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1 COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 2 SPENCER A. BURKHOLZ (147029) HENRY ROSEN (156963) 3 ANNE L. BOX (224354) LAURIE L. LARGENT (153493) 4 MARY K. BLASY (211262) JULIE A. WILBER (246949) 5 655 West Broadway, Suite 1900 San Diego, CA 92101 6 Telephone: 619/231-1058 619/231-7423 (fax) 7 [email protected] [email protected] 8 [email protected] [email protected] 9 [email protected] [email protected] 10 Lead Counsel for Plaintiffs 11 [Additional counsel appear on signature page.] 12 UNITED STATES DISTRICT COURT 13 NORTHERN DISTRICT OF CALIFORNIA 14 OAKLAND DIVISION 15 In re YAHOO! INC. ) Master File No. 4:08-cv-02150-CW 16 ) ) CLASS ACTION 17 This Document Relates To: ) ) LEAD PLAINTIFFS PENSION TRUST 18 ) FUND FOR OPERATING ENGINEERS ALL ACTIONS. ) AND POMPANO BEACH POLICE AND 19 FIREFIGHTERS' RETIREMENT SYSTEM'S OPPOSITION TO 20 DEFENDANTS' MOTION TO DISMISS PLAINTIFFS' CONSOLIDATED 21 AMENDED COMPLAINT 22 23 24 25 26 27 28 DATE: TIME: CTRM: JUDGE: September 18, 2008 2:00 p.m. 2, 4th Floor Hon. Claudia Wilken

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1 2 3 I. 4 II. 5 III. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 V. VI. D. E. C. IV. A. B. E. F. B. C. D.

TABLE OF CONTENTS Page INTRODUCTION ...............................................................................................................1 STATEMENT OF FACTS ..................................................................................................3 THE COMPLAINT SATISFIES THE PLEADING REQUIREMENTS FOR FALSITY .............................................................................................................................6 A. Defendants' Statements that the Development of Yahoo!'s Search Business Was Successful and Competitive with Google Were False and Misleading................................................................................................................6 Statements Regarding Panama Were False and Misleading....................................8 Defendants Are Liable for the Third-Party Statements Alleged in the Complaint...............................................................................................................10 Plaintiffs' Allegations of Falsity Regarding Yahoo!'s Search Business Are Further Corroborated by Numerous Confidential Witnesses ................................10 Yahoo!'s Financial Results Were False and Misleading Because They Improperly Included Revenues from Click Fraud .................................................12 The PSLRA's Safe Harbor Provision Does Not Insulate Defendants from Liability for Their False and Misleading Statements.............................................14

THE COMPLAINT ADEQUATELY ALLEGES SCIENTER ........................................16 The Confidential Witness Accounts Show Defendants Had Actual Knowledge of the Falsity of Their Statements When Made..................................17 The Complaint Also Raises a Strong Inference that Defendants' Misrepresentations Were Either Made Intentionally or with Deliberate Recklessness ..........................................................................................................18 Defendants' Scienter Is Strongly Inferred from Their Signed Certifications to the SEC ..............................................................................................................20 The Individual Defendants' Insider Trading of Yahoo! Stock Supports a Strong Inference of Scienter ..................................................................................20 The Complaint Pleads with Particularity Facts Demonstrating that Defendant Nazem Is Liable as a Primary Violator of Section 10(b) .....................22

THE COMPLAINT ADEQUATELY PLEADS LOSS CAUSATION ............................22 PLAINTIFFS HAVE ADEQUATELY ALLEGED AN INSIDER TRADING CLAIM UNDER SECTION 20A ......................................................................................24 PLAINTIFFS HAVE ADEQUATELY ALLEGED CONTROL PERSON LIABILITY UNDER SECTION 20(a)..............................................................................25

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1 2 3 VIII. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

TABLE OF CONTENTS Page CONCLUSION..................................................................................................................25

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1 2 3 CASES

TABLE OF AUTHORITIES Page

4 Barrie v. Intervoice-Brite, Inc., 397 F.3d 249 (5th Cir. 2005) .............................................................................................10 5 Berson v. Applied Signal Technology, Inc., 6 527 F.3d 982 (9th Cir. 2008) ..................................................................................... passim 7 Chiarella v. United States, 445 U.S. 222 (1980)...........................................................................................................22 8 Commc'ns Workers of Am. Plan for Employees' Pensions & Death Benefits 9 v. CSK Auto Corp., 525 F. Supp. 2d 1116 (D. Ariz. 2007) .................................................................................6 10 Credit Suisse First Boston Corp. v. Arm Fin. Group, 11 No. 99 Civ. 12046 (WHP), 2001 U.S. Dist. LEXIS 3332 (S.D.N.Y. Mar. 28, 2001) ..................................................................................................15 12 Dura Pharms., Inc. v. Broudo, 13 544 U.S. 336 (2005).................................................................................................2, 23, 24 14 Eminence Capital, L.L.C. v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2003) ...........................................................................................25 15 Howard v. Everex Sys., 16 228 F.3d 1057 (9th Cir. 2000) ...........................................................................................20 17 In re Cabletron Sys., 311 F.3d 11 (1st Cir. 2002)..........................................................................................10, 12 18 In re Copper Mountain Sec. Litig., 19 311 F. Supp. 2d 857 (N.D. Cal 2004) ..........................................................................15, 16 20 In re Daou Sys., 411 F.3d 1006 (9th Cir. 2005) ................................................................................... passim 21 In re Lattice Semiconductor Corp. Sec. Litig., 22 No. CV04-1255-AA, 2006 U.S. Dist. LEXIS 262 (D. Or. Jan. 3, 2006) ..........................................................................................................20 23 In re Omnivision Techs., 24 No. C-04-2297 SC, 2005 U.S. Dist. LEXIS 16009 (N.D. Cal. July 29, 2005)...................................................................................................21 25 In re SmarTalk Teleservices, Inc. Sec. Litig., 26 124 F. Supp. 2d 527 (S.D. Ohio 2000) ........................................................................10, 22 27 In re USA Talks.com, Inc. Sec. Litig., No. 99-CV-0162-L(JA), 2000 U.S. Dist. LEXIS 14823 28 (S.D. Cal. Sept. 14, 2000) ..................................................................................................10
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In re Vantive Corp. Sec. Litig., 283 F.3d 1079 (9th Cir. 2002) ...........................................................................................21 In re VeriFone Securities Litigation, 11 F.3d 865 (9th Cir. 1993) ...............................................................................................24 LDK Solar Sec. Litig., No. C 07-05182 WHA, 2008 U.S. Dist. LEXIS 42425 (N.D. Cal. May 29, 2008) ................................................................................12, 14, 24, 25 Lee v. City of Los Angeles, 250 F.3d 668 (9th Cir. 2001) .............................................................................................11 Metzler Investment GMBH v. Corinthian Colleges, Inc., No. 06-55826, 2008 U.S. App. LEXIS 15935 (9th Cir. July 25, 2008) ......................................................................................7, 16, 17, 24 No. 84 Employer-Teamster Joint Counsel Pension Trust Fund v. Am. West Holding Corp., 320 F.3d 920 (9th Cir. 2003) ..................................................................................... passim Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226 (9th Cir. 2004) .........................................................................10, 11, 12, 20 Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000).................................................................................................9 Pension Trust Fund v. Clorox Co., 353 F.3d 1125 (9th Cir. 2004) ...........................................................................................15 Pirraglia v. Novell, Inc., 339 F.3d 1182 (10th Cir. 2003) .........................................................................................13 Provenz v. Miller, 102 F.3d 1478 (9th Cir. 1996) .............................................................................................9 Rosenbaum Capital, LLC v. McNulty, 549 F. Supp. 2d 1185 (N.D. Cal. 2008) .............................................................................16 S. Ferry LP #2 v. Killinger, 399 F. Supp. 2d 1121 (W.D. Wash. 2005).....................................................................8, 11 Schlagal v. Learning Tree, Int'l, No. CV 98-6384, 1998 U.S. Dist. LEXIS 20306 (C.D. Cal. Dec. 23, 1998) ..................................................................................................22 Shurkin v. Golden State Vintners, Inc., 471 F. Supp. 2d 998 (N.D. Cal. 2006) ...............................................................................24 Tellabs, Inc. v. Makor Issues & Rights, Ltd., __ U.S. __, 127 S. Ct. 2499 (2007)..........................................................................2, 11, 16

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STATUTES, RULES AND REGULATIONS 15 U.S.C. §78j(b)................................................................................................................7, 22, 24, 25 §78t(a) ................................................................................................................................25 §78t-1 .................................................................................................................................24 §78u-4 ..................................................................................................................................6 §78u-4(b)(2)............................................................................................................... passim Federal Rules of Civil Procedure Rule 8(a)(2)........................................................................................................................23 Rule 9(b) ..........................................................................................................................6, 9

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ISSUES TO BE PRESENTED

Whether the Complaint's alleged false material statements are pled with sufficient

6 particularity because the Complaint sets forth: (a) Defendants' false statements made directly to the 7 8 statements were false, because these allegations are bolstered by 15 confidential witnesses who 9 10 11 12 13 14 15 16 under the PSLRA's safe harbor provisions because they are not forward-looking and, even if considered forward-looking, they were made with actual knowledge or not accompanied by corroborated each other and were in positions to know the information attributed to them. Safe Harbor 2. Whether the alleged false statements of historical fact are actionable because they are market and to securities analysts who repeated them to the market; and (b) the reasons why those

more than mere statements of optimism and whether the statements are not insulated from liability

17 meaningful cautionary language. 18 19 20 21 Scienter 3. Whether the Complaint satisfies the PSLRA's scienter standard by: (a) pleading

Defendants' actual knowledge of their false statements; and (b) whether sufficient facts regarding

22 Defendants' hands-on control of Yahoo!'s core business, SOX certifications and massive insider 23 selling allow the Court to draw an inference of scienter. 24 25 26 Loss Causation 4. Whether the Complaint sets forth "some indication of the loss and the causal

27 connection that the Plaintiff has in mind" by demonstrating that the January and July 2006 declines 28 in Yahoo!'s stock price were directly tied to Defendants' false statements regarding Yahoo!'s efforts

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to upgrade its search business and false financial results bolstered by improperly recognized click fraud revenue. Insider Trading Claim 5. Whether the Complaint states a claim for unlawful contemporaneous trading because

Plaintiffs plead a primary violation of the securities laws and Defendants were in possession of material, non-public information when they made contemporaneous stock sales. Control-Person Claim 6. Whether the Complaint states a claim for control-person liability against Defendants

because Plaintiffs plead a primary violation of the securities laws and set forth particularized facts demonstrating that the Individual Defendants ran the day-to-day operations of Yahoo!, influenced and controlled the decision-making at Yahoo! and the contents and release of the alleged false statements.

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1 I. 2

INTRODUCTION Plaintiffs' Consolidated Amended Complaint for Violation of the Federal Securities Laws

3 ("Complaint") easily meets this Circuit's pleading requirements. The Complaint pleads specifics, 4 from 15 confidential witnesses ("CWs"), detailing why Defendants' public statements were false by 5 identifying the material adverse facts that were concealed from investors. The crucial failure of 6 Yahoo! to develop a search engine business to compete with Google was withheld from investors. 7 Investors were also unaware Yahoo! was improperly recognizing revenue from click fraud from its 8 affiliates and partners to the detriment of its advertising customers, which allowed Yahoo! to meet 9 earnings estimates and inflate Yahoo!'s stock price. 10 Defendants' assertions that Plaintiffs have not adequately pled falsity are wrong.

11 Defendants' statements of historical fact that Yahoo! had successfully integrated Overture, that the 12 Company was successfully developing an upgrade to Overture and that the Company's search 13 business was allowing it to achieve record results were false and misleading when made. The 14 Complaint contains particularized allegations setting forth why Defendants' statements were false 15 and were not merely optimistic forward-looking statements about future prospects or search business 16 upgrades, that are supported by credible CWs, including former employees who were in a position to 17 know why Yahoo!'s acquisition of Overture and Project Panama's ("Panama") development were 18 failures. 19 Contrary to Defendants' assertion that Plaintiffs' false revenue recognition claims are

20 conclusory and not supported by adequate particularity as to the amount of revenue improperly 21 recognized, the Complaint sets forth an adequate basis that the amount of the improper revenue 22 recognized by click fraud was at least 10% of Yahoo!'s quarterly revenues by pointing to 23 independent experts and ex-Yahoo! employees who observed the practice. ¶¶204-208.1 Yahoo! has 24 also agreed in a settlement with its advertising customers to refund click fraud generated revenue 25 recognized during the Class Period, although it continues to conceal the amount. ¶¶10, 147. 26 27 28
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Unless otherwise stated, all "¶" or "¶¶" references are to the Complaint. All emphasis is added and citations are omitted, unless otherwise noted.

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1

The Complaint also sets forth a strong inference of Defendants' scienter based on facts from

2 15 CWs, who are all former employees of Yahoo!, demonstrating Defendants' actual knowledge of 3 the Overture integration and Panama development problems and the way Yahoo! benefited from 4 click fraud revenues to meet quarterly earnings numbers. ¶¶20-34, 155-178. The CWs are 5 corroborated by cogent inferences drawn from Defendants' executive positions and involvement in 6 the Company's core operations. Defendants were not only at the center of the Overture integration, 7 development of Panama and closely monitored the Company's systems used to detect and 8 supposedly prevent click fraud, but Defendants held themselves out to the market as extremely 9 hands-on managers familiar with Yahoo!'s business and even signed SOX certificates stating the 10 Company's internal controls were effective. This Court should reject Defendants' effort to ignore an 11 astounding $879 million in stock sales, constituting a significant percentage of their holdings ­ 84% 12 to 90% excluding vested options, and 35.6% to 68.1% including vested options ­ and an amount 13 670% larger than the same period prior to the Class Period. ¶12. In sum, Plaintiffs' inferences of 14 scienter are at least as compelling as Defendants' non-culpable explanations. Tellabs, Inc. v. Makor 15 Issues & Rights, Ltd., __ U.S. __, 127 S. Ct. 2499, 2509 (2007). 16 Defendants' arguments regarding loss causation also fail because the Complaint provides

17 Defendants with far more than the required "indication of the loss and the causal connection that the 18 plaintiff has in mind." Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 347 (2005). Here, the partial 19 disclosure and Class Period ending announcement all tie directly to the Defendants' fraudulent 20 statements regarding Yahoo!'s search business and improper recognition of revenue via click fraud. 21 ¶¶125, 126, 130, 150. Yahoo!'s stock price declined significantly in January 2006 and again in July 22 2006 when Yahoo! disclosed its true business conditions and was forced to downsize future earnings 23 targets. As such, Plaintiffs have fulfilled the requirements from Dura by explaining how their loss 24 was suffered when the market became aware that Panama was delayed and the Company's search 25 revenue was declining because it was forced to terminate relationships with lower quality affiliates 26 who were contributing to click fraud at Yahoo!. ¶150. With these allegations, Plaintiffs have 27 exceeded what the Ninth Circuit found sufficient in In re Daou Sys., 411 F.3d 1006 (9th Cir. 2005). 28
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1 II. 2

STATEMENT OF FACTS Plaintiffs bring this securities fraud class action on behalf of investors who acquired Yahoo!

3 securities from April 8, 2004 to July 18, 2006 (the "Class Period"), against Yahoo! and the 4 Individual Defendants.2 The detailed allegations in the Complaint show that by 2003 Yahoo! was 5 desperate to end its dependence on Google's algorithm for its search business, which accounted for 6 40% of its revenues. ¶¶3, 42. Although Google was dominating this expanding, lucrative industry, 7 in 2003 Yahoo! acquired Overture, an internet search company, to catch up to Google and develop 8 its own search algorithm. Id. The Overture acquisition was a disaster. Overture's internet platform, 9 accounting for over 50% of Yahoo!'s revenue and critical to the expansion of its search marketing 10 business, was incapable of handling the internet traffic pulsing through it and was "`bursting at the 11 seams'" and "literally self destructing." ¶30. In spite of the major obstacles to Yahoo!'s 12 development of a new search technology, the Company ignored repeated requests from personnel to 13 provide additional funding for servers in Overture's Pasadena facility. ¶¶29, 30, 56(a). Yahoo! also 14 fired senior Overture engineers most knowledgeable about and capable of developing the new search 15 technology. ¶3, 29, 56(b). 16 With knowledge of these crippling problems, in an effort to maintain the facade of keeping

17 up with Google, Defendants told investors the Overture acquisition was a success when exactly the 18 opposite was true. In Yahoo!'s 2003 Annual Report, CEO Semel stated: "The integration of the 19 Yahoo! and Overture . . . has proceeded well, and . . . seems even more compelling than we initially 20 thought." ¶45. In releasing Yahoo!'s 1Q 04 financial results, the Company reported: "`On the 21 technology front we hit the ball out of the park.'" ¶56. Given the problems permeating Overture 22 since its acquisition, these statements were false and misleading. The failure to successfully 23 integrate Overture had longstanding and detrimental consequences on Yahoo!'s execution of an 24 improved search marketing technology. In an effort to revamp the Overture system and better 25
2 The Individual Board of 26 Directors; Daniel Defendants include Terry S. Semel, Yahoo! CEO and Chairman of the President L. Rosensweig, Yahoo! COO; Farzad Nazem, Yahoo! Executive Vice Susan L. Decker, Yahoo! CFO and Executive Vice President of 27 and CTO; and ("Individual Defendants," and with Yahoo! "Defendants"). ¶¶13-18. Finance and Administration

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1 "monetize" its search business, in 2004 Yahoo! embarked on "Project Panama." ¶3. Panama was 2 also a nightmare for the Company. Panama's leadership changed three times in 2004 and 2005. ¶3, 3 32. The integration of separate software systems, a necessary precursor to Panama and known 4 internally as "`solving the blob,'" was far behind schedule due to Yahoo!'s firing of Overture 5 engineers. ¶¶3, 29, 102(c), 163. The user interface and algorithm were delayed and incomplete. 6 ¶¶30, 139(a). An essential integration of back-end components known as "Cheetah" was delayed 7 due to the problems at Overture. ¶23. Panama as a whole was "`stalled, delayed, and derailed'" 8 because Yahoo! fired Overture's technical experts. ¶31(d). 9 Each Individual Defendant was aware of these dilemmas impeding the execution of Panama.

10 Panama was run out of Nazem's office after October 2005 when it was transferred to Sunnyvale, and 11 Nazem was briefed on a weekly basis by the lead project manager of Panama. ¶¶20, 23. In turn, 12 Nazem shared the truth regarding Panama's delayed and uncertain status with the other Individual 13 Defendants in weekly meetings. ¶¶20(a), 160. Semel was also briefed on Panama's dire situation on 14 a weekly basis by the project's leadership team. ¶¶32, 94. 15 Despite the problems with Panama, Defendants assured investors the implementation of

16 Yahoo!'s improved search marketing technology was moving ahead in a successful and timely 17 manner. See, e.g., ¶¶103, 104. Defendants' statements were false and misleading, as the Individual 18 Defendants knew yet failed to disclose that Panama was far behind schedule, with no tangible date 19 for release confirmed. ¶¶20(a), 160. On October 18, 2005, CFO Decker informed investors that 20 Panama would be complete in late 2005, with financial benefits growing through 2006. ¶117. 21 Analysts repeated this information, emphasizing Panama as a "key driver" of the Company's 22 earnings in late 2005 and throughout 2006. ¶120. 23 The Truth Begins to Emerge 24 One quarter later, Defendants announced during a January 18, 2006 conference call that there

25 would be a delay in Panama's implementation to the second half of 2006. ¶125. Defendants also 26 made a partial disclosure that day in its 4Q05 results, missing estimates and issuing guidance lower 27 than expected by investors for FY 2006. ¶6, 126, 130. Yahoo! blamed slower search growth and an 28 anticipated increase in rates paid to affiliate websites. ¶6. The Company was being pressured to
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1 drop lower quality affiliates that were being utilized for click fraud, which benefited Yahoo!, and 2 therefore would have to share more advertising revenue with higher quality affiliates. ¶¶6, 126, 130. 3 The Company's stock price decreased over 10% on 118 million shares traded ­ five times Yahoo!'s 4 normal trading volume. ¶¶126, 130. Defendants did not admit, however, the full truth ­ that click 5 fraud revenues obtained from these affiliate websites were becoming harder to justify given the 6 recent advertiser backlash and increased media scrutiny of click fraud. ¶127. 7 Because Yahoo! failed to successfully integrate Overture and implement Panama, in 2004

8 and 2005, the Company's paid search revenues stagnated. ¶56(f). Desperate to demonstrate 9 growing search revenues, Yahoo! developed ways to use click fraud to their advantage, allowing the 10 recognition of search revenue they had not earned. ¶¶4-5, 22, 25, 29, 31, 56(e).3 Purposefully 11 exploiting the problem of click fraud, Yahoo! decided in late 2004 to "relax" the business rules and 12 filters in the click fraud detection system, particularly at quarter-end, allowing Yahoo! to generate 13 additional revenue by permitting the counting of improper clicks on content match partner sites. 14 ¶¶5, 22(d), 27, 31(k). Further, refunds for non-billable clicks were delayed until after quarter end. 15 ¶31(l)-(k). In total, click fraud during the Class Period resulted in Yahoo!'s recognition of $387 16 million in unearned revenue. ¶¶199, 203. 17 Finally, on July 18, 2006, Yahoo! made a full disclosure of the Company's problems, issuing

18 its 2Q06 results, missing revenue estimates, and announcing another delay of Panama beyond 4Q06. 19 ¶¶8, 150. Semel confirmed Yahoo!'s search revenue would be lower and its payments to affiliate 20 websites higher because the Company was forced to terminate relationships with affiliate websites 21 that were known to contribute to click fraud. ¶150. Investors punished the Company's stock on this 22
3 Defendants' contention that Yahoo! filtered fraudulent clicks during the Class Period misses the 23 point. Defendants' Motion to Dismiss Plaintiffs' Consolidated Amended Complaint ("Defs.' 24 Mem.") at 3. Plaintiffs' well-pled allegations show that Yahoo! lacked the proper controls to fully prevent click fraud revenue and Defendants manipulated the computer system to deliberately recognize Period. Defendants' 25 contentionfraudulent revenue throughout the Class the rates¶¶4, 5, 22, 25, 29, 31, 56(d).been filtering that in March 2007, Yahoo! announced at which "they had already

Mem. to which they 26 invalid clicks" is misleading. Defs.' controlat 9 n.2. The March 2007 press releasePeriod. Defs.' refer says nothing about Defendants' over fraudulent clicks during the Class 27 Mem. at 1; Declaration of Mark R.S. Foster in Support of Defendants' Motion to Dismiss Plaintiffs' Consolidated Amended Complaint ("Foster Decl."), Ex. 50. 28
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1 news, sending the share price down over 22% with 204 million shares traded, over 10 times the 2 normal trading volume. ¶8, 150, 232. 3 III. 4 Defendants take issue with the structure of the Complaint and assert that "plaintiffs fail to 5 identify with particularity the statements they contend are false." Defs.' Mem. at 10. In fact, the 6 Complaint details, in an organized fashion and on a quarterly basis, the "who, what, when and 7 8 9 straightforward manner, CW accounts that corroborate the allegations (¶¶20-34, 155-178); facts 10 demonstrating Defendants' knowledge of their fraud (¶¶155-178, 179-197); the financial motives for 11 Defendants' fraud, including their massive insider trading (¶¶179-197); Yahoo!'s false financial 12 statements (¶¶199-226); and loss causation (¶¶228-234). This is certainly enough to satisfy the 13 Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. §78u-4, and Federal Rule of Civil 14 15 A. 16 17 This Court should flatly reject Defendants' suggestion the misstatements alleged regarding 18 the integration of Overture and development of Panama are inactionable, "generalized, vague and 19 unspecific assertions," and that Plaintiffs are simply complaining about "`[p]roblems and difficulties 20 21
4 See ¶¶49-52, 55, 62, 64-66, 68, 72, 81, 22 109, 112, 114, 118, 57-59, 61, 124-126, 133, 137,75, 76, 78,143, 82, 84, 89, 93, 96, 101, 103, 104, 120, 122, 138, 142, 146. 23 5 See ¶¶56, 60, 73, 79, 90, 102, 113, 123, 131, 139, 144.

THE COMPLAINT SATISFIES THE PLEADING REQUIREMENTS FOR FALSITY

where" of Defendants' false and misleading statements,4 "why" they were false,5 and analysts' reaction to, and confirmation of, Defendants' false statements.6 The Complaint further alleges, in a

Procedure 9(b).7 Defendants' Statements that the Development of Yahoo!'s Search Business Was Successful and Competitive with Google Were False and Misleading

24 25

6 7

See ¶¶53, 67, 70, 77, 83, 97, 99, 105, 108, 119, 120, 128, 129, 141.

Defendants' assertion that Plaintiffs' have engaged in "puzzle" pleading should be rejected because the allegations of falsity and scienter contained in the Complaint are readily ascertainable. 26 See Commc'ns Workers of Am. Plan for Employees' Pensions & Death Benefits v. CSK Auto Corp., (D. Ariz. 2007) (rejecting puzzle pleading argument because 27 525 F. Supp. 2d 1116, 1118 n.1 to enable Defendants to respond and [the] Court to rule"). complaint was "sufficiently clear 28
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1 [that] are the daily work of business people.'" Defs.' Mem. at 12, 15.

8

In this Circuit, the

2 concealment of business problems is actionable fraud.9 Defendants were desperate to compete with 3 Google for market share in the fast growing, multi-billion dollar search business, and rushed to 4 create Yahoo!'s own search technology, which resulted in chaos and insurmountable engineering 5 problems that negatively impacted Yahoo!'s advertising revenue growth. After the acquisition of 6 Overture, Defendants misled investors by representing the integration was successful and Yahoo! 7 was positioned for revenue growth with its new search platforms.10 These statements were false and 8 misleading because Defendants knew that their new search platform was an engineering disaster, 9 "`bursting at the seams'" and "literally self destructing." ¶¶30, 56, 60, 73, 79, 90, 102, 113. 10 However, Defendants continued to mislead investors about the Company's record revenue growth 11 resulting from the new search platform, knowing that the engineering problems were stagnating 12 revenues.11 13 Defendants also argue that these statements are non-actionable "expressions of enthusiasm,

14 dedication, and optimism." Defs.' Mem. at 10-12. The Complaint concerns Defendants' false 15 statements regarding Yahoo!'s current business condition. Advertising revenue growth and the 16 The Ninth Circuit's recent decision in Metzler Investment GMBH v. Corinthian Colleges, Inc., No. 06-55826, 2008 U.S. App. LEXIS 15935 (9th Cir. July 25, 2008), is not controlling. Here, Plaintiffs 18 have set forth with particularity each of Defendants' false statements and specifically why each statement was false. In Metzler, the Ninth Circuit held plaintiff's falsity allegations were inadequate 19 because in a blanket fashion, plaintiff claimed each statement made during the class period related to the defendant company's financial health was false for exactly the same reason and failed to 20 adequately articulate why each statement was false. Id. at *50-*51. 9 See No. Am. West Holding Corp., 320 21 F.3d 920 84 Employer-Teamster Joint Counsel Pension Trust Fund v.misleading statements about (9th Cir. 2003) (defendants violated §10(b) by making 22 company's financial outlook at a time the company was experiencing operational problems which were negatively impacting its business). 23 10 See, e.g., ¶50 (defendant Semel stated: "Looking at Overture specifically . . . the underlying 17 financial upside surpassed our original 24 strategic fit with Yahoo! and Rosensweig stated: to or network has launched Yahoo! search expectations."); ¶52 (defendant "[W]e just recently 25 technology around the world . . . all within two weeks and it is very exciting and it's doing very well."). 26 See, e.g., ¶61 (Semel stated: "`Yahoo!'s second quarter results represent another record quarter for the Company and demonstrate continued execution of our core priorities.'"); ¶66 (Rosensweig 27 stated: "[O]ur business is in great shape and growing at a very fast pace."). 28
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1 Company's successful search business, including the integration of Overture and operation of the 2 new platform, were critical aspects of Yahoo!'s business and closely watched by analysts and 3 investors. Defendants' statements that Overture and its new search platform were successful, were 4 neither vague nor amorphous so that no reasonable investor would rely on them. S. Ferry LP #2 v. 5 Killinger, 399 F. Supp. 2d 1121, 1129 (W.D. Wash. 2005) ("[T]he exception for puffery is narrowly 6 drawn [and only] statements on the extreme edge of generality and vagueness may be insufficient as 7 a basis . . . for securities fraud."). 8 In fact, it was Yahoo!'s switch to its own search technology via Overture, and its revenue

9 growth, that were critical to convincing the market that the Company had a shot at competing with 10 Google. At the time Defendants were making these false statements, they knew that the integration 11 of Overture was a failure, the Company's transition to a new search platform (so it could compete 12 with Google) was an engineering disaster and revenues stagnated as a result. Clearly, investors 13 would consider statements regarding the most critical aspect of Yahoo!'s business to be important 14 when deciding whether to purchase Yahoo! stock. Am. West, 320 F.3d at 933 (a fact is material if 15 there is a substantial likelihood that a reasonable investor would consider it important in decision 16 making). 17 18 B. Statements Regarding Panama Were False and Misleading

Because Panama was critical to Yahoo!'s ability to compete with Google, beginning in July

19 2005, Defendants repeatedly promised investors that increased revenue from Panama would be 20 realized in late 2005 and throughout 2006.12 Defendants' promises were repeated by analysts who 21 clearly understood the importance of Panama to Yahoo!'s ability to compete with Google. See ¶105 22 (RBC Capital Markets reported: "Yahoo management has recently confirmed its intention to make 23 this change happen late this year or early in 2006."); ¶120 (William Blair & Co. stated: 24 "Management highlighted the progress it is making in search monetarization, which is beginning to 25
12 See, e.g., ¶104 (defendant Semel stated on July 19, 2005: "we will begin realizing additional 26 value from long-term initiatives as 2006 progresses"); ¶117 (defendant Decker stated on October 18, said is of those products 27 2005: "What wethen thewe expected to see someto build throughoutstart to hit and benefit late this year [2005] and financial impact really 2006.").

28
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1 have a favorable impact on results that slowly build and become more meaningful as we enter next 2 year."). Panama's importance was also clearly demonstrated when Yahoo!'s stock plummeted upon 3 Defendants' disclosure in July 2006 that Panama would again be delayed, this time beyond 4Q06. 4 ¶¶8, 150. Investors punished Yahoo!'s stock, sending it down over 22% on 204 million shares ­ 5 over 10 times its normal trading value. Id. See also Oran v. Stafford, 226 F.3d 275, 282 (3d Cir. 6 2000) (materiality can be properly measured post hoc by looking to the stock's price movement in 7 the period immediately following the alleged disclosure). 8 Defendants suggest their statements about Panama's launch are non-actionable forecasts.

9 Defs.' Mem. at 14. The statements are actionable because Defendants had no reasonable basis for 10 believing them to be true and, more importantly, had actual knowledge of undisclosed facts that 11 seriously undermined the accuracy of the statements. See Provenz v. Miller, 102 F.3d 1478 (9th Cir. 12 1996). Defendants knew that the critical "solving the blob" project was extremely delayed, no code 13 had been written for Panama as of December 2005, there was under-funding, lack of executive 14 support and terminated engineers that delayed Panama and Panama had failed at least two prior 15 times. ¶¶113(d), 123, 131, 139, 144.13 16 Both Semel and Decker lied to investors on numerous occasions about when increased

17 revenues would be seen from Panama. ¶¶104, 115, 117, 118, 125, 133, 146. Defendants had no 18 reasonable basis for their promises that the real financial impact would be seen in 2006, as they 19 knew about all the problems with Panama. ¶¶113(d), 123, 131, 139, 144. These allegations more 20 than sufficiently identify the particular false and misleading statements and adequately show why the 21 statements were false, thereby satisfying both the PSLRA and Rule 9(b). 22
13 launch were not false 23 theDefendants' argument that their statements regarding the Panama is highly misleading. because second phase of Panama rolled out only three weeks after 3Q06 In total, Panama was more than one year late. When Defendants first started giving analysts guidance as to 24 when Yahoo! would experience revenue from Panama in October 2005, Defendants promised a late launch and increasing ¶117. In reality, Panama did not roll 25 2005 February 2007! Foster revenues throughout 2006. unpersuasively challenge the relevanceout until Decl., Ex. 44. Defendants of

complete as of December 2005. Defs.' Mem. at 26 Plaintiffs' allegations that the Panama code was notthat the underlying code was finished, this does 15 n.7. While Defendants stated on May 17, 2006 was complete, or that the code was ready to be used in any functional manner. 27 not mean Panama31 at 40. Foster Decl., Ex. 28
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1 2

C.

Defendants Are Liable for the Third-Party Statements Alleged in the Complaint

Defendants also assert they are not liable for analyst statements, yet the Ninth Circuit has 3 held defendants can be liable for third-party statements. "[W]hen statements in analysts' reports 4 clearly originated from the defendants . . . the statements may be held to be actionable even if they 5 are not exact quotations." Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 6 1235 (9th Cir. 2004). Analyst statements set forth in the Complaint reiterate factual assertions made 7 by Defendants during conference calls. For example, following Yahoo!'s release of its 3Q04 results, 8 Prudential Equity Group stated: "Management noted that revenue-per-search grew sequentially after 9 two quarters of no sequential growth." ¶¶77, 83. See In re USA Talks.com, Inc. Sec. Litig., No. 9910 CV-0162-L(JA), 2000 U.S. Dist. LEXIS 14823, at *12 (S.D. Cal. Sept. 14, 2000) (defendants cannot 11 disclaim liability for analysts' statements that simply repeat facts asserted by defendants). 12 Defendants also erroneously claim their statements during the May 17, 2006 analyst day 13 conference call are not actionable because Defendants did not speak about the three-phase Panama 14 launch. Defs.' Mem. at 13-14. The conference call transcript shows (Foster Decl., Ex. 31) each 15 Defendant was present when the statements about Panama's launch were made and therefore each is 16 liable for the statements. See In re SmarTalk Teleservices, Inc. Sec. Litig., 124 F. Supp. 2d 527, 543 17 (S.D. Ohio 2000) ("[A] high ranking company official cannot sit quietly at a conference with 18 analysts, knowing that another official is making false statements and hope to escape liability for 19 those statements. If nothing else, the former official is at fault for a material omission in failing to 20 correct such statements in that context."); Barrie v. Intervoice-Brite, Inc., 397 F.3d 249, 262 (5th Cir. 21 2005) (same). 22 D. 23 24 Plaintiffs' Allegations of Falsity Regarding Yahoo!'s Search Business Are Further Corroborated by Numerous Confidential Witnesses

Plaintiffs' allegations of falsity concerning the success of Yahoo!'s search business and

25 growing revenues are corroborated by numerous CWs. Contrary to well established law in this 26 Circuit, Defendants ignore specific details provided by CWs as to both falsity and scienter, the basis 27 of their knowledge and the interlocking corroboration between their reports detailed in the 28 Complaint. Daou, 411 F.3d at 1015; Oracle, 380 F.3d at 1234; see also In re Cabletron Sys., 311
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1 F.3d 11, 30 (1st Cir. 2002) (with a "number of different sources," their "consistent accounts 2 reinforce one another"). The witness allegations must be accepted as true at the pleading stage. 3 Tellabs, 127 S. Ct. at 2509. 4 The CW accounts in this case easily meet Daou and Oracle. The Complaint identifies each

5 CWs by number, describes their job titles and duties, lists where they worked and their dates of 6 employment. ¶¶20-34; see Daou, 411 F.3d at 1015. Furthermore, the Complaint alleges how the 7 CWs knew about the information they provided. Oracle, 380 F.3d at 1233. Several CWs 8 corroborate the known delays impacting Panama, bolstering the reliability of each witness account. 9 Daou, 411 F.3d at 1015 (the number of sources demonstrates the reliability of those sources).14 The 10 Complaint also identifies other CWs (CW10, CW11, CW12) that corroborate the problems with the 11 Overture integration and new search platform. ¶¶30-32. 12 Faced with these detailed statements, Defendants also attempt to create factual and

13 credibility issues with respect to the CWs, which is improper at the pleading stage. See Lee v. City 14 of Los Angeles, 250 F.3d 668, 689-90 (9th Cir. 2001). For example, Defendants ignore the fact that 15 CW12 was an Operations Sales Manager during the Class Period and in that position had an integral 16 role in the initiation and roll-out of Panama. In challenging the reliability of CW15, Defendants 17 again completely ignore the Complaint's allegations. Contrary to Defendants' contentions, the 18 Complaint identifies CW15's responsibilities, the types of meetings CW15 attended and the details 19 of what was discussed at the meetings. ¶34.15 20 21 22 23 24 25 See ¶20 (CW1 was Vice President of Engineering throughout the Class Period and assigned by defendant Nazem to lead Panama in October 2005. As part of Yahoo!'s engineering department and as leader for Panama, CW1 had knowledge of all the delays and problems Panama faced); ¶21 (CW2, a former Yahoo! insider sales manager confirmed that Panama was delayed because of backend (i.e., "solving the blob") problems); ¶23 (CW4 confirmed that resources weren't given to Panama until fall 2005 when Panama moved to Sunnyvale and that, because the "solving the blob" problem was delayed, making a 3Q06 rollout was not feasible); ¶26 (CW7 confirmed that "solving the blob" was not complete by February 2006).
14

15 That CW11 left 26 roll-out CW10 and not distractYahoo! before Defendants began making promises about Panama's dates does from these witnesses' credibility because others corroborated their reports. For example, CW2, CW4, CW7 were at Yahoo! for the major part of the Class Period, if 27 not all the Class Period, and confirm CW10's report that the "solving the blob" problem (also known

28 as the "back-end" problem) was a critical precursor to Panama. ¶¶21, 23, 26, 29. S. Ferry, 399 F.
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1

Contrary to Defendants' arguments, the consistent theme throughout the CW accounts ­ that

2 engineering and timing obstacles with Panama made it impossible for monetization to happen by 3 2006 ­ supports the reliability of their statements. ¶¶20, 30, 31. In Berson v. Applied Signal 4 Technology, Inc., 527 F.3d 982 (9th Cir. 2008), the Ninth Circuit recently rejected an argument 5 similar to Defendants' argument that Plaintiffs' witnesses were not in positions to know about 6 certain projects "first-hand." Id. at 985.16 7 8 As a result of the engineering problems detailed above, the Company's advertising revenue 9 growth was stagnant by the start of the Class Period. ¶4. To bury this problem, Defendants ignored 10 that their sub-par technology was allowing click fraud revenue to be recognized, manipulated the 11 click fraud filters and delayed refunds to fraudulently boost revenues. ¶¶31(k), 31(l). Consequently, 12 Yahoo's Class Period financial statements were overstated by $387 million (¶¶199-210, 214-223). 13 Consistent with Daou, Plaintiffs have specifically pled, on a quarterly basis, the amount 14 Yahoo! overstated revenue and total net income per share during the Class Period (¶¶56(g), (k), 15 73(g), (k), 79(g), (k), 90(g), (k), 102(g), (k), 113(h), (l), 123(g), (k), 131(d), (h), 139(b), (f)), and how 16 Defendants violated Generally Accepted Accounting Principles by including click fraud revenues in 17 Yahoo!'s financial statements and failing to include the accrued liabilities for foreseeable refunds to 18 customers (¶¶202-213). 19 information for the court to determine that the problems are significant in affecting a company's 20 21 22 23 Supp. 2d at 1140 ("the consistent and interlocking nature of the evidence provided by each witness 24 bolsters the evidence's reliability and credibility").
16 See also LDK Solar Sec. Litig., No. C *23-*24 25 (N.D. Cal. May 29, 2008) (for pleading 07-05182 WHA, 2008 U.S. Dist. LEXIS 42425, at personal purposes, it is not necessary that the source have 26 first-hand knowledge). 17 As Daou noted, other circuits are consistent. 411 F.3d at 1015. 27 contention that a plaintiff must plead "exact dollar amounts" or specificThe First Circuit rejected a "identities" as long as other allegations collectively are sufficient. Cabletron, 311 F.3d at 32. The Ninth Circuit has held that 28

E.

Yahoo!'s Financial Results Were False and Misleading Because They Improperly Included Revenues from Click Fraud

See Daou, 411 F.3d at 1017 (a plaintiff need only allege enough

"financial statements" and "overall financial position").17 Further, the Complaint provides detailed

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1 allegations that corroborate the falsity of Yahoo!'s financial statements, including reports from 2 industry experts and analysts who have determined click fraud amounts to be at least 10%, and as 3 much as 30%, of all pay-per-clicks (¶¶204-208) and corroborating accounts by CW3, CW6, CW8, 4 CW9, CW10, CW11 and CW12. ¶¶22, 25, 27-30, 31(l)-(k).18 5 Defendants fasten on to the "turning the dial" allegations rather than considering the full

6 context of the facts alleged in the Complaint and the detail with which all click fraud allegations are 7 pled. Defs.' Mem. at 8. As confirmed by CW3, CW6, CW9, CW10 and CW11, Yahoo!'s new 8 developing search technology was poorly equipped to filter bad clicks and account for its low quality 9 traffic partners. ¶¶22, 25, 27-30, 31(h). As confirmed by CW9, who worked on Yahoo!'s Click 10 Activity Research team, which was responsible for handling click fraud complaints, Defendants did 11 nothing to block the source of the click fraud (i.e., low quality traffic partners) and chose to include 12 the revenue in the Company's financial statements, in addition to including improperly recognized 13 revenue from Defendants' end-of-quarter filter manipulations. ¶28. CW3 also confirmed the 14 Company relaxed its click fraud filters to generate more revenues. ¶22(d). According to CW9, 15 Yahoo! had thousands of low quality content match partners who had an incentive to commit click 16 fraud or increase non-billable clicks since they received a piece of the revenues from Yahoo!, and 17 customer complaints about click fraud always increased at end-of-quarter. ¶28. Contrary to 18 Defendants' argument, the Company's settlement of the customer click fraud lawsuit provides 19 20 21 witness reports of a 50% miss in revenue projections provided sufficiently "hard numbers" when 22 confirmed by adequate corroborating details. Oracle, 380 F.3d at 1231.
18 Ironically, attack the lack of internal documents supporting, and 23 quantify, the Defendants click fraud revenue when Defendants are solely inPlaintiffs' inability to overstated possession of such documents, but have been unwilling to quantify any amounts. Defs.' Mem. at 8-9. In June 2006, 24 Yahoo! agreed to settle a customer click fraud lawsuit by providing advertisers with refunds due to Period. are vigorously click 25 click fraud during the Classin whichIn addition, Defendantsnot be completedefending a second¶140. fraud lawsuit in California, class certification will until spring 2009.

Because only have access to the information, cases like Daou 26 of accountingDefendantsnot have to raise to the level of particularity have found that allegations fraud do Defendants suggest. See Pirraglia v. Novell, Inc., 339 F.3d 1182, 1193 n.14 (10th Cir. 2003) (This is especially true "at the 27 pleading stage" since such specifics "would presumably be kept" in the Company's "private files."). 28
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1 further corroboration that the click fraud revenues were improperly included in Yahoo!'s Class 2 Period financial statements. Defs.' Mem. at 9 n.2; ¶¶140, 147. 3 Defendants incorrectly contend Yahoo! missed investor expectations on four occasions

4 during the Class Period, thereby undermining Plaintiffs' allegations of click fraud. Defs.' Mem. at 8. 5 Defendants' contention is misleading because two of the occasions were the January and July 2006 6 announcements when Defendants disclosed their fraud to investors. ¶¶125, 126, 150. Further, 2Q04 7 and 2Q05 were seasonally weaker quarters where Yahoo! failed to achieve the high end of analyst 8 expectations. Although investors were disappointed, Yahoo! claimed to achieve its own internal 9 guidance and referred to the results as "the best quarter in Yahoo! history" and "record results." 10 ¶¶62, 104. As alleged in the Complaint, however, Yahoo! only achieved the reported results via 11 improper recognition of click fraud revenue and subsequently went on a media campaign to 12 convince investors that their search business was competitive with Google. ¶69. 13 14 The safe harbor provision of the PSLRA protects only "`forward-looking statements 15 identified as such, which are accompanied by meaningful cautionary statements,'" and is 16 inapplicable to any "description of past or present events." LDK Solar, 2008 U.S. Dist. LEXIS 17 42425, at *45. Defendants' false and misleading statements are not protected by the safe harbor (or 18 pre-PSLRA bespeaks caution rule) because they were not forward-looking; and even if they were, 19 they were knowingly false when made and not accompanied by meaningful cautionary language. 20 First, Defendants made statements about the current status of the development of Yahoo!'s 21 22 were forward-looking, the safe harbor does not shield Defendants from liability when representations 23 24 See, e.g., ¶50 ("Looking at Overture specifically . . . the underlying strategic fit with Yahoo! and financial upside to our network has surpassed our original expectations."); ¶76 ("Our . . . continued 25 investment in people and infrastructure have led to the increased product quality and powerful rate of ("`Yahoo! continued to growth in 26 innovation which are really both paying off."); ¶103in . . . search marketing see.solid our abilitythe second quarter as a result [in part] of our strength . . and to execute and perform according to plan.'"); ¶104 ("The new [improving matching algorithms] are 27 working very well and so we're seeing increased success with that."). 28
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F.

The PSLRA's Safe Harbor Provision Does Not Insulate Defendants from Liability for Their False and Misleading Statements

search business.19 Second, even if Yahoo!'s statements regarding the progress and status of Panama

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1 were known to be false or misleading when made. The Company "may be held liable if the 2 `forward-looking statement' [was] made with `actual knowledge . . . the statement was false or 3 misleading.'" Am. West, 320 F.3d at 936. The Complaint alleges numerous detailed facts showing 4 Defendants knew about material problems with Panama, yet failed to disclose them to investors.20 5 Third, even if Defendants' statements were forward-looking, the cautionary language

6 accompanying the announcements was meaningless because it did not truthfully address the specific 7 risks or disclose existing adverse risks. See Credit Suisse First Boston Corp. v. Arm Fin. Group, No. 8 99 Civ. 12046 (WHP), 2001 U.S. Dist. LEXIS 3332, at *23 (S.D.N.Y. Mar. 28, 2001) ("warnings of 9 specific risks . . . do not shelter defendants from liability if they fail to disclose hard facts critical to 10 appreciating the magnitude of the risks described"). As the Ninth Circuit recently emphasized, 11 knowingly warning a negative event "might" occur is "quite different" from informing the public it 12 has already "in fact" occurred. Berson, 527 F.3d at 987 (emphasis in original). Clearly, "investors 13 would treat the two differently." Id. at 990. See In re Copper Mountain Sec. Litig., 311 F. Supp. 2d 14 857, 883 (N.D. Cal 2004) ("`the inclusion of general cautionary language . . . would not excuse the 15 alleged failure to reveal known material, adverse facts'").21 16 Defendants argue warnings of the risks relevant to Yahoo!'s search marketing business,

17 notably those in press releases and conference calls from April 7, 2004 to October 18, 2005, are 18 protected by the safe harbor. Defs.' Mem. at 22. They are not, however, because Defendants were 19 aware these risks had already materialized. Berson, 527 F.3d at 987. By April 7, 2004, the 20 21 On an October 18, 2005 conference call, for example, Defendant Decker informed investors the financial benefits of Panama would be seen in late 2005 and 2006, despite the Individual 22 Defendants' knowledge that the search algorithm was slated for launch no earlier than 2Q06. ¶¶3, 117. Also, during a May 17, 2006 analyst day, 23 20(a), 116, Panama roll-out beginning in 3Q06 and concludingDefendants provided details of a three-phase in 4Q06, despite their knowledge that a first-phase launch in 3Q06 and full implementation in 4Q06 was impossible. ¶¶8, 143, 144(b). 24 21 Employers Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125 25 (9th Cir. 2004), cited by Defendants, is distinguishable. In Clorox, many of defendant's "statements and defendant "identified the important problems with [the 26 were cautions in themselves," estimate of the approximate timetable to be off." Id. at 1133. Here, acquisition] that could cause her assured successful development new search algorithm, absent 27 Defendants' statementsknew the timetable for Panama wasof the they represented. disclosure they already not as 28
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1 integration and performance of Overture was already known to be disastrous due to underfunding 2 and Yahoo!'s firing of senior engineers. ¶¶3, 29, 30, 56. Also, by April 7, 2004, Defendants knew 3 Yahoo! was adjusting poorly to changes in Overture personnel because Yahoo! had terminated the 4 engineers capable of executing new search technology, causing major delays and obstacles. ¶3, 29, 5 56. Not until the fall of 2005 did Yahoo! begin to dedicate more resources to the development of 6 Panama. ¶¶20(a), 21, 23. The cautionary language cited by Defendants as adequate warnings at the 7 May 17, 2006 analyst day about the three-phase roll-out of Panama in 3Q and 4Q 2006 therefore has 8 no effect, because they already knew they were "unable to adapt [their] systems in a timely manner," 9 yet continued to assure investors Panama would be successfully executed by the end of 2006. ¶¶8, 10 143. Because Defendants failed "`to reveal known material, adverse facts'" (Copper Mountain, 311 11 F. Supp. 2d at 883), and did not disclose to investors that the risks addressed in these press releases 12 had already "in fact" occurred (Berson, 527 F.3d at 987) (emphasis in original)), the cautionary 13 language cited by Defendants was meaningless.22 14 IV. 15 THE COMPLAINT ADEQUATELY ALLEGES SCIENTER To plead scienter under the PSLRA (15 U.S.C. §78u-4(b)(2)), Plaintiffs' allegations "taken

16 collectively" must give rise to a strong inference of scienter, and not be viewed as individual 17 allegations "scrutinized in isolation." Tellabs, 127 S. Ct. at 2509. "The inference that the defendant 18 acted with scienter need not be irrefutable, i.e., of the `smoking gun' genre, or even the `most 19 plausible of competing inferences.'" Id. at 2510. Instead, "[w]hen the allegations are accepted as 20 true and taken collectively," a court need only find that a reasonable person would "deem the 21 inference of scienter at least as strong as any opposing inference." Id. at 2511. When all of the 22 allegations are considered together as Tellabs mandates, Plaintiffs properly allege that Defendants 23 knowingly (or at least recklessly) made false and misleading statements to the investing public.23 24 25 See also Rosenbaum Capital, LLC v. McNulty, 549 F. Supp. 2d 1185, 1191 (N.D. Cal. 2008) (warnings lose value when defendants publicly stated an acquisition was well integrated when they 26 knew the integration was "highly problematic"). 27 23 Plaintiffs' strong allegations of scienter easily satisfy Metzler, 2008 U.S. App. LEXIS 15935. 28 Here, massive insider trading was dramatically out of line with pre-Class Period sales, and detailed
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1 2

A.

The Confidential Witness Accounts Show Defendants Had Actual Knowledge of the Falsity of Their Statements When Made

The Complaint alleges with particularity that the Individual Defendants, all Yahoo! top 3 officers and executives, knew of the falsity of their statements regarding Yahoo!'s search business 4 and the inclusion of click fraud revenues in Yahoo!'s financial statements. ¶¶20-34, 155-178. The 5 CW accounts in the Complaint paint a stunning picture of the Individual Defendants' personal 6 involvement in every aspect of the key components of Yahoo!'s financial operations during the 7 Class Period ­ the integration of Overture, the execution of Panama, and the recognition of click 8 fraud revenue ­ and corroborate allegations showing Defendants knew their statements were false 9 when made. Id. 10 According to CW1, Nazem removed the previous engineer in charge of Panama after it 11 "`failed miserably'" in July or August 2005. ¶20. CW4 confirmed in October 2005, Nazem yanked 12 Panama from the Overture facilities and based it out of his corporate office, then selected CW1 to 13 lead Panama and placed him/her under "`a lot of pressure'" to "get [Panama] out there immediately." 14 ¶¶20, 23. Nazem met with CW1 every Wednesday for progress reports on Panama, and CW15 also 15 attended weekly meetings held by Nazem to discuss Panama. ¶¶20(a), 34. CW2 recalled in March 16 2006, Nazem met with sales management in Pasadena to discuss the resources dedicated to Panama. 17 ¶21. CW12 attended a meeting in early 2006 wherein Nazem announced Project Symphony, a back18 end project associated with Panama, was being "`scratched'" and its resources diverted to Panama. 19 ¶31. 20 CW1 further confirmed Nazem met on a weekly basis with and provided updates on Panama 21 to Defendants Semel, Decker and Rosensweig. ¶29(a). CW13 stated Defendant Semel received 22 additional weekly briefings on Panama from other senior management. ¶32. Each Individual 23 Defendant constantly monitored, and therefore knew about, the delays and problems with the 24 25 26 corroborating CW accounts establish Defendants' personal involvement in the fraud alleged, rather 27 than conclusory allegations that Defendants had to be aware of the Company's improper practices. Id. at *39-*43. 28
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1 execution of Panama, while falsely assuring investors that everything was on track for improving the 2 Company's search monetization. ¶¶20(a), 32, 158. 3 The Complaint also alleges facts showing Defendants knew, or were deliberately reckless in

4 not knowing, that Yahoo!'s financial statements were falsely overstated because they included click 5 fraud revenues. Decker was intimately involved in the Company's recognition of click fraud 6 revenue. Defendants not only ignore Plaintiffs' detailed and corroborating witness accounts (¶¶207 34), as well as the extensive additional indicia of scienter (¶¶155-178), but Defendants also attempt 8 to mislead the Court into thinking none of the CWs ever communicated or met with Decker or 9 Semel. Defs.' Mem. at 17. This simply is not true. CW8 met with Decker to discuss click fraud at 10 Yahoo! in 2005. ¶27. CW10 gave Decker access to the revenue reporting system at Overture. ¶29. 11 CW9 talked to Decker about customer complaints about click fraud. ¶170. Decker had access to the 12 "`CVS code log'" computer system, in which she could ascertain and even amend the method to 13 determine whether a click was billable. ¶29. CW8, CW9 and CW10 confirmed Defendant Decker 14 was aware of the majority of customer complaints regarding click fraud. ¶¶27-29. Also, in August 15 2005, CW14 and other engineers from CW14's group had a meeting with Semel and discussed the 16 diminished customer search experience due to increased ads placed to increase revenue. ¶¶33, 178. 17 Customer complaints about click fraud were logged in the customer relationship management

18 system and according to CW9 and CW10, both of whom worked in divisions at Yahoo! dealing with 19 click fraud, Decker reviewed the complaints. ¶¶33, 176, 178. Importantly, CW12 stated there were 20 more complaints from customers about click fraud at the end of each quarter. ¶31. These CW 21 accounts show Decker knew, or was deliberately reckless in not knowing, that click fraud revenues 22 were improperly included in Yahoo!'s revenues each quarter during the Class Period. 23 24 25 B. The Complaint Also Raises a Strong Inference that Defendants' Misrepresentations Were Either Made Intentionally or with Deliberate Recklessness

A strong inference of scienter can be inferred where defendants were high level managers

26 and the accounting fraud had a significant impact on the company's revenue. Berson, 527 F.3d at 27 987. The Individual Defendants held themselves out as the persons most knowledgeable about the 28
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1 key components of Yahoo!'s financial condition during the