LIONEL Z. GLANCY #134180
MICHAEL GOLDBERG #188669
TRACY L. THROWER #145782
LAW OFFICES OF LIONEL Z. GLANCY
1801 Avenue of the Stars, Suite 308
Los Angeles, California 90067
Phone: (310) 201-9150
Fax: (310) 201-9160
Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
ROBERT REE, individually and on ) Civ. Action No.
behalf of all others similarly ) C99-0562 MMC
situated, )
) CLASS ACTION
Plaintiff, )
) Hon. Maxine M. Chesney
v. )
) MEMORANDUM OF POINTS AND
WARREN E. PINCKERT and CHOLESTECH ) AUTHORITIES IN SUPPORT
CORPORATION, ) OF REE PLAINTIFFS GROUP
) MOTION FOR APPOINTMENT
Defendants. ) OF LEAD PLAINTIFFS AND
) FOR APPROVAL OF LEAD
) PLAINTIFFS' CHOICE OF
___________________________________) LEAD COUNSEL
Date: May 7, 1999
Time: 9:00 a.m.
Ctrm: 2
TABLE OF CONTENTS
INTRODUCTION
FACTUAL BACKGROUND
ARGUMENT
I. THE MEMBERS OF THE REE PLAINTIFFS GROUP ARE THE MOST
ADEQUATE PLAINTIFFS UNDER THE PROVISIONS OF THE
EXCHANGE ACT
A. The Ree Plaintiffs Group Suffered The Largest Losses
Of Any Party Moving To Be Appointed Lead Plaintiff
B. The Ree Plaintiffs Group Satisfies The
Requirements Of Rule 23 Of The Federal Rules Of
Civil Procedure
1. The Claims Of The Ree Plaintiffs Group
Are Typical Of The Claims of The Class
2. The Ree Plaintiffs Group Will Fairly And
Adequately Represent The Interests Of The
Class
II. THIS COURT SHOULD APPROVE THE REE PLAINTIFFS
GROUP'S CHOICE OF LEAD COUNSEL
CONCLUSION
TABLE OF AUTHORITIES
CASES
Becher v. Long Island Lighting Co.,
164 F.R.D. 144
(E.D.N.Y. 1996)
Follette v. Vitanza,
658 F. Supp. 492
(N.D.N.Y. 1987)
In re Drexel Burnham Lambert Group. Inc.,
960 F.2d 285
(2d Cir. 1992),
cert. dismissed,
506 U.S. 1088 (1993)
Walsh v. Northrop Grumman Corp.,
162 F.R.D. 440
(E.D.N.Y. 1995)
CODES
Federal Rules of Civil Procedure
10b-5
Federal Rules of Civil Procedure
Rule 23
Federal Rules of Civil Procedure
Rule 23(a)
Securities Exchange Act of 1934
Securities Exchange Act
20(a)
Securities Exchange Act
Section 10(b)
Securities Exchange Act
Section 21D
Securities Exchange Act
Section 21D(a)(3)(B)(i)
Securities Exchange Act
Section 21D(a)(3)(B)(v)
Securities Exchange Act
§ 21D(a)(3)
Securities Exchange Act
§ 21D(a)(3)(B)
PUBLICATIONS
Statement of Managers --
The "Private Securities Litigation Reform Act of 1995",
141 Cong. Rec. Hl3691-08
The named Plaintiff in this action, Robert Ree,
together with forty other stockholders of defendant Cholestech
Corporation ("Cholestech" or the "Company"), respectfully
submit this memorandum of law in support of its motion for an
order appointing the Ree Plaintiffs Group as lead plaintiffs in
this action and approving the Ree Plaintiffs Group's choice of
the Law Offices of Lionel Z. Glancy as Lead Counsel.1
INTRODUCTION
This action is a putative class action filed by and on
behalf of purchasers of Cholestech common stock between July
30, 1997 and June 26, 1998, inclusive (the "Class Period").2
As detailed in plaintiffs' Class Action Complaint (the
"Complaint"), plaintiffs allege that during the Class Period,
the Company and certain of its senior management violated the
federal securities laws.3
FACTUAL BACKGROUND
The Complaint alleges that Defendant Cholestech was
founded in 1989 and has traded publicly since 1992. The
Company claims that its primary product, the LDX System, is a
diagnostic testing method which allows for testing and
measuring multiple analytes simultaneously with a single drop
of blood within five minutes. The LDX System includes the LDX
Analyzer and a variety of single-use cassettes to physician
office laboratories, healthcare promotional settings and
pharmacy markets. In essence, the LDX Analyzer allows
healthcare providers to detect various diseases and disorders,
including cholesterol disorders, with as much accuracy as tests
performed in hospital laboratories.
Of tremendous stated importance to the Company was the LDX
System's waiver of the requirements under the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"), granted by
the U.S. Government. This waiver allows the LDX System to be
the only point-of-care multi-analyte system legally operable by
a person without special medical training. This attribute
makes the LDX System extremely attractive to potential end-
users, as they can employ any of their office workers to use
the LDX System. (Complaint, ¶3)
To effectuate their fraudulent scheme, defendants
undertook to flood the Company's distribution channels with LDX
Systems and book as income 100% of the revenues attributable to
excess product sent out the door -- product which defendants
knew or recklessly disregarded that end-users did not want.
This practice effectively and artificially inflated
Cholestech's revenues and earnings -- and, thereby, the
Company's stock. (Complaint, ¶5).
In addition, defendants represented to investors that the
Company's distribution into the pharmacy market was being
executed according to the Company's plan. The pharmacy market
represented a huge market which the Company hoped would embrace
the LDX System, particularly in light of Cholestech's CLIA
waiver. Defendants misled the investing public by not
informing them that the pharmacy distribution plan was not
being realized. (Complaint, ¶7).
The price of Cholestech's stock was artificially inflated
during the Class Period as a result of defendants' alleged
fraud to as high as $17.875. Upon revelation of the truth
after the close of trading on June 28, 1999, the Company's
stock plummeted to $6, a decline of 66.43% from the Class
Period high. Plaintiff filed this suit on behalf of himself as
well as on behalf of all other purchasers of Cholestech common
stock during the Class Period, alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and Rule 10b-5 promulgated
thereunder.
The issue before this Court by the instant motion is the
appointment of lead plaintiff and lead counsel in this action
pursuant to § 21D(a)(3) of the Exchange Act. On December 22,
1995, Congress amended the Exchange Act to include a new
Section 21D which, among other things, set forth a procedure
for providing notice to members of a proposed class action and
the selection of a lead plaintiff or plaintiffs to oversee
class actions brought under the federal securities laws.
Specifically, Section 21D(a)(3) provides that, within 20 days
after the date on which a class action is filed:
the plaintiff or plaintiffs shall cause to be
published, in a widely circulated national
business-oriented publication or wire service, a
notice advising members of the purported plaintiff
class -- (I) of the pendency of the action, the
claims asserted therein, and the purported class
period; and (II) that, not later than 60 days after
the date on which the notice is published, any member
of the purported class may move the court to serve as
lead plaintiff of the purported class.
Further, Section 21D(a)(3)(B) directs the Court to
consider any motions by purported class members to serve as
lead plaintiff(s) in response to any such notice by the later
of: (i) 90 days after the date of publication; or (ii) as soon
as practicable after the Court decides any pending motion to
consolidate any actions "asserting substantially the same claim
or claims"; and to presume that the "most adequate plaintiff'
to serve as lead plaintiff is the person or group of persons
that:
(aa) has either filed the complaint or made a
motion in response to a notice;
(bb) in the determination of the court, has the
largest financial interest in the relief sought by
the class; and,
(cc) otherwise satisfies the requirements of
Rule 23 of the Federal Rules of Civil Procedure.
The Ree Plaintiffs Group published the requisite notice of
this action over Businesswire, a "business-oriented publication
or wire service." See Goldberg Declaration, Exhibit B. To the
knowledge of the Ree Plaintiffs Group, no other member of the
putative Class has moved this Court for appointment as lead
plaintiff, rendering the Ree Plaintiffs Group's aggregate
losses of approximately $234,029.39, the "largest financial
interest in the relief sought by the class." Because plaintiff
Robert Ree filed the original complaint in this action, and
because the Ree Plaintiffs Group otherwise meets the
requirements of Rule 23 of the Federal Rules of Civil
Procedure, the Ree Plaintiffs Group should be appointed lead
plaintiff.
ARGUMENT
I. THE MEMBERS OF THE REE PLAINTIFFS GROUP ARE THE MOST
ADEQUATE PLAINTIFFS UNDER THE PROVISIONS OF THE EXCHANGE
ACT
A. The Ree Plaintiffs Group Suffered The Largest Losses
Of Any Party Moving To Be Appointed Lead Plaintiff
Section 21D(a)(3)(B)(i) of the Exchange Act directs
the Court to appoint as lead plaintiff "the member or members
of the purported plaintiff class that the court determines to
be most capable of adequately representing the interests of
class members," and further directs the Court to presume that
the most adequate plaintiff is "the person or group of persons"
that, among other things, "has the largest financial interest
in the relief sought by the class." The Ree Plaintiffs Group
has a strong financial interest in the outcome of this action
based upon the substantial damages incurred as a result of its
purchase of approximately 56,692 shares of Cholestech common
stock during the Class Period. See Goldberg Declaration,
Exhibit C. As a direct result of these purchases, the Ree
Plaintiffs Group suffered approximately $234,029.39 in losses
due to defendants' wrongful conduct. To the knowledge of the
Ree Plaintiffs Group, this is the largest loss presented to the
Court for consideration in connection with appointment of lead
plaintiff in this action, and pursuant to Section 21
D(a)(3)(B)(i), the Ree Plaintiffs Group should be appointed
lead plaintiff in this action.
B. The Ree Plaintiffs Group Satisfies The Requirements
Of Rule 23 Of The Federal Rules Of Civil Procedure
Section 21D(a)(3)(B) of the Exchange Act further
provides that, member or members of the putative class that are
appointed lead plaintiff must also "otherwise satisfy the
requirements of Rule 23 of the Federal Rules of Civil
Procedure." Rule 23(a) provides that a party may serve as a
class representative only if the following four requirements
are satisfied:
(1) the class is so numerous that joinder
of all members is impracticable, (2) there
are questions of law or fact common to the
class, (3) the claims or defenses of the
representative parties are typical of the
claims or defenses of the class, and (4)
the representative parties will fairly and
adequately protect the interests of the
class.
Of the four prerequisites to class certification, only two
-- typicality and adequacy -- directly address the personal
characteristics of the class representative. Consequently, in
deciding a motion for appointment of lead plaintiff, the Court
should limit its inquiry to the typicality and adequacy prongs
of Rule 23(a), and defer examination of the remaining
requirements until the lead plaintiff(s) move for class
certification. As set forth below, the members of the Ree
Plaintiffs Group satisfy the typicality and adequacy
requirements of Rule 23(a), thereby supporting their
appointment as lead plaintiff.
1. The Claims Of The Ree Plaintiffs Group
Are Typical Of The Claims of The Class
The typicality requirement of Rule 23(a)(3) is
satisfied "when each class member's claim arises from the same
course of events, and each class member makes similar legal
arguments to prove the defendants' liability." In re Drexel
Burnham Lambert Group. Inc., 960 F.2d 285, 291 (2d Cir. 1992),
cert. dismissed, 506 U.S. 1088 (1993). The claims of the class
representative need not be identical to the claims of the
class, however, to satisfy typicality. Instead, Courts have
recognized that:
[w]hen the same unlawful conduct was directed at both
the named plaintiff and the class he seeks to
represent, the typicality requirement is usually met
"irrespective of minor variations in the fact
patterns underlying the individual claims".
See Becher v. Long Island Lighting Co., 164 F.R.D. 144, 151
(E.D.N.Y. 1996) (finding typicality despite minor individual
distinction in claims) (citation omitted). See also Walsh v.
Northrop Grumman Corp., 162 F.R.D. 440, 445 (E.D.N.Y. 1995)
(noting that typicality will be lacking only where a conflict
exists that "goes to the very subject matter of the
litigation"); Follette v. Vitanza, 658 F. Supp. 492, 506
(N.D.N.Y. 1987) ("Rule 23 does not require complete identity of
legal claims among class members so long as at least one common
question can be identified").
The claims asserted by the Ree Plaintiffs Group are
typical, if not identical, to the claims of the members of the
Class here. As set forth above, the Complaint filed in this
action alleges that defendants violated the Exchange Act. In
particular, it is alleged that during the Class Period,
defendants Cholestech and Warren E. Pinckert concealed facts
relating to serious and pervasive operational problems in the
Company so that the individual defendants could sell millions
of dollars of personal holdings in Cholestech before the
negative information hit the market. Goldberg Declaration,
Exhibit A. The typicality requirement is thus satisfied,
because the claims asserted by the Ree Plaintiffs Group arise
"from the same events or course of conduct that gives rise to
claims of other class members and the claims are based on the
same legal theory." Walsh, 162 F.R.D. at 445 (citations
omitted).
2. The Ree Plaintiffs Group Will Fairly And
Adequately Represent The Interests Of The Class
Prior to the enactment of Section 21D of the Exchange Act,
the Courts adopted a two-pronged approach to evaluating the
adequacy of a proposed class representative. First, class
counsel had to be adjudged qualified, experienced and generally
able to conduct the litigation. Second, class members could not
have interests "antagonistic" to one another. See, e.g.,
Becher, 164 F.R.D. at 152 (citations omitted); Follette, 658 F.
Supp. at 506.
Section 21D of the Exchange Act altered this analysis with
respect to proposed "lead plaintiffs," however, by directing
the Court to limit its inquiry strictly to the existence of any
conflicts between the interests of the proposed representatives
and the proposed class, and then allowing the lead plaintiff or
plaintiffs to retain lead counsel to represent the proposed
class, "subject to the approval of the court." See Section
21D(a)(3)(B)(v) of the Exchange Act.
The interests of the Ree Plaintiffs Group are clearly
aligned with the members of the Class here, and there is no
evidence of any antagonism between the interests of these
individuals and the Class. As set forth in the Complaint, the
Ree Plaintiffs Group shares numerous common questions of law
and fact with the Class, and their claims are typical of the
Class. Further, the Ree Plaintiffs Group has already
demonstrated itself to be a zealous advocate on behalf of the
Class. Specifically, each member of the Ree Plaintiffs Group
has signed a certification stating that he or she is willing to
assume the responsibilities of a class representative. See
Goldberg Declaration, Exhibits A and D. Thus, the close
alignment of interests between the Ree Plaintiffs Group and the
Class, combined with the strong desire of these individuals to
prosecute this action on behalf of the Class, favors granting
the instant motion.
II. THIS COURT SHOULD APPROVE THE REE PLAINTIFFS
GROUP'S CHOICE OF LEAD COUNSEL
Recent amendments to the Exchange Act vest authority in
the member or members of the putative class selected as lead
plaintiff to select and retain lead counsel, subject only to
the approval of the Court. See Section 21D(a)(3)(B)(v). Thus,
the Court should not disturb the appointed lead plaintiffs'
choice of counsel unless "necessary to protect the interest of
the plaintiff class." See Statement of Managers -- The "Private
Securities Litigation Reform Act of 1995," 141 Cong. Rec.
Hl3691-08, at H13700 (daily ed. Nov. 28, 1995). In the present
case, the Ree Plaintiffs Group has retained the Law Offices of
Lionel Z. Glancy to pursue this litigation on its behalf. The
Glancy firm possesses experience in the area of securities
class action litigation and has successfully prosecuted
securities fraud class actions on behalf of injured investors,
as detailed in the firm resume annexed as Exhibit E to the
accompanying Goldberg Declaration. Thus, the Court may be
assured that granting the instant motion means that the Class
will receive the highest caliber of legal representation.
CONCLUSION
For all of the foregoing reasons, of the Ree Plaintiffs
Group respectfully requests that this Court appoint them as
lead plaintiffs to oversee this litigation and approve their
choice of counsel.
Dated: April 1, 1999 Respectfully submitted,
LAW OFFICES OF LIONEL Z. GLANCY
By_____________________________
Lionel Z. Glancy, Esquire
Michael Goldberg, Esquire
Tracy L. Thrower, Esquire
1801 Avenue of the Stars
Suite 308
Los Angeles, California 90067
Phone: (310) 201-9150
Fax: (310) 201-9160
Proposed Lead Counsel
For Plaintiffs and the Class
ROBERT C. SUSSER
ROBERT C. SUSSER, P.C.
6 East 43rd Street, Suite 1900
New York, New York 10017
Phone: (212) 808-0298
Fax: (212) 949-0966
BRIAN BARRY
LAW OFFICES OF BRIAN BARRY
8424A Santa Monica Boulevard
Suite 184
Los Angeles, CA 90069
Phone: (323) 954-7210
Fax: (323) 954-7235
Attorneys For Plaintiffs
1 Members of the Ree Plaintiffs Group include plaintiff
Robert Ree and class members Frank Bianchi, Mark Bouquet, Timothy
Castell, Amy Chu, Elyse Coleman, Lisa Custodio, Robert Cuva, Miles
Daub, David Drewek, Donald Fought, Allen Gerston, Albert Jackson,
Daryl Johnson, Richard Kain, Said Khatib, Carl Kircher, Larry
Kolodey, Nicholas Laurora, Jennine Lindberg, Patricia Malloy,
Stuart Matt, Todd Matthews, David Miller, Kurt Mitchell, Robert
Morrison, Myron Olson, Sharon Quercioli, Martha Rabkin, Robert Ree,
Mario Scoma, Ben Stackler, James Stauber, Martha Stovall, Anthony
Strachan, Frank Strock, Gene Torbeck, Thomas Trenkmann, Ted Valk,
Barry Weisman, Bernard Wiest, and Douglas Wray.
2 All such purchasers are collectively referred to
herein as the "Class."
3 The Complaint was filed on February 5, 1999 on behalf
of purchasers of Cholestech securities during the Class Period. A
true and correct copy of that Complaint is attached as Exhibit A to
the Declaration of Michael Goldberg In Support Of Motion by The Ree
Plaintiffs Group For Appointment Of Lead Plaintiffs And For
Approval of Counsel (the "Goldberg Affidavit").
Source: File to epost from Law Offices of Lionel Z. Glancy