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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

SPECIAL SITUATIONS FUND III, L.P., SPECIAL SITUATIONS CAYMAN FUND, L.P., SPECIAL SITUATIONS TECHNOLOGY FUND NEW, L.P., AND SPECIAL SITUATIONS TECHNOLOGY FUND II, L.P., ON BEHALF OF THEMSELVES AND OTHERS SIMILARLY SITUATED, Plaintiffs, v. QUOVADX, INC., LORINE R. SWEENEY, GARY T. SCHERPING, JEFFREY M. KRAUSS, FRED L. BROWN, J. ANDREW COWHERD, JAMES B. HOOVER, CHARLES J. ROESSLEIN, and JAMES A. GILBERT. Defendants.

Civil Action No. 1:04-cv-01006-RPM ORAL ARGUMENT REQUESTED DOCUMENT ELECTRONICALLY FILED

_____________________________________________________________________________ SPECIAL SITUATIONS FUND III, L.P., SPECIAL SITUATIONS CAYMAN FUND, L.P., SPECIAL SITUATIONS TECHNOLOGY FUND NEW, L.P., AND SPECIAL SITUATIONS TECHNOLOGY FUND II, L.P.'s MEMORANDUM OF LAW IN SUPPORT OF THEIR MOTION FOR PARTIAL SUMMARY JUDGMENT AS TO LIABILITY _____________________________________________________________________________

LOWENSTEIN SANDLER
Attorneys at Law 65 Livingston Avenue Roseland, New Jersey 07068 973.597.2500 Attorneys for Lead Plaintiffs Of Counsel: Lawrence M. Rolnick, Esq. On the Brief: Marcela A. Kirberger, Esq.

PC

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES.......................................................................................................ii PRELIMINARY STATEMENT .................................................................................................1 STATEMENT OF FACTS..........................................................................................................3 LEGAL ARGUMENT ................................................................................................................7 I. UNDER SECTION 11 OF THE SECURITIES ACT DEFENDANTS ARE STRICTLY LIABLE FOR THE MISSTATEMENTS IN THE REGISTRATION STATEMENT ....................................................................................8 a. The Registration Statement Filed By Quovadx On December 10, 2003 Contained a Misrepresentation Of Fact Regarding The Third Quarter Financial Results. ...............................................................................................10 The Misrepresentation Regarding Quovadx's 2003-Third Quarter Financial Results Was Material. .........................................................................11

b.

CONCLUSION.........................................................................................................................15

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TABLE OF AUTHORITIES Cases Page

Abercrombie v. City of Catoosa, 896 F. 2d 1228 (10th Cir. 1990) ...............................................8 Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972)....................................................12 Ahern v. Gaussoin, 611 F. Supp. 1465 (D. Or. 1985)...................................................................9 Akerman v. Oryx Comm., Inc., 609 F. Supp. 363 (S.D.N.Y. 1984) .............................................9 Anderson v. Liberty Lobby, 477 U.S. 242 (1986) ....................................................................7, 8 In re AnnTaylor Stores Sec. Litig., 807 F. Supp. 990 (S.D.N.Y. 1992) ........................................9 Applied Genetics Int'l v. First Affiliated Securities, 912 F. 2d 1238 (10th Cir. 1990)...................7 Basic, Inc. v. Levinson, 485 U.S. 224 (1988).............................................................................12 Carry v. U.S. Postal Service, 812 F. 2d 621 (10th Cir. 1987) .......................................................7 Celotex Corp. v. Cattret, 477 U.S. 317 (1986) .........................................................................7, 8 Comeau v. Rupp, No. 86-1531-K, 1988 WL 93977 (D.C. Kan. March 23, 1988) ......................12 Competitive Associates, Inc. v. International Health Sciences, Inc., Fed. Sec. L. Rep. (CCH) ¶ 94966, 1975 WL 349 (S.D.N.Y. 1975) ...................................9 Connett v. Justus Enters. of Kan., Inc., 68 F.3d 382 (10th Cir. 1995).........................................12 In re Consumers Power Co. Sec. Litig., 105 F.R.D. 583 (E.D. Mich. 1985) .................................9 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).................................................................9, 10 Feit v. Leasco Data Processing Equipment Corp., 332 F. Supp. 544 (E.D.N.Y. 1971) .................9 Frymire v. Peat, Marwick, Mitchell & Co., 657 F. Supp. 889 (N.D. Ill. 1987) .............................9 Garcia v. Cordova, 930 F. 2d 826, 829 (10th Cir. 1991) ............................................................12 Gibb v. Delta Drilling Co., 104 F.R.D. 59 (N.D. Tex. 1984)........................................................9 Greenapple v. Detroit Edison Co., 468 F. Supp. 702 (S.D.N.Y.1979) ..........................................9 Greenapple v. Detroit Edison Co., 618 F. 2d 198 (2d Cir. 1980)..................................................9

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Greenwald v. Integrated Energy, Inc., 102 F.R.D. 65 (S.D. Tex. 1984)........................................9 Grossman v. Novell, Inc., 120 F.3d 1112 (10th Cir. 1997).........................................................11 Grossman, Faber & Miller, P.A. v. Cable Funding Corp., Fed. Sec. L. Rep. (CCH) ¶ 94913, 1974 WL 470 (D. Del. 1974) .............................................................................9 Heller v. Quovadx, United States District Court For The District Of Colorado Civil Action No. 04-M-0665 (OES) ...............................................................................10 Henderson v. Inter-Chem Coal Co., Inc., 41 F. 3d 567 (10th Cir. 1994).......................................7 Herman & MacLean v. Huddleston, 459 U.S. 375 (1983)...................................................... 9, 10 In re Initial Public Offering Sec. Litig., 358 F. Supp. 2d 189 (S.D.N.Y. 2004)............... 10, 11, 12 Kronfeld v. Trans World Airlines, Inc., 832 F. 2d 726 (2nd Cir. 1987) ........................................9 In re LILCO Sec. Litig., 625 F. Supp. 1500 (E.D.N.Y. 1986) ......................................................9 Lazar v. Sadlier, 622 F. Supp. 1248 (C.D. Cal. 1985) ..................................................................9 Lorber v. Beebe, 407 F. Supp. 279 (S.D.N.Y. 1975)....................................................................9 Mashburn v. National Healthcare, Inc., 684 F. Supp. 660 (M.D. Ala. 1988) ................................9 Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) .....................................7 PPM America, Inc. v. Marriott Corp., 820 F. Supp. 970, 975 (D. Md. 1993) ...........................8, 9 Rybozyme Pharmaceuticals, Inc. Sec. Litig., 209 F. Supp. 2d 1106 (D. Colo. 2002)....................7 SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833 (2d Cir. 1968)...................................................12 Schaeffer v. Evolving Systems, Inc., 29 F. Supp. 3d 1213, 1220 (D. Colo. 1998) ........................9 Schwartz v. Celestial Seasonings, Inc., 178 F.R.D. 545 (D. Colo. 1998)................................ 8, 11 Securities and Exchange Commission v. Melchior, No. l 90-C-1024J, 1993 WL 89141 at 12-13 (D.C. Utah Jan. 14, 1993) ......................................................12 Securities and Exchange Commission v. Southwest Coal & Energy Co., 439 F. Supp. 820 (W.D. La. 1977) ...................................................................................9 Shidler v. All American Life & Financial Corp., 775 F. 2d 917 (8th Cir. 1985) ...........................9

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In re SmithKline Beckman Corp. Sec. Litig., 751 F. Supp. 525 (E.D. Pa. 1990) ..........................9 Spiegel v. Tenfold Corp., 192 F. Supp. 2d 1261 (D. Utah 2002) ..................................................9 TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438 (1976)............................................................11 In re Ultimate Corp. Sec. Litig., Fed. Sec. L. Rep. (CCH)¶ 94523, 1989 WL 86961 (S.D.N.Y. 1989) ....................................................................................9 Wielgos v. Commonwealth Edison Co., 892 F. 2d 509 (7th Cir. 1989) ........................................9 In re Worldcom, Inc. Sec. Litig., 352 F. Supp. 2d 472 (S.D.N.Y. 2005).......................................9 Statutes and Rules 15 U.S.C. § 77k................................................................................................................. 1, 8, 11 Fed. R. Civ. P. 56(c), (e) .............................................................................................................7 17 C.F.R. 210.4-01 (a)(1) .................................................................................................... 13, 14

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Lead Plaintiffs Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Technology Fund New, L.P., and Special Situations Technology Fund II, L.P., (collectively "Special Situations" or "Lead Plaintiffs") respectfully submit this brief in support of their motion for partial summary judgment on Defendants' liability pursuant to 15 U.S.C. § 77k.1 PRELIMINARY STATEMENT The underlying facts and Plaintiffs' theory of liability in this case are simple, straightforward and, as we demonstrate below, appropriate for partial summary judgment. This is a class action seeking remedies under Sections 11 and 15 of the Securities Act for materially false and misleading statements made by the Defendants in a Form S-4 Registration Statement (the "Registration Statement") filed with the United States Securities and Exchange Commission ("SEC") for the issuance of securities in connection with an exchange offer with Rogue Wave Software, Inc. ("Rogue Wave"). Simply put, Defendants are liable under Section 11 because the Registration Statement at issue contained a misrepresentation of material fact regarding the Company's 2003 third-quarter financial results which rendered the Registration Statement false and misleading. Quovadx and Rogue Wave are both in the business of creating and selling enterprise software. In November, 2003, Quovadx announced that it had executed a definitive agreement for the acquisition of Rogue Wave. The acquisition was structured as an exchange offer which provided that Quovadx would acquire all of the outstanding stock of Rogue Wave for $4.09 in cash and 0.5292 of a share of Quovadx common stock for each share of Rogue Wave common stock. Thus, Quovadx utilized its common stock as the "currency" to acquire Rogue Wave's common stock. However, as a result of the admittedly improper reporting and recognition of millions of dollars of unrealized revenue, the price of Quovadx's stock was artificially inflated. Well after the transaction had been consummated, Quovadx admitted that its
1

15 U.S.C. §77k shall hereinafter be referred to as Section 11 of the Securities Act of 1933 (the "Securities Act").
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financial results had been materially misstated and in fact restated its financial results. As a result, the price of Quovadx stock plummeted some 79% from the date of the Rogue Wave acquisition to the date this suit was brought. Section 11 is a strict liability statute against the issuer and is subject only to a due diligence defense for the non-issuers who signed the registration statement -- in this case, the Individual Defendants. To prevail on a claim against the issuer under Section 11, a plaintiff need only prove that he acquired securities pursuant to a registration statement which contained an untrue statement of a material fact. There can be no dispute that Plaintiffs here meet the elements necessary to impose strict liability pursuant to Section 11. Indeed, the Registration Statement filed by Quovadx ("Quovadx" or the "Company") with the SEC on November 12, 2003 and amended on or about December 10, 2003, incorporated by reference Quovadx's Form 10-Q for the third quarter ending on September 30, 2003. The 2003 third-quarter financial results were restated by the Company in March 2004 due to the Company's improper recognition and reporting of millions of dollars of unrealized revenue -- revenue it had not yet earned -- in connection with a software distribution contract with InfoTech Network Group. The falsity of the 2003 third-quarter financial statements -- as incorporated in the Registration Statement pursuant to which the exchange offer with Rogue Wave was consummated -- constitutes a material misrepresentation of fact under Section 11. In addition, the signing officers and

directors cannot defeat liability under this Section because, far from having engaged in due diligence, they themselves orchestrated and carried out the massive fraud to inflate the price of Quovadx stock precisely at the same time the Company was in the midst of merger negotiations with Rogue Wave. Having proven their prima facie case pursuant to Section 11, Plaintiffs are entitled to partial summary judgment on liability against the issuer as a matter of law, and also against the signing non-issuers, unless they can come forward with proof that they conducted due diligence or were not aware that the misleading registration statement had become effective -- a

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burden impossible to meet as reflected by Quovadx's own press releases disclosing the pivotal role of the Individual Defendants in orchestrating and carrying out the fraud. STATEMENT OF FACTS On October 22, 2003, Quovadx issued a press release announcing a historic software, training, maintenance and support agreement with an Indian conglomerate, InfoTech Network Group ("InfoTech"), pursuant to which Quovadx would realize revenues of $7.6 million (the "InfoTech Contract"). See Declaration of Marcela A. Kirberger ("Kirberger Decl."), Ex. 1. Quovadx further announced that it had already recognized $4.6 million of the total amount of the InfoTech Contract during the third quarter of 2003 and expected to recognize the remainder over the next four quarters. Id. In a separate press release also issued on October 22, 2003, the Company reported its "highest quarterly revenue" in the Company's history, and record software revenue of $7.8 million. Kirberger Decl., Ex. 2. The release further stated that the "total revenue for the third quarter of 2003 was $19.9 million, up 33% from $15.0 million from the same period [the previous year]." Id. A few days later, on November 4, 2003, the Company announced its intention to acquire Rogue Wave Software ("Rogue Wave") in a cash and stock transaction valued at $71 million."2 Kirberger Decl., Ex. 3. On November 3, 2003, a day before the announcement to acquire Rogue Wave was made, Quovadx filed its Form 10-Q for the quarter ending September 30, 2003. That Form 10-Q, containing the financial statements of Quovadx for the third quarter of 2003, was signed by defendants Sweeney and Scherping, who certified that it fully complied with the requirements of the Securities Exchange Act of 1934, and that the information contained presented, in all material respects, the financial condition and results of Quovadx's operations. Kirberger Decl., Ex. 5. The financial statements for Quovadx for the third quarter of 2003 incorporated in the Form 10-Q represented that revenues for that quarter were $19.9 million. Those amounts included $4.6 million in revenues attributable to purported sales to InfoTech.
2

Merger negotiations between Rogue Wave and Quovadx spanned from July to November of 2003. Kirberger Decl., Ex. 4, ¶¶ 31-41. -3-

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The very next day, on November 4, 2003, Quovadx issued a press release announcing the acquisition of Rogue Wave. The acquisition, which was structured as an

exchange offer whereby Quovadx would acquire all of the outstanding stock of Rogue Wave for $4.09 in cash and 0.5292 of a share of Quovadx common stock for each share of Rogue Wave common stock. Kirberger Decl. Ex., 3. Based on the average closing price of Quovadx stock for the five trading days ending on October 21, 2003, the aggregate consideration was valued at $6.85 a share. Id. Thus, based upon its then current value, Quovadx common shares were utilized as partial "currency" to acquire the Rogue Wave common shares. Accordingly, the higher the price of Quovadx common shares, the fewer shares the Company would have to issue. On November 12, 2003, Quovadx filed a Registration Statement with the SEC on Form S-4 in connection with its offer to exchange the common stock of Rogue Wave. Quovadx incorporated by reference its Form 10-Q for the third quarter, ending on September 30, 2003 into the Registration Statement. Kirberger Decl., Ex. 6. On December 10, 2003, Quovadx filed a Second Amendment to the Registration Statement on Form S-4 in connection with the Exchange Offer which became effective on December 19, 2003. The Registration Statement included Quovadx's financial results for the third quarter of fiscal year 2003 -- which included the purported InfoTech revenue -- and which the Company later admitted were materially misstated. All of the Individual Defendants3 signed the Registration Statement. Kirberger Decl., Ex. 7. On December 19, 2003, Quovadx completed the acquisition of all of the outstanding shares of Rogue Wave. The total purchase price for the acquisition was $79.1 million, including 5,656,670 shares of Quovadx common stock, exchange of stock options valued at $3.4 million, cash of $8.0 million net of cash acquired and $3.9 million in merger-related costs. Kirberger Decl., Ex. 8.

3

Lorine R. Sweeney, Gary T. Scherping, Jeffrey M. Krauss, Fred L. Brown, J. Andrew Cowherd, James B. Hoover, Charles J. Roesslein, and James A. Gilbert are collectively referred to as the "Individual Defendants." -4-

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On March 15, 2004, Quovadx announced that it would delay the filing of its annual report on Form 10-K for the year ended December 31, 2003. According to Quovadx, this delay was necessary because it had to restate its 2003 third quarter financial results and revise its previously announced preliminary 2003 fourth quarter and full year financial results. Kirberger Decl., Ex. 9. The March 15 press release explained that the restatement was caused by the Company's "unsuccessful" efforts to collect funds from letters of credit opened by InfoTech and, as a result, the Company had to restate and remove all revenue from sales to InfoTech from the Company's published financial reports for fiscal year 2003. Id. As a result of the restatement of the third quarter-2003, "software license revenues were reduced by $4.6 million to $3.2 million and total revenues were reduced from $19.9 million to $15.2 million." Id. In addition, "[n]et loss calculated in accordance with generally accepted accounting principles (GAAP) for the quarter was, at the time of the restatement] $(5.3) million or $(0.17) per share compared to the originally reported GAAP net loss of $(1.1) million or $(0.03) per share. Deferred revenue was reduced by $3.0 million." Id. Also on March 15, the Company hosted a call for investors where Sweeney, blasting insinuations of management wrongdoing, reassured investors and analysts that because InfoTech had issued new letters of credit, the funds would be collected. Id. As a result of the March 15

announcement, the price of Quovadx stock fell approximately 29%, closing at $3.58 per share on March 16, 2003. The Company, however, continued to reassure the investing public that while it had to remove all revenue associated with these contracts from its published financial reports for 2003, it still expected to book such revenue in 2004. However, this reassurance turned out to be equally false. On April 12, 2004, the Company issued a press release announcing it had retained the firm of Hogan & Hartson L.L.P. to conduct a special review of the InfoTech relationship as a result of a formal SEC investigation into the March 15 restatement. Kirberger Decl., Ex. 10. That same day, Quovadx announced the resignation of defendants Sweeney and Scherping. Kirberger Decl., Ex. 11. Following the April

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12 announcements, Quovadx's stock price suffered a sharp drop, closing at $2.90 per share. Kirberger Decl., Ex. 12. On May 13, 2004, the Company issued a press release in connection with its investigation into the InfoTech problem. The Company confirmed that it had received "no payments from InfoTech under the distribution agreement executed on September 8, 2003" pursuant to which Quovadx had shipped InfoTech $14.1 million worth of software products. Kirberger Decl., Ex. 13. The Company further disclosed that "[p]rior to the distribution

agreement with Quovadx, [InfoTech] had not been a software distributor or sold software." In addition, the Company was not able to determine "that the purported line of credit maintained by InfoTech at a bank in India now exists or has 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 press release also revealed that "Quovadx no longer expect[ed] such letters of credit, or any other credit facilities established by InfoTech, to be a source of payment by InfoTech." Finally, the audit committee investigation confirmed that Quovadx's former management had induced InfoTech to enter into the distribution agreement by paying the Indian company $2.46 million, and that "InfoTech would not have entered into the distribution agreement without concurrently entering into the outsourcing agreement." The investigation uncovered an additional inducement to InfoTech to enter into the distribution agreement in exchange for an additional $10 million in outsourcing services to be purchased yearly by Quovadx. Id. In a shocking revelation, the report exposed that certain payments to InfoTech totaling $2.9 million were made "for the purpose of enabling InfoTech to establish the letters of credit required to secure InfoTech's payment obligations under the distribution agreement." Id. In essence, the audit committee investigation confirmed that the InfoTech deal had been a hoax, that the revenue from the InfoTech Contract never existed at all, and that Sweeney and Scherping had orchestrated the massive fraud during September and October of 2003 to inflate the price of Quovadx stock precisely at the same time the Company was in the midst of merger negotiations with Rogue Wave. Id. -6-

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Thereafter, in a press release on May 14, 2004, the Company announced that it had "severed relations with its former president and CEO Lorine Sweeney and CFO Gary Scherping" and further, had discontinued severance payment to these former executives and demanded the return of monies already paid as severance, compensation and bonuses. Kirberger Decl., Ex. 14. Following this announcement, Quovadx stock fell to $1.00 a share. Kirberger Decl., Ex. 12. The Company's Registration Statement on Form S-4, signed by each Individual Defendant and filed with the SEC, incorporated the Company's financial results for the third quarter of 2003, results which the Company later admitted were materially misstated. The price of Quovadx stock dropped 79% from $4.91 on December 19, 2003, the date the acquisition of Rogue Wave was consummated, to $1.03 on May 17, 2004, the date this suit was brought. Id. LEGAL ARGUMENT Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). See also Celotex Corp. v. Cattret, 477 U.S. 317, 322 (1986); Henderson v. Inter-Chem Coal Co., Inc., 41 F. 3d 567, 569 (10th Cir. 1994); Rybozyme Pharmaceuticals, Inc. Sec. Litig., 209 F. Supp. 2d 1106 (D. Colo. 2002). In ruling on a motion for summary judgment a court must construe all facts and reasonable inferences therefrom in the light most favorable to the nonmoving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Applied Genetics Int'l v. First Affiliated Securities, 912 F. 2d 1238, 1241 (10th Cir. 1990). Whether a genuine issue of material fact exists will turn on the evidence presented, and a court will grant summary judgment when the evidence is so one-sided that the moving party must prevail as a matter of law. See Anderson v. Liberty Lobby, 477 U.S. 242, 248-49 (1986); Carry v. U.S. Postal Service, 812 F. 2d 621, 623 (10th Cir. 1987). An issue of fact is "genuine" when a reasonable jury, in light of the evidence presented, "could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248. Therefore, the presence of some

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alleged factual dispute, by itself, will not defeat an otherwise "properly supported" motion for summary judgment. Id. Once the moving party has met the burden of showing that there is an absence of any genuine issue of material fact, Rule 56(e) "requires the nonmoving party to go beyond the pleadings and by . . . affidavits, or by the `depositions, answers to interrogatories, and admissions on file,' designate `specific facts showing that there is a genuine issue for trial.'" Celotex, 477 U.S. at 324. See also Abercrombie v. City of Catoosa, 896 F. 2d 1228, 1230 (10th Cir. 1990). I. UNDER SECTION 11 OF THE SECURITIES ACT DEFENDANTS ARE STRICTLY LIABLE FOR THE MISSTATEMENTS IN THE REGISTRATION STATEMENT Section 11 of the Securities Act imposes civil liability on all persons who prepare and sign a materially misleading registration statement. 15 U.S.C. § 77k. Thus, anyone who acquires a security pursuant to a false and misleading registration statement may sue for damages. Section 11 is a statute of strict liability. It provides that any signer of a registration statement, any partner or director of the issuer, any professional involved in preparing or certifying the statement -- accountant, engineer, or appraiser --, and any underwriter of a registration statement is liable "[i]n case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading . . ." Id. Thus, a registration statement is materially misleading if it contains an untrue statement of material fact or if it omits a material fact necessary to prevent the statement from being misleading. As a threshold matter, pursuant to Section 11's broad language, any person may initiate an action under the securities laws provided they can prove that the securities purchased or acquired "were issued in connection with a false registration statement, i.e., if the shares can be traced to [] a public offering conducted via a misleading registration statement." Schwartz v. Celestial Seasonings, Inc., 178 F.R.D. 545, 556 (D. Colo. 1998) (citing PPM America, Inc. v.

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Marriott Corp., 820 F. Supp. 970, 975 (D. Md. 1993).

Moreover, Section 11 imposes "a

stringent standard of liability on the parties who play a direct role in a registered offering." Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983). In fact, federal courts have characterized this standard as one of "strict liability" as against the issuer. In re Worldcom, Inc. Sec. Litig., 352 F. Supp. 2d 472, 491 (S.D.N.Y. 2005) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208 (1976). See also Schaeffer v. Evolving Systems, Inc., 29 F. Supp. 3d 1213, 1220 (D. Colo. 1998) (holding that "[u]nder § 11, `[I]f a plaintiff purchased a security issued pursuant to a registration statement, he need only show a material misstatement or omission to establish his prima facie case."); Spiegel v. Tenfold Corp., 192 F. Supp. 2d 1261, 1268 (D. Utah 2002) (holding that "Section 11 imposes strict liability against the issuer of securities where a registration statement contains material misstatements or omits material facts."). 4 Defendants other than the issuer are also liable for even innocent misstatements, subject to the due diligence
4

This long-standing principle of strict liability under Section 11 has been recognized by federal courts across the country in hundreds of cases. See Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 200 (1976); Kronfeld v. Trans World Airlines, Inc., 832 F. 2d 726, 731 n. 8 (2 nd Cir. 1987); Shidler v. All American Life & Financial Corp., 775 F. 2d 917, 927 (8th Cir. 1985); In re SmithKline Beckman Corp. Sec. Litig., 751 F. Supp. 525, 529 (E.D. Pa. 1990); In re Ultimate Corp. Sec. Litig., Fed. Sec. L. Rep. (CCH)¶ 94523, at 93319, 1989 WL 86961 (S.D.N.Y. 1989); Mashburn v. National Healthcare, Inc., 684 F. Supp. 660, 670 (M.D. Ala. 1988); Frymire v. Peat, Marwick, Mitchell & Co., 657 F. Supp. 889 (N.D. Ill. 1987); In re LILCO Sec. Litig., 625 F. Supp. 1500, 1503 (E.D.N.Y. 1986); Lazar v. Sadlier, 622 F. Supp. 1248, 1251 (C.D. Cal. 1985); Ahern v. Gaussoin, 611 F. Supp. 1465, 1479 (D. Or. 1985); In re Consumers Power Co. Sec. Litig., 105 F.R.D. 583, 594 (E.D. Mich. 1985); Akerman v. Oryx Comm., Inc., 609 F. Supp. 363, 368 (S.D.N.Y. 1984); Gibb v. Delta Drilling Co., 104 F.R.D. 59, 74 (N.D. Tex. 1984); Greenwald v. Integrated Energy, Inc., 102 F.R.D. 65, 71 (S.D. Tex. 1984); Greenapple v. Detroit Edison Co., 468 F. Supp. 702, 708 (S.D.N.Y. 1979); Securities and Exchange Commission v. Southwest Coal & Energy Co., 439 F. Supp. 820, 826 (W.D. La. 1977); Lorber v. Beebe, 407 F. Supp. 279, 285 (S.D.N.Y. 1975); Competitive Associates, Inc. v. International Health Sciences, Inc., Fed. Sec. L. Rep. (CCH) ¶ 94966, at 97336, 1975 WL 349 (S.D.N.Y. 1975); Feit v. Leasco Data Processing Equipment Corp., 332 F. Supp. 544, 575 (E.D.N.Y. 1971); Grossman, Faber & Miller, P.A. v. Cable Funding Corp., Fed. Sec. L. Rep. (CCH) ¶ 94913, at 97117, 1974 WL 470 (D. Del. 1974); Greenapple v. Detroit Edison Co., 618 F. 2d 198, 203 (2d Cir. 1980); Wielgos v. Commonwealth Edison Co., 892 F. 2d 509, 513 (7th Cir. 1989); In re AnnTaylor Stores Sec. Litig., 807 F. Supp. 990, 997-98 (S.D.N.Y. 1992).

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defense found in Section 11(b)(3), as to which they have the burden of proof. See Herman & MacLean, 459 U.S. at 382; Hochfelder, 425 U.S. at 208. Indeed, a defendant other than the issuer could be absolved from Section 11 liability only if he had reasonable grounds to believe, and did believe, the registration statement was correct and, with respect to any part of the registration statement not purporting to be made on the authority of an expert, he conducted a reasonable investigation of its accuracy. Securities Act, § 11(b)(3). Under Section 11(b)(2) a non-issuer defendant shall not be liable if he can come forward with proof that the offending registration statement became effective without his knowledge. See id. To establish a prima facie case under § 11, a plaintiff need show only that (1) the registration statement of the security purchased contained an omission or misrepresentation, and (2) the omission or misrepresentation was material, e.g., it would have misled a reasonable investor about the nature of his or her investment. Schaeffer, 29 F. Supp. 3d, 1220. Unlike a Section 10(b) claim, scienter is not required for establishing liability under this section.5 In fact, the liability of the issuer of a materially misleading registration statement is "virtually absolute, even for innocent misstatements." Herman & MacLean, 459 U.S. at 382. See also Hochfelder, 425 U.S. at 200. a. The Registration Statement Filed By Quovadx On December 10, 2003 Contained a Misrepresentation Of Fact Regarding The Third Quarter Financial Results.

To support a claim under Section 11, the alleged misrepresentation in the Registration Statement "must be one of existing fact, not merely an expression of opinion, belief or expectation." In re Initial Public Offering Sec. Litig., 358 F. Supp. 2d 189, 210 (S.D.N.Y. 2004) (citations omitted). Here, Quovadx's misrepresentations with respect to its 2003 thirdquarter financials were, undisputedly, misrepresentations "of existing fact."
5

There is also pending a separate class action being prosecuted against Quovadx arising out of identical conduct by Defendants. However, that class action, captioned Heller v. Quovadx, United States District Court For The District Of Colorado Civil Action No. 04-M0665(OES) is for claims arising under Section 10(b) of the Exchange Act of 1934. Those claims, unlike the ones in the present action, require that the plaintiff-class prove scienter. -10-

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Indeed, on March 15, 2004 Quovadx issued a press release announcing the restatement of its 2003 third quarter financial results which removed "all revenue associated with contracts between the Company and InfoTech Network Group from its published financial reports for 2003." The restatement included the reduction of the "[t]hird quarter, 2003 software license revenues by $4.6 million to $3.2 million and total revenues were reduced from $19.0 million to $15.2 million." Id. In addition, Quovadx's net loss for the quarter was increased from $1.1 million to $ 5.3 million. The 2003 third-quarter financial results had been previously incorporated into Quovadx's Registration Statement filed with the SEC on December 10, 2003 in connection with Quovadx's acquisition of Rogue Wave. As admitted by Quovadx itself on March 15, 2003 and on several instances thereafter, the 2003 third-quarter financial statements contained misrepresentations with respect to the company's revenues and earnings. The restatement by the Company of its third-quarter revenues is absolute and is unassailable proof of that fact. These misrepresentations in the Registration Statement of Quovadx constitute an "untrue statement of fact" that rendered Quovadx's Registration Statement false and misleading pursuant to the terms of Section 11. b. The Misrepresentation Regarding Quovadx's 2003-Third Quarter Financial Results Was Material.

In order to meet the materiality element of a Section 11 claim, a plaintiff must set forth facts showing that the defendant made an untrue statement of material fact, or failed to state a material fact necessary to make the statements that were made not misleading. 15 U.S.C. 77k; Schwartz v. Celestial Seasonings, Inc., 178 F.R.D. 545, 559 (D. Colo. 1998). "A statement or omission is material only if a reasonable investor would consider it important in determining whether to buy or sell stock." Id. (citing Grossman v. Novell, Inc., 120 F.3d 1112, 1119 (10th Cir. 1997). The Supreme Court has defined materiality as the "substantial likelihood that a reasonable shareholder would consider [the fact] important." TSC Indus. Inc. v. Northway, Inc.,

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426 U.S. 438, 449 (1976). See also Affiliated Ute Citizens v. United States, 406 U.S. 128, 15354 (1972). However, the fact that the investor may have found the information useful alone is not sufficient, for a materiality determination requires that the misstatement or omission "significantly alter[] the `total mix' of information made available." Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (internal citations omitted). The Tenth Circuit has closely followed this definition and held that "the question of materiality is to be resolved as a matter of law when the information is `so obviously important [or unimportant] to an investor, that reasonable minds cannot differ on the question of materiality.'" Connett v. Justus Enters. of Kan., Inc., 68 F.3d 382, 384 (10th Cir. 1995) (quoting Garcia v. Cordova, 930 F. 2d 826, 829 (10th Cir. 1991)). Following the Supreme Court's materiality threshold, federal courts have held that misstatements and omissions in Registration Statements concerning a company's revenues or financial statements and significant overstatements or understatements of asset value, revenue or profits, would be considered important by a reasonable shareholder and are, thus, material. See, e.g., In re Initial Public Offering Sec. Litig., 358 F. Supp. 2d 189, 210 (S.D.N.Y. 2004) (observing that "[m]aterial facts may `include not only information disclosing the earnings and distributions of a company but also those facts which affect the probable future of the company and those which may affect the desire of investors to buy, sell, or hold the company's securities.'") (internal citations omitted). See also Securities and Exchange Commission v. Melchior, No. l 90-C-1024J, 1993 WL 89141 at * 12-13 (D.C. Utah Jan. 14, 1993) (adopting the materiality test set forth in TSC Industries and finding that defendants' failure to disclose in the prospectus certain projected acquisitions, which would have an impact in the company's liquidity, constituted a material omission); Comeau v. Rupp, No. 86-1531-K, 1988 WL 93977 at * 10-11 (D.C. Kan. March 23, 1988) (adopting the materiality test set forth in TSC Industries and holding that defendant's failure to disclose the existence of loans, liens and lawsuits against the company, which had the effect of reducing the value of the company by 68%, constituted material omitted information), cause transferred by 1988 WL 93981 (D. Kan. Jun 01, 1988); SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833, 849 (2d Cir. 1968) (finding that materiality -12-

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encompasses "`any fact' . . which in reasonable and objective contemplation might affect the value of the corporation's stock or securities.") The concept of "materiality" is, in the accounting context, also related to the "realization" principle. Pursuant to Generally Accepted Accounting Principles ("GAAP")

revenue should not be recognized until it is "realized or realizable [and] earned." FASB Concept Statement No. 5, ¶ 83. This is known as the "realization principle" which provides that "revenue be earned before it is recognized." Jan R. Williams & Joseph v. Carcello, 2005 Miller GAAP Guide Level A, Restatement and Analysis of Current FASB Standards (2005). This simply means that under accepted accounting guidelines, revenue is recognized when it is earned, and the earning process is not complete until the sales price is collected or "assured reasonably." Id. With respect to errors in previously reported financial statements GAAP provides that financial statements are to be restated only if the error involved is material and if the error was in existence at the time the financial statements were issued. See Accounting Principles Board Opinion No. 20 (July 1971) (replaced by Statement of Financial Accounting Standard No. 154 (May 2005) (which "continues the requirements of APB Opinion 20 for reporting [] the correction of an error [in previously issued financial statements]"). Likewise, Regulation S-X (17 C.F.R. 210.4-01 (a)(1)) sets forth that financial statements will reflect "material information" as is necessary "to make the required statements . . . not misleading." In addition, those financial statements filed with the SEC which are not prepared in compliance with GAAP are "presumed to be misleading and inaccurate, despite footnote of other disclosures." Id. Thus, by definition, the fact that Quovadx was required to restate its financial statements for the third quarter of 2003 renders the misstatements made material. Here, the uncontroverted facts are that Quovadx's Registration Statement contained financial statements that, by the Company's own admissions, were false and inaccurate and had to be restated -- all of which resulted in a sharp reduction of the Company's value, and therefore, its stock price. Removing revenue from the 2003 third-quarter results in the amount of $4.6 million proved to be a tremendous blow to the Company's reported earnings. Furthermore, -13-

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the Company's own admissions in the press releases that followed the March 15 announcement place the Individual Defendants at the center of the fraud. Indeed, after completing its internal investigation into the March 15 restatement, Quovadx announced that its former management had induced InfoTech to enter into the distribution agreement by signing an outsourcing agreement "under which Quovadx would pay up to $2.46 million to Infotech for outsourcing services." Kirberger Decl., Ex. 4, ¶ 56. Quovadx's former management also promised InfoTech "a target of an additional $10 million in outsourcing services to be purchased by Quovadx from Infotech on an annual basis." Id. The Company further stated that "Infotech would not have entered into the distribution agreement without concurrently entering into the outsourcing agreement." Id. On a subsequent press release issued on May 14, 2004, Quovadx announced that it had "severed relations with its former president and CEO Lorine Sweeney and CFO Gary Scherping." Kirberger Decl., Ex. 4, ¶ 58. Because of Sweeney and Scherping's pivotal role in the InfoTech scheme -- which came to light as a result of the Company's own internal investigation -- Quovadx "discontinued severance payments to these former executives and has demanded the return of severance payments already paid to them under their severance agreements, and the return of prior compensation including bonuses." Id. Clearly, Quovadx's own public statements about the Individual Defendants' role in the fraudulent scheme and its retaliatory actions against them, hardly suggest that the Individual Defendants engaged in any due diligence in connection with the misrepresentations contained in the Registration Statement, far from it, the non-issuers were the master-minds and driving force behind the fraud. In sum, the Defendants have violated the provisions of Section 11 and are thus liable to the Plaintiffs for having issued a materially false and misleading Registration Statement in connection with the exchange offer with Rogue Wave.

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CONCLUSION Because there is no genuine issue of a material fact, Plaintiffs respectfully request that the Court grant partial summary judgment on liability in their favor and against the Defendants. Respectfully submitted, LOWENSTEIN SANDLER PC By: s/Marcela A. Kirberger Lawrence M. Rolnick, Esq. Marcela A. Kirberger, Esq. 65 Livingston Avenue Roseland, NJ 07068-1791 Tel. 973.597.2500 Fax 973.597.2400 Attorneys for Lead Plaintiffs Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Technology Fund New, L.P., and Special Situations Technology Fund II, L.P.

Dated: December 1, 2005

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