MILBERG WEISS BERSHAD
  HYNES & LERACH LLP
JOHN E. GRASBERGER (89774)
JOHN K. GRANT (169813)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
     - and -
WILLIAM S. LERACH (68581)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058

SCHIFFRIN & CRAIG, LTD.
RICHARD S. SCHIFFRIN
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
Telephone: 610/667-7706

Attorneys for Plaintiff

II. STATEMENT OF FACTS

III. ARGUMENT

A. Securities Actions Are Particularly Appropriate For Class Treatment

B. The Requirements Of Rule 23(a) Are Satisfied With Respect To Plaintiff's Claims

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 Which Predominate Over Questions Affecting Only Individual Members

3. Plaintiff's Claims Are Typical Of Those Of The Class

4. Plaintiff Will Fairly And Adequately Protect The Interests Of The Class

C. The Requisites of Rule 23(b)(3) Have Been Met

1. Common Questions Of Law Or Fact Predominate

2. A Class Action Is Superior To Other Available Methods For The Fair And Efficient Adjudication Of This Action

I. INTRODUCTION AND SUMMARY OF ARGUMENT

In a long and virtually unbroken line of cases, the Ninth Circuit and the district courts of this Circuit have endorsed the use of class action procedures in adjudicating claims under the federal securities laws.

[C]lass actions commonly arise in securities fraud cases as the claims of separate investors are often too small to justify individual lawsuits, making class actions the only efficient deterrent against securities fraud.

In re Worlds of Wonder Sec. Litig., [1989-1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶95,004, at 95,626 (N.D. Cal. Mar. 26, 1990) (citing Harris v. Palm Springs Alpine Estates, Inc., 329 F.2d 909, 913 (9th Cir. 1964)). The necessity for class actions as a means of enforcement of the federal securities laws has been consistently recognized by courts throughout the United States. See, e.g., Basic Inc. v. Levinson, 485 U.S. 224 (1988); Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975). In recognition of their significant role in protecting investors, the courts liberally construe the requirements of Rule 23 in order to favor class certification. "'[T]he ultimate effectiveness of [security anti-fraud laws] may depend on the applicability of the class action device.'" Id. at 903 (citation omitted). 

II. STATEMENT OF FACTS

This action was brought against defendant Digital Link and certain of its officers and directors on behalf of investors who purchased Digital Link stock during the Class Period. ¶¶29, 30. The Complaint alleges violations of §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. More specifically, the Complaint alleges that defendants engaged in a scheme to defraud investors by making false and misleading statements that artificially inflated Digital Link's stock from $7.75 to a high of $34 per share. ¶3. At the same time that the defendants were issuing false and misleading statements, however, these same insiders sold 1.3 million of their own shares, pocketing over $25 million before Digital Link revealed the truth and its stock plunged to $8. Id.

As described in detail in plaintiff's Complaint, see ¶¶42-77, Digital Link's collapse was not the product of unforeseen catastrophe, but resulted from the defendants' deliberate misrepresentation of Digital Link's business and prospects. Most notably, defendants misled investors with respect to the development of Digital Link's GateWay product. ¶2. Defendants represented that development of the GateWay was "on track," was "forg[ing] ahead" and would help fuel Digital Link's "explosive growth." ¶¶43, 46, 52, 55. Development of the GateWay, however, was not "on track," but was mired in technical difficulties that made it clear that the GateWay would not be completed in the foreseeable future. ¶¶54, 65. Indeed, defendants not only concealed the design difficulties Digital Link was experiencing with the GateWay product, but went so far as to affirmatively deny that any such problems existed, insisting that the GateWay product was testing well, ¶57, only later to concede that the product was defective and would have to be redesigned.

In addition, defendants misled investors with respect to the overall demand for Digital Link's products. In October of 1995, for example, Digital Link reported record third quarter revenues, but announced a "modest slowdown" in its broadband sales, a segment representing 17% of the Company's business. ¶73. Defendants reassured investors, however, that Digital Link's business was otherwise strong and would support 1995 fourth quarter earnings of $0.18, a slight reduction from defendants' prior $0.19 forecast for that quarter. ¶¶73, 74.

In fact, defendants knew that Digital Link's slowdown was not limited to Digital Link's broadband products, but involved Digital Link's entire business. ¶75. Nor was the slowdown "modest" as reported. Not only were broadband revenues expected to substantially worsen, but internetworking revenues were expected to take an even greater hit in the fourth quarter of 1995. Digital Link subsequently stunned investors when it reported a meager $0.05 for its fourth quarter earnings, in contrast to defendants' prior assurances that investors could expect fourth quarter earnings of $0.18. ¶77.

As a result of these misrepresentations, hundreds of investors lost millions of dollars by purchasing Digital Link securities at inflated prices. On October 17, 1995, when the truth regarding defendants' inability to develop the GateWay was disclosed, Digital Link stock fell from $26 to $16. ¶10. Two months later, when the full extent of Digital Link's reduced demand was further disclosed on December 29, 1995, the stock again collapsed, dropping from $14.50 to $8. ¶13. Many investors saw the value of their holdings in Digital Link reduced to less than 35% of what they had been worth just over two months earlier.

Defendants are liable under the federal securities laws both for false statements made to securities analysts and those that analysts made in reports about Digital Link. Digital Link's insiders are liable for false statements to analysts in conference calls and other presentations, just as with any other false statement. They are also liable for statements made by analysts in reports about Digital Link because they were involved in the preparation of these reports and provided the information for those reports, reviewing and approving them before they were issued. 

III. ARGUMENT

A. Securities Actions Are Particularly Appropriate For Class Treatment

Courts in the Ninth Circuit and this District favor a liberal use of class actions to enforce the securities laws. In re Computer Memories Sec. Litig., 111 F.R.D. 675, 679 (N.D. Cal. 1986). Securities actions are considered particularly appropriate for class action treatment. In re Cirrus Logic Sec., 155 F.R.D. 654, 656 (N.D. Cal. 1994); Guenther v. Pacific Telecom, 123 F.R.D. 333, 336 (D. Or. 1988).⁽⁴⁾

Most actions brought under the anti-fraud provisions of the federal securities laws involve numerous alleged victims, virtually none of whom have suffered damages substantial enough to support an individual prosecution. Hence:

Class actions are a particularly appropriate and desirable means to resolve claims based on the securities laws, "since the effectiveness of the securities laws may depend in large measure on the application of a class action device." . . . "The interests of justice require that in a doubtful case . . . any error, if there is to be one, should be committed in favor of allowing a class action."

The Supreme Court has long recognized -- and Congress recently affirmed -- that private actions are also an important enforcement mechanism to supplement governmental administrative regulation of the securities markets. "Private enforcement . . . provides a necessary supplement to Commission action," by both affording relief to those injured by violations of the securities laws and serving as a deterrent to future wrongdoing. J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964). Accord Randall v. Loftsgaarden, 478 U.S. 647, 664 (1986); Basic, 485 U.S. at 231 (private actions for violations of the Exchange Act "constitute[]an essential tool for enforcement of the [Exchange] Act's requirements") (emphasis added); Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985) (implied private actions provide "'a most effective weapon in the enforcement'" of the securities laws and are a "'necessary supplement to Commission action'") (citations omitted). In enacting the PSLRA, Congress reaffirmed the importance of private enforcement of the securities laws:

Private securities litigation is an indispensable tool with which defrauded investors can recover their losses without having to rely upon government action. Such private lawsuits promote public and global confidence in our capital markets and help to deter wrongdoing and to guarantee that corporate officers, auditors, directors, lawyers and others properly perform their jobs. . . .

A review of the requirements of Rule 23 and the relevant case law demonstrates that this lawsuit should be certified as a class action. 

B. The Requirements Of Rule 23(a) Are Satisfied With Respect To Plaintiff's Claims

(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.

1. The Class Is So Numerous That Joinder Of All Members Is Impracticable

The numerosity requirement is easily satisfied here, as Digital Link had million shares of common stock outstanding during the Class Period, owned by hundreds, if not thousands, of shareholders throughout the country. Thus, while the exact number of Class members is unknown at this time and can only be ascertained through appropriate discovery, it can be safely stated that joinder of such a large number of investors is clearly impracticable. Wehner, 117 F.R.D. at 643; In re Seagate Techs. Sec. Litig., 115 F.R.D. 264, 267 (N.D. Cal. 1987); Weinberger v. Jackson, 102 F.R.D. 839, 844 (N.D. Cal. 1984). 

2. There are Questions Of Law Or Fact Common To The Class Which Predominate Over Questions Affecting Only Individual Members

Confronted with a class of purchasers allegedly defrauded over a period of time by similar misrepresentations, courts have taken the common sense approach that the class is united by a common interest in determining whether a defendant's course of conduct is in its broad outlines actionable, which is not defeated by slight differences in the class members' positions . . . .

The Complaint alleges that the Class members' injuries resulted from a continuing course of conduct whereby defendants issued a series of false and misleading statements designed to increase Digital Link's stock price and maintain it at inflated levels. The existence and nature of defendants' material misrepresentations and omissions -- the most important issues in a securities fraud case -- are common to all members of the proposed Class and predominate over any conceivable issues which might be unique to individual Class members. ¶¶42-77. The claims against defendants arise from the same set of operative facts and common legal theories which include:

a. Whether the federal securities laws were violated by defendants;

b. Whether defendants omitted and/or misrepresented material facts;

c. Whether defendants' statements omitted material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading;

d. Whether defendants knew or had reasonable grounds to believe that their statements were false and misleading;

e. Whether the price of Digital Link stock was artificially inflated during the Class Period; and

f. The extent of damage sustained by Class members and the appropriate measure of damages.

[W]here members of a class are subject to the same misrepresentations and omissions, and where alleged misrepresentations fit within a common course of conduct, common questions exist and a class action is appropriate.

The primary objective of Rule 23 is to accomplish an effective resolution of the common questions pertaining to defendants' liability. Since there is substantial convergence in what plaintiff must prove to prevail, the commonality of questions of law and fact among the members of the Class and their predominance over issues unique to any individual Class member clearly satisfies the requirements of Rule 23(a)(2). 

3. Plaintiff's Claims Are Typical Of Those Of The Class

Typicality does not require the representative's claims to be identical to those of the class members:

"Typicality refers to the nature of the claim or defense of the class representative, and not to the specific facts from which it arose or the relief sought. Accordingly, differences in the amount of damage, the size or manner of [stock] purchase, the nature of the purchase[], and even the specific document influencing the purchase will not render a claim atypical in most securities cases."

The decisions construing the requirements of Rule 23(a)(3) have held that the Rule requires only that there be no express conflict between the representative parties and the class "over the very issue in litigation" and that the representative's "interests are not antagonistic to those of the class." Mersay v. First Republic Corp., 43 F.R.D. 465, 468-69 (S.D.N.Y. 1968); accord Stolz, 620 F. Supp. at 404. There is no conflict or antagonism here between plaintiff's interests and those of absent Class members. Nor does typicality require that the class representative have standing for each misrepresentation. Alfus v. Pyramid Tech. Corp., 764 F. Supp. 598, 606 (N.D. Cal. 1991). This Court has stated:

In the context of securities fraud cases, a rule requiring a class representative to have individual standing for all claims asserted by the class would make class actions untenable. Such a rule would mean that only a named plaintiff who purchased on the last day of the class period could represent the class with respect to each of the alleged misrepresentations made during the class period.

This case satisfies the typicality requirement. The Complaint alleges that the defendants committed the same type of unlawful acts by the same methods against the entire Class. In fact, plaintiff and the Class were defrauded by the same false information, by the same common course of conduct on the part of defendants and will employ the same evidence to prove their case. Plaintiff and the other Class members have the same interest in proving defendants' liability and recovering damages for their losses from common legal and factual theories. 

4. Plaintiff Will Fairly And Adequately Protect The Interests Of The Class

First, the named representatives must appear able to prosecute the action vigorously through qualified counsel, and second, the representatives must not have antagonistic or conflicting interests with the unnamed members of the class.

Courts have focused on whether counsel for the class is competent to handle the litigation. In re MDC Holdings Sec. Litig., 754 F. Supp. 785, 802 (S.D. Cal. 1990); Weinberger, 102 F.R.D. at 845. Plaintiff have retained counsel who have already been appointed Lead Counsel by this Court, and who are qualified, experienced and generally able to conduct the proposed litigation. Co-Counsel also have extensive experience in class action litigation and have successfully prosecuted class actions in this District and throughout the country.⁽⁶⁾

The second requirement is also satisfied where, as here, there is a lack of antagonism between the representative plaintiff and the absent class members. Schaffer, 1996 U.S. Dist. LEXIS 5372, at *18; Lubin v. Sybedon Corp., 688 F. Supp. 1425, 1461 (S.D. Cal. 1988); Weinberger, 102 F.R.D. at 844-45. The representative plaintiff's interests and those of the Class are complementary and plaintiff will vigorously prosecute this action on behalf of the Class. Indeed, the burden is on the defendants to prove that the representation will be inadequate. Epitope, Inc. Sec. Litig., [1992-1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶97,272, at 95,267 (D. Or. Nov. 30, 1992). 

C. The Requisites of Rule 23(b)(3) Have Been Met

(b) Class Actions Maintainable. An action may be maintained as a class action if the prerequisites of subdivision (a) are satisfied, and in addition:

* * *

(3) the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.

1. Common Questions Of Law Or Fact Predominate

In determining whether common questions predominate, the Court's inquiry should be directed primarily toward the issue of liability. See Blackie, 524 F.2d at 902; Memorex, 61 F.R.D. at 103. The critical issues of fact and law raised in this action are, in essence, whether defendants made the omissions and misrepresentations alleged in the Complaint, whether those omissions and misrepresentations were material and whether defendants acted with the requisite scienter.⁽⁷⁾ In this case, each Class member, if initiating a separate action, would necessarily allege liability of defendants based upon the above-mentioned misrepresentations in the defendants' public statements. These common legal questions certainly "predominate" over any individual or non-common issues that may arise.

Additionally, reliance is not a predominating individual issue. Plaintiff is entitled to a presumption of reliance where, as here, the complaint alleges that defendants artificially inflated the price of a company's stock by issuing false and misleading statements and omitting to disclose material facts which defendants had a duty to disclose. Basic, 485 U.S. at 247. Accordingly, the predominance requirement is satisfied. 

2. A Class Action Is Superior To Other Available Methods For The Fair And Efficient Adjudication Of This Action

Virtually all of the previously cited authorities have recognized that the class action device is superior to other available methods for the fair and efficient adjudication of controversies involving a large number of purchasers of securities injured by securities law violations. Indeed, it has been uniformly recognized that the class action is superior to the available methods, particularly duplicative individual lawsuits, since "[n]umerous determinations could result in varying adjudications of liability." United Energy, 122 F.R.D. at 258. Denying class treatment might preclude individuals with smaller claims from obtaining any relief.

In determining whether the "superiority" requirement of Federal Rule of Civil Procedure 23(b)(3) is satisfied, a court may consider the following:

"(a) the interest of memirtually identical, members have no need to individually control separate actions. Second, plaintiff is not aware of any individual actions concerning this dispute that have been commenced by other Class members, other than as specified herein. Third, the nationwide geographical dispersion of the Class members makes it desirable that litigation of the claims involved be concentrated in this forum.

Finally, there is no reason to believe that plaintiff's attorneys will encounter significant or unusual difficulties in the management of this litigation. Weinberger v. Thornton, 114 F.R.D. 599 (S.D. Cal. 1986); In re Victor Techs. Sec. Litig., 102 F.R.D. 53 (N.D. Cal. 1984), aff'd, 792 F.2d 862 (9th Cir. 1986); Mersay, 43 F.R.D. 465. As the court observed in In re Antibiotic Antitrust Actions, 333 F. Supp. 278, 282 (S.D.N.Y. 1971):

[T]here is the question of whether difficulties in the management of these actions preclude a finding that the class action is "superior to other available methods for the fair and efficient adjudication of the controversy." It should be noted at the outset that difficulties in management are of significance only if they make the class action a less "fair and efficient" method of adjudication than other available techniques.

(Emphasis in original.)

The Supreme Court has endorsed the superiority of class suits for resolving securities claims:

The aggregation of individual claims in the context of a classwide suit is an evolutionary response to the existence of injuries unremedied by the regulatory action of government. Where it is not economically feasible to obtain relief within the traditional framework of a multiplicity of small individual suits for damages, aggrieved persons may be without any effective redress unless they may employ the class-action device.

Deposit Guaranty Nat'l Bank v. Roper, 445 U.S. 326, 339 (1980). Here too, judicial economy and the best interests of the Class members favor class certification. 

IV. CONCLUSION

For the foregoing reasons, plaintiff requests entry of an Order certifying this action as a class action pursuant to Federal Rule of Civil Procedure 23(b)(3).
 

DATED: April 17, 1997

MILBERG WEISS BERSHAD   HYNES & LERACH LLP JOHN E. GRASBERGER JOHN K. GRANT     ______________________________            JOHN K. GRANT 222 Kearny Street, 10th Floor San Francisco, CA 94108 Telephone: 415/288-4545 MILBERG WEISS BERSHAD   HYNES & LERACH LLP WILLIAM S. LERACH 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 SCHIFFRIN & CRAIG, LTD. RICHARD S. SCHIFFRIN Three Bala Plaza East Suite 400 Bala Cynwyd, PA 19004 Telephone: 610/667-7706 Attorneys for Plaintiff

DGTL-LNK\LSN00291.BRF

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1. Excluded from the Class are defendants herein, members of their immediate families, any entity in which a defendant has a controlling interest, and the legal representatives, heirs, successors-in-interest, or assigns of any excluded party.

2. On February 20, 1997, pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. Law 104-67, §101(b) (enacting §21D of the Securities Exchange Act of 1934, 15 U.S.C. §78u-4(a), and §27 of the Securities Act of 1933, 15 U.S.C. §77z-1), this Court appointed plaintiff George Genna ("Genna") as Lead Plaintiff.

3. The Individual Defendants are Vinita Gupta, Daniel L. Palmer, Timothy K. Montgomery, Stanley E. Kazmierczak, Toni Bellin, Benjamin W. Berry, Morey P. Schapira, Gregory M. Avis and Charles R. Moore.

4. See also Wehner v. Syntex Corp., 117 F.R.D. 641, 642-45 (N.D. Cal. 1987); In re Pizza Time Theatre Sec. Litig., 112 F.R.D. 15, 21 (N.D. Cal. 1986); Computer Memories, 111 F.R.D. at 679; In re Adobe Sys., Inc. Sec. Litig., 139 F.R.D. 150 (N.D. Cal. 1991); Yamner v. Boich, [1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶98,427 (N.D. Cal. Sept. 15, 1994); Levine v. Diamanthuset, Inc., [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶96,934 (N.D. Cal. July 14, 1992); In re Ramtek Sec. Litig., [1990-1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶95,814 (N.D. Cal. Feb. 4, 1991).

5. The questions raised by a class certification motion are purely procedural: For purposes of a class certification motion, the plaintiff's allegations are to be taken as true and the court may not examine the merits of the plaintiff's case. Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 (1974); Blackie, 524 F.2d at 901 n.17; Freedman v. Louisiana-Pacific Corp., 922 F. Supp. 377, 398 (D. Or. 1996) ("In ruling on a motion to certify, the court accepts as true the allegations made in support of certification, and does not consider the merits of the case."); Schaffer v. Timberland Co., No. 94-634-JD, 1996 U.S. Dist. LEXIS 5372, at *5 (D.N.H. Mar. 19, 1996) ("The court's decision to certify a class rests on a 'rigorous analysis of the particular facts of the case,' but remains 'an initial determination that must be made without inquiry into the merits of the plaintiffs' claims.'") (citations omitted) (Grant Decl., Ex. B).

6. The résumé of Milberg Weiss Bershad Hynes & Lerach LLP is attached as Exhibit C to the Grant Declaration. The résumé of Schiffrin & Craig, Ltd. is attached as Exhibit D to the Grant Declaration.

7. In Harris, 329 F.2d at 913, the Ninth Circuit held that the fact that different members of the class may have made purchases at different times and may have been exposed to different representations by the defendants did not preclude a finding that common issues of fact and law prevail.

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DECLARATION OF SERVICE BY MAIL

I, the undersigned, declare:

1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Francisco, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 222 Kearny Street, 10th Floor, San Francisco, California 94108.

2. That on April 17, 1997, declarant served the NOTICE OF MOTION AND MOTION FOR CLASS CERTIFICATION AND MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF by depositing a true copy thereof in a United States mailbox at San Francisco, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List.

3. That there is a regular communication by mail between the place of mailing and the places so addressed.

I declare under penalty of perjury that the foregoing is true and correct. Executed this 17th day of April, 1997, at San Francisco, California.
 

______________________________ DEBORAH R. DASH

 

9 Oct 1997
Source: Milberg Weiss web file