Free Response to Motion - District Court of Colorado - Colorado

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 1 of 29

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO
Civil Action No. 04-cv-01006-RPM

SPECIAL SITUATIONS FUN III, L.P.; SPECIAL SITUATIONS CAYMAN FUN, L.P.;
SPECIAL SITUATIONS TECHNOLOGY FUN NEW, L.P.; and
SPECIAL SITUATIONS TECHNOLOGY FUN II, L.P., on behalf of

themselves and others

similarly situated,
Plaintiffs,
v.

QUOV ADX, INC.,

Defendant.

DEFENDANT QUOV ADX, INC.'S OPPOSITION TO

LEAD PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT
INTRODUCTION
Although Defendant Quovadx, Inc. ("Quovadx") has admitted to improperly recognizing

revenue in financial statements incorporated in its December 10, 2003, amended Form S-4

Registration Statement ("Registration Statement") in connection with its transaction with
Infotech Network Group ("Infotech"), Lead Plaintiffs ("Plaintiffs") now seek partial summary
judgment on a separate basis ofliability under Section 11 of

the Securities Act of 1933 ("Section

11"). That is, the Registration Statement also contained material omissions regarding the

Infotech agreements and transactions. Plaintiffs' Motion for Partial Summary Judgment
("Plaintiffs' motion"), however, fails for multiple reasons:

First, the motion is premised on "facts" that are not only disputed, but wrong, and which
Quovadx will disprove at triaL. Although Plaintiffs are free to try to persuade the jury at trial that

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 2 of 29

Quovadx's failure to state these "facts" establishes an additional basis of Section 11 liability,

questions as to whether the allegedly undisclosed "facts" are in fact true are inherently factual
issues and inappropriate for resolution on summary judgment.

Second, the motion is premised on alleged facts that, even if true, did not exist or were
unknown as of the date on which Quovadx fied its Registration Statement (z. e., December 10,
2003). To be actionable, the allegedly omitted facts must have existed or been known as of

the

date the Registration Statement was filed.
Third, the motion fails to identify any allegedly omitted fact that is material as a matter of

law. Indeed, Plaintiffs fail to cite any case in which a court has decided that an omission was
material as a matter of law under Section 11. (See PIs.' Br. at 1 -21.) The only Section 11 cases

that have decided materiality as a matter of law have concluded that an omission was
immaterial.

Fourth, Plaintiffs fail to identify any omitted fact that was required to be disclosed in the
Registration Statement by United States Securities and Exchange Commission ("SEC")

Regulation S-K, Items 101 and 303, 17 C.F.R. §§ 229.101, 229.303. In fact, Plaintiffs' brief
shoehorns their first three fatal flaws into their arguments based on Items 101 and 303.

Fifth, Plaintiffs fail to identify any statement, other than the affrmative misstatement
regarding Infotech revenues for which Quovadx has already accepted responsibility, that was

rendered misleading as a result of an alleged omission. In essence, Plaintiffs have asserted a
nonsensical theory of liability-namely, because Quovadx included material misstatements in its

Registration Statement, Quovadx necessarily "omitted" to disclose that such statements were

2

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 3 of 29

false. Plaintiffs fail to cite any authority to support their position that omissions liability can be
independently based on an alleged omission that is subsumed by an affrmative misstatement.

STATEMENT OF FACTS

A. Quovadx's Agreements with Infotech and Public Disclosures Regarding
Those Agreements
Quovadx is a publicly-traded corporation in the business of creating and selling enterprise

software. (See, e.g., First Am. Compl. ii 12.) In the third quarter of 2003, Quovadx negotiated

two separate contracts with an Indian firm, Infotech Network Group, which represented a

conglomerate of 15 different companies that were owned and operated by one of India's
wealthiest families, the B. K. Birla family. (See Quovadx, Inc.' s Resp. to PIs.' Interrogatories &

Requests for Admissions at 11-16, attached hereto as Exhibit 1.) Under the first contract, the
Strategic Partner Outsourcing Agreement that Quovadx and Infotech executed on September 8,

2003 ("Outsourcing Agreement"), Quovadx agreed to purchase from Infotech up to $2,460,000

million in certain research and development, back offce, and call center services, as requested
by Quovadx through Statements of

Work to be negotiated by the parties. (Id at 4, 15.) Under

the second contract- the September 8,2003, Software Distributor Agreement between Quovadx

and Infotech and the September 25, 2003, Amendment No. 1 to the Distribution Agreement

(together, the "Distribution Agreement")-Infotech agreed to purchase from Quovadx
approximately $7,600,000 worth of

software licenses. (Id at 3-4,11-12.)

Quovadx publicly announced these "related" agreements in an October 22, 2003, press
release. (PIs.' Mot. Ex. 1 at 1.) The press release also stated that Quovadx had recognized
revenue from the Distribution Agreement in the third quarter of2003. (Id)

$4,600,000 of

3

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 4 of 29

B. Quovadx's Acquisition of

Rogue Wave Software, Inc. and Filing of

Form S-4

Registration Statements
At approximately the same time the Infotech Distribution Agreement was announced,
Quovadx was engaged in merger negotiations with Rogue Wave Software, Inc. ("Rogue Wave").
(See, e.g., First Am. Compl. iiii 30-32; PIs.' Mot. Ex. 3 at 1; zd Ex. 6 at 4, 59.) Quovadx and

Rogue Wave ultimately agreed to merge, and under the merger agreement, Rogue Wave
stockholders received $4.09 per share in cash and 0.5292 shares of

Quovadx stock for each share

of

Rogue Wave stock. (PIs.' Mot. Ex. 6 at 4.) Quovadx issued new shares to the Rogue Wave

shareholders, and on November 12, 2003, fied an initial Form S-4 Registration Statement Under

the Securities Act of 1933, (id), followed by an amended Form S-4 Registration Statement on

December 10, 2003 ("the Registration Statement"), (id Ex. 7). The Registration Statement
incorporated Quovadx's Form 10-Q for the third quarter of 2003 ("Form 10-Q"), (id Ex. 7 at
11), which in turn incorporated financial statements that included the $4,600,000 in revenue that

Quovadx had recognized from the Infotech Distribution Agreement in the third quarter of 2003, (id Ex. 5 at 4, 23, 25).
C. Quovadx's Restatement of Its 2003 Third Quarter Revenue and Other Pre-

suit Disclosures Regarding the Infotech Relationship

On March 15, 2004, Quovadx publicly announced that it had been unsuccessful in
collecting funds from Infotech under the Distribution Agreement. (PIs.' Mot. Ex. 9 at 1.) As a

result, Quovadx also announced that it had restated its published 2003 third quarter financial
results and had revised its previously announced preliminary 2003 fourth-quarter financial

results "by removing all revenue associated with the shipment of software product to Infotech

Network Group." (Id)

4

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 5 of 29

On April 12, 2004, Quovadx publicly announced that the SEC had notified Quovadx that

the SEC's previously announced informal inquiry had become a formal investigation, and that

the Audit Committee of Quovadx's Board of Directors had retained the law firm Hogan &
Hartson LLP to conduct an investigation of Quovadx's relationship with Infotech, as well as
Quovadx's disclosures concerning Infotech. (PIs.' Mot. Ex. 11 at 1.) That same day Quovadx
also announced the resignations of former President and CEO Lorine Sweeney ("Sweeney") and

former CFO Gary Scherping ("Scherping"). (Id Ex. 12 at 1.)

On May 13, 2004, Quovadx issued a press release disclosing the results of the Audit
Committee's investigation into the Infotech relationship. (PIs.' Mot. Ex. 13 at 1 -2.) In pertinent

part, the release stated that the Audit Committee had found the following: (1) as of May 13,
2004, Quovadx had not yet received any payment from Infotech under the Distribution
Agreement, and Infotech continued to owe Quovadx approximately $14,100,000 for software

that had been shipped to Infotech; (2) prior to entering into the Distribution Agreement, Infotech

"had not been a software distributor or sold software"; and (3) Quovadx could not determine
whether the purported line of credit maintained by Infotech at a bank in India had existed, that
such line of credit was secured by liquid assets, or that it was capable of backing letters of credit

to be established by Infotech to secure payment under the Distribution Agreement. (Id) The
same press release also disclosed that Quovadx's new management had investigated the
circumstances surrounding the Outsourcing Agreement and had reached the following

conclusions:

(The J outsourcing agreement was likely an inducement to Infotech to enter into the distribution agreement referred to above and also executed on September 8, 2003, and that Infotech would not have entered into the distribution agreement without concurrently entering into the outsourcing agreement. There also appears

5

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 6 of 29

to have been an additional inducement to Infotech to enter into the distribution

agreement in the form of discussions between Infotech and Quovadx's former
management regarding a target of an additional $ 1 0 million in outsourcing services to be purchased by Quovadx from Infotech on an annual basis. There is

no legally binding commitment for Quovadx to purchase any such additional
outsourcing services. . . .

Quovadx has made payments to Infotech totaling approximately $2.9 million, consisting ofa $410,000 payment in October 2003, payments totaling $500,000 in December 2003 and a payment of approximately $2 million in March 2004. These payments were authorized by Quovadx's former management, and were
purported to be prepayments to Infotech under the outsourcing agreement.

Certain of these payments appear to have been made for the purpose of enabling Infotech to establish the letters of credit required to secure Infotech's payment

obligations under the distribution agreement. Infotech has represented to
Quovadx that these funds were used to create the necessary infrastructure to

accommodate the anticipated increase in outsourcing work from Quovadx to
Infotech. Quovadx cannot confirm that the funds were used for these purposes, or that it will receive full benefit from the payment of such funds to Infotech.

(Id at 2-3.) Quovadx's May 13, 2004, press release did not report any finding that any
transaction with Infotech was fraudulent, was made in bad faith, or was otherwise improper.
(See zd) Likewise, Quovadx has not admitted any wrongdoing in connection with the Infotech

agreements, but only has admitted that Quovadx improperly recognized revenue from the
Distribution Agreement in the third quarter of2003. (See, e.g., Ex. 1 at 11-21.)

D. Plaintiffs' Lawsuit and Allegations of Material Omissions
This lawsuit was fied on May 17, 2004, against Quovadx, Sweeney, Scherping, and the

members of Quovadx's Board of Directors, alleging that the Infotech transactions were
fraudulent and intended to inflate the price of Quovadx's stock. (First Am. Compl. iiii 56, 58,
69.) Plaintiffs' complaint alleges that the "Registration Statement contained misrepresentations

of material facts and omitted to state material facts required to be stated in order to make the
statements contained therein not misleading." (Id ii 68.) Quovadx has admitted that the amount

6

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 7 of 29

of its revenues originally reported II its Form 10-Q, as incorporated by reference in the
Registration Statement, constituted an affrmative misstatement of material fact, and that

Quovadx is liable to the Plaintiff Class under Section 1 1 because the Registration Statement

contained the aforementioned untrue statement of material fact. Currently, Plaintiffs' only
remaining Section 1 1 claims against Quovadx are based on their allegations that certain

statements in the Registration Statement were misleading due to material omissions.
As Plaintiffs note, there are two possible bases of omissions liability under Section 1 1 :
(1) where an omitted fact was "required to be stated" and (2) where the omitted fact was

necessary to make the Registration Statement "not misleading." (PIs.' Br. at 10.) See also 15
U.S.C. §§ 77k(a) & 77k(e). Relying on both of these standards, Plaintiffs argue that Quovadx
had a duty to disclose the following specific facts surrounding the Infotech transaction.
1. Quovadx induced Infotech to enter into the Distribution Agreement by entering into a contemporaneous Outsourcing Agreement under which Quovadx agreed to pay Infotech $2,460,000 for outsourcing services.
2. Infotech would not have entered into the Distribution Agreement without a

contemporaneous Outsourcing Agreement.
3. Quovadx had made a $410,000 payment to Infotech in October 2003, purportedly as a "prepayment" under the Outsourcing Agreement, but which was actually made to enable Infotech to establish the letters of credit required to secure Infotech's payment obligations under the Distribution Agreement, and that this "prepayment" was part of a total of $2,900,000 in prepayments made to Infotech
between October 2003 and March 2004.

4. Quovadx induced Infotech to execute the Distribution Agreement with a pledge to purchase from Infotech an additional $10,000,000 in outsourcing services annually from Infotech.
5. Infotech was an outsourcing agent for Indian companies seeking outsourcing

work, not a software distributor or seller, and prior to the Distribution Agreement, Infotech had no experience distributing or selling software.
6. Quovadx had received no payments from Infotech under any of

the agreements.
7

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 8 of 29

7. Quovadx could not confirm the existence ofInfotech's letter of credit purportedly maintained at a bank in India, or that such letter of credit had existed.
8. Quovadx did not expect such letters of credit, or any other credit facilities established by Infotech, to be a source of payment by Infotech for amounts due under the Distribution Agreement.
(See PIs.' Br. at 6_7.)1

ARGUMENT
In order for the jury to hold Quovadx liable for the alleged omissions from the

Registration Statement, Plaintiffs must (1) establish that the omitted "facts" are in fact true, (2)

prove that the information regarding these "facts" existed at the time Quovadx fied its
Registration Statement, (3) establish that the "facts" were material2, and (4) demonstrate that the
"facts" were either (a) specifically required by federal

law to be disclosed in the Registration

1 Throughout their brief, Lead Plaintiffs frequently draw conclusions from and
characterize these purported "facts" in a pejorative way, suggesting that "the Infotech Contract was a sham," (PIs.' Br. at 6), and that the transaction was "circular," (PIs.' Br. at 11). Although Plaintiffs may try to persuade the jury that their characterizations are accurate and justified, Quovadx disputes the truth of these purported facts, (id at 11 -2 1), and these disputed facts cannot provide a basis for entry of summary judgment on omissions liability. See Fed. R. Civ. P. 56( c) ("The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affdavits, if any, show that there is
no genuine issue as to any material fact and that the moving party is entitled to a judgment as a

matter of law." (emphasis added)). Moreover, it is well-established that Quovadx did not have any duty to characterize the Infotech agreements or transactions as fraudulent in Quovadx's SEC fiings. See, e.g., Lessler v. Little, 857 F.2d 866, 875 (1st Cir. 1988) (affrming dismissal of 1934 Act claims where the plaintiff alleged that the company failed to label or describe a transaction as a "shame" or "guise," because under "established case law" there is no claim based on the wording and editorial presentation" of a proxy statement); Kas v. Fin. Gen. Bankshares, Inc., 796

F.2d 508, 517 (D.C. Cir. 1986) (the federal securities laws only require that the facts be
disclosed; there is no duty to "label or editorialize on the disclosed facts"). 2 The test of materiality is identical under Sections 11 and 1 O(b). E.g., Beecher v. Able,

435 F. Supp. 397, 413 (S.D.N.Y. 1977). Thus, Section 10(b) cases discussing the materiality
requirement are relevant to Plaintiffs' motion here.

8

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 9 of 29

Statement or (b) necessary to make one or more statements in the Registration Statement not

misleading. See 15 U.S.C. § 77k(a).3 Whether any of Plaintiffs' allegedly omitted facts meet
this standard is a question of disputed fact, making summary judgment inappropriate here.

Plaintiffs' alleged omissions do not support Plaintiffs' motion because Quovadx disputes

the veracity, in whole or in part, of all of these alleged "facts," except the fifth fact, (Ex. 1 at 1121; Argument, Part II.A, infra); denies that several of the alleged facts existed or were known as

of the date of Quovadx' s Registration Statement, (see Argument, Part II.A, infra); disputes the

materiality of alleged facts one through eight, (see Argument, Parts II.B, infra); disputes
Plaintiffs' characterization of the Distribution Agreement as a "phony" or "sham"; disputes that

Quovadx was required to disclose the alleged facts pursuant to Regulation S-K, Items 101 and

303, 17 C.F.R. §§ 229.101, 229.303, (see Argument, Part III, infra); and denies that Quovadx

was required to disclose any additional information about the Distribution Agreement once

3 See also Oxford Asset Mgmt., Ltd v. Jaharis, 297 F.3d 1182, 1189 (1 lth Cir. 2002)

("To avoid dismissal of a section 11 omission claim, plaintiffs must properly allege: 1) the
prospectus contained an omission; 2) the omission was material; 3) defendants were under a duty to disclose the omitted material information; and 4) that such information existed at the time the

prospectus became effective."); Cooperman v. Individual, Inc., 171 F.3d 43, 47, 49 (1st Cir. 1999) ("Although in the context of a public offering there is a strong affrmative duty of
disclosure, it is clear that an issuer of securities owes no absolute duty to disclose all material

information."); Hohmann v. Packard Instrument Co., 471 F.2d 815, 821-22 (7th Cir. 1973)
(affrming district court's directed verdict in favor of defendants on Section 11 claims where "no evidence was offered or submitted or received by the Court that there was a material fact omission from the prospectus and that there was no evidence offered that if there was a fact, that

it was in existence at the time of the effective date of the prospectus"); Freedman v. Value
Health, Inc., 958 F. Supp. 745 (D. Conn. 1997) ("(DJefendants are liable only for nondisclosure
of 'hard' material information that was in their possession at the effective date of the

Prospectus.").

9

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 10 of 29

Quovadx had corrected its improper recognition of revenue from that agreement, (see Argument,
Part iv, infra).

I. THE STANDARD APPLICABLE TO PLAINTIFFS' MOTION
Generally, summary judgment is appropriate where the evidence, viewed in a light most
favorable to the non-moving party, shows that there is no genuine issue of material fact and that

the moving party is entitled to judgment as a matter of law. Blackhawk-Central City Sanitation

Dist. v. Am. Guar. & Liab. Ins. Co., 214 F.3d 1183, 1188 (10th Cir. 2000). When, as here, the
issues before the Court involve the determination of the materiality of alleged misrepresentations
or omissions, a heightened standard should be applied because the "determination requires

delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of

facts and the significance of those inferences to him, and these assessments are peculiarly ones
for the trier of fact." TSC Indus., Inc. v. Northway, Inc., 426 US. 438, 450 (1976). "Only if

the

established omissions are so obviously important to an investor, that reasonable minds cannot
differ on the question of materiality is the ultimate issue of materiality appropriately resolved as

a matter of law by summary judgment." Id (internal quotation marks omitted); accord Connett
v. Justus Enters. of Kan., Inc., 68 F.3d 382, 384 (10th Cir. 1995). Under this standard, summary
judgment with respect to Quovadx's liability for the omission of

Plaintiffs' alleged "facts" would

be improper for the several reasons discussed in Part II below. Cf Basic Inc. v. Levinson, 485
US. 224, 240 (1988) (adopting a "fact-specific inquiry" in determining materiality); In re
AMDOCS Ltd Sec. Litig., 390 F.3d 542, 547 (8th Cir. 2004) ("materiality is generally a question
of fact reserved for the jury").

10

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 11 of 29

II. PLAINTIFFS' OMISSIONS THEORY OF LIABILITY REQUIRES THE

RESOLUTION OF MULTIPLE, DISPUTED QUESTIONS OF FACT BEFORE SECTION 11 LIABILITY CAN BE IMPUTED TO QUOV ADX
A. Most of

the Alleged Omitted "Facts" Are Untrue, Did Not Exist as of December 10, 2003, or Both, and Therefore Cannot Support Omissions Liability

Alleged omissions one, two, three, four, six, seven, and eight do not meet the first two
elements of liability - that the "facts" are true and existed as of December 10, 2003, the date on
which Quovadx fied its Registration Statement that incorporated the November 11, 2003, Form

10_Q.4 As shown in Exhibit 1, Quovadx disputes the veracity, in whole or in part, of each of
these purported facts and also disputes the time in which the undisputed facts were known and

available to Quovadx. (Ex. 1 at 10-22.) Because there is a genuine issue of material fact on
these points, summary judgment would be improper, and Plaintiffs must prove the truth of their

allegations to the jury. See Hohmann, 471 F.2d at 821-22 (omissions-based claim was defeated
because the plaintiffs failed to prove truth of the omitted fact and timely existence of same).
1. Alleged Omissions One and Two

As to the first and second alleged omissions, Quovadx has never admitted that it induced
Infotech to enter into the Distribution Agreement by entering into a contemporaneous

Outsourcing Agreement in which Quovadx agreed to purchase from Infotech $2,460,000 in

4 The fifth set of alleged omissions - that Infotech was an outsourcing agent for Indian

companies and that Infotech had no experience distributing or selling software - are true statements, but they were not material facts requiring disclosure. (See Argument, Part II.B,
infra.) Although Quovadx's new management is not aware of any information indicating that Infotech itself had any experience as a software distributor before entering into the Distribution Agreement, one or more of the 15 Indian companies that were promoted and represented by
Infotech reportedly had prior software distribution experience. (See Ex. 1 at 13, 19,25.)

11

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 12 of 29

outsourcing services. Nor has Quovadx admitted that Infotech would not have entered into the
Distribution Agreement but for the Outsourcing Agreement. (E.g., Ex. 1 at 15-16.) Quovadx

can only speculate as to whether Infotech was induced to enter into the Distribution Agreement

and whether Infotech would not have entered into the Distribution Agreement if Quovadx had

not simultaneously entered into the Outsourcing Agreement. (Id) Further, it is demonstrably
untrue that Quovadx was obligated to purchase $2,460,000 in outsourcing services; that figure was merely an estimate of the services that Quovadx would purchase from Infotech in the first
year under the agreement, and under the terms of the Outsourcing Agreement Quovadx was

required to pay for outsourcing services only after Quovadx had requested and Infotech had
performed such services. (Id) Still further, Quovadx has admitted only that, in early May 2004,

five months after the Registration Statement was fied and after Quovadx's new management had
conducted a review of the circumstances surrounding the Outsourcing Agreement, new

management's opinion was that Quovadx probably had entered into the Outsourcing Agreement

as an inducement for Infotech to enter into the Distribution Agreement. 5 (See PIs.' Mot. Ex. 13
at 2; Ex. 1 at 15-16.)

5 Even if Quovadx had made such an admission, Plaintiffs' brief wholly fails to explain
why this fact would be material as a matter of

law. (See PIs.' Br. at 6-20.) Quovadx could have entered into the necessary outsourcing arrangements with some company other than Infotech, but if Infotech was willing to contemporaneously become Quovadx's software distributor in the enormous Indian market in the event that Quovadx selected Infotech as the outsourcing agent, it made perfect economic sense for Quovadx to select Infotech, rather than some third party. (See,
e.g., Ex. 1 at 15-16 (responding that Quovadx initiated negotiations with Infotech regarding Quovadx's outsourcing needs months before Quovadx and Infotech discussed the possibility that Infotech would become Quovadx's exclusive distributor in India and certain African countries).

12

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 13 of 29

2. Alleged Omission Three

As to the third alleged omission (or set of related omissions), the alleged facts are neither
true nor did they exist as of

December 10, 2003. Quovadx admits that, in October 2003, it made

a $410,000 prepayment to Infotech pursuant to a Statement of Work under the Outsourcing

Agreement and that the payment was authorized, in part, for the purpose of providing a margin
payment to Infotech's bank in India to assist Infotech in establishing a letter of credit needed to

secure Infotech's payment obligations under the Distribution Agreement. (Ex. 1 at 16-17.) But

Quovadx also received actual value for this prepayment in the form of outsourcing services
performed by Infotech. (See id at 20-21.) Further, Quovadx has never admitted that its

$500,000 in prepayments to Infotech in December 2003 were made for the purpose of assisting
Infotech in establishing letters of credit. (See id at 15-16, 20-21.) Quovadx received value for

these December 2003 payments in the form of outsourcing services provided by Infotech. (Id)

Moreover, the December 2003 prepayments were authorized and made after Quovadx fied its
Form 10-Q and Registration Statement, so as a factual matter it would have been impossible for
Quovadx to omit this information from either SEC fiing. Still further, Quovadx's new

management also concluded in early May 2004 that Quovadx's $1,960,000 payment to Infotech
on March 10, 2004, was not a legitimate prepayment for Infotech's outsourcing services
pursuant to a Statement of Work, but Quovadx also is not aware of

information showing, and has

never admitted, that the payment was intended to be used to enable Infotech to establish letters of
credit. (See id) Obviously, the March 10, 2004, payment to Infotech occurred months after

Quovadx fied its Registration Statement, so it is factually impossible for a jury or the Court to

find that Quovadx omitted this "fact," even if it were true, which it is not. Cf, e.g., Gross v.

13

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 14 of 29

Summa Four, Inc., 93 F.3d 987, 995 (1st Cir. 1996) (affrming dismissal of complaint where the

plaintiff failed to allege facts "from which one could reasonably infer" that the defendant knew
about the alleged information at the time it issued the subject press release).
3. Alleged Omission Four

As to the fourth alleged omission-i. e., that Quovadx induced Infotech to enter into the

Distribution Agreement by pledging to purchase an additional $10,000,000 annually II
outsourcing services-this "fact," too, is not true. Quovadx never pledged to purchase an
additional $10,000,000 in outsourcing services annually from Infotech. (See, e.g., Ex. 1 at 16.)
In early May 2004, Quovadx's new management determined that certain employees of

Quovadx

had engaged in discussions with Infotech regarding the possibility that Quovadx could purchase

from Infotech up to $10,000,000 in outsourcing services annually, but that Quovadx's former
management had never agreed to any such purchases. (Id) Because this fact is false, Quovadx
should not have, and did not, disclosed it in its Registration Statement.
4. Alleged Omission Six

As to the sixth alleged omission-namely, that Quovadx had not received any payment
from Infotech under the Distribution Agreement as of the date of the Registration Statement-

Infotech's first payment was not even due until December 12, 2003, so this "fact" was not yet

known nor a cause for concern as of December 10, 2003. (See id at 12, 18-19.) Further,
Quovadx's internal business personnel performed an analysis of the Infotech transaction in
accordance with generally accepted accounting principles ("GAAP"), and Quovadx's
management concluded that the GAAP factors supported recognition of $4,600,000 in revenue
associated with the Distribution Agreement during the third quarter of 2003. (Id at 11.) Still

14

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 15 of 29

further, Quovadx sought the opinion of its outside auditors, Ernst & Young LLP ("E& Y"),

regarding the proposed recognition of revenue, and the outside auditors concurred with

Quovadx's GAAP analysis. (Id) Even further still, Quovadx had received letters from
Infotech's bank in India confirming that Infotech had a $10,000,000 line of credit that could be
used to purchase software and that Infotech had satisfied the requirements for opening two

letters of credit totaling $5,400,000, which would be opened by October 21, 2003. (Id) In
addition to Quovadx's former management having good cause to believe Infotech was preparing

in good faith to make the required payments under the Distribution Agreement, Quovadx's due
diligence confirmed that Infotech was financially backed by the B.K. Birla Group of Companies,

which are owned and operated by one of India's wealthiest families, and that those companies
had substantial assets that could be used to satisfy Infotech's payment obligations. (Id)
5. Alleged Omission Seven

With respect to the seventh alleged omission, again Plaintiffs allege an untrue "fact" as
the basis for this purported omission. As noted above, Infotech was not required to maintain a

letter of credit at its bank in India, but Infotech produced letters from that bank indicating to
Quovadx that, as of

November 11, 2003, Infotech would establish the letters of credit in the near

future. (Ex. 1 at 13-14.) Quovadx believes that the two reported letters of credit were issued in
favor of Infotech, but Quovadx was never able to draw down on Infotech's letters of credit. (Id
at 13.) Quovadx first encountered diffculty drawing down on Infotech's letters of credit in mid-

December 2003. (Id) When Quovadx's finance department attempted to draw down on the
first letter of credit established by Infotech, in the amount of $2,000,000, Quovadx was advised
that First American Bank in Chicago, Ilinois, the issuing bank, required an inspection certificate

15

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 16 of 29

demonstrating that the software had been inspected on receipt in India. (Id at 13-14.) Infotech

contended that bureaucratic problems prevented Indian customs offcials from providing the
required certificate to the Reserve Bank of India, which in turn was necessary for the Reserve
Bank to permit a draw-down by Quovadx on Infotech's letter of credit at First American Bank.
(Id at 14.) In short, Plaintiffs' seventh alleged omission is false, but even if it were true, the

evidence proves that Quovadx did not encounter diffculty liquidating Infotech's letters of credit
until mid- to late-December 2003, after Quovadx had fied its Registration Statement.
6. Alleged Omission Eight

Finally, Plaintiffs' eighth alleged omission - that Quovadx did not expect Infotech's
letters of credit, or any other Infotech credit facilities, to be a source of payment by Infotech
under the Distribution Agreement is untrue as to the period until early May 2004. (See Ex. 1 at
13-14 (stating that Quovadx still had expectations that it eventually would be able to draw down

on Infotech's letters of credit even after March 15, 2004). It was not until early May 2004 that

Quovadx concluded and publicly announced that Quovadx no longer had any expectation that

Infotech's letters of credit or other credit facilities would be a source of payment by Infotech.
(See id; PIs.' Mot. Ex. 13 at 2.)
Seven of

Plaintiffs' eight alleged omissions are untrue, or at least disputed, as a matter of

fact, and even if they were true, such purported facts did not exist as of the date Quovadx fied
its Registration Statement. Consequently, the seven alleged omissions described above cannot
impute omissions liability to Quovadx under Section 11. See, e.g., Oxford Asset Mgm't, 297
F.3d at 1189-90; Hohmann, 471 F.2d at 821-22. Moreover, the only admitted facts that were

omitted from the Registration Statement - that Infotech was an outsourcing agent for Indian

16

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 17 of 29

companies and that Infotech had no prior experience distributing or selling software - were not
material facts requiring disclosure in the Registration Statement.6 (See Argument, Part II.B,

infra.) For the same reasons, Plaintiffs are not entitled to summary judgment.

B. Even If the Alleged Omitted Facts Were True, and Even If They Existed as
of December 10, 2003, Quovadx Disputes Their Materiality
Even if the Court were to agree with Plaintiffs that some or all of the allegedly omitted

facts are true, and even if the Court were to agree that one or more of the true facts actually

existed or were known to Quovadx as of December 10, 2003, Plaintiffs still would not be
entitled to summary judgment because Quovadx disputes the materiality of each of

the allegedly

omitted facts. Connett, 68 F.3d at 384. Plaintiffs fail to cite a single case in which a court has
decided that a statement or omission was material as a matter of

law. (See PIs.' Br. at 1-21.) In

the only case that Plaintiffs cite on this issue, SEC v. Cochran, the Tenth Circuit reversed the
trial court's grant of summary judgment on materiality based on disputed facts, but did not find

that the alleged omissions and misstatements were material as a matter of law. See 214 F.3d

the two omitted facts had been publicly disclosed well before Quovadx fied its Registration Statement. For example, Quovadx's October 22, 2003, press release announcing the Infotech agreements included the following description of Infotech:

6 The first of

Infotech Network Group is a consortium of multi-channel integrated Business Process Outsourcing centers spread across 15 cities in India offering back-offce
services, voice-based call centers and integrated software development centers. . .

The parent companies of these IT -enabled services companies such as
Manjushree Infotech of of the Indo-Bharat Group, Total Out the BK Birla Group, CVSIT of

the Colourtex Group, BPT

source of the UCA group, Crea BPO of the Ocean Park Group and Sharp Infotech of the Sharp Group have an estimated market value of over $250 billion.
(PIs.' Mot. Ex. 1 at 2.)

17

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 18 of 29

1261, 1267 (10th Cir. 2000). To the best of Quovadx's knowledge, the only reported federal

cases that have decided materiality as a matter of law in a similar context have concluded that
the alleged omissions were immaterial as a matter of law. 7

Plaintiffs' arguments demonstrate clearly why the materiality element should be resolved

by the finder of fact in this case, as it is in most securities cases. Here, Plaintiffs argue their
version of the facts and speculate as to how investors would have reacted if additional
information had been disclosed by Quovadx at various points in time. (See PIs.' Br. at 20 ("Had

investors known . . . they would have recognized . . .. Investors would have understood . . . .
Had the truth been disclosed. .. Quovadx's stock price would not have risen." (emphasis

added).) Plaintiffs' arguments simply assume Plaintiffs' desired conclusion-that the alleged

omissions were material because investors would have reacted in the manner predicted by
8
Plaintiffs.

7 Eg., Connett, 68 F.3d at 384 (affrming grant ofJNOV and holding that omissions were
immaterial as a matter of law); Garcza v. Cordova, 930 F.2d 826, 832 (10th Cir. 1991)

(reversing denial of JNOV and holding that omissions were immaterial as a matter of law); In re AMDOCS, 390 F. 3 d at 548 (affrming Rule 1 2(b )( 6) dismissal and outlining categories of

statements and omissions that are immaterial as a matter of law); Klein v. Gen. Nutrition Cos., 186 F.3d 338, 342 (3d Cir. 1999) (various alleged omissions from registration statement and prospectus were not material and could be decided as a matter of law); Hilson Partners L.P. v. Adage, Inc., 42 F.3d 204, 219-20 (4th Cir. 1994) (noting that materiality was "fact-specific inquiry," but dismissing suit because allegations were immaterial).

8 Plaintiffs' only suggested evidence for materiality is the drop in market price of
Quovadx stock on May 13, 2004. (See PIs.' Br. at 19-20.) As a threshold matter, whether the disclosure of a particular fact caused a subsequent change in stock price is inherently a factual question. Accordingly, various courts have concluded that market movement "cannot be a
dispositive test (of materiality J." Justin Indus. v. Choctaw Sec., Inc., 920 F.2d 262, 268 n.6 (5th

Cir. 1990); accord Nathenson v. Zonagen Inc., 267 F.3d 400, 415 (5th Cir. 2001) (evidence of
price decline is more properly rooted in the reliance element of securities fraud than materiality);
(Footnote contd on next page)

18

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 19 of 29

With respect to the only omitted facts as to which there is no factual dispute as to either

their truth or the existence of the facts as of December 10, 2003 - namely, Quovadx's
knowledge that Infotech was an outsourcing agent for several Indian companies and that, prior
to the Distribution Agreement, Infotech itself had no experience distributing or selling software
- there is a genuine dispute as to whether the omitted facts are materiaL. 9 Quovadx admits that it

knew that Infotech was an outsourcing agent for Indian companies seeking outsourcing work at
the time Quovadx first came in contact with Infotech in Spring 2003. (Ex. 1 at 12.) Indeed, that

is precisely why Quovadx approached Infotech. Further, Quovadx's new management believes
that, as of September 8,2003, one or more Quovadx employees knew that Infotech had not been

a software distributor or seller before Infotech entered into the Infotech Distribution Agreement.
(Id) To the best of Quovadx's knowledge, however, one or more of

the companies that backed

Infotech did have prior distribution experience. (Id) Neither of these facts, though, were
required to be disclosed to shareholders, and neither of the facts renders any statement in the

Registration Statement misleading. Still further, even if Infotech had not previously sold
software, and even if that had been disclosed to investors, that fact cannot be characterized as so
obviously important that any reasonable investor would have viewed it as having significantly

(Footnote contdfrom previous page)

SEC v. Bausch & Lomb Inc., 565 F.2d 8, 15-16 (2d Cir. 1977) (considerable decrease in stock price did not establish materiality per se); Geiger v. Solomon-Page Group, Ltd., 933 F. Supp. 1180, 1188 (S.D.N.Y. 1996) ("Evidence of stock price movement may be relevant to the issue of materiality but it is not determinative."). 9 In any event, Quovadx publicly disclosed the first fact. (See note 4, supra.)

19

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 20 of 29

altered the total mix of information available. Cf Basic, 485 US. at 231-32. Clearly,
reasonable minds can differ as to materiality here.

In short, regardless of whether Plaintiffs suggest that the alleged omissions were required
to be disclosed in the Registration Statement or were necessary to make the information not

misleading, Plaintiffs have done nothing more than present a factual argument that, in their

view, additional information should have been provided to investors about the details of the
Infotech agreements and transactions, and that the undisclosed information rises to the level of
omissions that are material as a matter of law. Accordingly, their motion should be denied.

C. SEC Regulation S-K, Items 101 and 303, Did Not Require Quovadx to Disclose the Allegedly Omitted "Facts"
Assuming the truth, timely existence, and materiality of the allegedly omitted facts,

Plaintiffs argue that Quovadx is liable because the Registration Statement failed to include
information specifically required by the SEC's rules and forms. Again, Plaintiffs' argument is

simply wrong, especially because this argument hinges upon the errors we have already
described in Parts II.A. and II.B above.
1. SEC Item 303 Did Not Require the Disclosure of Omitted "Facts"

Plaintiffs claim that under Regulation S-K, Item 303, 17 C.F.R. § 229.303, Quovadx was

required to disclose additional, specific information surrounding the Distribution Agreement

because such information was necessary to understand and analyze the financial health of
Quovadx. (See PIs.' Br. at 10-17.) Item 303 requires a general discussion of the company's
financial condition, changes in financial condition, and results of operations, including:

(i) unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income;

20

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 21 of 29

(ii) any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations; and (iii) a narrative discussion of the extent to which (any) increases (in revenues) are attributable to increases in prices or to increases in the volume or amount of goods or services being sold or to the introduction of new products or services.

17 C.F.R. § 229.303(a)(3)(i)-(iii).
mischaracterizations of

To support their position, Plaintiffs resort to

the facts:

Here, the Company's largest customer, its largest sales contract, and the preponderance of its existing and expected software revenue was the result of a circular, reciprocal contract with a company that was not even in the business of selling or distributing software. Moreover, the "sale" would not have occurred if the Company did not promise to buy outsourcing services from the "distributor"
in like amount. This information certainly was necessary to understand the

Company's "changes in financial condition," to understand its "results of
operations," to allow investors "to analyze financial information," to understand "the quality of' and "potential variability" of the Company's cash flow and to understand whether the Company's performance was "indicative of future
performance and "the registrant's prospects for the future." In short, the
information was necessary to accomplish each and every objective of

the MD&A.

(PIs.' Br. at 1 1.)

Plaintiffs have put the cart before the horse. They have not yet proved to the Court that
the above "facts" are facts at all, let alone undisputed facts.10 As shown above, the Distribution

Agreement is neither "circular" nor "reciprocal," but was expected to provide software sales

revenue to Quovadx in an amount much larger than the amount Quovadx expected to pay

10 Plaintiffs elected to fie their summary judgment motion months before the expiration

the fact discovery deadline set by the Court's Amended Scheduling Order (Doc. #176), and months before Plaintiffs had served Quovadx with written discovery.
of

21

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 22 of 29

Infotech for outsourcing services; 11 whereas Infotech's first experience as a software distributor

followed Infotech's execution of the Distribution Agreement, one or more of the companies
represented by Infotech are believed to have had such experience prior to September 8, 2003;
Plaintiffs and Quovadx can only speculate at this point as to whether Infotech would have

entered into the Distribution Agreement without concurrently entering into the Outsourcing

Agreement; and even if the latter point were established by Plaintiffs, they have failed to
demonstrate why Item 303 required disclosure of

that fact.

Second, given the total mix of information that was available to investors as of

December

10, 2003, including the information that Quovadx had already disclosed to the public on October

22 and November 11, 2003, Item 303 cannot be construed as requiring the additional disclosures
that Plaintiffs desire. Even a cursory reading of the actual

language in Quovadx's Form 10-Q

shows that Quovadx made all of

the disclosures required by Item 303. (See PIs.' Mot. Ex. 5.)

Plaintiffs cite In re American Express Company, S.E.c. Release No. 23332, 1986 WL
806533 (S.E.C. June 17, 1986), in support of their position that Item 303 required further

disclosure by Quovadx. The findings in American Express, however, are premised on admitted
fraud. See id., 1986 WL 806533 at *8 ("American Express should have disclosed that the entire

Insurance Services gain was attributable to the improperly recorded Hannover transaction"). In

11 Plaintiffs fail to acknowledge that Infotech's financial obligations to Quovadx under
the Distribution Agreement greatly exceeded Quovadx's financial obligations to Infotech under the Outsourcing Agreement. (PIs.' Br. at 1-21.) In reality, Infotech owed, and still owes, Quovadx $14,100,000 for Infotech's purchases of Quovadx software products and licenses,

whereas Quovadx owed Infotech, at most, $1,200,000 for outsourcing services performed
through September 2004. (Compare PIs.' Mot. Ex. 13 at 1 with Ex. 1 at 22.)

22

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 23 of 29

that case, the facts, undisputed for the purpose of the SEC's opinion, showed that American

Express essentially failed to disclose or discuss losses that had already materialized. Plaintiffs

attempt to stretch American Express to this case in which they claim that Quovadx failed to
disclose "facts" surrounding a contract that are not facts at all or that did not exist at the time the

Registration Statement was fied. Plaintiffs have put forth no evidence that, as of December 10,
2003, Quovadx's losses had materialized, and all the evidence shows that Quovadx's former
management was optimistic about Quovadx's prospects for receipt of

the Infotech payments.

Plaintiffs also cite In re Presstek, Inc., S.E.C. Release No. 39472, 1997 WL 784548
(S.E.C. Dec. 22, 1997), which discusses Item 303 disclosure requirements in the context of

the

respondent's failure to disclose that the respondent was missing shipments for one of its key

products, and that management knew before fiing the financials at issue that the missed
shipments "would have a material unfavorable impact on (respondent's) net sales." 1997 WL
784548, at * 12. By contrast, Quovadx had just signed the Distribution Agreement and made its

first shipment of software when the financial statements at issue were fied with the SEC and

incorporated into the Registration Statement. (See Ex. 1 at 11-16.) Infotech's first payment
under the Distribution Agreement was not even due until December 12, 2003, after Quovadx had
fied its Registration Statement. Without a crystal ball, Quovadx lacked the ability to predict the

future events that eventually transpired, and Quovadx lacked reason to believe that the

Distribution Agreement would not generate the revenue Quovadx had recognized in the third
quarter of2003. Cf Oxford Asset Mgmt., 297 F.3d at 1189 (to be actionable as an omission, the
information must exist at the time of

the registration statement).

23

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 24 of 29

Plaintiffs, first, assume the existence of the purported scheme to defraud and, second,
make the unsupported allegation that their version of the facts is undisputed in all respects. But
it is precisely the disputed nature of the facts here and their materiality that precludes summary
judgment on the proffered basis ofItem 303' s disclosure requirements.
2. SEC Item 101 Did Not Require the Disclosure of

the Omitted "Facts"

Plaintiffs also cite Regulation S-K, Item 101, 17 C.F.R. § 229.101, as a basis for

Quovadx's purported duty to disclose the enumerated omitted "facts." Item 101 requires in
pertinent part, "to the extent material to an understanding of the registrant's business taken as a
whole," disclosure of

the "name of any customer and its relationship, if any, with the registrant. .

. if sales to the customer by one or more segments are made in an aggregate amount equal to 10

percent or more of the registrant's consolidated revenues and the loss of such customer would
have a material adverse effect on the registrant and its subsidiaries taken as a whole." 17 C.F.R.
§§ 229. 101(c)(1), (c)(l)(vii) (emphasis added). Plaintiffs argue that Item 101 required Quovadx
to disclose all of the alleged details surrounding the Infotech agreements because Infotech

comprised 22% of Quovadx's third quarter 2003 revenue. (PIs.' Br. at 18.) This argument
misses the mark for several reasons.

First, Plaintiffs have put the cart before the horse by simply assuming - rather than
proving - the truth, timely existence, and materiality of the omitted facts. (Compare 17 C.F.R.
§ 229. 101(c)(1) and Argument, Parts II.A-II.B, supra, with PIs.' Br. at 17-18.)

Second, Plaintiffs' argument that Item 101 mandated disclosure is necessarily dependent

on their broad, though unstated, interpretation of the term "relationship" in Item 101. (See PIs.'
Br. at 18.) Their interpretation, however, is illogical and inconsistent with the purpose of 17

24

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 25 of 29

C.F.R. § 229. 101(c)(1)(vii) and the federal securities laws generally. Cf Basic, 485 US. at 231

(noting the Supreme Court's historical reluctance to not "set too Iowa standard of materiality"
because "a minimal standard might bring an overabundance of information within its reach, and

lead management 'simply to bury the shareholders in an avalanche of trivial information - a
result that is hardly conducive to informed decisionmaking. ", (quoting TSC Indus., 426 US. at

448-49)).

The discussion in Quovadx's Form 10-Q indicated that Quovadx's revenue increased as a

result of a $4,600,000 "software sale," but the Form 10-Q did not say that Infotech would be a
purchaser upon which Quovadx or its licensing segment would be dependent. (See PIs.' Mot.

Ex. 5 at 23 (stating that Quovadx's increase in revenue "was primarily due to a software sale for

$4.6 million and continued focus on software sales").) Moreover, Quovadx had publicly
disclosed the name of

this customer and Quovadx's relationship with the customer several weeks

before Quovadx fied its Form 10-Q. (See id Ex. 2 at 1.)
Third, the purpose of disclosing the information required by Item 101(c)(vii) is to assess

the registrant's "dependence. . . upon a single customer, or a few customers, the loss of anyone

or more of which would have a material adverse effect" on the registrant so as to facilitate
investors' assessment of risk going forward. 17 C.F.R. § 229.101(c)(1)(vii). Nothing in the
Form 10-Q or Registration Statement stated or implied that Infotech would be a repeat purchaser
of software in the future or that Quovadx predicted similar software sales in the future. (See PIs.'

Mot. Exs. 5 & 7.) In short, nothing in the language of Item 101 suggests that Quovadx was

required to disclose additional details surrounding the Infotech agreements under the
circumstances as of

December 10, 2003.

25

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 26 of 29

Accordingly, the Court should deny Plaintiffs' request to find that Quovadx was required,

under Regulation S-K, Items 101 and 303, to disclose the allegedly omitted "facts."

III. THE ALLEGED OMISSIONS RELATING TO THE INFOTECH
RELATIONSHIP ARE SUBSUMED BY THE ADMITTED FALSE STATEMENT

OF REVENUE AND DO NOT RENDER ANY OTHER STATEMENT
MISLEADING AS A MATTER OF LAW
Plaintiffs contend that even if Regulation S-K did not require disclosure of the allegedly

omitted facts surrounding the Infotech relationship, Quovadx had a duty to supplement
affrmative statements in the Registration Statement so as to make them not misleading. (PIs. '
Br. at 18-19.) The Registration Statement, however, was true, accurate, and complete with the

lone exception of the misstated Infotech revenue. All of Plaintiffs' eight alleged omissions
involve supplementary information about the Infotech relationship. (See PIs.' Br. at 6-7.)

Because Quovadx has admitted that recognizing and recording the Infotech revenue constituted

an untrue statement of fact in the Registration Statement, and because Quovadx corrected that

affrmative misstatement on March 15, 2004, by publicly restating its financial results for the
third quarter of 2003 so as to remove all revenue from the Distribution Agreement, the alleged
omissions - even if true, and most are not - merely would have explained and provided

additional, unnecessary details about the Infotech agreements. As such details are subsumed by
the now-corrected misstatement, the alleged omissions are not themselves separately actionable
because they made another statement in the Registration Statement misleading.
Under the 1933 Act, if

the alleged defect in a registration statement involves a purported

omission, the plaintiff must prove that the omission renders a statement in the registration
statement misleading in some material respect. See 15 US.C. § 77k(a); cf, e.g., In re Sears,

Roebuck & Co. Sec. Litig., 792 F. Supp. 977, 981-82 (E.D. Pa. 1992). Here, Plaintiffs identify

26

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 27 of 29

the misleading statement as Quovadx's statement in the Form 10-Q, incorporated by reference

into the Registration Statement, that Quovadx's increase in revenue "was primarily due to a
software sale for $4.6 million and continued focus on software sales." (PIs.' Mot. Ex. 5 at 23.)
This statement is the same misstatement regarding recognition of Infotech revenue that

Quovadx acknowledged and corrected on March 15,2004. (See PIs.' Mot. Ex. 9 at 1.)

Plaintiffs' unsupported allegations and characterizations of additional, undisclosed

"facts" do not compel a finding that there were additional, unidentified statements in the
Registration Statement that are distinct from the improper statement of revenue and somehow
misleading as a matter of law due to the allegedly omitted facts. Plaintiffs have failed to identify
any separate statement in the Registration Statement that is misleading by virtue of omissions,

and thus their alternative argument is fundamentally flawed.
Plaintiffs cite Schaffer v. Evolving Systems, Inc., 29 F. Supp. 2d 1213, 1221 (D. Colo.
1998), for the proposition that, "(h )aving elected to release selective, purportedly positive

information about the transaction, Quovadx had a duty to reveal the entire truth of the

transaction." (PIs.' Br. at 14.) In Schaffer, the defendant-issuer moved to dismiss a Section 11
claim under Rule 1 2(b )( 6), arguing that it had no duty to disclose negative information regarding
a new business. 29 F. Supp. 2d at 1221. In denying the defendant's Rule 12(b)(6) motion, and

taking all allegations in the complaint as true, the district court concluded that the duty to
disclose specific negative information to make a statement not misleading could not be decided
as a matter of law. Id. Here, Plaintiffs ask this Court to reach exactly the opposite conclusion -

they ask the Court to find that, as a matter of law, Quovadx failed to include information

necessary to make some unidentified affrmative statement "not misleading," such as the

27

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 28 of 29

"reciprocal relationship between it and Infotech." (PIs.' Br. at 19.) The Court should reject
Plaintiffs' invitation to supplant the jury and deny Plaintiffs' motion for summary judgment.

CONCLUSION

For the foregoing reasons, the Court should deny Plaintiffs' motion for summary
judgment.
Dated: July 24, 2006
Respectfully submitted,

sf Michael T. Williams Hugh Q. Gottschalk John M. Vaught Michael T. Williams Wheeler Trigg Kennedy LLP 1801 California Street, Suite 3600 Denver, Colorado 80202
Telephone: (303) 244-1800 Facsimile: (303) 244-1879

williams(£wtklaw. com

Attorneys for Defendant Quovadx, Inc.

28

Case 1:04-cv-01006-RPM

Document 183

Filed 07/24/2006

Page 29 of 29

CERTIFICATE OF SERVICE (CM/ECF)
I hereby certify that on July 24, 2006, I electronically fied the foregoing with the Clerk of Court using the CM/CF system which will send notification of such fiing to the following email addresses:

. Hugh Gottschalk

gottschalk(£wtklaw. com hart(£wtklaw. com;gottesfeld(£wtklaw. com
. Marcela A. Kirberger

mkirberger(£lowenstein. com
. Marc Bradley Kramer

MarcBKramer(£cs. com MarcBKramerEsq (£aol. com
. Lawrence M. Rolnick

lrolnick(£lowenstein. com
. Gavin J. Rooney

grooney(£lowenstein. com mredmon(£lowenstein. com
. John Mark Vaught

vaught(£wtklaw. com como(£wtklaw. com
. Michael T. Wiliams

williams(£wtklaw. com chavez(£wtklaw. com

sf Michael T. Williams by Diane Edwards Attorneys for Defendant Quovadx, Inc. Wheeler Trigg Kennedy LLP

29