corp. Sec. Litig., 283 F .3d 1079, 1084-85

(9th Cir . 2002) (purpose of Reform Act was "pa rticularly to put an end to the practice of

pleading `fraud by hindsight"') .

Plaintiffs' attempt to defend their allegations , which are premised on Mr . Rossi's alleged

I statement , does not succeed . Opp . at 14; ¶ 60. There is no allegation that Mr . Rossi , or anyon e

else for that matter, stated when the individual defendants knew about the distributor reportin g

issue . Nor do plaintiffs' cases support their effort to get around the ban on pleading fraud by

hindsight . In those cases, courts considered statements outside the Class Period that showed that

specific members of management had contemporaneous knowledge . See Opp. at 9-10 . 4

3 Plaintiffs are wrong in their asse rtion that the Ninth Circuit reversed this decision in anunpublished opinion . See Opp . at 14; compare CATS, 2001 WL 34070630 (Protection Onedefendants ' motion to dismiss ) (cited in Def. Mem . at 12 , 19) with Cats v. Protection One, Inc .,Nos. CV99-3755DT, CV99-3798DT, CV99-4147DT, CV99-5534DT, 2001 WL 34070755 (C .D .Cal. June 4 , 2001) (Arthur Andersen's motion to dismiss ), rev 'd, 49 Fed . Appx. 169 (9th Cir .2002) . The Ninth Circuit reversed the latter decision on grounds not presented here , i.e., whetherplaintiffs had sufficiently pled "loss causation " in the context of a Section 11 claim.

4 See In re Vivendi Universal, S.A. Sec. Litig., [2003-2004 Tr. Binder] Fed . Sec. L. Rep .(CCH) ¶ 92,619, at 92,907 (S .D.N.Y. Nov. 4, 2003) (post-class period Wall Street Journal

(continued . . . )

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Plaintiffs cannot establish scienter merely by stating the accounting rule, pointing to a

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subsequent restatement, and concluding the difference must be attributable to fraud. See Def.

Mem. at 11-12 . The stark contrast with plaintiffs' cases illustrates this point .5 For example,

plaintiffs rely on In re Daou Systems, Inc. Securities Litigation, 397 F .3d 704 (9th Cir . 2005),

amended and superseded on denial of reh'g, - F.3d -, 2005 WL 1431833 (9th Cir . June 21,

2005) .6 The Daou complaint contained "specific allegations of direct [defendant] involvement in

the production of false accounting statements and reports ." Daou, 2005 WL 1431833, at * 12 .

For example, confidential witnesses "confirmed that it was known throughout Daou at this time

[2Q97] that [individual defendants] were engaged in improper revenue recognition ." Id.

(describing contemporaneous accounting report reflecting revenue recognition scheme). The

SAC contains no such contemporaneous allegations . There are no statements attributed to

"confidential witnesses," for example, indicating that defendants deliberately failed to record

revenue in July or October 2003 as part of the alleged cookie jar scheme . The SAC does not

quote, or even paraphrase, 2003 documents concerning the purported scheme .

( . . .continued from previous page )investigative report quoted from CFO's handwritten letter to CEO imploring him to "take serioussteps to reduce Vivendi's ballooning debt" one week before CEO told board the "company hadno problem" and approved $10 billion acquisition) ; In re Scholastic Corp . Sec. Litig., 252 F.3d63, 72 (2d Cir . 2001) ("marked decreased sales experienced" pre-class period relevant toestablish defendants had a basis for knowing at start of class period that increased sales wereunlikely) ; In re Raytheon Sec . Litig., 157 F. Supp . 2d 131, 144, 151 (D. Mass . 2001) (aftercompany announced $668 million pre-tax charge to earnings, revelations came to light showingproblems "likely would have been apparent to management before" public disclosure) .

5 Other cases on which plaintiffs rely are qualitatively different . In re McKesson HBOC, Inc .Sec. Litig., 126 F. Supp. 2d 1248, 1273 (N.D. Cal . 2000) (restating $327 million of improperlyrecorded transactions involving, inter alia, side letters with contingencies, two-year deliveryperiods, and fictitious sales) ; Cylink, 178 F. Supp. 2d at 1082 (restating several transactionsinvolving, inter alia, shipments to warehouses, full rights of return or cancellation, resulting inoverstatements of 97 .5% and 46% in first two quarters) ; In re Baan Co. Sec. Litig., 103 F. Supp.2d 1, 8-9 (D .D.C. 2000) (compliance with new accounting rules resulted in net losses of $295million to clear indirect channel of existing inventory) . Here by contrast, the nature of the errorssuggests accounting mistakes rather than senior management decisions .

6 On June 21, 2005, the Ninth Circuit issued an amended opinion in Daou . The amendedopinion is identical to the opinion published at Daou, 397 F .2d 704 (9th Cir. 2005) with theexception of its citation to Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct . 1627 (2005) (Daou,2005 WL 1431833, at *3) and the discussion of the "in connection with," causation andeconomic loss elements of a Rule lOb-5 claim (Daou, 2005 WL 1431833, at *14-16) .

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The restatement and the Company's public comments about it, none of which admi t

contemporaneous knowledge of the accounting errors, are the linchpin of plaintiffs' scienter

analysis . The SAC, however, provides a basis to strongly infer that defendants lacked any

knowledge of accounting errors in the original financial statements . The SAC alleges that on

June 9, 2004, OmniVision announced that an independent internal investigation was being

conducted and that certain of the Company's financial statements may be restated . ¶ 55 . On

June 23, 2004, the Company announced the conclusion of the internal inquiry and the details of

the restatement . ¶ 60. The market reacted negatively to the June 9 announcement (156), and

plaintiffs filed lawsuits supposing that Omni Vision had inflated its revenues . If, as plaintiffs

now allege, defendants knew all along that the restatement would increase Class Period revenues

and earnings, why would defendants not disclose the direction of the restatement and perhaps

mitigate the market (and plaintiff) reaction to the news? An inference of innocence from the

SAC's allegations is at least as equally plausible as an inference of fraud . See Gompper, 298

F .3d at 897 .

B. Plaintiffs Have Not Sufficiently Alleged Knowledge of Falsity

None of plaintiffs' theories indicates that the transactions underlying the restatemen t

I were the product of a fraudulent scheme. Def. Mem. at 12-19 . The opposition does not remed y

the SAC' s defects in this regard .

1 . Internal controls

Deficiencies in internal controls, standing alone, do not raise an inference of fraudulent

intent . Id. at 12-14 (citing PR Diamonds, Inc . v. Chandler, 364 F.3d 671, 691-92 (6th Cir .

2004)).7 Plaintiffs' challenge to this proposition is two-fold . First, plaintiffs echo earlier themes .

Specifically, plaintiffs argue that defendants certified the adequacy of the internal controls ;

OmniVision's independent auditors subsequently identified material weaknesses in internal

controls ; and, therefore defendants must have known of these weaknesses at the time the y

7 Plaintiffs mischaracterize PR Diamonds . See Opp. at 22. In PR Diamonds, the SixthCircuit dismissed the complaint owing to plaintiffs' failure to offer "specific, highly suspiciousfacts and circumstances" to support an inference that defendant was aware of internal controldeficiencies . 364 F.3d at 694 .

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prepared the certifications . Opp . at 21-22. Once again, they do not allege any facts showin g

I contemporaneous knowledge of any - let alone "material" - problems with OmniVision' s

internal controls, nor do they allege any "red flags" or other facts of "pervasive" problems .

Next, plaintiffs argue the defendants knew or should have known the financial statements

were incorrect and the internal controls were inadequate because they had a duty to monitor both .

Id . at 22. Plaintiffs rely on cases applying the Second Circuit's more lenient standard for

pleading scienter by circumstantial evidence to allegations of the outside auditor's failure to

oversee internal controls . For example, plaintiffs cite In re WorldCom, Inc. Securities Litigation,

[2003 Tr . Binder] Fed . Sec . L. Rep. (CCH) ¶ 92,450 (S .D .N.Y. June 25, 2003) (denying outside

auditor's motion to dismiss) . Noting that GAAP violations alone are insufficient to plead fraud,

the Worldcom court found that "the enormous amounts at stake coupled with detailed allegations

regarding the nature and extent" of accounting fraud and the auditor's "failure to conduct a

thorough and objective audit" satisfied the Second Circuit's standard for pleading scienter . Id. ¶

92,450 at 92,341 . There are no such allegations here . The SAC must fail .

2. OmniVision's explanation of the restatement

OmniVision' s disclosures explaining the reasons for the restatement do not support

plaintiffs' theory of fraudulent intent, nor are they contradictory or implausible . Def. Mem. at

14-16 . First, defendants have repeatedly demonstrated that the distributor reporting issue only

involved one distributor - not Aiptek, which is an OEM customer . Id. at 14-15. Second,

defendants have shown that the allegations fail to support plaintiff's contention that the

distributor reporting issue was not attributable to World Peace's having a reporting schedule with

irregular month ends that did not match OmniVision's month ends . Id . at 15-16 . Finally,

defendants showed that the explanation for the title transfer issue does not support plaintiffs'

theory that a restatement of Q1'04 was not warranted . Id. at 14-16 . The SAC does not allege

any internal reports, confidential witnesses, or any other facts indicating that OmniVision

deliberately instructed World Peace to misreport sales, that any defendant was aware that World

Peace's reports failed to include certain sales shipped prior to month's end, or that th e

explanation for the title transfer issue rendered the explanation for the restatement of Q2'04 and

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Q3'04 implausible . In fact, the more plausible inference is that the distributor reporting and titl e

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transfer issues were attributable to simple oversight , not fraud. Id . at 15 (citing cases) .

In response , plaintiffs continue to rely on their unsupported inferences, suppositions and

misrepresentations, instead of facts . Opp. at 12, 14-15 .8 The inference arising from plaintiffs'

assumptions is not plausible - let alone "more plausible" - than the inference shown by

defendants. Def. Mem. at 4-5, 14-16 . Instead, they contend that scienter may be inferred

because the restatement involved World Peace and Aiptek, which constituted more than one-

third of OmniVision's revenues .9 Opp. at 9, 11 . As discussed above, however, the Reform Act

requires more than what is alleged here . Plaintiffs cannot substitute the Reform Act's "strong

inference" requirement with a presumption of scienter derived from a customer's size any more

than they can establish knowledge by virtue of a defendant's position in the company . In re

Read-Rite Corp . Sec. Litig., 335 F.3d 843, 848 (9th Cir. 2003) (strong inference of scienter

cannot be established by allegations that "`facts critical to a business's core operations or an

important transaction generally are so apparent that their knowledge may be attributed to the

company and its key officers"') (citation omitted) .

Plaintiffs' contention that defendants "had to know" OmniVision improperly recognized

revenue with respect to World Peace and Aiptek owing to their positions as "top executives" an d

their purported access to unidentified information (Opp . at I 1-12) is without merit . The Ninth

Circuit has held that generic allegations, such as those alleged here, are insufficient . Daou, 2005

8 For example, plaintiffs contend that OmniVision initially disclosed that one of itsdistributors did not report information to OmniVision in a timely manner, which resulted indelays in revenue recognition, and then subsequently disclosed that the problem originated withOmniVision because it stated that its independent auditors identified material weaknesses in theinternal controls and procedures "resulting from incorrectly review[ing] distributor reports ."

Opp. at 4, 11 . These statements are entirely consistent. A delay in revenue recognition occurreddue to one distributors' failure to timely report information; because this error was not notedduring the Company's review of that distributor's reports, the auditors subsequently determinedthat there was an internal controls weakness .

9 Plaintiffs assert that World Peace and Aiptek were OmniVision' s "largest customers" and"constituted approximately 19% and 11 .5%, respectively, of OmniVision 's revenues ." Opp. at11 . According to the SAC, however, these customers only represented these percentages ofOmniVision' s sales for one quarter (Q2'04), not for the entire class period. IT 76-77 ; see alsoDef. Mem. at 14 n .7; Ex. E at 35-36 . Plaintiffs' claim that World Peace and Aiptek representmore than one third of the Company 's revenues is belied by their own allegations .


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WL 1431833, at *11 ("General allegations of defendants' `hands-on' management style, their

interaction with officers and employees, their attendance at meetings, and their receipt of

unspecified weekly or monthly reports are insufficient .") . Plaintiffs must plead "specific

admissions" by specific members of top management of their involvement "in every detail of the

company and that they monitored" the internal information that contradicted their Class Period

statements . Id. ; Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1231,

1234 (9th Cir . 2004) (CEO admissions sufficient to show scienter : "All of our information is on

one database. We know exactly how much we have sold in the last hour around the world .") .' °

3. Management changes

Defendants established that the SAC did not plead facts showing that the departure of

non-defendant John Lynch, the former V .P. of Marketing and Sales, and the Company's changes

in CFOs are indicative of fraud. Def. Mem. at 16-18 . Plaintiffs now offer unsupported

speculation that "Lynch must have been involved" with alleged improper revenue recognition

practices. Opp. at 15-16 . That is just guesswork, though, and does not take the place of

particularized facts . Id. at 16-17 .

With respect to the remaining allegations regarding management changes, plaintiffs

predictably cited to In re Adaptive Broadband Securities Litigation, [2001-2002 Tr . Binder] Fed .

Sec. L. Rep. (CCH) ¶ 91,759 (N .D. Cal . Apr. 2, 2002) . As defendants demonstrated in the

opening brief, the allegations in Adaptive Broadband stand in stark contrast to the allegations

here. In Adaptive Broadband, there were allegations that the CFO repeatedly overrode the

company's procedures; senior executives recognized revenue on shipments to Adaptive's own

10 Two of the cases to which plaintiffs cite, In re PeopleSoft, Inc. Securities Litigation, [2000Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 91,035 (N.D. Cal. May 25, 2000) and In re RampNetworks, Inc . Securities Litigation, 201 F. Supp. 2d 1051, 1076 (N.D. Cal. 2002)) were calledinto question when the Ninth Circuit rejected the holding upon which those cases rely . SeeRead-Rite, 335 F .3d at 848 (rejecting Epstein v. Itron, Inc., 933 F. Supp. 1314 (E.D. Wash.1998)) . In re Clarus Corp . Securities Litigation, 201 F. Supp. 2d 1244 (N.D. Ga. 2002) (cited inOpp. at 11), is also inapposite . Noting that non-compliance with GAAP alone is not enough toplead fraud, the court found that defendants "must have been aware" that one transactionaccounting for 37% of revenue in one quarter should not have been considered a sale orrecognized as revenue . Id. at 1250-5 1, n.6 . The court relied solely on allegations attributed to aconfidential witness - a former employee with personal knowledge of the nature, terms andcontingencies of the transaction . Id. at 1250. There are no such allegations here .



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warehouse in a scheme to "lease" storage space to a customer ; the CEO and CFO's severance

pay was suspended two months after the alleged fraud was announced ; and, based on first-hand

witness accounts, inter alia, a second set of accounting books was created to record transactions

that violated the company's procedures . Given these allegations, this Court found that the

departure and relocation of senior executives "add one more piece to the scienter puzzle ." Id. ¶

91,759, at 98,604. There are no such allegations here .

4. Plaintiffs' remaining theorie s

Plaintiffs classify OmniVision's write-down of inventory in 2001 as a "financial gimmick

to show improvement in future reporting periods" and suggest that this "adds to the inference of

scienter." Opp. at 19. They fail to address the fact that accounting rules required OmniVision to

write down the value of this excess inventory, nor do they cite to any literature prohibiting the

sale of the excess inventory after the write-down. Def. Mem. at 18-19 .

Plaintiffs similarly fail to address the fact that Item 303(a) of Regulation S-K, 17 C .F.R . §

229.303(a)(3), is not applicable to the quarterly reports and that there is no private right of action

for a violation of this SEC Regulation. Def. Mem. at 19 (citing cases) . Instead, they state that

"[w]hen companies violate Item 303 of Regulation S-K, they often violate Section 10(b) as

well." Opp. at 12 . Even if plaintiffs had established a violation of Regulation S-K and standing

to pursue this claim - which they clearly have not - this is not an adequate substitute for the

Reform Act's pleading requirements . See Wietschner v. Monterey Pasta Co ., 294 F. Supp . 2d

1102, 1118 (N .D. Cal. 2003) (even if plaintiffs could demonstrate a breach of an SEC regulation,

it "would not assist in stating a cause of action under section 10(b) for securities fraud") .

C. The Alleged Stock Sales Undermine an Inference Of Sciente r

Defendants established that the alleged stock sales do not constitute circumstantial

evidence of scienter in this case. Indeed, those sales are inconsistent with any attempt to commit

securities fraud. If, in fact, defendants were causing financial results (and hence OmniVision's

stock price) to be artificially deflated in the current period, so that it would be higher in future

periods, there would be no reason to sell stock in the current period . Plaintiffs fail to allege a

cognizable motive for defendants to sell stock during a period when they allegedly knew tha t

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OmniVision's results were purposefully understated . Def. Mem . at 20-21 (citing cases) . Indeed,

defendants were significantly and "actually harmed [not helped] by their alleged fraud," negating

an inference of scienter. Shuster v. Symmetricom , Inc., [2000-2001 Tr . Binder] Fed. Sec. L. Rep .

(CCH) ¶ 91 ,206, at 95 , 033 (N . D. Cal. Aug . 1, 2000), aff'd , No . 00-16893 , 2002 U .S . App .

LEXIS 10335 (9th Cir . May 30, 2002) .

Plaintiffs' only response to these arguments is to speculate regarding the import of th e

stock sales: "Defendants were aware of the need to restate long before it was publicly

disclosed"; "Weeks, if not months, had to have lapsed between the time" an employee raised

issues that the Company promptly investigated; and the sales occurred "during the time when an

internal review was likely taking place ." Opp . at 17 (emphasis added) . Such speculation in the

opposition is not an adequate substitute for allegations in the SAC demonstrating that either Mr .

Hong or Mr. Wu was aware on March 30 of the transactions that would be restated . Nor do

plaintiffs explain why Mr. Rossi, the CFO, would not have sold stock during this time .

Plaintiffs also mischaracterize defendants' opening brief, which showed that the timing o f

defendants' stock sales negates an inference of scienter because the sales occurred after the

release of quarterly financial results . Def. Mem. at 20-21 (citing In re Homestore.com, Inc. Sec .

Litig., 252 F. Supp. 2d 1018, 1030 (C .D. Cal . 2003) (sales after release of financial statements,

"explains why the insider defendants had common trading days") ; Ex. Y. Defendants did not, as

plaintiffs contend (Opp . at 17-18), state that OmniVision has the same trading windows as

Homestore.com. Plaintiffs, in any event, have misapplied OmniVision's fiscal periods to arrive

at the purported trading windows . Compare id. (stating Q4'04 began on May 1, 2004) with ¶ 34

n.2 (Q4'04 ends on April 30) .1 1

D. The Secondary Offering Does Not Support a Strong Inference of Sciente r

OmniVision's secondary offering in July 2003 fails to give rise to the requisite stron g

11 Plaintiffs continue to reference the alleged stock sales by non-defendants (Opp . at 2, 16)without providing any information as to their relevance to the defendant's scienter . See Def.Mem. at 21-22. The Court may disregard these allegations . See In re Splash Tech . Holdings,Inc. Sec. Litig., 160 F . Supp. 2d 1059, 1082 n .22 (N.D. Cal . 2001) (finding "no reason" toconsider non-defendant stock sales without "specific facts" indicating they "personally possessednon-public adverse information") .



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inference of scienter. Def. Mem. at 22. Plaintiffs' reliance on the secondary offering makes no

sense. The secondary offering occurred in July 2003, before OmniVision issued any of the

financial results that were subsequently restated. Def. Mem. at 22 (citing, inter alia, Albert

Fadem Trust v. American Elec . Power Co., 334 F. Supp . 2d 985, 1015-16 (S.D. Ohio 2004)

(finding plaintiffs' allegation concerning secondary offering insufficient to establish scienter,

particularly where timing showed that offering occurred prior to defendants' discovery of

inaccurate reporting)) .

Plaintiffs' opposition is not credible . See Opp . at 18-19 (citing Howard v. Everex Sys . ,

Inc., 228 F.3d 1057, 1063-64 (9th Cir. 2000) (considering "motive and opportunity" because

substantive requirements for pleading scienter on summary judgment not altered by Reform

Act)) . For example, they rely on an opinion by a district court located in the Third Circuit,

where scienter may be pleaded "by means of motive and opportunity ." In re Resource Am. Sec.

Litig., [2000 Tr. Binder] Fed . Sec. L. Rep. (CCH) ¶ 91,029, at 94,775 (E .D . Pa. July 26, 2000)

(cited in Opp . at 18) . Even under that more lenient standard, the court in Resource stated that

plaintiffs' reliance on the company's public offering to show motive was a "close question ." Id.

¶ 91,029, at 94,777 . In this Circuit, "plaintiffs who plead the required state of mind in general

terms of mere `motive and opportunity' or `recklessness' fail to meet the PSLRA's heightened

pleading requirements ." Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035 (9th Cir . 2002) .

III. DEFENDANTS ARE NOT LIABLE FOR STATEMENTS THEY DID NOT MAKE

It is well established that defendants cannot be liable for statements they did not make .

See Def. Mem. at 22-23 . Plaintiffs concede that neither Mr . McCown nor Mr. Rossi can be

liable "for statements not falling within their respective reigns " as CFO . Opp . at 23, n .10 .

Plaintiffs nonetheless continue to asse rt that Mr. Wu is accountable for press releases and SEC

filings that he did not sign under the "group publication doctrine ." Id. at 23.

As defendants demonstrated, even if the group published doctrine survives passage of th e

Reform Act, it does not salvage plaintiffs' claims against Mr. Wu. Def. Mem. at 23 . A

defendant cannot be liable under Section 10(b) unless the allegations against him meet "all of the

requirements for primary liability under Rule I Ob -5." Central Bank v . First Interstate Bank, 51 1

DEFS .' REPLY ISO MTN TO DISMISS -14- C :\NrPortbl\PALIBI\MSMI\2676006_2 .DOC


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U.S . 164, 191 (1994) . Plaintiffs generically contend that Mr. Wu was involved in "day-to-day

operations of the Company" and "controlled the contents of' the allegedly false and misleading

statements . Opp. at 23. This is a far cry from a particularized allegation indicating that Mr . Wu

was personally involved in the preparation of those challenged statements that courts require

when a plaintiff attempts to rely on the group-published information doctrine . See Def. Mem. at

123 .

IV. THE ECONOMIC LOSSES WERE NOT CAUSED BY THE RESTATEMENT

Defendants demonstrated that the loss causation requirement - which mandates a causa l

connection between the alleged misrepresentations and the subsequent decline in the price of the

stock - is not met here because OmniVision's stock price rose when the actual restatement was

released . Id . at 23-24 (citing Dura, 125 S . Ct . at 1633-34) . Whether the stock price decreased in

reaction to the announcement of a possible restatement does not meet the requisite showing of a

"causal" connection between the allegedly false statements and investor losses . Plaintiffs, rather,

must show that the understatement of revenue in one quarter and reporting of that revenue in the

next quarter - as reflected in the actual restatement - caused the investor losses. While

OmniVision's stock dropped after the announcement of a possible restatement, the SAC does no t

show that these losses were caused by the accounting errors that were later revealed. Loss

causation, not "loss correlation," is required .

CONCLUSION

For all of the foregoing reasons , defendants respectfully request that the SAC b e

dismissed with prejudice .

I Dated: June 24, 200 5


Respectfully submitted,

WILSON SONSINI GOODRICH & ROSATIProfessional Corporation

By : /s/ Douglas J . ClarkDouglas J . Clark

Attorneys for Defendants


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I, Jenny L . Dixon, am the ECF User whose identification and password are being used tofile this DEFENDANTS' REPLY MEMORANDUM IN SUPPORT OF MOTION TODISMISS THE SECOND CONSOLIDATED AMENDED COMPLAINT . In compliance

with General Order 45 .X.B, I hereby attest that Douglas J . Clark has concurred in this filing .

Dated : June 24, 2005 WILSON SONSINI GOODRICH & ROSATI

Professional Corporation


By : /s/ Jenny L. DixonJenny L. Dixon

Attorneys for Defendant sOMNIVISION TECHNOLOGIES, INC ., SHAWHONG, RAYMOND WU, H. GENE McCOWN,AND JOHN T . ROSSI

- I - C:\NrPortbl\PALIB1\MSMI\2676006_2 .DOC

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