In Re: KLA-Tencor Corporation Securities Litigation...

Case 3:06-cv-04065-MJJ Document 107 Filed 05/21/2007 of

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MICHAEL J. SHEPARD (Bar No. 91281)WARRINGTON S. PARKER III (Bar No. 148003)THOMAS S. KIMBRELL (Bar No. 223068)RYAN D. MARSH (Bar No. 237259)HELLER EHRMAN LLP333 Bush StreetSan Francisco, CA 94104Telephone: +1 (415) 772-6000Facsimile: +1 (415) 772-6268Email: [email protected]; [email protected];[email protected]; [email protected]

Attorneys for DefendantJON D. TOMPKINS

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

IN RE KLA-TENCOR CORP. SECURITIES Master File No. 06-cv-4065-MJJLITIGATION

THIS DOCUMENT RELATES TO ALLACTIONS

DEFENDANT JON D. TOMPKINS'MOTION TO DISMISS PLAINTIFFS'CONSOLIDATED FEDERALSECURITIES CLASS ACTIONCOMPLAINT; MEMORANDUM OFPOINTS AND AUTHORITIES INSUPPORT THEREOF; REQUEST FORJUDICIAL NOTICE ANDDECLARATION OF WARRINGTONS. PARKER III IN SUPPORTTHEREOF[REQUEST FOR JUDICIAL NOTICEFILED CONCURRENTLY]

Date: September 12, 2007Time: 2:00 p.m.Place: Courtroom 11, 19th

Floor

The Honorable Martin J. Jenkins

DEFENDANT JON D. TOMPKINS' MOT. TO DISMISS PLS.' CONSOLIDATED FEDERAL SECURITIES CLASSACTION COMPLAINT, MEMORANDUM OF POINTS AND AUTHORITIES-MASTER FILE NO.06-CV-4065-MJJ


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TABLE OF CONTENTS

Page

NOTICE OF MOTION AND MOTION TO DISMISS ..................................................... 1

INTRODUCTION ............................................................................................................... 2

BACKGROUND ................................................................................................................. 3

A. Jon D. Tompkins ........................................................................................... 3

B. Mr. Tompkins' Alleged Connection with Stock Options and Sales ............. 3

C. Mr. Tompkins' Alleged Involvement with Accounting and InternalControls ......................................................................................................... 5

D. Alleged Involvement with Corporate Statements ......................................... 5

1. PLAINTIFFS DO NOT SUFFICIENTLY PLEAD THAT MR. TOMPKINSACTED WITH SCIENTER ..................................................................................... 6

A. Allegations that Mr. Tompkins Granted or Approved Backdated StockOptions Do Not Show Scienter ..................................................................... 6

B. Allegations that Mr. Tompkins Received Stock Options Do Not ShowScienter .......................................................................................................... 8

C. Allegations that Mr. Tompkins Exercised Options or Sold Stock Fail toShow Scienter ................................................................................................ 8

D. Allegations that Mr. Tompkins Signed SEC Filings Do Not ShowScienter ........................................................................................................ 10

E. Defendants' Interest in Increased Compensation for Themselves andOthers Is Insufficient to Show Scienter ...................................................... 10

F. Scienter Is Not Shown From the Pervasiveness of the AllegedFraudulent Scheme, From KLA's Restatement of Its Financials, orFrom the Applicable Accounting Rules ...................................................... 11

G. Mr. Tompkins Resignation from KLA's Board of Directors Does NotShow Scienter .............................................................................................. 11

II. PLAINTIFFS ALSO CANNOT SHOW SCIENTER THROUGHIMPERMISSIBLE GROUP PLEADING .............................................................. 12

III. PLAINTIFFS FAIL TO PLEAD "SCHEME LIABILITY UNDERRULE 10B-5(A) AND (C) ..................................................................................... 13

IV. PLAINTIFFS' SECTION 10(B) AND RULE 10B-5 CLAIMS ARE TIME-BARRED TO THE EXTENT THEY ARE BASED ON CONDUCT ORMISSTATEMENTS ANTEDATING JUNE 29, 2001 .......................................... 14

V. PLAINTIFFS FAIL TO PLEAD A SECTION 14(A) CLAIM ............................. 14



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A. The PSLRA's Heightened Pleading Requirements Apply to Plaintiffs'14(a) Claims ................................................................................................ 15

B. Plaintiffs Also Have Not Pled Any Facts to Show that Mr. TompkinsActed Negligently In Connection With the Preparation or Release ofKLA's Proxy Statements ............................................................................. 16

C. Plaintiffs Have Not Shown that Any Alleged Misstatements orOmissions in Proxy Statements Were an "Essential Link inAccomplishing a Proposed Transaction ...................................................... 17

D. Plaintiffs' Section 14(a) Claims are Time-Barred to the Extent TheyAre Based on KLA's 2001 and 2002 Proxy Statements ............................. 18

VI. PLAINTIFFS FAIL TO STATE A CLAIM FOR "CONTROLLINGPERSON LIABILITY UNDER § 20(A) OF THE EXCHANGE ACT............... 19

VII. PLAINTIFFS FAIL TO STATE A § 20A INSIDER TRADING CLAIM ........... 20

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

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Case 3:06-cv-04065-MJJ Document 107 Filed 05/21/2007

TABLE OF AUTHORITIES

Cases

of 2811

Pane(s)

Burgess v. Premier Corp.,727 F.2d 826 (9th Cir. 1984) .................................................................................... 19

Cal. Pub. Employees' Retirement Sys. v. Chubb Corp.,394 F.3d 126 (3d Cir. 2004) ..................................................................................... 16

Cal. Pub. Employees' Retirement S s. v. Chubb Corp.,No. Civ. No. 00-4285 (GEB), 2002 WL 33934282 (D.N.J. Jun. 26, 2002) ...... 15, 16

Commc'ns Workers ofAm. Plan for Employees' Pensions and Death Benefits v. CSK AutoCorp.,

No. CV06-1503, 2007 U.S. Dist. LEXIS 22782 (D. Ariz. Mar. 28, 2007) ......... 7, 11

Cooper v. Pickett,137 F.3d 616 (9th Cir. 1997) .................................................................................... 13

Corwin v. Bresler,741 F.2d 410 (D.C. Cir. 1984) ................................................................................. 17

Desaigoudar v. Meyercord,223 F.3d 1020 (9th Cir. 2000) ...................................................................... 15, 16, 17

General Elec. Co. v. Cathcart,980 F.2d 927 (3d Cir. 1992) ..................................................................................... 17

Gompper v. VISX, Inc. ,_^'298 F.3d 893 (9 Cir. 2002) ................................................................................... 6, 8

Heliotrope Gen., Inc. v. Ford Motor Co.,189 F.3d 971 (9th Cir. 1999) ......................................................................... ........... 19

Herm v. Stafford,663 F.2d 669 (6th Cir. 1981) ......................................................................... ........... 19

Howard v. Everex Sys., Inc.,228 F.3d 1057 (9th Cir. 2000) .................................................................................. 19

Indiana Elec. Workers Pension Trust Fund, IBEW v. Dunn,No. C-06-01711 RMW, 2007 WL 1223220 (N.D. Cal. Mar. 1, 2007) .................... 18

In re 3 Com Sec. Litig.,No. C-97-21083 JW, 1999 WL 1039715 (N.D. Cal. July 8, 1999) .............. ........... 20

In re Calpine Corp. Sec. Litig.,288 F. Supp. 2d 1054 (N.D. Cal. 2003) ................................................................... 10

In re Cornerstone Propane Partners, L.P. Sec. Litig.,416 F. Supp. 2d 779 (N.D. Cal. 2005) .......................................................... ........... 10

I



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In re Cornerstone Propane Partners, L.P. Sec. Litig.,355 F. Supp . 2d 1069 (N.D. Cal . 2005 ) ................................................................... 11

In re Exxon Mobil Corp. Sec. Litig.,387 F. Supp. 2d 407 (D.N.J. 2005) .......................................................................... 18

In re Hienergy Techs., Inc. Sec. Litig.,No. SACV04-1226DOC(JTLX), 2005 WL 3071250 (C.D. Cal.Oct. 25, 2005) ...................................................................................................................9,9,10

In re ICNPharms., Inc. Sec. Litig.,299 F. Supp. 2d 1055 (C.D. Cal. 2004) ..................................................................... 9

In re Immune Response Sec. Litig.,375 F. Supp. 2d 983 (S.D. Cal. 2005) ...................................................................... 12

In re Invision Techs., Inc. Sec. Litig.,No. C04-03181MJJ, 2006 U.S. Dist. LEXIS 76458 (N.D. Cal. Aug. 31, 2006) ..... 12

In re J.P. Morgan Chase Sec. Litig.,363 F. Supp. 2d 595 (S.D.N.Y. 2005) ...................................................................... 16

In re McKesson HBOC, Inc. Sec. Litig.,126 F. Supp. 2d 1248 (N.D. Cal. 2000) ....................................................... 12, 16, 19

In re Oak Tech. Sec. Litig.,No. 96-20552 SW9 1997 WL 448168 (N.D. Cal. Aug. 1, 1997) ............................. 19

In re Read-Rite Corp. Sec. Litig.,335 F.3d 843 (9th Cir. 2003) ............................................................................... ....... 6

In re Real Estate Assocs. Ltd. P'ship Litig.,223 F. Supp. 2d 1142 (C.D. Cal. 2002) .................................................................... 16

In re Royal Dutch/Shell Transport Sec. Litig.,No. 04-374, 2006 WL 2355402 (D.N.J. Aug. 14, 2006) ......................................... 13

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

In re Splash Tech. Holdings, Inc. Sec. Litig.,No. C 99-00109 SBA, 2000 WL 1727405 (N.D. Cal. Sept. 29, 2000) .............. 19, 20

In re Syncor Int'l Corp. Sec. Litig.,327 F. Supp. 2d 1149 (C.D. Cal. 2004) ............................................................... ....... 9

In re U.S. Aggregates, Inc. Sec. Litig.,235 F. Supp. 2d 1063 (N.D. Cal. 2002) ............................................................. 10, 11

In re Vantive Corp. Sec. Litig.,283 F.3d 1079 (9th Cir. 2002) ............................................................................ ....... 8

Lampf, Pleva, Prupis & Petigrow v. Gilbertson,501 U.S . 350 (1991) ........................................................................................... 14, 18

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Neubronner v. Milken,6 F.3d 666 (9th Cir. 1993) ........................................................................................ 20

Paracor Fin., Inc. v. Gen. Elec. Ca ital Corp.,96 F.3d 1151 (9th Cir. 1996). ................................................................................... 19

Salit v. The Stanley Works,802 F. Supp. 728 (D. Conn. 1992) ........................................................................... 17

SEC v. Todd,No. 03CV2230, 2006 WL 1564892 (S.D. Cal. May 30, 2006) ............................. 7, 8

Simpson v. AOL Time Warner Inc.,452 F.3d 1040 (9th Cir. 2006) .................................................................................. 13

Southland Sec. Corp. v. INSpire Ins. Solutions, Inc.,365 F.3d 353 (5th Cir. 2004) ................................................................................... 12

Statutes

15 U.S.C. § 78u-4 et seq..................................................................................................... 1

28 U.S.C. § 1658(b) (1990) ............................................................................................... 14

Civil Local Rule 7-4(a)(3) ................................................................................................... 1

Exchange Act of 1934 § 10(b) .................................................................................. 1, 2, 14

Exchange Act of 1934 § 14(a) .................................................................................... passim

Exchange Act of 1934 § 20A ..................................................................................... passim

Federal Rule of Civil Procedure 12(b)(6) ........................................................................... 1

SEC Rule lOb-5 (a) ..................................................................................................... passim

SEC Rule lOb-5(c) ..................................................................................................... passim

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NOTICE OF MOTION AND MOTION TO DISMISS

TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD:

PLEASE TAKE NOTICE that on September 12, 2007 at 2 p .m., or as soon thereafter

as the matter may be heard, in the courtroom of the Honorable Martin J . Jenkins, United

States District Court, 450 Golden Gate Avenue, San Francisco , CA 94102, defendant Jon D.

Tompkins will, and hereby does, move pursuant to Federal Rule of Civil Procedure 12(b)(6)

and the Private Securities Litigation Reform Act of 1995 (the "PSLRA ), 15 U.S.C. § 78u-4

et seq., for an order dismissing the Consolidated Federal Securities Class Action Complaint

(the "Complaint ).

This motion is made on the grounds that the Complaint (1) fails to set forth

particularized allegations sufficient to satisfy the PSLRA, (2) fails to state a claim for

"scheme liability under Section 10(b), (3) asserts claims that are time-barred, (4) fails to

state a claim under Section 14(a) of the Exchange Act of 1934 ("Exchange Act ), (5) fails

to state a claim under Section 20(a) of the Exchange Act, and (6) fails to state an insider

trading claim under Section 20A of the Exchange Act.

This motion is based on this Notice of Motion and Motion, the Memorandum of

Points and Authorities in support thereof, the Reply in support of the Motion, the motions of

KLA and the other individual defendants, the Request for Judicial Notice and Declaration of

Warrington S. Parker III filed concurrently herewith, the papers and argument submitted in

support thereof, and any other matters that come before the Court including oral argument

on this Motion.

ISSUES TO BE DECIDED (CIVIL LOCAL RULE 7-4(A)(3))

1. Does the Complaint contain particularized scienter allegations?

2. Does the Complaint sufficiently allege the existence of a "scheme under

Section 10(b)?

3. Is Plaintiffs' 10(b) and Rule I Ob-5 claim time-barred to the extent it depends

on conduct predating June 29, 2001 and when certain plaintiffs purchased KLA stock before

Heller 2811 July 31, 2001?Ehrman LLP



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4. Does the Complaint state a claim under Section 14(a) of the Exchange Act?

5. Does the Complaint state a claim under Section 20(a) of the Exchange Act?

6. Does the Complaint state an insider trading claim under Section 20A of the

Exchange Act?

MEMORANDUM OF POINTS AND AUTHORITIES

INTRODUCTION

Plaintiffs have sued Jon Tompkins based merely on the fact that he was once an

officer, and then, within the time period for which the class seeks relief, a director of KLA-

Tencor Corporation ("KLA ). That these are the sole bases for their Consolidated Federal

Securities Class Action Complaint ("Complaint ) is revealed by what is left unsaid in the

Complaint as well as by what is alleged. The Complaint fails to allege that Mr. Tompkins

backdated an option or knew that options were being backdated, or knew, counseled or

offered insights on the proper accounting treatment for stock options. Even the confidential

witness statements incorporated in the Complaint fail to implicate-or mention- Mr.

Tompkins.

The allegations the Complaint does contain essentially provide some biographical

background on Mr. Tompkins. For example, the Complaint mentions that Mr. Tompkins

was the CEO, Chairman, and member of the Stock Options Committee, although not since

1999. It also alleges that Mr. Tompkins was a director of KLA, a position he held from

1999 to December 2006. ¶ 58.1 In setting out this biography, the Complaint acknowledges

that Mr. Tompkins' role was less than that of the other defendants. The Complaint

specifically excludes Mr. Tompkins from the groups of "officer defendants, "compensation

committee defendants, "audit committee defendants, and "nominating and governance

committee defendants, see ¶¶ 27, 34, 43, 54, and instead refers to him as "the additional

outside director defendant. Compl. at 21.

1 All citations to Plaintiffs' Consolidated Federal Securities Class Action Complaintherein will take the form 'I_ .

2DEFENDANT JON D. TOMPKINS' MOT. TO DISMISS PLS.' CONSOLIDATED FEDERAL SECURITIES CLASSACTION COMPLAINT, MEMORANDUM OF POINTS AND AUTHORITIES-MASTER FILE NO.06-CV-4065-MJJ


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This barren set of biographical allegations does not come close to alleging a viable

claim under Section 10(b) or any of the other statutes referenced in the Complaint. Far

from setting forth sufficient, particularized allegations that Mr. Tompkins committed some

wrong or lied about backdating or improperly accounted for options, knowing it was wrong,

the Complaint fails even to allege specific facts that Mr. Tompkins did anything bad, let

alone that he did it with scienter.

BACKGROUND

A. Jon D. Tompkins

Throughout the alleged class period, Mr. Tompkins was an "outside director of

KLA, rather than a corporate officer. Compl. at 21. Prior to the class period, Mr. Tompkins

served briefly as an officer of KLA between mid-1997 and mid-1998, ¶¶ 1, 57, and as

Chairman of the Board of Directors from mid-1998 through mid-1999. ¶ 57.

There are no allegations that Mr. Tompkins had direct or supervisory responsibility

for granting stock options, approving stock options, or accounting for stock options at any

point during the class period. The most Plaintiffs allege is that Mr. Tompkins served on

KLA's Stock Option Committee from mid-1997 through mid-1999, two years prior to the

class period. ¶¶ 247(a), 299.

B. Mr. Tompkins' Alleged Connection with Stock Options and Sales

Plaintiffs do not connect Mr. Tompkins to granting, dating, or accounting for stock

I options during the class period. Instead, they allege that Mr. Tompkins received and

exercised backdated options and approved options as a member of the Board of Directors.

See, e.g., ¶¶ 249, 253, 309, 312-13.

Receipt of Options . Plaintiffs allege that Mr. Tompkins received backdated stock

options, ¶ 309; however, they say saying nothing about whether Mr. Tompkins knew or

could have known that the options he received were backdated. And when read together,

the Complaint's paragraphs about the options Mr. Tompkins received during the class

period show that they could not have been backdated. Mr. Tompkins received those options

under the terms of the 1998 Outside Director Option Plan. See ¶¶ 171, 180, 191, 205.



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Through 2004, it provided each director a set number of options automatically on the date

of each annual meeting. The options were dated as of the meeting. ¶¶ 79, 81, 166, 171,

1809191.2 It follows that the November 8, 2002 option grant that Plaintiffs identify as a

backdated option was dated as of the date of the annual meeting; it was not backdated. See

Exh. A to the Request for Judicial Notice and Decl. of Warrington S. Parker III in Support

of Defendant Jon D. Tompkins' Motion to Dismiss Plaintiffs' Consolidated Federal

Securities Class Action Complaint ("RJN ) at 3.3

Sales of Stock. Plaintiffs next allege that, after Mr. Tompkins exercised "backdated

stock options, he then sold KLA stock. ¶¶ 253, 312-13. But they offer no facts to suggest

that Mr. Tompkins' exercise of stock options and sales of stock were outside of his normal

trading pattern. They do not aver that Mr. Tompkins' transactions resulted in sales of a

large percentage of his overall holdings in KLA stock. Nor do they allege that his sales of

stock immediately preceded the publication of news that resulted in a stock price increase.

In short, they do not allege any facts to suggest that Mr. Tompkins' stock sales were

suspicious in any way.

Dating of Options . Lastly, Plaintiffs contend that as a director Mr. Tompkins

"approved the backdating of option grants. ¶ 249. This allegation depends entirely on Mr.

Tompkins' role as "the additional outside director and his approval of options. See ¶ 249,

line 4-6 (citing ¶¶ 34-35, 58, 72-89). Plaintiffs do not allege Mr. Tompkins knew anything

about backdating or selected dates or did anything he knew to be wrong. As for Plaintiffs'

allegations that, prior to the class period, Mr. Tompkins served on the Stock Option

2 KLA's Special Committee found that no material backdating occurred after June30, 2002. Exh. D to RJN at 24.

3 The October 18, 2004 and May 11, 2005 options received by Mr. Tompkins alsowere not backdated. ¶ 312. The October 18, 2004 options were priced on the day of theOctober 18, 2004 annual meeting. Exh. B to RJN at 81 . The May 11, 2005 options werepriced under the terms described in KLA's 2005 proxy statement, which provided thatoutside directors would receive "2,500 share increments each quarter, approximately twobusiness days following the Company's earnings release for the prior fiscal quarter. Exh. Cto RJN at 107. The May 11, 2005 options were issued two days after KLA filed its quarterlyearnings report ¶ 130.



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Committee, which according to Plaintiffs selected option dates, there is no allegation that

Mr. Tompkins attended any meetings, selected dates or knew that there was anything wrong

even were he involved. Not even the confidential witnesses who plaintiffs offer to explain

the workings of the Stock Option Committee say these things. They do not mention any

examples of any documents Mr. Tompkins reviewed, any conversations he had, or any other

facts that suggest that, even if he did approve grants, he knew they were backdated or that

they would be accounted for improperly. In fact, they do not mention Mr. Tompkins at all.

See ¶ 247.

C. Mr. Tompkins' Alleged Involvement with Accounting and InternalControls

Plaintiffs allege that the "directors failed to properly account for stock options and

withhold taxes when employees exercised options, and failed to take steps to ensure that

KLA had proper internal controls. ¶¶ 236, 243, 254, 265. Plaintiffs allege that as directors,

certain defendants were "responsible for the company's internal accounting and financial

controls. ¶¶ 58, 265(e).

Resting their allegations solely on Mr. Tompkins' status, Plaintiffs do not allege any

facts suggesting that the accounting or any claimed lack of internal control was the result of

intentional or deliberately reckless conduct on Mr. Tompkins' part. Id. Plaintiffs do not

even allege how it was that Mr. Tompkins knew or recklessly disregarded any concerns or

issues with the accounting or the controls, or why he was responsible for them. Mr.

Tompkins was not on KLA's audit committee, he was not on KLA's compensation

committee, and he did not sign any Sarbanes-Oxley certifications regarding internal

controls. ¶¶ 264-65.

D. Alleged Involvement with Corporate Statements

Without alleging any facts that Mr. Tompkins had any involvement in the

preparation or release of the press releases cited in the Complaint, KLA's quarterly reports

filed with the SEC, or its proxy statements, Plaintiffs generally assert that the defendants

"issued false and misleading statements regarding [KLA's] financials and that they "were



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involved in the drafting, producing, reviewing and/or dissemination of the false and

misleading statements alleged in their Complaint. ¶¶ 60, 90-91, 159-60, 243, 255, 257.

The only actual involvement Plaintiffs allege as to Mr. Tompkins is that he "signed KLA's

Form 10-Ks filed with the SEC in 2001 - 2005. ¶¶ 95, 104, 113, 122, 132.

ARGUMENT

1. PLAINTIFFS DO NOT SUFFICIENTLY PLEAD THAT MR. TOMPKINSACTED WITH SCIENTER

Plaintiffs' attempts to allege that Mr. Tompkins acted with scienter at best suggest

that he could have known about options backdating and the accounting issues at KLA

because he was employed there. These allegations fall well short of the PSLRA's

heightened pleading standard, which requires "allegations of specific contemporaneous

statements or conditions that demonstrate the intentional or the deliberately reckless false or

misleading nature of the statements when made . In re Read-Rite Corp. Sec. Litig., 335

F.3d 843, 846 (9th Cir. 2003 ) (internal quotation marks and citation omitted). An inference

of scienter rising to the level demanded by the PSLRA does not exist if an inference of

innocence is "equally if not more plausible. Gompper v. VISX, Inc., 298 F.3d 893, 897

(9th Cir. 2002 ). Although Plaintiffs ' Complaint offers seven different theories in an attempt

to establish scienter-ranging from his claimed receipt of options to his resignation from

the KLA Board-these theories , alone and together, amount to nothing more than a

suggestion that Mr. Tompkins could have been involved in wrongdoing-far less than the

PSLRA requires.

A. Allegations that Mr. Tompkins Granted or Approved Backdated StockOptions Do Not Show Scienter

There is not a single allegation that Mr. Tompkins selected or was otherwise

involved in the selection of grant dates during the class period. Plaintiffs do allege in the

first sentence of paragraph 249 of their Complaint that, during his tenure as a director, Mr.

Tompkins as well as all the Director Defendants "each approved the backdating of options

grants. ¶ 249. However, as the next sentence of paragraph 249 makes clear, the allegation



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that Mr. Tompkins chose grant dates is based only on the fact that he held the position of

director and that the stock option plans allowed the Board to approve options. See ¶ 249,

lines 4-6 (citing ¶¶ 34-35, 58, 72-89). The allegations do not support any suggestion that

Mr. Tompkins did select options dates or that he knew or recklessly disregarded information

indicating that options were backdated. As such, they fail to show scienter. "[G]eneral

allegations concerning the Defendants' positions and access to information do not establish

a strong inference that they acted with scienter. Commc'ns Workers ofAm. Plan for

Employees'Pensions and Death Benefits v. CSKAuto Corp., 2007 U.S. Dist. LEXIS 22782,

at * 15 (D. Ariz. Mar. 28, 2007); SEC v. Todd, No. 03CV2230, 2006 WL 1564892, at * 1, *7

(S.D. Cal. May 30, 2006) (noting that "knowledge of the existence of the [challenged]

transactions does not allow a reasonable fact-finder to draw an inference that [the CEO] had

knowledge of their impropriety, or was reckless in not knowing ).

Nor is scienter shown by any allegation that Mr. Tompkins was a member of the

Stock Option Committee. ¶ 247. The Complaint makes clear that Mr. Tompkins was on

that committee years prior to the class allegations-from mid-1997 to 1999. Id. While

Plaintiffs allege that the committee made decisions about "what the grant dates should be,

there is no evidence that Mr. Tompkins participated in the selection of any grant dates or

knew that the committee was engaged in any wrongdoing. This omission is glaring given

the allegations of the confidential witnesses, two of whom-according to the Complaint

offered information about the committee. For example, CW #5 identifies those who were

"definitely on the committee. But he/she does not identify Mr. Tompkins. ¶ 247(b). Nor

can CW #5 state what happened at those meetings or who attended. Id. CW #4's

allegations similarly fall short. CW #4 "confirms that there was a Stock Option

Committee. He/she also explains how, in his/her alleged view, the committee operated.

However, he/she does not say anything about Mr. Tompkins, his role-if any-on the

committee, or even whether the same practices were in place while Mr. Tompkins allegedly

was on the committee. ¶ 247(c), (d), (e).



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These allegations are therefore insufficient. They do not put Mr. Tompkins in the

role of selecting option dates. They do not suggest that Mr. Tompkins, even were he in the

role of selecting dates, knew that there was some wrongdoing or that he recklessly

disregarded facts that would have indicated wrongdoing. See In re Vantive Corp. Sec.

Litig., 283 F.3d 1079, 1087 (9th Cir. 2002) (refusing to find scienter adequately pled where

plaintiff "advert[ed] to the defendants' `hands-on' management style, their interaction with

other corporate officers and employees, their attendance at management and board

meetings, and reports generated on a weekly and monthly basis in the Finance

Department[.] (internal quotation marks omitted)). The fact that no such facts are alleged

is itself significant. Gompper, 298 F.3d at 897 (noting a court will "consider all reasonable

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

plaintiffs. ).

B. Allegations that Mr. Tompkins Received Stock Options Do Not ShowScienter

Plaintiffs' allegation that Mr. Tompkins "received backdated stock options also

does not allow for an inference of scienter. ¶ 309. Even if this allegation were true , it says

nothing about whether Mr. Tompkins knew or deliberately disregarded the possibility that

the options were backdated when he received them and/or that they would be accounted for

improperly in KLA's financials . SEC v. Todd, 2006 WL 1564892 at *7 (noting that the

CEO was not an accountant and there was no evidence to show that "he had any reason to

have accounting expertise sufficient to challenge the treatment given to any particular

transaction ).

C. Allegations that Mr. Tompkins Exercised Options or Sold Stock Fail toShow Scienter

Plaintiffs offer a lengthy chart reciting that Mr. Tompkins and others exercised

I options and sold stock, but identify nothing suspicious about either of those acts. See ¶¶

312, 313. Plaintiffs do not allege that Mr. Tompkins trading was out of the ordinary.

Plaintiffs do not allege that Mr. Tompkins' sales during the class period amounted to a large



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percentage of his overall stock holdings. They say nothing about the timing of the sales - -

whether, for example, they preceded announcements or events that caused a run up in

KLA's stock price. Nor do Plaintiffs' allegations regarding the profit or proceeds that Mr.

Tompkins obtained from the transactions show the transactions were suspicious. Because

of these flaws, the Complaint is insufficient. In re Silicon Graphics Inc. Sec. Litig., 183

F.3d 970, 986 (9th Cir. 2004) (noting that insider trading is suspicious only when out of line

with prior trading practices and identifying as "factors to consider : "(1) the amount and

percentage of shares sold by insiders; (2) the timing of the sales; and (3) whether the sales

were consistent with the insider's prior trading history. ); see also In re ICNPharms., Inc.

Sec. Litig., 299 F. Supp. 2d 1055, 1068 (C.D. Cal. 2004) (refusing to find that $3 to $6

million in stock sales showed scienter where complaint did not allege insiders' prior trading

history or provide facts regarding sales as a percentage of total holdings); In re Hienergy

Techs., Inc. Sec. Litig., No. SACV04-1226(JTLX), 2005 WL 3071250, at *11-12 (C.D. Cal.

Oct. 25, 2005) (refusing to find stock sales were suspicious where plaintiffs failed to plead

sufficient information relevant to Silicon Graphics factors even where plaintiffs had pled

profits obtained).4

Plaintiffs do attempt to plead some facts to show that some of the defendants'

transactions were suspicious, but never make any such allegations about Mr. Tompkins.

Plaintiffs aver that "several of the defendants sold shares in May 2006, after some

preliminary reports that companies were backdating options and just weeks before the first

news that KLA was possibly among the list of companies engaging in such conduct. ¶

314. This lone allegation is of no help against Mr. Tompkins, however, because his last

stock transaction alleged in the Complaint was in August 2005. ¶ 313.

4 The failure to provide such allegations is all the more significant given the lengthyfive-year class period. In re Syncor Int'l Corp. Sec. Litig., 327 F. Supp. 2d 1149, 1163(C.D. Cal . 2004) (viewing allegations of insider trading with heightened scrutiny where theclass period was approximately four years and eight months).

9DEFENDANT JON D. TOMPKINS' MOT. TO DISMISS PLS.' CONSOLIDATED FEDERAL SECURITIES CLASSACTION COMPLAINT, MEMORANDUM OF POINTS AND AUTHORITIES-MASTER FILE NO. 06-CV-4065-MJJ


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D. Allegations that Mr. Tompkins Signed SEC Filings Do Not Show Scienter

The simple fact that Mr. Tompkins signed KLA's Form 10-Ks for 2001 through

2005 says nothing about whether he knew or deliberately disregarded the possibility that

they were false. ¶¶ 95, 104, 113, 122, 132. As discussed supra, plaintiffs have not pled any

facts to show that Mr. Tompkins was even aware that backdating occurred or that options

were or would be accounted for improperly. There is therefore no plausible basis for an

assumption that he should have questioned the veracity of the financials when he signed

them. See In re U.S. Aggregates, Inc. Sec. Litig., 235 F. Supp. 2d 1063, 1074 (N.D. Cal.

2002) (finding that allegations that officer was "very hands on and signed SEC filings

failed to raise an inference of scienter); In re Hienergy Techs., Inc Sec. Litig., 2005 WL

3071250, at *6 ("While signing false financial reports does constitute `making' a statement

for the purposes of 10(b) liability, a plaintiff must still show scienter on the part of the

signatory. ).

E. Defendants' Interest in Increased Compensation for Themselves andOthers Is Insufficient to Show Scienter

Plaintiffs' attempt to plead scienter by alleging that Mr. Tompkins had a motive to

increase his own or others' compensation is also fruitless. ¶¶ 305-08. It is well-established

that "motive and opportunity standing alone are insufficient grounds for establishing

scienter. In re Cornerstone Propane Partners, L.P. Sec. Litig., 416 F. Supp. 2d 779, 790

(N.D. Cal. 2005). Also, an incentive to increase one's compensation is insufficient to show

scienter. In re Calpine Corp. Sec. Litig., 288 F. Supp. 2d 1054, 1087 (N.D. Cal. 2003). In

any case, as KLA's brief in support of its motion points out, plaintiffs' insinuation that a

motive existed to compensate employees with backdated stock options because KLA could

not properly compensate employees with cash is without foundation. See KLA's Br. in

Supp. of Mot. to Dismiss.



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F. Scienter Is Not Shown From the Pervasiveness of the Alleged FraudulentScheme, From KLA's Restatement of Its Financials, or From theApplicable Accounting Rules

Plaintiffs cannot show scienter by merely pointing to the fact that KLA restated its

financials. Nor can they do so by pointing to the "duration, magnitude and pervasiveness of

the scheme. ¶ 316. The mere fact that there may have been violations of accounting

standards or other policies at KLA, even over a significant period of time, says nothing

about whether these violations occurred with an intent to deceive. See In re Cornerstone

Propane Partners, L.P. Sec. Litig., 355 F. Supp. 2d 1069, 1091 (N.D. Cal. 2005) ("In order

to distinguish `deliberate recklessness' from `ordinary carelessness,' allegations of GAAP

violations must be augmented by `facts that shed light on the mental state' of defendants,

rather than conclusory allegations that defendant must have known of the accounting

failures due to the degree of departure from established accounting principles. ).

G. Mr. Tompkins Resignation from KLA's Board of Directors Does NotShow Scienter

The only fact Plaintiffs have left to attempt to show scienter is that Mr. Tompkins

resigned from the Board in 2006 after the Special Committee's investigation. ¶ 298(f).

This fact also gets them nowhere. Without sufficient allegations to show that Mr.

Tompkins' resignation was connected to fraudulent conduct on his part, there is no basis on

which to infer scienter. See Commc'ns. Workers ofAm. Planfor Employees' Pensions and

Death Benefits,, 2007 WL 951968, at *6 (refusing to find a strong inference of scienter

absent "any details that indicate the Individual Defendants resigned or were terminated for

their active participation in fraudulent conduct. ); In re Cornerstone Propane Partners, L.P.

Sec. Litig., 355 F. Supp. 2d at 1093 (finding that defendants' departures were not of

themselves evidence of scienter where "there was no evidence that defendants' termination

was based on fraud. ); see also In re U.S. Aggregates, 235 F. Supp. 2d at 1073-74 (refusing

to find scienter based on CFO's termination, where one "could infer" that his termination

was related to a financial restatement, but plaintiff could point to no particularized

allegation refuting the equally reasonable assumption that defendant was terminated simply



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because the errors that lead to the restatement occurred on his watch or because he failed

adequately to supervise his department).5

II. PLAINTIFFS ALSO CANNOT SHOW SCIENTER THROUGHIMPERMISSIBLE GROUP PLEADING

Despite placing Mr. Tompkins into his own private category as "the additional

outside director defendant, Compl. at 21, Plaintiffs do nothing more than to pack Mr.

Tompkins into generalized allegations about groups of defendants, without explaining how

he was specifically involved. See, e.g., ¶ 236 ("Defendants wholly failed to maintain

effective internal controls over financial reporting .... ); ¶ 254 ("Defendants reported

inflated net income figures for KLA by failing to properly account for stock options .... ).

As this Court recently recognized, pleadings of this nature do not pass muster under the

PSLRA. In re Invision Techs., Inc. Sec. Litig., No. C04-03181MJJ, 2006 U.S. Dist. LEXIS

76458, at *20 n. 4 (N.D. Cal. Aug. 31, 2006) (Jenkins, J.) (recognizing that "[p]laintiffs

must allege facts tying each of the alleged misstatements and omissions to each of the

Defendants[.] (quoting In re Immune Response Sec. Litig., 375 F. Supp. 2d 983, 1031 (S.D.

Cal. 2005))); see also Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353,

365 (5th Cir. 2004) ("The PSLRA requires the plaintiffs to distinguish among those they

sue and enlighten each defendant as to his or her particular part in the alleged fraud.

(internal quotation marks omitted) (emphasis in original)).

Additionally, Plaintiffs cannot rely on the group pleading doctrine because they have

not pled that as "the additional outside director defendant, Mr. Tompkins participated in

the day-to-day activities of KLA. See Compl. at 21. For Plaintiffs to take advantage of the

group pleading doctrine as to outside directors , their "complaint must contain allegations

that an outside director either participated in the day-to-day corporate activities, or had a

special relationship with the corporation, such as participation in preparing or

5 By contrast, in In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1274(N.D. Cal . 2000), the company ' s Chairman and CEO stated that the executives were fired"for cause and that they "should have known, or did know, of... accounting problems.



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communicating group information at particular times. In re GlenFed, Inc. Sec. Litig., 60

F.3d 591, 593 (9th Cir. 1995). Because there are no such allegations against Mr. Tompkins,

the Complaint cannot survive.

III. PLAINTIFFS FAIL TO PLEAD "SCHEME" LIABILITY UNDERRULE 10B-5(A) AND (C)

Plaintiffs also fail to adequately plead that Mr. Tompkins was part of a "scheme

giving rise to liability under SEC Rule lOb-5(a) and (c). In setting out their "scheme

claim, Plaintiffs accuse defendants of four things: 1) the preparation and release of

misleading financial statements, 2) the manipulation of stock option grants, the exercise of

such options, and the sale of the stock obtained from the exercise, 3) the failure to withhold

taxes associated with the exercise of stock options, and 4) ensuring that KLA lacked

sufficient internal controls. ¶ 243.

At best, the Complaint alleges a series of wrongful acts. But a series of wrongful

acts does not constitute a scheme. A scheme is alleged when there is both wrongful acts

and, in addition, conduct that "had the principalpurpose and effect of creating a false

appearance , such as creating a sham business to hide improper conduct. Simpson v. AOL

Time Warner Inc., 452 F.3d 1040, 1048-50 (9th Cir. 2006) (emphasis added); In re Royal

Dutch/Shell Transport Sec. Litig., No. 04-374, 2006 WL 2355402, at * 8 (D.N.J. Aug. 14,

2006) (collecting authorities). No such allegations are in the Complaint.

The scheme allegations against Mr. Tompkins fail for the additional reason that there

is nothing said specifically about Mr. Tompkins' role in any scheme. Plaintiffs fail to show

that "each defendant committed a manipulative or deceptive act in furtherance of the

scheme. Cooper v. Pickett, 137 F.3d 616, 624 (9th Cir. 1997) (emphasis added). Although

Plaintiffs claim that Mr. Tompkins' position gave him the "opportunity to perpetrate the

fraudulent scheme and gave him access to "adverse undisclosed material information, ¶¶

59, 315, the fact that Mr. Tompkins could have done something wrong had he the

inclination is not enough. See In re Silicon Graphics Sec. Litig., 183 F.3d at 974 ("In order



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to show a strong inference of deliberate recklessness, plaintiffs must state facts that come

I closer to demonstrating intent, as opposed to mere motive and opportunity. ).

IV. PLAINTIFFS' SECTION 10(B) AND RULE 10B-5 CLAIMS ARE TIME-BARRED TO THE EXTENT THEY ARE BASED ON CONDUCT ORMISSTATEMENTS ANTEDATING JUNE 29, 2001

Mr. Tompkins joins in KLA's argument that Plaintiffs' 10(b) and Rule IOb-5 claim

is barred to the extent it is based on misstatements or conduct preceding June 29, 2001.6 As

KLA explains, under 28 U.S.C. § 1658(b), Plaintiffs' 10(b) claim must have been

commenced within "the earlier of (1) 2 years after the discovery of facts constituting the

violation; or (2) 5 years after such violation. The five year period in the statute is absolute

and cannot be tolled. See Lampf, Pleva, Prupis & Petigrow v. Gilbertson, 501 U.S. 350,

363 (1991) (predecessor of the current five-year period was "clearly to serve as a cutoff...

tolling principles do not apply to that period. ). Since Plaintiffs' original complaint was

filed on June 29, 2006, any conduct or misstatements predating June 29, 2001 cannot serve

as a basis for Plaintiffs' claim.

Among other things, this means that no liability can result from Mr. Tompkins'

tenure on KLA's Stock Option Committee from mid-1997 to mid-1999, from his time as an

officer of KLA, or from his receipt of stock options preceding June 29 , 2001 . It also

eliminates liability for options he exercised before that date.8 To the extent Plaintiffs' 10(b)

and Rule I Ob-5 claim is based on such conduct, it must be dismissed.

V. PLAINTIFFS FAIL TO PLEAD A SECTION 14(A) CLAIM

Plaintiffs Section 14(a) claim must be dismissed because Plaintiffs fail to properly

plead that Mr. Tompkins acted with scienter, which they must. And even if Plaintiffs were

6 For the reasons explained by KLA in its brief, Mr. Tompkins also j oins in KLA'sargument that Plaintiffs ' Section 10(b) and Rule lOb-5 claims on behalf of plaintiffs thatpurchased stock before July 31, 2001 are time-barred. KLA's Br. in Supp . of Mot. toDismiss.

7 Plaintiffs allege that Mr. Tompkins received options on August 31, 1998, October23, 1998, and November 10, 2000. ¶ 309.

8 Plaintiffs allege that Mr. Tompkins exercised options on June 7, 2001. ¶ 312.



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held to a negligence standard, they have not even alleged that Mr. Tompkins was involved

in the preparation or release of KLA's proxy statements. They also fail to show that

misstatements or omissions in the proxy statements were an "essential link in

accomplishing a proposed transaction. Finally, to the extent they base their claims on

KLA's 2001 and 2002 proxy statements, they are time-barred.

A. The PSLRA's Heightened Pleading Requirements Apply to Plaintiffs'14(a) Claims

Plaintiffs' 14(a) claim is a fraud claim. Although Plaintiffs had the option of

pleading facts supporting a theory that Mr. Tompkins acted negligently in disseminating

proxy statements containing misleading information, they chose not to do so. They chose to

allege fraudulent and intentional conduct.9 They are now bound by that decision.

Desaigoudar v. Meyercord, 223 F.3d 1020, 1022-23 & n.5 (9th Cir. 2000) (affirming

district court's rejection of plaintiff's claim that the complaint also sounded in negligence

after reviewing complaint's language which asserted "knowing [] and intentional []

misconduct); Cal. Pub. Employees' Retirement Sys. v. Chubb Corp., No. Civ. No. 00-4285

(GEB), 2002 WL 33934282, at *31 (D.N.J. 2002) (rejecting plaintiffs' attempt to plead a

14(a) claim based in negligence where it found that "[n]owhere in plaintiffs' Complaint is

there an assertion of ordinary negligence and where "plaintiffs repeatedly refer to the

defendants' actions as `a fraudulent scheme,' or `a campaign to persuade investors.' ).

Where a complaint is filled "with allegations of intentional misconduct, as it is here, a

plaintiff cannot simply erase these allegations by disclaiming allegations of fraud in one

paragraph of a 371 paragraph complaint. Cal. Pub. Employees' Retirement Sys., 2002 WL

9 See, e.g. ¶ 2 ("This action involves an admitted intentionally fraudulent scheme ...¶ 9 ("There is no doubt that the backdating of the option grants and corresponding

public misrepresentations were the result of intentional and opportunistic acts. ); ¶ 243("[D]efendants each knowingly or with deliberate recklessness committed manipulative ordeceptive acts in furtherance of the scheme .... ); ¶348 (attempting to plead negligentviolation of 14(a) by incorporating all the allegations in their complaint "except allegationsof fraud or intent and by "expressly disclaim[ing] any claim of fraud or intentionalmisconduct. ¶ 348.



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33934282, at *31 (rejecting plaintiffs attempt to disclaim "allegations of fraud, knowledge,

intent or scienter recognizing that "plaintiffs cannot transform 150 paragraphs of factual

allegations with one line ). For this reason, the heightened pleading requirements of Rule

9(b) and the PSLRA apply to Plaintiffs' ¶14(a) claims. Desaigoudar, 223 F.3d at 1022;

Cal. Pub. Employees' Retirement Sys. v. Chubb Corp., 394 F.3d 126, 145 n. 9 (3d Cir.

2004) ("Plaintiffs' section 14(a) claims must meet the PSLRA particularity requirements

because they are grounded in fraud. ).

As explained in Section I, supra, Plaintiffs have not pled that Mr. Tompkins acted

with the requisite level of scienter. Their 14(a) claims must be dismissed. See In re J.P.

Morgan Chase Sec. Litig., 363 F. Supp. 2d at 636 (finding that plaintiffs failed "to plead a

strong inference of scienter in connection with a material misrepresentation or omission

after finding that plaintiffs' Section 14(a) claims were grounded in fraud and were therefore

subject to heightened pleading requirements); In re Real Estate Assocs. Ltd. P'Ship Litig.,

223 F. Supp. 2d 1142, 1148 (C.D. Cal. 2002).

B. Plaintiffs Also Have Not Pled Any Facts to Show that Mr. TompkinsActed Negligently In Connection With the Preparation or Release ofKLA's Proxy Statements

Even if Plaintiffs could base a Section 14(a) claim on a negligence theory, their

allegations are insufficient. They have failed to plead detailed facts "giving rise to a strong

inference that Mr. Tompkins acted negligently. In re McKesson HBOC, Inc. Sec. Litig.,

126 F. Supp. 2d 1248, 1267 (N.D. Cal. 2000) (noting that negligence must be pleaded with

particularity under the PSLRA).

In fact, there are no allegations at all that Mr. Tompkins acted negligently. Plaintiffs

offer only an undifferentiated group allegation: that "[i]n the exercise of reasonable care,

defendants should have known that the Proxy Statements were materially false and

misleading ¶ 353. Such a statement is insufficient. In re McKesson HBOC, Inc. Sec.

Litig., 126 F. Supp. 2d at 1267 (allegation that Section 14(a) defendants "acted negligently

and without due care in distributing ... the Joint Proxy Statement insufficient under

PSLRA). It says nothing about whether Mr. Tompkins had any involvement in drafting or



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approving the Proxy Statements or whether he "knew of the facts allegedly omitted from the

proxy statement[s]. Salit v. The Stanley Works, 802 F. Supp. 728, 733 (D. Conn. 1992).

Without either type of allegation "plaintiffs have insufficiently pled a negligence claim.

Id.

C. Plaintiffs Have Not Shown that Any Alleged Misstatements or Omissionsin Proxy Statements Were an "Essential Link" in Accomplishing aProposed Transaction

A Section 14(a) plaintiff must show "transaction causation -that the proxy

statement "was an essential link in the accomplishment of the proposed transaction.

Desaigoudar, 223 F.3d at 1022; Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 933 (3d Cir.

1992). Plaintiffs' propose this link: had Plaintiffs known about the backdating they would

not have voted for certain directors and those directors could not have continued their

wrongdoing. ¶¶ 354, 362.

These allegations do not amount to transaction causation. "[T]he mere fact that

omissions in proxy materials, by permitting directors to win re-election, indirectly lead to

financial loss through mismanagement will not create a sufficient nexus with the alleged

monetary loss. Gen. Elec. Co., 980 F.2d at 933.; Corwin v. Bresler, 741 F.2d 410, 428

(D.C. Cir. 1984) (holding causation requirement not met by allegation that that "due to the

misleading proxy statements the current directors were reelected and he, as a shareholder,

was damaged by the continued fraudulent acts of the elected directors[.] ).

Although Plaintiffs also contend that proxy statements were connected to the 2004

Equity Incentive Plan and the IRC Section 162(m) Performance Bonus Plan, they have not,

and cannot, plead that approval of these plans actually caused them any harm. See Gen.

Elec. Co., 980 F.2d at 933 n. 12 (affirming dismissal of Section 14(a) claim where plaintiff

had sought damages based on the adoption of particular provisions but there was "nothing

in the complaint to support a conclusion that the ... provisions caused damage). By its

terms, the 2004 Equity Incentive Plan prohibited the backdating of stock option grants-the

very activity that is the source of Plaintiffs' allegations of fraud. See ¶ 88 (the 2004 Equity

Incentive Plan states, "[t]he per share exercise price for the Shares to be issued pursuant to



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exercise of an Option shall be determined by the Administrator and shall be no less than

100% of the Fair Market Value per share on the date of the grant. ). In any event, that plan

was adopted after the backdating at the company allegedly stopped. Exh. D to RJN at 24.

Plaintiffs also do not provide aLny details regarding the terms of the IRC Section 162(m)

Performance Bonus Plan, how that plan could possibly have harmed Plaintiffs, or indeed

whether the plan had anything whatsoever to do with option grants. See ¶ 294 (quoting the

2006 Proxy Statement that "at the 2005 annual meeting, the stockholders approved a new

Performance Bonus Plan structured in a manner that will allow the Company to qualify all

or part of the compensation earned under that plan as performance-based compensation not

subject to the $1 million limit on deductibility under Section 162(m). ).

D. Plaintiffs' Section 14(a) Claims are Time-Barred to the Extent They AreBased on KLA's 2001 and 2002 Proxy Statements

Section 14(a) claims "must be commenced within one year after the discovery of the

facts constituting the violation and within three years after such violation . Indiana Elec.

Workers Pension Trust Fund, IBEW v. Dunn, No. C-06-01711 RMW, 2007 WL 1223220, at

*4 (N.D. Cal. Mar. 1, 2007) (quoting Lampf, Pleva, Lipkind, Prupis & Petigrow v.

Gilbertson, 501 U.S. 350, 364 (1991) (emphasis added). The limitations period for claims

under Section 14(a) begins to run "on the date that the allegedly false or misleading

statement underlying the claim[] was made. In re Exxon Mobil Corp. Sec. Litig., 387 F.

Supp. 2d 407, 421 (D.N.J. 2005).

The original class action complaint was filed in this case on June 29, 2006.

Accordingly, any claims arising from proxy statements issued before June 29, 2003 (3 years

before the original complaint was filed) are time-barred. KLA's 2001 and 2002 proxy

statements were issued on Sept. 21, 2001 and Sept. 20, 2002 respectively. ¶¶ 166, 171. To

the extent the claims are based on these statements they should be dismissed.


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Case 3:06-cv-04065-MJJ Document 107 Filed 05/21/2007 of 2811

VI. PLAINTIFFS FAIL TO STATE A CLAIM FOR "CONTROLLING PERSON"LIABILITY UNDER § 20(A) OF THE EXCHANGE ACT

For the reasons set forth in this brief and in the brief of KLA, Plaintiffs fail to

adequately plead a primary violation of the Exchange Act. Their § 20(a) claim, therefore,

fails. Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir. 1996)

(recognizing that to establish "controlling person liability under § 20(a), plaintiffs "must

show that a primary violation was committed[.] ); Heliotrope Gen., Inc. v. Ford Motor Co.,

189 F.3d 971, 978 (9th Cir. 1999) (holding that defendants could not be liable under § 20(a)

because they were not liable under another provision of the Exchange Act).

Even if there were a primary violation, the Complaint would not make out a §20(a)

claim against Mr. Tompkins. Plaintiffs have failed to plead specific facts that show that Mr.

Tompkins "`directly or indirectly' controlled the violator. Paracor Fin., Inc., 96 F.3d at

1151; Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000).

It is not enough that Mr. Tompkins was a director . "A director ` is not automatically

liable as a controlling person . Burgess v. Premier Corp., 727 F.2d 826, 832 (9th Cir.

1984) (quoting Herm v. Stafford, 663 F.2d 669 , 684 (6th Cir. 1981)). Instead, there must be

sufficient allegations that reflect that a defendant has "actual participation in the

corporation ' s operation or some influence before the consequences of control may be

imposed.' Id.; Howard, 228 F.3d at 1066 n. 10 ("The status or position of an alleged

controlling person, by itself, is insufficient to presume or warrant a finding ofpower to

control or influence . ); In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp . 2d at 1277

(plaintiff must "plead and prove [ ] with particularity that "defendants exercised a

significant degree of day-to-day operational control , amounting to the power to dictate

another party's conduct or operations (internal quotation marks omitted)); In re Oak Tech.

Sec. Litig., No. 96-20552 SW, 1997 WL 448168, at * 15 (N. D. Cal. Aug. 1, 1997)

(plaintiffs must plead circumstances of control relationship with particularity under Rule

9(b) and the PSLRA); In re Splash Tech . Holdings, Inc. Sec. Litig., No. C 99 -00109 SBA,



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2000 WL 1727405, at * 15 (N.D. Cal. Sept. 29, 2000) (stating similarly). No such

I allegations against Mr. Tompkins have been made.

Nor is it enough that Mr. Tompkins signed SEC filings. See ¶ 57. This does not

reflect control necessary to satisfy the elements of a section 20(a) claim. See In re Splash

Tech. Holdings, Inc. Sec. Litig., 2000 WL 1727405, at * 16 (holding that plaintiff failed to

allege control with particularity as to a defendant director despite the fact that he signed a

prospectus and registration statement and the complaint's allegation that he had "access to

unspecified inside information[.] ). Accordingly, Plaintiffs' § 20(a) claim should be

dismissed.

VII. PLAINTIFFS FAIL TO STATE A § 20A INSIDER TRADING CLAIM

In addition to the reasons set forth above, Plaintiffs' § 20A claim fails because

Plaintiffs do not plead facts to show that Mr. Tompkins possessed material non-public

information when he traded KLA securities. Neubronner v. Milken, 6 F.3d 666, 672 (9th

Cir. 1993) (noting that plaintiff must allege "specifically what information [defendant]

obtained, when and from whom he obtained it, and how he used it for his own advantage. ).

Plaintiffs' vague assertion that "defendants were in possession of material, adverse, non-

public information about KLA at the time options were granted or exercised or stock was

sold (¶ 367) is not sufficient. See In re 3 Com Sec. Litig., No. C-97-21083 JW, 1999 WL

1039715, at *8 (N.D. Cal. Jul. 8, 1999) (finding that plaintiff's sole allegation that the

defendants possessed the "material adverse non-public information about USR and 3Com

complained of herein when they sold their shares of stock to be "too conclusory to give

rise to liability for insider trading under Section 20A. ). Moreover, as explained in Section

I supra, Plaintiffs do not plead any facts to show that Mr. Tompkins was aware of any

backdating issues or that his transactions were suspicious in any way. Accordingly,

Plaintiffs' § 20A claim should be dismissed.

CONCLUSION

For the foregoing reasons, Mr. Tompkins respectfully requests that the Court dismiss

the Complaint and all claims asserted therein against him.



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I May 21, 2007 Respectfully submitted,

HELLER EHRMAN LLP

By /s/ WARRINGTON S. PARKER IIIWarrington S. Parker III

Attorneys for DefendantJON D. TOMPKINS



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SV 2278583 v3

5/21/07 9:17 PM (43611.0004)


In Re: KLA-Tencor Corporation Securities Litigation...

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